**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-K**

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) ofthe SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended June 30, 2007**

**Commissionfile number 1-10875**

**J. L.HALSEY CORPORATION**

 (exact name of registrant as specified in itscharter)

| **DELAWARE**                             |   | **01-0579490**                        |
|------------------------------------------|--------|---------------------------------------|
| (State of  incorporation)                |   | (I.R.S. Employer  Identification No.) |
|                                     |   |                                  |
| **103  Foulk Rd, Suite 205Q**            |   | ** **                            |
| **Wilmington,  DE**                      |   | **19803**                             |
| (Address of  principal executive office) |   | (Zip Code)                            |

 

Registrant’stelephone number, including area code:  **(302) 691-6189**

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, Par Value $.01 Per Share**

(Title of class)

Indicate by checkmark if the Registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes  o    No  x

Indicated by checkmark if the Registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  Yes  o    No  x

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  x    No  o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate bycheckmark whether the Registrant is a larger accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarger accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
| Large Accelerated filer  o | Accelerated filer  o | Non-accelerated filer  x |
|--------------------------------------|--------------------------------|------------------------------------|

 

Indicated by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o     No  x

As of December 29,2006, the aggregate market value of the shares of common stock held bynon-affiliates was approximately $39,377,801 (Determination of stock ownershipby non-affiliates was made solely for the purpose of responding to thisrequirement and the Registrant is not bound by this determination for any otherpurpose.)

There were96,330,675 shares of the Registrant’s common stock outstanding as of September5, 2007.

DOCUMENTSINCORPORATED BY REFERENCE

Part III incorporatescertain portions of the proxy statement for the annual stockholders meeting tobe held on or about December 11, 2007.

 

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**J. L. HALSEY CORPORATION ANDSUBSIDIARIES**

**FORM 10-K – FISCAL YEAR ENDEDJUNE 30, 2007**

**Contents and Cross ReferenceSheetFurnished Pursuant to General Instruction G(4) of Form 10-K**
| Item No.    | ** ** | **Description**                                                                             | ** ** | ** ** |
|-------------|------------|---------------------------------------------------------------------------------------------|------------|------------|
|        |       |                                                                                        |       |       |
|        |       | PART I                                                                                      |       |       |
|        |       |                                                                                        |       |       |
| Item  1.    |       | Business                                                                                    |       |       |
| Item  1A.   |       | Risk  Factors                                                                               |       |       |
| Item 1B.    |       | Unresolved Staff  Comments                                                                  |       |       |
| Item  2.    |       | Properties                                                                                  |       |       |
| Item 3.     |       | Legal Proceedings                                                                           |       |       |
| Item 4.     |       | Submission of  Matters to a Vote of Security Holders                                        |       |       |
|        |       |                                                                                        |       |       |
|        |       | PART II                                                                                     |       |       |
|        |       |                                                                                        |       |       |
| Item 5.     |       | Market for  Registrant’s Common Equity and Related Stockholder Matters                 |       |       |
| Item 6.     |       | Selected Financial  Data                                                                    |       |       |
| Item 7.     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |       |
| Item 7A.    |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       |       |
| Item 8.     |       | Financial  Statements and Supplementary Data                                                |       |       |
| Item 9.     |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosures      |       |       |
| Item 9A(T). |       | Controls and  Procedures                                                                    |       |       |
| Item 9B.    |       | Other Information                                                                           |       |       |
|        |       |                                                                                        |       |       |
|        |       | PART III                                                                                    |       |       |
|        |       |                                                                                        |       |       |
| Item 10.    |       | Directors and  Executive Officers of the Registrant                                         |       |       |
| Item 11.    |       | Executive  Compensation                                                                     |       |       |
| Item 12.    |       | Security  Ownership of Certain Beneficial Owners                                            |       |       |
| Item 13.    |       | Certain  Relationships and Related Transactions                                             |       |       |
| Item 14.    |       | Principal  Accountant Fees and Services                                                     |       |       |
|        |       |                                                                                        |       |       |
|        |       | PART IV                                                                                     |       |       |
|        |       |                                                                                        |       |       |
| Item 15.    |       | Exhibits,  Financial Statement Schedules                                                    |       |       |
|        |       |                                                                                        |       |       |
| Signatures  |       |                                                                                        |       |       |

 

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**PART I**

**Forward-Looking Information**

*ThisAnnual Report on Form 10-K includes forward-looking statements related tofuture events and our future performance within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the Securities andExchange Act of 1934, as amended. All statements other than statements ofhistorical fact, including statements regarding industry prospects and futureresults of operations or financial position, made in this Annual Report areforward looking. We use words such as “anticipates,” “believes,” “expects,” “future”and “intends” and similar expressions to identify forward-looking statements.Forward-looking statements reflect management’s current expectations, plans orprojections and are inherently uncertain. Our actual results may differsignificantly from management’s expectations, plans or projections. Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date hereof. Certain risks and uncertainties thatcould cause our actual results to differ significantly from management’sexpectations are described in the section entitled “Business — RiskFactors” This section, along with other sections of this Annual Report,describe some, but not all, of the factors that could cause actual results todiffer significantly from management’s expectations and have a material adverseeffect on our business, financial condition and results of operations as wellas the value of our common stock. We undertake no obligation to publiclyrelease any revisions to these forward-looking statements that may be made toreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events. Readers are urged, however, to review thefactors set forth in reports that we file from time to time with the Securitiesand Exchange Commission. Unless the context requires otherwise in this AnnualReport the terms “we,” “us” and “our” refer to J.L Halsey Corporation and itssubsidiaries.*

**ITEM 1.        BUSINESS**

**Overview**

J.L. HalseyCorporation, through its wholly owned subsidiaries, Lyris Technologies, Inc. (“Lyris”),Uptilt, Inc. (d/b/a “EmailLabs”), ClickTracks Analytics, Inc. (“ClickTracks”),and Hot Banana Software, Inc. (“Hot Banana”) is a leading digital marketingtechnology and services firm.  Our email marketing software and servicesprovide clients with solutions for creating, managing and delivering online,permission-based direct marketing programs, newsletters, discussion groups andother digital communications to clients whose email lists require specializedtechnology in order to effectively communicate with their members andcustomers.  We offer our email solutions in two forms: as software that isdownloaded and installed on customers’ computers, and as a hosted solution inwhich customers use our software through an internet connection.  ThroughClickTracks and Hot Banana, we also offer website analytics software andservices, and website content management software and services.

On August 18,2006, we acquired ClickTracks and Hot Banana.  ClickTracks is a Webanalytics provider based in Santa Cruz, California, and Hot Banana is ane-marketing Web content management company based in Ontario, Canada. ClickTracks’ web analytics software and services provide clients with leadingsolutions for analyzing the behavior of visitors to their websites and managingpay-per-click (PPC) campaigns.  We offer our analytics solutions in twoforms:  as software that is downloaded and installed on customers’computers, and as a hosted solution in which customers use our software throughan internet connection.  Hot Banana is a Web Content Management Suite (WebCMS) that assists marketers in managing a Web site’s content creation,publishing and optimization process.  Clients use Hot Banana to achievegreater efficiencies and realize more revenue through more efficient control oftheir corporate web sites, intranets, extranets, landing pages and micromarketing sites.  Hot Banana sells its software on an installed basis andas a hosted solution in which the customer uses the software through aninternet connection.

***Our Products and Services***

***Email Marketing***

***ListManager***.  Corporations,government agencies, not-for-profit organizations, political campaigns,universities, and other groups and organizations have large lists of peoplewith whom they want to communicate by email.  These lists can range fromhundreds to thousands to millions of email addresses.  For the pastthirteen years, Lyris has developed and licensed software, called*ListManager*, which can manage these emailaddress lists. This software enables customers to develop, send and monitorcomplex email mailings reliably.  The software also permits organizationsto design email campaigns that are customized to their members’ preferences.

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Lyris offershosted email marketing solutions based on the*ListManager* platform under two brands:*ListHosting* and*SparkList*.  These services enable clients to create, send andmonitor email campaigns with only a web browser and without the need for theirown engineering and equipment support.  For these clients, email administrationand security are outsourced and they can manage mailing lists, as well asdirect marketing campaigns, newsletters and discussion groups, while supportedby Lyris’ data facility and technical staff.

Over ninetypercent (90%) of Lyris’ revenues come from the licensing of*ListManager* software, the sale of supportand maintenance services for*ListManager*software and from the sale of the use of*ListManager*softwareon a hosted basis.

***EmailLabs***.  For the past eightyears, EmailLabs has developed and licensed software called *EmailLabs*, which manages email lists similar to thosemanaged by Lyris.  This software enables customers to develop, send andmonitor complex email mailings reliably and to customize the design of themailings to their members’ preferences.  Customers obtain the benefits ofEmailLabs functionality primarily by logging onto EmailLabs’ servers via theinternet on a hosted basis.

Over ninety-sevenpercent (97%) of EmailLabs’ revenue comes from the sale of the use of *EmailLabs* on a hosted basis, and from related support andmaintenance services.

***Web Analytics Software. *** For thepast five years, ClickTracks has developed and licensed web analyticssoftware.  ClickTracks offers three different types of products, all ofwhich enable customers to track and report on basic statistics about thebehavior of visitors to their websites.  These products use the same codebase and are branded Optimizer, Professional, and JDC.  ClickTracks alsosells software to agencies and ISPs (internet service providers) which run thesoftware on behalf of other customers.  Most of ClickTracks’ revenue comesfrom the sale of installed software, the sale of maintenance and supportservices, and from the sale of the use of ClickTracks’ software on a hostedbasis.

***Web Content Management Software.*** Hot Banana, which sells two products, is the successor organization to acompany founded in 2001.  The first is Hot Banana Web Content ManagementSuite, which enables customers to manage content across their different web propertiesmore easily, including corporate web sites, intranets, extranets, landing pagesand micro marketing sites.  The second is Hot Banana Active MarketingSuite, which integrates several features including content management, webanalytics, email marketing, and event registration to enable marketingprofessionals to effectively plan and execute web-centric marketingcampaigns.  Most of Hot Banana’s revenue comes from the sale of softwareon an installed basis together with professional services, including creativedesign, content creation, and other web site development services.

***Other Products***. In November 2004,Lyris acquired Piper Software Company and its*EmailAdvisor* product, which is sold on a hosted basis. *  EmailAdvisor*is a deliverability monitoring tool that helps facilitate the delivery oflegitimate email while taking into account the complexity of different emailprograms.  With the tremendous increase in spam (see “U.S. and ForeignGovernment Regulation” below), many ISPs, network administrators and others nowdeploy anti-spam filters to prevent spam from entering their emailinboxes.  Many of these anti-spam filters unfortunately block legitimateemails that people want to receive. *  EmailAdvisor* helps email sendersminimize the chance that legitimate email is wrongly blocked.

Lyris also sellsemail security and antispam software.  This product, called*MailShield*, is a server-based emailfiltering application that allows organizations to proactively manage andprevent unauthorized inbound and outbound email. *  MailShield*is used at the enterprise level to block spam and email viruses and preventrelay abuse by which spammers exploit servers to send their mail, and also tofilter content contained in outbound email

Finally, Lyrisoffers another software product called*MailEngine*. *MailEngine*is an SMTP Mail Transfer Agent (“MTA”).  This is the software thatactually sends the email out through the internet’s mail system. Companies partner*MailEngine* withtheir own internal systems to send high volumes of email.

***Customers***

Over 8,000customers have purchased**our software products and more than 2,000customers use our software on a hosted basis.  Our customers includeseveral departments of the U.S. government, national political campaigns, localgovernments and political campaigns, Fortune 500 and smaller companiesincluding many top software companies, and some of the largest and mostreputable academic organizations, charitable organizations and athletic teams.

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***Strategy***

Our primary goalis to create value for our stockholders by creating and delivering efficientlyand profitably a leading set of products to our customers.  We hope tosell products and services at a quality and price points that deliver value forour customers.  To accomplish these goals and objectives, our aim is tobecome a leader in developing and selling technology solutions for digitalmarketers, primarily focusing on small and medium-size organizations.  Weintend to achieve this objective by improving and diversifying our currentproduct offerings through research and development, by unifying our products tooffer a bundled offering incorporating next-generation technology, and throughselect strategic acquisitions.  Webelieve an opportunity exists to provide a wider array of services to ourclients and in particular, provide more integrated solutions that satisfy theneeds of our customers.  Because we operate in a fragmented market,characterized by a large number of small competitors and a handful ofmedium-sized competitors, we believe there may be an opportunity to createstockholder value by acquiring competing and complementary businesses or bypartnering to include their technology in an integrated suite.

***Sales and Marketing***

Our sales andmarketing activities are based in our Emeryville, California headquarters withadditional personnel in Menlo Park and Santa Cruz, California and in Barrie,Ontario.  The sales team is structured by product, with teams focused onthe respective brands.  The sales teamalso includes a group of account managers who focus on retention and developingnew business from our largest clients.  As of June 30, 2007, our sales andmarketing organization consisted of 53 employees.  Our marketing effortsconsist of trade shows, business development activities including technology,agency and referral partnerships, limited print advertising, and internetadvertising including “pay-per-click” (PPC) marketing on major search enginessuch as Google and Yahoo.

***Customer Service, Support and Operations***

We believe thatcontinuous data center operations and quality customer service and support arecrucial to our success in selling software and hosting services.

We currently leasespace and services in secure co-location data facilities in Fremont, Novato,Santa Clara and Menlo Park, California and in Parsippany, New Jersey. These facilities have redundant electrical generators and UPS power supplies,fire suppression systems, and 24x7 physical security that protect thefacilities.  Our network software constantly monitors our systems andnotifies systems engineers if any unexpected conditions arise.

We providecustomer service and support in differing levels depending on the productpurchased.  *ListManager* software customers receive “included support,”which provides free web access to our online support databases and thirty daysof email assistance.  Customers may also purchase two levels of paidsupport.  The first level, referred to as Essential Support, providesemail assistance and free access to minor upgrades during the term of thesupport contract.  The second level, referred to as Comprehensive Support,includes email and telephone support (subject to certain limits) and freeaccess to minor and major upgrades for one year.

For our hostedemail offerings, including *EmailLabs*,*SparkList* and Lyris*ListHosting*, we offer free access to ouronline support databases and web seminars on the fundamentals of our hostedproducts as well as on the basics of email marketing and communication. Upgrades are automatically deployed to clients since the service is providedusing our servers on a hosted basis.  *EmailLabs*’ standard contract allows for two hours of phonesupport per month, with a fee for additional hours used.  In addition,each client goes through a standard one to two-hour personalized trainingsession.  Additional customized training sessions are available at acharge.

ClickTracksprovides technical support via an online ticketing system to all existingcustomers under a current maintenance contract (based on named keycontacts).  Normal support hours are 6am to 6pm US Pacific Time, and 8amto 5pm in the UK.  ClickTracks typically responds on the same day thatquestions are received.  ClickTracks periodically releases softwareupdates with basic product improvements.  All customers can download theseupdates, free of charge, through ClickTracks’ website.  Major upgrades areincluded in the regular yearly maintenance contract.  Major upgradesinclude all new features and enhancements to the software (beyond the productupdates available to all users).  Customers who require more personalizedtechnical support can also purchase the Premium Support package.  PremiumSupport guarantees four-hour response time and priority routing of issues to anengineer.  Premium Support is 30% of the license price per year.

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Hot Bananaprovides application support for phone and email queries to all clients. Other online help tools also are provided.  Each client goes through animplementation process for a fee, and additional customization trainingsessions are also available at a charge.  Upgrades to the Hot Bananaproduct are automatically deployed to clients at no charge since it isdelivered as a hosted service.

As of June 30,2007, our operations, customer service and support organization had 28employees.

***Technology***

Our products arewritten in several computing languages, including Flex, Cold Fusion, C, C++,C#, and TCL, among others.  They are designed to run in conjunction with anumber of different commercial database servers, including mySQL, Microsoft SQLServer and Oracle.  Lyris’ and EmailLabs’ platforms are designed to handlehundreds of thousands of emails per hour, while emphasizing reliability,availability and security.  They automatically handle bounces due to invalidemail addresses and track user activity after receipt of the emails, such asopen detection, clickthrough tracking and purchase tracking.  Theinformation gathered from user activities is digested into reports and can beused for initiating further email campaigns.

Our securitysystems control access to internal systems and data via the internet.Internally, log-ins and passwords are maintained for all systems, with accesscontrol granted on an individual basis to only the required areas for which therecipient is responsible.  Firewalls prevent unauthorized access fromoutside or access to confidential data on the inside.  We rely on certainencryption and authentication technologies licensed from third parties toprovide secure transmission of confidential information.

***Research and Development***

Because we competein technology markets, we must try to continually innovate as fast or fasterthan our competition. We are committed to supporting and updating our coretechnology and to expanding our product offerings to provide a leading set ofproducts that meet the needs of our customers.  We are continuallyreinvesting resources in product development.

Historically, wehave released major upgrades to our flagship products every 12 to 16 months andhave augmented these offerings with periodic minor upgrades.  As of June30, 2007, we have approximately 61 engineers who are engaged in maintaining ourcurrent products and researching, developing, testing and deploying newversions of our software.

***Competition***

***General***.  We operate in extremelycompetitive technology markets.  Many of our competitors havesignificantly greater resources (financial, technical, marketing, human capitaland other resources) than we do.  In general, the barriers to entry insoftware and hosting markets are considered to be low.  New competitorscan and will enter the markets in which we compete.  We believe thefollowing factors are important or may become important in the competition forcustomers:

·                  Product featureset;

·                  Ease of use ofthe products;

·                  Ability tointegrate with other applications that our clients use to interact with theircustomers such as Customer Relationship Management (“CRM”), enterprisemarketing management (“EMM”), Web analytics, Enterprise Resource Planning packagesand consumer and business databases;

·                  Performance andscalability;

·                  Price and totalcost of ownership;

·                  Stability andreliability;

·                  Quality ofcustomer service and support;

·                  Brand name andreputation; and

·                  Ability toprovide services in a secure environment and maintain the confidentiality ofcustomer data.

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***Email Marketing Markets. ***The market for email marketing software and hostedemail marketing services is fragmented with many participants, and we haveseveral types of competitors.  Some of these competitors offer anon-premise software solution, others offer a hosted service, and still othersoffer both, as we do.

There are manysmall, privately-held competitors, particularly on the hosted side.  Manycompetitors price their products below ours.  At the higher end of theemail marketing market, there are a number of large companies that compete witheither an integrated offering or that compete with large staffs of people whohelp customize the applications for their customers’ needs.  Among thecompanies that include email marketing in an integrated offering are CRMsoftware vendors such as Siebel, EMM software vendors such as Unica, outsourcede-commerce solution providers such as Digital River, database marketers such asExperian (which owns CheetahMail), Axciom (which owns Digital Impact) and HarteHanks (which owns PostFuture).  Alliance Data Systems’ Epsilon divisionoffers email marketing services under the brand names BigFoot Interactive andDartMail as part of an integrated solution.  Other competitors includeSilverpop, Responsys, Exact Target, Constant Contact and SubscriberMail.

***Email Security and Anti-Spam Markets***.  In the email security and anti-spam markets,there are a number of very large competitors and several well-funded start-upcompetitors.  Large companies who operate in this market include Symantec,Cisco, McAfee, Microsoft, Tumbleweed and Trend Micro.  Additionally, manyother privately held companies compete in this space, many of whom have raisedsignificant funding from private investors.  Some of the largerprivately-held companies include Proofpoint, MXLogic, Sophos, Kaspersky Labs,and Cloudmark.  Other competitors provide enabling anti-spam technologyrather than an end-user solution.  Examples of such companies includeMailshell, Commtouch and MailFrontier (acquired by SonicWall).  Emailsecurity and anti-spam markets are among the most competitive of all markets inthe high tech space.

***Web Analytics Market***.  In the web analytics market, there are anumber of large competitors and several well-funded start-up competitors. Large companies who operate in this market include Visual Sciences, WebTrends,Omniture, CoreMetrics, and Urchin (acquired by Google).  Additionally,many other smaller, privately held companies compete in this space, includingIndextools, OneStat, and Manticore Technology.  The web analytics marketis among the most competitive of all technology markets.

***Web Content Management Market***.  In the web content management market, thereare a number of very large competitors and several well-funded start-upcompetitors.  Large companies who operate in this market include EMC(through its Documentum subsidiary), Interwoven, Silver Lake Software,Hummingbird, and Vignette Software.  Additionally, many other smallerprivately held companies compete in this space, including CrownPeak,Clickability, Ektron, PaperThin, and FatWire.

***Intellectual Property***

We have filedseveral patent applications.  One coverssome of the technology developed for*EmailAdvisor*, while fourare related to technology and processes developed for ClickTracks. We enter into confidentiality and proprietary rights agreements with ouremployees, consultants, and other third parties in order to try to protect ourtrade secrets and intellectual property.  In recent years, many softwarecompanies have filed patents covering their technologies.  Many of thesepatents have yet to be litigated.  Others may develop technologies thatare similar or superior to our technology and may receive and enforce patentson such technology.  We are aware of several issued or pending patentsthat may be asserted against us.

***U.S. and Foreign Government Regulation***

Email has been thesubject of regulation by local, state, federal and foreign governments. In 2003, the US Congress passed the CAN-SPAM Act.  The CAN-SPAM Act of2003 establishes the United States’ first national standards for the sending ofcommercial email and requires the Federal Trade Commission (FTC) to enforce itsprovisions.

CAN-SPAM definesspam as “any electronic mail message the primary purpose of which is thecommercial advertisement or promotion of a commercial product or service(including content on an Internet website operated for a commercial purpose).”It exempts “transactional or relationship messages.” The bill permits emailmarketers to send unsolicited commercial email as long as it contains all ofthe following: an opt-out mechanism; a valid subject line and header (routing)information; and the legitimate physical address of the mailer, among otherrequirements.

If a user optsout, a sender has ten days to remove the address. The legislation alsoprohibits the sale or other transfer of an email address after an opt-outrequest.

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We believestrongly that emailers should send email only to those who have requested orgiven permission (twice) for email to be sent.  We do not permit any ofour hosted customers to send SPAM, and we require by contract that our softwarepurchasers and hosted clients comply with CAN-SPAM.  Additionally, Lyrissells an anti-spam solution, called*MailShield*.

***Corporate Background***

***Acquisition of Lyris***

On May 12, 2005,we acquired all of the outstanding capital stock of Lyris.  The purchaseprice was $30.7 million, which included cash payments of $25.1 million (includingacquisition costs and working capital adjustments of $1.2 million) and $5.6million in the form of a promissory note payable, subject to Lyris’ achievingspecified revenue targets, on the second anniversary of the closing date withinterest equal to 10% per annum.  Thespecified revenue targets stated in the promissory note were attained.  On March 31, 2007, this note was amended toextend the maturity date to November 12, 2008. In addition, the amendment provided for the following payments (constitutingboth principal and interest): (a) $1,000,000 due May 12, 2007; (b) $1,453,447due February 12, 2008; and (c) $4,687,666 due November 12, 2008.  We paid $1,000,000 on May 14, 2007.  With this acquisition, we became a leadingemail marketing company with over 5,000 customers worldwide.

***Acquisition of EmailLabs***

On October 11,2005, we acquired all of the outstanding capital stock of EmailLabs for $24.5million (including acquisition costs and working capital adjustments of$612,000).  Of this purchase price, $19.5 million was paid in cash atclosing of which $2.3 million was funded by EmailLabs’ available cash. $500,000 of the purchase price was held back as security against EmailLabsmeeting certain agreed upon minimum working capital requirements.  Thisholdback, less the final working capital adjustment, was paid during thequarter ended March 31, 2006.  The agreement also includes contingentmerger consideration consisting of two equal earn-out payments of $1.725million due on the first and second anniversary of the closing date ifEmailLabs achieves specified revenue targets.  We paid the first $1.725million installment to the former EmailLabs’ stockholders on October 13,2006.  EmailLabs has achieved all revenue targets and, as a result, wehave accrued the liability for the second installment in the current portion ofour Balance Sheet at June 30, 2007.  Withthis acquisition, we extended our role in the email marketing market.

***Acquisition of ClickTracks***

On August 18,2006, we acquired all of the outstanding capital stock of ClickTracks forapproximately $8.5 million in cash and $2.8 million of our common stock issuedto certain security holders of ClickTracks.  Pursuant to the purchaseagreement, we agreed to additional payments totaling approximately $3.8 millionin the event ClickTracks achieves future revenue targets and working capitaladjustments.  In accordance with anagreement between us and John Marshall, the former President of ClickTracksAnalytics, Inc. dated March 13, 2007, Mr. Marshall, acting in his capacity asthe representative of the former stockholders of ClickTracks, acknowledged thatthe revenue targets for the initial post-closing payment would not be met.  Then, pursuant to an agreement between us andMr. Marshall (again acting as representative of the former ClickTracksstockholders), dated June 8, 2007, Mr. Marshall waived all rights to any futurepayments under the original purchase agreement. On July 2, 2007, we purchased 2,226,006 shares of our common stock at apurchase price of $0.75 per share, (or $1,669,504.50 in the aggregate) fromJohn Marshall, the former president of ClickTracks in accordance with anAgreement that was entered into between us and Mr. Marshall on June 8, 2007.These shares represented the number of shares Mr. Marshall received from us onAugust 18, 2006, as part of our acquisition of ClickTracks.

***Acquisition of Hot Banana***

On August 18,2006, we acquired all of the outstanding capital stock of Hot Banana, forapproximately $1.9 million Canadian ($1.8 million U.S. based on thethen-applicable exchange rate), with additional installments of up to $750,000Canadian ($670,661 U.S.) if Hot Banana achieves specified revenue andtechnology integration targets, and up to an additional $500,000 Canadian($447,107 U.S.) payable subject to working capital and other adjustments. InMarch 2007 we paid approximately $94,000 Canadian ($81,000 U.S.) and in May2007 we paid approximately $94,000 Canadian ($86,000 U.S.) to the former ownersof Hot Banana for the first and second installments of the technologyintegration earn-out. In April 2007, we paid approximately $336,000 Canadian($299,000 U.S.) to the former owners of Hot Banana for the final workingcapital adjustment.  We believe that it is probable that Hot Banana’sperformance will result in contingent payments for revenue targets to thesellers of Hot Banana and, as a result, we have recorded $487,858 as aliability in the current and long-term portions of our Balance Sheet as ofJune 30, 2007.

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***Discontinued operations***

We are thesuccessor to NovaCare, Inc. (“NovaCare”), which was a national leader inphysical rehabilitation services, orthotics and prosthetics and employeeservices. The changes to Medicare reimbursement in the late 1990’s haddeleterious effects on us and our competitors and customers.  The prioroperating business most affected by the Medicare changes was the long-term careservices segment in which NovaCare provided therapists to skilled nursingfacilities.  This business was disposed of in fiscal 1999 with theshutdown of certain of its operations in the Western United States during thethird fiscal quarter and the sale of the remaining operations on June 1, 1999.NovaCare’s former outpatient services segment was disposed of through the salesof its orthotics and prosthetics (O&P) and physical rehabilitation andoccupational health (PROH) businesses. The O&P business was sold to HangarOrthopedic Group, Inc. in July of 1999 and the PROH business was sold to SelectMedical Corporation in November of 1999.  NovaCare’s former employeeservices segment was disposed of through the sale of NovaCare’s interest inNovaCare Employee Services (“NCES”) in October of 1999 to a subsidiary of PlatoHoldings, Inc. as part of a tender offer by Plato for all of NCES’s outstandingshares.  With cash raised from the sales of these businesses, we repaidall of NovaCare’s bank debt in the summer of 1999, and in January of 2000 weretired NovaCare’s publicly-traded subordinated debt.

We sold theNovaCare name as part of the sale of the PROH business and we subsequentlychanged our name to NAHC, Inc. (“NAHC”).  On June 18, 2002, in atransaction approved by our stockholders at a special meeting, NAHC merged withand into Halsey, its wholly-owned subsidiary. The purpose of the merger betweenNAHC and Halsey was to implement transfer restrictions on our common stock inorder to preserve our federal income tax net operating losses.

Prior to theacquisitions of Lyris, EmailLabs, ClickTracks and Hot Banana, we spent severalyears maximizing remaining assets, including old accounts receivable, Medicarereceivables and appeals, and tax items, and minimizing liabilities retainedafter the sales of the operating businesses.  We have collected virtuallyall of the receivables, other than amounts which are the subject of litigationor arbitration or that have been written off, and also resolved all but onelitigation matter remaining from our prior operations.  None of ourcurrent executives or directors were associated with us prior to, or at thetime of, the sale of the NovaCare healthcare operating businesses in 1999.

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**ITEM1A. RISK FACTORS**

*Thefollowing section describes risks and uncertainties that we believe mayadversely affect our business, financial condition or results of operations. The risks described below are not the only risks facing us. Additional risksnot currently known to us or that we currently deem immaterial may also impairour business operations. Our business, financial condition or results ofoperations could be materially adversely affected by any of these risks. This Annual Report on Form 10-K is qualified in its entirety by theserisks.  This Annual Report also contains forward-looking statements thatinvolve risks and uncertainties. Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofcertain factors, including the risks faced by us described below and elsewherein this report.   The market price of our common stock could declinedue to any of these risks and uncertainties, or for other reasons, and you maylose part or all of your investment.*

**RisksRelated to Our Business and Industry**

***Our business is substantially dependent on the market foremail marketing.***

More than 90% ofour revenue comes from the market for email marketing — from the licensing ofsoftware, the sale of support and maintenance contracts related to oursoftware, and from the sale of hosted services.  The remainder of ourrevenue, with the acquisitions of ClickTracks and Hot Banana, comes from Webanalytics and content management.  The markets for email marketing, webanalytics, marketing content management and related services are relatively newand still evolving.  There can be no certainty regarding how or whether thesemarkets will develop, or whether they will experience any contractions.

***Seasonal trends may cause our quarterly operating results tofluctuate, which may adversely affect the market price of our common stock.***

The traditionaldirect marketing industry has typically generated lower revenues during thesummer months and higher revenues during the calendar year-end months. Webelieve our business is also affected by similar revenue fluctuations, but ourlimited operating history and the impact of our acquisitions and theintegration of those acquisitions make it difficult to predict the magnitude ofthese effects. Because we may experience these effects, investors (and,possibly, securities analysts) may not be able to predict our quarterly orannual operating results. If we fail to meet expectations of securitiesanalysts and investors, our stock price could decline.

***If businesses and consumers fail to accept online directmarketing as a means to attract and retain new customers, demand for ourservices may not develop and the price of our stock could decline.***

The market foronline direct marketing services is relatively new, rapidly evolving and ourbusiness may be harmed if sufficient demand for our services does not develop.Our current and planned services are very different from the traditionalmethods that many of our clients have historically used to attract newcustomers and maintain customer relationships.  As a result, customers andpotential customers may be reticent to try new technologies and new solutions, andthe demand for our services may not develop or may decline, which could causeour stock price to decline.

***Our results depend on consumer use of email and theInternet.  If consumers do not continue to use email and the Internet,demand for our services may not develop and the price of our stock coulddecline.***

Our current andplanned services enable customers to use email and the internet to increaserevenue and traffic from, and communication with, their online audiences,customers and members. Our ability to serve these customers therefore dependson their audiences continuing to use both email and the Internet ascommunications media.  If consumer adoption of either technology declines,demand for our services may not develop or may decline.

***The growth of the email marketing market depends on thecontinued growth and effectiveness of anti-spam products.***

Adoption of emailas a communications medium depends on the ability to prevent junk mail, or “spam,”from overwhelming a subscriber’s electronic mailbox.  In recent years,many companies have evolved to address this issue and filter unwanted messagesbefore they reach customers’ mailboxes.  In response, spammers have becomemore sophisticated and have also begun using junk messages as a means forfraud.  Email protection companies in turn have evolved to address thisnew threat.  However, if their products fail to be effective against spam,adoption of email as a communications tool will decline, which would adverselyaffect the market for our services.

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***The online direct marketing industry is highly competitive,and if we are unable to compete effectively, the demand for, or the prices of,our services may decline.***

The market foronline direct marketing is highly competitive, rapidly evolving and experiencingrapid technological change. Intense competition may result in price reductions,reduced sales, reduced gross margins and operating margins, and loss of marketshare. Our principal competitors include providers of online direct marketingsolutions such as DoubleClick (acquired by Google), Responsys, Experian,Silverpop, Bigfoot Interactive, Exact Target, Constant Contact and InfoUSA, webanalytics providers such as Omniture, Core Metrics, Visual Sciences andWebTrends, and Urchin (acquired by Google), web content management providerssuch as Interwoven and Vignette Software, Silver Lake Software and many othersmaller privately held companies, including Indextools, OneStat, and ManticoreTechnology. The loss of a client due to service quality or technology problemscould result in reputational harm to us and, as a result, increase the effectof competition and negatively impact our ability to attract new clients.

Many of thesepotential competitors have broad distribution channels and may bundlecomplementary products or services. Such bundled products include, but are notlimited to, web analytics, data mining, customer relationship management (CRM)systems and professional services.  If we are not able to bundlecomplementary services or continue to expand our distribution capabilities, ourresults may suffer.

In addition, weexpect competition to persist and intensify in the future, which could harm ourability to increase sales and maintain our prices. In the future, we mayexperience competition from Internet service providers, advertising and directmarketing agencies and other large established businesses possessing large,existing customer bases, substantial financial resources and establisheddistribution channels.  These businesses could develop, market or resell anumber of online direct marketing solutions. These potential competitors mayalso choose to enter, or have already entered, the market for online directmarketing by acquiring one of our existing competitors or by forming strategicalliances with a competitor. As a result of future competition, the demand forour services could substantially decline. Any of these occurrences could harmour ability to compete effectively.

***If we fail to respond to rapidly changing technology orevolving industry standards, our products and services may become obsolete orless competitive.***

The markets forour products and services are characterized by rapid technological advances,changes in client requirements, changes in protocols and evolving industrystandards.  If we are unable to develop enhancements to, and new featuresfor, our existing products and services, or develop entirely new products andservices, our products and services may become obsolete, less marketable orless competitive, and our business will be harmed.  The ability to add newenhancements, new features and new services depends on several factors,including having sufficient financial, technical and human resources andcompleting such work in a timely fashion.  Failure to produce timely acceptablenew features will significantly impair our ability to retain existing revenueand earn new revenue.

***If we fail to market new features and migrate customers tonew versions of our system, our products and services may become obsolete orless competitive.***

The development ofproprietary technology and service enhancements and the migration of customersto new technology entail significant technical and business risks and requiresubstantial expenditures and lead-time. We might not be successful in marketingand supporting recently released versions of our technology and services on atimely or cost-effective basis. In addition, even if new technology andservices are developed and released, they might not achieve market acceptance.Also, if we are not successful in a smooth migration of customers to new orenhanced technology and services, we could lose customers.

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***We face significant threats from new entrants to ourbusiness.***

Barriers to entryin software markets are low.  Privately-backed and public companies couldchoose to enter our space and compete directly with us, or indirectly byoffering substitute solutions.  The result could be decreased demandor pricing for our services, longer sales cycles, or a requirement to makesignificant incremental investments in research and development to match theseentrants’ new technologies.  If any of these happens, it could cause us tosuffer a decline in revenues and profitability.

***The majority of our hosted services are sold pursuant toshort-term subscription agreements, and if our customers elect not to renewthese agreements, our revenues may decrease.***

Typically, ourhosted services are sold pursuant to short-term subscription agreements, whichare generally six months to one year in length, with no obligation to renewthese agreements. Our renewal rates may decline due to a variety of factors,including the services and prices offered by our competitors, new technologiesoffered by others, consolidation in our customer base or if some of ourcustomers cease their operations. If our renewal rates are low or decline forany reason, or if customers renew on less favorable terms, our revenues maydecrease, which could adversely affect our stock price.

***Defects in our products could diminish demand for our productsand services and cause us to lose customers.***

Because ourproducts and services are complex, they may have errors or defects that usersidentify after they begin using them, which could harm our reputation andbusiness.  In particular, our anti-spam products may identify somelegitimate emails as unwanted or unsolicited spam, or we may not be able tofilter out a sufficiently high percentage of unsolicited or unwanted messagessent to the email accounts of customers.  Complex software products likeours frequently contain undetected errors when first introduced or when newversions or enhancements are released.  In addition, we may be unable torespond in a prompt manner, or at all, to new methods of attacking a messagingsystem, such as new spamming techniques.  We have from time to time founddefects in products, and errors in existing products may be detected in thefuture.  Any such errors, defects or other performance problems couldimpact the perceived reliability of our products and services and hurt ourreputation.  If that occurs, customers could elect not to renew orterminate their subscriptions and future sales could be lost.

***If the delivery of our email messages is limited or blocked,then the amount we may be able to charge clients for producing and sendingtheir campaigns may be reduced and clients may discontinue their use of ourservices.***

Internet serviceproviders are able to block messages from reaching their users. Recent releasesof Internet service provider software and the implementation of stringent newpolicies by Internet service providers make it more difficult to deliver emailson behalf of customers. We continually improve our own technology and work withInternet service providers to improve our ability to successfully deliver emails.However, if Internet service providers materially limit or halt the delivery ofour emails, or if we fail to deliver emails in such a way as to be compatiblewith these companies’ email handling or authentication technologies, then theamount we may be able to charge clients for producing and sending their onlinedirect marketing campaigns may be reduced and clients may discontinue their useof our services.  In addition, the effectiveness of email marketing maydecrease as a result of increased customer resistance to email marketing ingeneral.

***Our facilities and systems are vulnerable to naturaldisasters and other unexpected events and any of these events could result inan interruption of our ability to execute clients’ online direct marketing campaigns.***

We depend on theefficient and uninterrupted operations of our data centers and hardwaresystems. The data centers and hardware systems are located in California, anarea susceptible to earthquakes. The data centers and hardware systems are alsovulnerable to damage from fire, floods, power loss, telecommunications failuresand similar events. If any of these events results in damage to our datacenters or systems, we may be unable to execute clients’ hosted online directmarketing campaigns until the damage is repaired, and may accordingly loseclients and revenues. In addition, subject to applicable insurance coverage, wemay incur substantial costs in repairing any damage.

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***System failures could reduce the attractiveness of ourservice offerings.***

We provide emailmarketing and delivery services to our clients and end-users through ourproprietary technology and client management systems. The satisfactoryperformance, reliability and availability of the technology and the underlyingnetwork infrastructure are critical to our operations, level of client service,reputation and ability to attract and retain clients. We have experiencedperiodic interruptions, affecting all or a portion of our systems, which webelieve will continue to occur from time to time. Any systems damage orinterruption that impairs our ability to accept and fill client orders couldresult in an immediate loss of revenue to us, and could cause some clients topurchase services offered by our competitors. In addition, frequent systemsfailures could harm our reputation.  Some factors that could lead tointerruptions in customer service include: operator negligence; improper operation by, or supervision of,employees; physical and electronic break-ins; misappropriation; computer virusesand similar events; power loss; computer systems failures; and Internetand telecommunications failures. We do not carry sufficient businessinterruption insurance to fully compensate us for losses that may occur.

***A rapid expansion of our network and systems could cause ournetwork or systems to fail or cause our network to lose data.***

In the future, wemay need to expand our network and systems at a more rapid pace than we have inthe past. We may suddenly require additional bandwidth for which we have notadequately planned. We may secure an extremely large customer, group ofcustomers, or experience demands for growth by an existing customer or set ofcustomers that would require significant system resources. Our network orsystems may not be capable of meeting the demand for increased capacity, or wemay incur additional unanticipated expenses to accommodate such capacityconstraints. In addition, we may lose valuable data or our network maytemporarily shut down if we fail to expand our network to meet futurerequirements. Any disruption in our network processing or loss of data maydamage our reputation and result in the loss of customers.

***If we are unable to safeguard the confidential informationin our data warehouse, our reputation may be harmed and we may be exposed toliability****.*

We currently storeconfidential customer information in a secure data warehouse owned by a thirdparty. We cannot be certain, however, that we will be able to preventunauthorized individuals from gaining access to this data warehouse. If anycompromise or breach of security were to occur, it could harm our reputationand expose us to possible liability. Any unauthorized access to our serverscould result in the misappropriation of confidential customer information or causeinterruptions in our services. It is also possible that one of our employeescould attempt to misuse confidential customer information, exposing us toliability. In addition, our reputation may be harmed if we lose customerinformation maintained in our data warehouse due to systems interruptions orother reasons.

***If we are unable to protect our intellectual property or ifthird parties develop superior intellectual property, third parties could useour intellectual property without our consent and prevent us from using theirtechnology.***

Our ability tosuccessfully compete is substantially dependent upon internally developedtechnology and intellectual property, which we protect through a combination ofpatent, copyright, trade secret and trademark law, as well as contractualobligations. We may not be able to protect our proprietary rights. Unauthorizedparties may attempt to obtain and use our proprietary information. Policingunauthorized use of our proprietary information is difficult, and we cannot be certainthat the steps we have taken will prevent misappropriation, particularly inforeign countries where the laws may not protect our proprietary rights asfully as in the United States.

We are one ofseveral companies rapidly building new technologies in this industry.  Itis possible that a third party could be awarded a patent that applies to someportion of our business.  If this occurs, we may be required to incursubstantial legal fees, cease using the technology or pay significant licensingfees for such use.  We are aware of several patents that may be assertedagainst us.

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***We rely upon third parties for technology that is critical to ourproducts, and if we are unable to continue to use this technology and futuretechnology, our ability to sell or continue to support subscriptions to ourproducts and services would be limited and our operating results could beharmed.***

We rely onnon-exclusive software license rights from third parties in technologies thatare incorporated into and necessary for the operation and functionality of ourproducts. Our licenses often require the payment of royalties or otherconsideration to third parties. Our success depends in part on our continuedability to have access to these technologies, and we do not know whether thesethird-party technologies will continue to be licensed to us on commerciallyreasonable terms or at all. Our loss of license to, or the inability tosupport, maintain and enhance, software products we license from third partiescould result in our customers having to upgrade their Lyris or EmailLabsproducts. In addition, a loss of license from third parties could lead toincreased costs and delays or reductions in our product development, sales andsupport until we are able to develop functionally equivalent software oridentify and obtain licenses to alternative third party software withcomparable functionality, which we may be unable to do. As a result, ourmargins, market share and operating results could be significantly harmed. Ifany of these events occurs, our business and operating results could be harmed.

***If a third party asserts that we are infringing itsintellectual property, whether successful or not, it could subject us to costlyand time-consuming litigation or expensive licenses, and our business may beadversely affected.***

The software andInternet industries are characterized by the existence of a large number ofpatents, trademarks and copyrights and by frequent litigation based onallegations of infringement or other violations of intellectual propertyrights. Third parties may assert patent and other intellectual propertyinfringement claims against us in the form of lawsuits, letters or other formsof communication. If a third party successfully asserts a claim that we areinfringing their proprietary rights, royalty or licensing agreements might notbe available on terms we find acceptable or at all. Because currently pendingpatent applications are not publicly available for certain periods of time, wecannot anticipate all such claims or know with certainty whether our technologyinfringes the intellectual property rights of third parties.  As a generalmatter, we do not search patent office files for patents or patent applicationsthat we may possibly infringe.  We are aware of several patents thatpotentially may be asserted against us.

From time to timewe may be named as a defendant in lawsuits claiming that we have, in some way,violated the intellectual property rights of others. Existing lawsuits againstothers in this industry, as well as any future assertions or prosecutions ofclaims like these, could require us to expend significant financial andmanagerial resources. The defense of any claims, with or without merit, couldbe time-consuming, result in costly litigation and diversion of technical andmanagement personnel, cause product enhancement delays or require that wedevelop non-infringing technology or enter into royalty or licensingagreements.

We expect that thenumber of infringement claims in our market will increase as the number ofservices and competitors in our industry grows. These claims, whether or notsuccessful, could:

·                  divertmanagement’s attention;

·                  result in costlyand time-consuming litigation;

·                  require us toenter into royalty or licensing agreements, which may not be available onacceptable terms, or at all; or

·                  require us toredesign our software and services to avoid infringement.

As a result, anythird-party intellectual property claims against us could increase our expensesand adversely affect our business. In addition, many of our subscriptionagreements require us to indemnify our customers for third-party intellectualproperty infringement claims, which would increase the cost to us resultingfrom an adverse ruling in any such claim. Even if we have not infringed anythird parties’ intellectual property rights, we cannot be sure our legaldefenses will be successful, and even if we are successful in defending againstsuch claims, our legal defense could require significant financial resourcesand management time.

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***Activities of clients could damage our reputation or giverise to legal claims against us.***

Clients’ promotionof their products and services may not comply with federal, state and locallaws. We cannot predict whether our role in facilitating these marketingactivities would expose us to liability under these laws. Any claims madeagainst us could be costly and time-consuming to defend. If we are exposed tothis kind of liability, we could be required to pay fines or penalties,redesign business methods, discontinue some services or otherwise expendresources to avoid liability.

Our servicesinvolve the transmission of information through the Internet. These servicescould be used to transmit harmful applications, negative messages, unauthorizedreproduction of copyrighted material, inaccurate data or computer viruses toend-users in the course of delivery. Any transmission of this kind could damageour reputation or could give rise to legal claims against us. We could spend asignificant amount of time and money defending against these legal claims.

***Regulation of, and uncertainties regarding the applicationof existing laws and regulations to, online direct marketing and the Internetcould prohibit, limit or increase the cost of  our business.***

InDecember 2003, Congress enacted the CAN-SPAM Act of 2003, which regulatesthe sending of commercial email and pre-empts state laws regulating commercialemail.  The effect of this legislation on marketers is difficult topredict.  We cannot assure you that this or future legislation regardingcommercial email will not harm our business.  In addition, many stateshave passed laws that are significantly more punitive and difficult to complywith than CAN-SPAM, particularly Utah and Michigan.  It is not clear towhat extent these state laws will in fact be preempted by CAN-SPAM.

Our business couldbe negatively impacted by new laws or regulations applicable to online directmarketing or the Internet or the application of existing laws and regulationsto online direct marketing or the Internet. There is a growing body of laws andregulations applicable to access to, or commerce on, the Internet. Moreover,the applicability to the Internet of existing laws is uncertain and may takeyears to resolve. Due to the popularity and wide-spread use of the Internet, itis likely that additional laws and regulations will be adopted covering issuessuch as privacy, pricing, content, copyrights, distribution, taxation,antitrust, characteristics and quality of services and consumer protection. Theadoption of any additional laws or regulations may impair the growth of theInternet or online direct marketing, which could, in turn, decrease the demandfor our services and prohibit, limit or increase the cost of our doingbusiness.

***We have acquired all of our operating businesses since May2005, and we may continue to expand through acquisitions of, or investments in,other companies or through business relationships, all of which may divert ourmanagement’s attention, resulting in additional dilution to our stockholdersand consumption of resources that are necessary to sustain our business.***

One of ourbusiness strategies is to acquire competing or complementary services,technologies or businesses. We also may enter into relationships with otherbusinesses in order to expand our service offerings, which could involvepreferred or exclusive licenses, additional channels of distribution ordiscount pricing or investments in other companies.

Our completedacquisitions and any future acquisition, investment or business relationshipmay result in unforeseen operating difficulties and expenditures. Inparticular, we may encounter difficulties assimilating or integrating theacquired businesses, technologies, products, personnel or operations of theacquired companies, particularly if the key personnel of the acquired companychoose not to work for us and we may have difficulty retaining the customers ofany acquired business due to changes in management and ownership.  Acquisitions may also disrupt our ongoingbusiness, divert our resources and require significant management attentionthat would otherwise be available for ongoing development of our business.Moreover, we cannot assure you that the anticipated benefits of anyacquisition, investment or business relationship would be realized or that wewould not be exposed to unknown liabilities, nor can we assure you that we willbe able to complete any acquisitions on favorable terms or at all. Inconnection with one or more of those transactions, we may:

·                  issue additionalequity securities that would dilute our stockholders;

·                  use cash that wemay need in the future to operate our business;

·                  incur debt onterms unfavorable to us or that we are unable to repay;

·                  incur largecharges or substantial liabilities;

·                  encounterdifficulties retaining key employees of the acquired company or integratingdiverse business cultures;

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·                  become subjectto adverse tax consequences, substantial depreciation or deferred compensationcharges; and

·                  encounterunfavorable reactions from investment banking market analysts who disapprove ofour completed acquisitions.

***Failure to properly manage and sustain our expansion effortscould strain our management and other resources.***

Our ability tosuccessfully offer services and implement our business plan in a rapidlyevolving market requires an effective planning and management process. We maytry to rapidly and significantly expand the depth and breadth of our serviceofferings. Failure to properly manage this expansion could place a significantstrain on our managerial, operational and financial resources. To manageexpansion, we are required to continually:

·                  improve existingand implement new operational, financial and management controls, reportingsystems and procedures;

·                  install newmanagement information systems; and

·                  train, motivate,retain and manage our employees.

We may be unableto install management information and control systems in an efficient andtimely manner, and our current or planned personnel, systems, procedures andcontrols may be inadequate to support our operations.

***Because competition for our target employees is intense, wemay not be able to attract and retain the highly skilled employees we need tosupport our planned growth.***

To continue toexecute our growth plan, we must attract and retain highly qualified personnel.Competition for these personnel is intense, especially for engineers with highlevels of experience in designing and developing software and Internet-relatedservices. We may not be successful in attracting and retaining qualifiedpersonnel. We have from time to time in the past experienced, and we expect tocontinue to experience in the future, difficulty in hiring and retaining highlyskilled employees with appropriate qualifications. Many of the companies withwhich we compete for experienced personnel have greater resources than we have.In addition, in making employment decisions, particularly in the Internet andhigh-technology industries, job candidates often consider the value of thestock options they are to receive in connection with their employment.Volatility in the price of our stock may, therefore, adversely affect ourability to attract or retain key employees. Furthermore, the new requirement toexpense stock options may discourage us from granting the size or type of stockoption awards that job candidates require in order to join us. If we fail toattract new personnel or fail to retain and motivate our current personnel, ourbusiness and future growth prospects could be severely harmed.

***Any failure to adequately expand our direct sales force willimpede our growth.***

We currently are,and in the future expect to continue to be, substantially dependent on ourdirect sales force to obtain new customers and to manage our customerrelationships. We believe that there is significant competition for directsales personnel with the advanced sales skills and technical knowledge we need.Our ability to achieve significant growth in revenue in the future will dependin large part on our success in recruiting, training and retaining sufficientdirect sales personnel. New hires require significant training and may, in somecases, take more than a year before they achieve full productivity. Our recenthires and planned hires may not become as productive as we would like, and wemay be unable to hire sufficient numbers of qualified individuals in the futurein the markets where we do business. If we are unable to hire and developsufficient numbers of productive sales personnel, sales of our service willsuffer.

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***If we fail to develop our brands cost-effectively, ourbusiness may be adversely affected.***

We believe thatdeveloping and maintaining awareness of our brands in a cost-effective manneris critical to achieving widespread acceptance of our current and futureservices and is an important element in attracting new customers. Furthermore,we believe that the importance of brand recognition will increase ascompetition in our market develops. Successful promotion of our brands willdepend largely on the effectiveness of our marketing efforts and on our abilityto provide reliable and useful services at competitive prices. Brand promotionactivities may not yield increased revenue, and even if they do, any increasedrevenue may not offset the expenses we incur in building our brands. If we failto successfully promote and maintain our brands, or incur substantial expensesin an unsuccessful attempt to promote and maintain our brands, we may fail toattract enough new customers or retain our existing customers to the extentnecessary to realize a sufficient return on our brand-building efforts, and ourbusiness and results of operations could suffer.

***Widespread blocking or erasing of cookies or limitations onour ability to use cookies may impede our ability to collect information withour technology and reduce the value of that data.***

Our technologycurrently uses cookies, which are small files of information placed on anInternet user’s computer, to collect information about the user’s visits to thewebsites of our customers. Third-party software and our own technology make iteasy for users to block or delete our cookies. Several software programs,sometimes marketed as ad-ware or spyware detectors, block our cookies bydefault or prompt users to delete or block our cookies. If a large proportion,such as a majority, of users delete or block our cookies, this could underminethe value of the data that we collect for our customers and could negativelyimpact our ability to deliver accurate reports to our customers, which wouldharm our business.

Changes in webbrowsers may also encourage users to block cookies. Microsoft, for example,frequently modifies its Internet Explorer web browser. Some modifications byMicrosoft could substantially impair our ability to use cookies for datacollection purposes. If that happens and we are unable to adapt our technologyand practices adequately in response to changes in Microsoft’s technology, thenthe value of our services will be substantially impaired. Additionally, othertechnologies could be developed that impede the operation of our services.These developments could prevent us from providing our services to ourcustomers or reduce the value of our services.

In addition, lawsregulating the use of cookies by us and our customers could also prevent usfrom providing our services to our customers or require us to employalternative technology. A European Union Directive currently being implementedby member countries requires us to tell users about cookies placed on theircomputers, describe how we and our customers will use the information collectedand offer users the right to refuse a cookie. Although no European countrycurrently requires consent prior to delivery of a cookie, one or more Europeancountries may do so in the future. If we were required to obtain consent beforedelivering a cookie or if the use or effectiveness of cookies is limited, wewould be required to switch to alternative technologies to collect user profileinformation, which may not be done on a timely basis, at a reasonable cost or atall.

***We may not realize expected benefits from our acquisitions.***

We expect ouracquisitions to result in additional net revenues for us.  Achieving thebenefits of these acquisitions will depend in part on our demonstration tocustomers that the acquisitions will not result in adverse changes in clientservice standards.

With respect tothe integration of personnel, despite our efforts to retain the key employeesof acquired businesses, we may not be successful, as competition for qualifiedmanagement and technical employees in our industry is intense.  We mayalso be perceived to have a different corporate culture and these key employeesmay not want to work for a larger, publicly-traded company.  In addition,competitors may recruit these key employees.  As a result, these keyemployees could leave with little or no prior notice, which could impede theintegration process and harm our business, financial condition and operatingresults.  In connection with these acquisitions certain key employees haveentered into employment agreements or consulting and non-competition agreementsthat will restrict their ability to compete with us if they leave or at theconclusion of their consulting term. We cannot assure you of the enforceabilityof these non-competition agreements or that these employees or consultants willcontinue to work with us under their employment or consulting agreements.

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***Exposure to risks associated with our internationaloperations could unfavorably affect our performance.***

Hot Banana isbased in Ontario, Canada and has significant revenues there.  The successand profitability of our international operations may be adversely affected byrisks associated with international activities, including economic and laborconditions, tax laws and changes in the value of the U.S. dollar versus thelocal currencies in which Hot Banana’s business may be denominated. Specifically with currency risks, we do not currently utilize derivativeinstruments to hedge an exposure to fluctuation in foreign currency, includingthe Canadian dollar, and our revenues may decrease as a result of suchfluctuations.

***We may need to raise additional capital to achieve ourbusiness objectives, which could result in dilution to existing investors orincrease our debt obligations.***

Our capitalrequirements depend on several factors, including the rate of market acceptanceof our products, the ability to expand our client base and the growth of salesand marketing.   In addition, under the terms of the agreementsgoverning our four acquisitions, we are required to make additional payments tothe sellers of the businesses if certain conditions are met.  We believethat some of these conditions are likely to be met, and, therefore, haveclassified specified payments on our balance sheet as short-term or long-termdebt.  Our principal use of cash in the future will be the payment ofearn-outs related to our acquisitions and the pay down of debt.  Based on our current projections, we believewe will be able to make these payments with our available resources.  If however, operating results deteriorate orother adverse events occur, we will not have adequate resources to make thesepayments and we may be forced to seek additional resources.  There is no certainty that we will be able toraise additional equity or other capital, or the terms on which such capitalmay be raised will be favorable to us.  The terms of any new capital maybe superior to, or dilutive to, the existing common shareholders.

***Restrictions in the agreements with our lenders may inhibitour ability to grow.***

We borrowed moneyto purchase EmailLabs and Hot Banana.  Our agreement with Comerica, N.A.,our senior lender, places certain restrictions on us, including restrictions onour total borrowings, our debt to EBITDA ratios, and our ability to buyadditional businesses, among other restrictions.

**Risksrelated to us and Investment in our Common Stock**

***Internet-related stock prices are especially volatile, andthis volatility may depress our stock price or cause it to fluctuatesignificantly.***

The stock market,and the trading prices of Internet-related companies in particular, have beennotably volatile. This volatility is likely to continue in the short-term andis not necessarily related to the operating performance of affected companies.This broad market and industry volatility could significantly reduce the priceof our common stock at any time, without regard to our operating performance.Factors that could cause our stock price in particular to fluctuate include,but are not limited to:

·                  actual oranticipated variations in quarterly operating results;

·                  announcements oftechnological innovations by others or us;

·                  acceptance byconsumers of technologies of companies other than us;

·                  the ability tosign new clients and the retention of existing clients;

·                  new products orservices that we offer;

·                  competitivedevelopments including new products or services, or new relationships by ourcompetitors;

·                  changes thataffect our clients or the viability of their product lines;

·                  conditions ortrends in the Internet and online commerce industries;

·                  global unrestand terrorist activities;

·                  changes in theeconomic performance and/or market valuations of other Internet or onlinee-commerce companies;

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·                  required changesin generally accepted accounting principles and disclosures;

·                  our announcementof significant acquisitions, strategic partnerships, joint ventures or capitalcommitments or results of operations or other developments related to thoseacquisitions;

·                  additions ordepartures of key personnel; and

·                  sales or othertransactions involving our common stock.

***Our executive officers and directors have control over ouraffairs.***

As of July 31,2007, our executive officers and directors and entities affiliated with thembeneficially own or have options exercisable within 60 days to purchase, in theaggregate, approximately 40.3% of our common stock.  The chairman of our board of directors, Mr.William T. Comfort, III, both individually and as general partner of LDNStuyvie Partnership beneficially owns 36.2% of our common stock.  Thesestockholders together have, and Mr. Comfort himself has, the ability to exertsubstantial influence over all matters requiring approval by our stockholders,including the election and removal of directors and any merger, consolidationor sale of all or substantially all of our assets. This concentration ofownership could have the effect of delaying, deferring or preventing a changeof control or impeding a merger or consolidation, takeover or other businesscombination.

***We are a small company without securities analyst coverageat the present time and there is limited trading of our stock.***

Trading marketsfor common stock rely in part on the research and reports that industry orfinancial analysts would publish about us or our business. Currently, nosecurities analysts cover our stock.  As a result, we lack visibility inthe market.  In addition, if one or more analysts initiate coverage withan unattractive rating, our stock price would likely decline rapidly. There is also little liquidity in the trading of our stock and therefore it maybe more difficult for investors to sell our common stock.  Sales of largeblocks of stock may have a significantly greater negative impact because of thelack of liquidity.

***The stock transfer restrictions implemented in the merger ofNAHC, Inc. and J. L. Halsey Corporation may delay or prevent takeover bidsby third parties and may delay or frustrate any attempt by stockholders toreplace or remove the current management.***

The shares ofcommon stock issued by us in the merger with our former parent company, NAHC,Inc., are subject to transfer restrictions that, in general, prevent anyindividual stockholder or group of stockholders from acquiring in excess of 5%of our outstanding common stock. The types of acquisition transactions that wemay undertake will be limited unless our board of directors waives the transferrestrictions. The transfer restrictions also may make it more difficult forstockholders to replace current management because no single stockholder maycast votes for more than 5% of our outstanding shares of common stock, unlessthat stockholder held more than 5% of our common stock before the merger or ourboard of directors specifically authorizes the acquisition of more than 5% ofour common stock.

***We may not be able to realize the benefits of our NOLcarryforwards.***

Our ability to useour potential tax benefits derived from our net operating loss carryforwards infuture years will depend upon the amount of our otherwise taxable income. If wegenerate insufficient taxable income in future years, the NOLs will not beneeded or used and therefore will provide no benefit to us. If we experience achange of ownership within the meaning of Section 382 of the InternalRevenue Code, we will not be able to realize the benefit of our net operatingloss, capital loss and tax credit carryforwards.

***There are uncertainties related to legacy assets andliabilities.***

We continue tomanage a relatively small number of legacy assets and liabilities remainingfrom the period prior to the sale of our operating businesses in1999.   These remaining legacy assets consist of restricted cash, oldreceivables that are the subject of litigation or arbitration, and appeals ofMedicare related claims.  We have established significant reserves againstthese assets because of the uncertainty regarding our ability to collect them.

We are defendingone remaining lawsuit against us. Our management believes that we shouldprevail in this case.  However, there is uncertainty and cost related tothe claim.   The outcome of this matter is not possible to predictand the current reserves include only estimates of the costs of litigating, butdo not reflect the possibility of a settlement, an adverse ruling or a judgmentagainst us. For more information regarding this lawsuit, please see Note 18 tothe Condensed Consolidated Financial Statements.

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***Provisions in our certificate of incorporation and bylawsmight discourage, delay or prevent a change of control of us or changes in ourmanagement and, therefore, depress the trading price of our common stock.***

In addition to theprovisions to protect our NOLs, our amended and restated certificate ofincorporation and bylaws contain provisions that could depress the tradingprice of our common stock by acting to discourage, delay or prevent us fromhaving a change of control or changes in our management that our stockholdersmay deem advantageous. These provisions:

·                  establish aclassified board of directors so that not all members of our board are electedat one time;

·                  provide thatdirectors may only be removed “for cause” and only with the approval of 66 2/3%of our stockholders;

·                  requiresuper-majority voting to amend some provisions in our amended and restatedcertificate of incorporation;

·                  authorize theissuance of “blank check” preferred stock that our board of directors couldissue to increase the number of outstanding shares to discourage a takeoverattempt;

·                  provide that theboard of directors is expressly authorized to make, alter or repeal our bylaws;and

·                  establishadvance notice requirements for nominations for elections to our board or forproposing matters that can be acted upon by stockholders at stockholdermeetings.

**Insurance**

We currentlypurchase insurance policies to cover the ongoing liability and property risksarising out of our current operations.

Although wepurchased professional liability tail coverage insurance for periods prior tothe sales of our previous healthcare businesses, the insurer, PHICO InsuranceCompany, has been declared insolvent and is no longer able to pay claims on ourbehalf (see “Legal Proceedings”).

**Employees**

At June 30, 2007,we had 162 employees. Our employees are not represented by any labor union andwe are not aware of any current activity to organize any of our employees.

**ITEM 1B.****         ****UNRESOLVED STAFFCOMMENTS**

None

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**ITEM 2.****         PROPERTIES**

Our principaloffice is located at 103 Foulk Rd, Suite 205Q, Wilmington, DE 19803 where welease approximately 112 square feet of office space. Our subsidiaries leaseoffice space in California, Delaware, Pennsylvania, Nevada and Ontario, Canada.

A summary of oursignificant leased office facilities at June 30, 2007 are as follows:
| Location                | ** ** | **Approximate Number of  Square Feet Leased** | ** ** | **Expiration of Lease** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------|------------|
|                    |       |                                                              |       |                              |       |
| Emeryville,  California |       | 19,500                                                            |       | October  2009                     |       |
| Menlo Park,  California |       | 14,500                                                            |       | April  2008                       |       |
| Santa Cruz,  California |       | 11,000                                                            |       | December  2009                    |       |
| Barrie, Ontario         |       | 6,400                                                             |       | December  2008                    |       |
| Round Rock,  Texas      |       | 1,168                                                             |       | January  2008                     |       |
| Wayne,  Pennsylvania    |       | 837                                                               |       | September  2008                   |       |
| Wilmington, Delaware    |       | 112                                                               |       | September 2007                    |       |

 

Our remaining lease obligation as of June 30, 2007 for all of ourfacilities is $1.7 million.

**ITEM 3.****         LEGALPROCEEDINGS**

NovaCare v.Stratford Nursing Home.* *We filed this collection lawsuit in August, 1999 to collect on a receivable ofapproximately $146,000, which we have fully reserved.  Stratfordcounter-claimed with numerous theories asserting that we instead owed Stratfordmoney.  Although Stratford’s principal claims were dismissed by the court,Stratford, in the last quarter of fiscal year 2003, had quantified itsremaining counter-claims at approximately $1 million.  We believe that thetheories on which these damages are based are inconsistent with the contractbetween the parties and with the conduct of each party.  As of June 30,2007, this case is pending in the U.S. District Court for the Southern Districtof New Jersey (Camden).  The outcome of this action is not possible topredict and we have reserved an estimate of the cost of litigating this action;however, this estimate does not reflect the possibility of an adverse ruling ora judgment against us or a settlement.

NC Holdings v.United Rehabilitation Services, Inc. et.al.  We filed this collection lawsuit in October2006, to recover prudent buyer receivables in the amount of $897,907, which wehave fully reserved. This action was filed in United States District Court –for the Eastern District of Wisconsin (Civil Action No.06-C-1085).  We believe our claims for breach of contractand unjust enrichment will prevail, however, the outcome of this action is notpossible to predict.

O’Leary v. JoynerSports Medicine* *Weare a defendant in one professional liability claim and had previouslypurchased professional liability insurance policies from PHICO InsuranceCompany.  On February 2, 2002, a Pennsylvania court authorized stateinsurance regulators to liquidate the insolvent PHICO Insurance Company, whichhad provided professional liability insurance policies to us. As a result,PHICO will not be permitted to pay any claims on our behalf; however, theremaining claims were transferred to various state guaranty funds.  Since2002, state insurance guaranty funds have paid the amounts due for liabilityclaims settlements on our behalf.  Based on our discussion with the stateguaranty funds and a review of claims during the third quarter of 2004, we nowbelieve that a payment may be required to settle the professional liabilityclaim that may exceed the amount available to us under the applicable stateguaranty fund limits.  We recorded an accrual and related expense in thethird quarter of 2004 equal to the estimated cost to settle that claim less theamount that would be paid by the state guaranty fund.  A ruling inFebruary 2006, by the Superior Court of New Jersey may free this stateguarantee fund from contributing their limit to any settlement on ourbehalf.  Because of this ruling, we have increased our reserve for thisliability claim.  There is no insurance policy in place that would pay anysettlement or award for this claim; therefore, in the event that our currentreserve assessment is incorrect, we will be required to fund any amount inexcess of the reserve amount.

**ITEM 4.****         SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

During the fourth quarter of fiscal year 2007, nomatters were submitted to a vote of the security holders.

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**PART II**

**ITEM 5.****         MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

Our common stockis traded on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbolJLHY.OB.  Trading of our common stock on OTCBB commenced on December 3,1999.  Our common stock was previouslytraded on the New York Stock Exchange (the “NYSE”) under the symbol NOV untilNovember 22, 1999. Our common stock traded on the OTCBB under the symbolNAHC until June 17, 2002.  On July 30, 2007 there were 540 holders ofrecord of common stock.

The followingtable sets forth the high and low bids per share of common stock on the OTCBBfor the relevant periods, and reflect inter-dealer prices, without retailmark-up, mark-down or commission and thus may not necessarily represent actualtransactions.
|                                | ** ** | **High**   | ** ** | **Low**    | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|
|                           |       |       |       |       |       |
| **Year  Ended June 30, 2007:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                  |       | $          | 1.13       |       | $          | 0.77 |   |
| Second Quarter                 |       | 0.91       |       | 0.66       |       |
| Third Quarter                  |       | 0.84       |       | 0.70       |       |
| Fourth Quarter                 |       | 0.91       |       | 0.70       |       |
|                           |       |       |       |       |       |
| **Year  Ended June 30, 2006:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                  |       | $          | 0.79       |       | $          | 0.50 |   |
| Second Quarter                 |       | 0.73       |       | 0.51       |       |
| Third Quarter                  |       | 0.76       |       | 0.53       |       |
| Fourth Quarter                 |       | 0.96       |       | 0.67       |       |

 

With the exceptionof 2-for-1 stock splits of common stock affected in the form of stock dividendsin June 1987 and July 1991, no other dividends have been paid or declared oncommon stock since our initial public offering on November 5, 1986.  We donot expect to declare any cash dividends on common stock in the foreseeablefuture.

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**ITEM 6.****         SELECTEDFINANCIAL DATA**

The followingselected financial data should be read in conjunction with our consolidatedfinancial statements and the accompanying notes presented elsewhere herein.

We disposed of ourprevious healthcare operating segments in 1999 and from that time perioduntil May 11, 2005, our activities had consisted of managing the legalproceedings against us, attempting to realize its assets, generaladministrative matters and searching for potential acquisition candidates.

The selectedfinancial data below includes data of Lyris beginning from May 12, 2005, dataof EmailLabs beginning from October 11, 2005 and data from ClickTracks and HotBanana from August 18, 2006. Accordingly, the accompanying selected financialdata for periods prior to May 12, 2005 reflects only our assets and liabilitiesand results of operations as discontinued operations except for its remaininggeneral and administrative activities which were treated as continuingoperations.

**J.L. HALSEY CORPORATION AND SUBSIDIARIES**

**FIVEYEAR FINANCIAL SUMMARY**

**(Inthousands, except share and per share amounts)**
| ** **                                                     | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                     | ** ** | **2007 (3)**                       | ** ** | **2006 (2)** | ** ** | **2005 (1)** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** Statement  of Operations Data:**                       |       |                                    |       |   |   |   |   |   |   |   |   |
| Software revenues                                              |       | $                                       | 8,045      |   | $ | 5,331 |   | $ | 796 |   | $ | — |   | $ | — |   |
| Services revenues                                              |       | 30,960                                  |       | 19,022 |   | 1,411 |   | — |   | — |   |
| Gross Profit                                                   |       | 26,965                                  |       | 17,597 |   | 1,760 |   | — |   | — |   |
| (Loss) income from continuing operations                       |       | (775                                    | )          | 2,986 |   | (434 | ) | (2,186 | ) | (3,189 | ) |
| Income tax provision                                           |       | 544                                     |       | 827 |   | 77 |   | — |   | — |   |
| Gain on disposal of discontinued operations, net  of tax  |       | 1,670                                   |       | 407 |   | 281 |   | 4,941 |   | 4,067 |   |
| Net income (loss)                                              |       | 351                                     |       | 2,566 |   | (230 | ) | 2,755 |   | 878 |   |
| (Loss) gain per share from continuing operations               |       |                                    |       |   |   |   |   |   |   |   |   |
| Basic and diluted                                              |       | (0.01                                   | )          | 0.03 |   | (0.01 | ) | (0.03 | ) | (0.04 | ) |
| Net income (loss) per share:                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| Basic and diluted                                              |       | 0.00                                    |       | 0.03 |   | (0.00 | ) | 0.03 |   | 0.01 |   |
| Weighted average shares used in basic per share  calculation   |       | 90,706,301                              |       | 83,126,803 |   | 82,296,880 |   | 82,193,063 |   | 83,097,263 |   |
| Weighted average shares used in diluted per share  calculation |       | 92,904,183                              |       | 84,485,747 |   | 82,296,880 |   | 82,193,063 |   | 83,097,263 |   |
|                                                                |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **As of June 30,** | ** ** |
|----------------------------------|------------|--------------------|------------|
| ** **                       | ** ** | **2007**           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Balance  Sheet Data:**         | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents        |       | $                  | 659        |   | $ | 255 |   | $ | 3,102 |   | $ | 28,880 |   | $ | 23,219 |   |
| Intangibles, net of amortization |       | 22,414             |       | 19,776 |   | 12,714 |   | — |   | — |   |
| Goodwill                         |       | 36,021             |       | 27,390 |   | 17,749 |   | — |   | — |   |
| Total assets                     |       | 70,191             |       | 57,719 |   | 38,824 |   | 31,643 |   | 29,142 |   |
| Long term debt (4)               |       | 13,494             |       | 11,592 |   | 5,600 |   | — |   | — |   |
| Stockholders’ equity        |       | 45,806             |       | 30,066 |   | 27,082 |   | 27,080 |   | 24,325 |   |
|                                  |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1)    | Includes information from Lyris as of the  acquisition date of May 12, 2005 through June 30, 2005                                                                                                                                                                                 |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                              |
| (2)    | Includes information from EmailLabs as of the  acquisition date of October 11, 2005 through June 30, 2006.                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                              |
| (3)    | Includes information from ClickTracks and Hot Banana  as of the acquisition date of August 18, 2006 through June 30, 2007.                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                              |
| (4)    | Represents revolving line of credit and contingent  payment incurred as part of the acquisition of EmailLabs on October 11, 2005  in Fiscal 2006 and Fiscal 2007 and contingent note payable incurred as part  of the acquisition of Lyris  on May 12,  2005 in Fiscal 2005. |

 

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**ITEM 7.****         MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our Condensed Consolidated FinancialStatements and the notes to those statements included elsewhere in this AnnualReport on Form 10-K.  The discussion and analysis below includes certainforward-looking statements that are subject to risks, uncertainties and otherfactors, as described in “Risk Factors” and elsewhere in this Annual Report onForm 10-K, that could cause our actual growth, results of operations,performance, financial position and business prospects and opportunities forthis quarter and the periods that follow to differ materially from thoseexpressed in, or implied by, those forward-looking statements.*

**Overview**

J.L. HalseyCorporation, through its wholly owned subsidiaries, Lyris Technologies, Inc. (“Lyris”),Uptilt, Inc. (d/b/a “EmailLabs”), ClickTracks Analytics, Inc. (“ClickTracks”),and Hot Banana Software, Inc. (“Hot Banana”) is a leading digital marketingtechnology and services firm.  Our email marketing software and servicesprovide clients with solutions for creating, managing and delivering onlinepermission-based direct marketing programs, newsletters, discussion groups andother digital communications to clients whose email lists require specializedtechnology in order to effectively communicate with their members andcustomers.  We offer our email solutions in two forms: as software that isdownloaded and installed on customers’ computers, and as a hosted solution inwhich customers use our software through an internet connection.  ThroughClickTracks and Hot Banana, we also offer website analytics software andservices, and website content management software and services.

On May 12, 2005,we acquired all of the outstanding capital stock of Lyris for $30.7 million,which included cash payments of $25.1 million (including acquisition costs andworking capital adjustments of $1.2 million) and $5.6 million in the form of apromissory note payable, subject to Lyris achieving specified revenue targets,on May 12, 2007, with interest accruing at 10% per annum.  Thespecified revenue targets stated in the promissory note were attained.  OnMarch 31, 2007, the note was amended to extend the maturity date to November 12,2008.  In addition, the amendmentprovided for the following payments (constituting both principal and interest):(a) $1,000,000 due May 12, 2007; (b) $1,453,447 due February 12, 2008; and (c)$4,687,666 due November 12, 2008. We paid $1,000,000 on May 14, 2007 and have recorded the remainingpayments as a liability in the current and long-term portions of our BalanceSheet as of June 30, 2007.

On October 11,2005, we acquired all of the outstanding capital stock of EmailLabs for $24.5million (including acquisition costs and working capital adjustments of$612,000).  Of this purchase price, $19.5 million was paid in cash atclosing with $2.3 million funded by EmailLabs’ available cash and the remainderfunded with the proceeds of the Loan and Security Agreement between Halsey andComerica Bank (See Note 7  Revolving Line of Credit).  $500,000 of this purchase price was held backpursuant to minimum working capital requirements.  This holdback, less thefinal working capital adjustment, was paid during the quarter ended March 31,2006.  The EmailLabs purchase agreement also includes contingentconsideration consisting of two equal earn-out payments of $1.725 million dueon the first and second anniversary of the closing date if EmailLabs achievesspecified revenue targets.  We paid the first $1.725 million installmentto the former EmailLabs’ stockholders on October 13, 2006.  EmailLabs hasachieved all revenue targets and, as a result, we have recorded the secondinstallment of $1.725 million as a liability in the current portion of ourBalance Sheet at June 30, 2007.  Additionally, the former stockholders ofEmailLabs were to receive any income tax refunds related to the period endingon and including the closing date.  The tax refunds totaled $482,000 andwere paid in September 2006.    With the acquisitions ofLyris and EmailLabs, we became a leading email marketing company with over 5,000customers worldwide.

On August 18,2006, we acquired all of the outstanding capital stock of ClickTracks forapproximately $8.5 million in cash, $2.8 million of our common stock (2,799,636shares) issued to certain security holders of ClickTracks and $337,000 ofacquisition costs.  The common stock issued as a result of thisacquisition was from our shares held in treasury. In December 2006 we paidapproximately $141,000 to the former owners of ClickTracks for the finalworking capital adjustment.  Pursuant to the purchase agreement, we agreedto additional payments totaling approximately $3.8 million in the eventClickTracks achieves future revenue targets. In accordance with an agreement between us and John Marshall, the formerPresident of ClickTracks Analytics, Inc. dated March 13, 2007, Mr. Marshall,acting in his capacity as the representative of the former stockholders ofClickTracks, acknowledged that the revenue targets for the initial post-closingpayment would not be met.  Then, pursuantto an agreement between us and Mr. Marshall (again acting asrepresentative of the former ClickTracks stockholders), dated June 8, 2007, Mr.Marshall waived all rights to any future payments under the original purchaseagreement.

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On August 18,2006, we also acquired all of the outstanding capital stock of Hot Banana forapproximately $1.9 million Canadian ($1.8 million U.S. based on thethen-applicable exchange rate), with additional installments of up to $750,000Canadian ($664,108 U.S.) if Hot Banana achieves specified revenue andtechnology integration targets, and up to an additional $500,000 Canadian($447,107 U.S.) payable subject to working capital and other adjustments.  In March 2007 we paid approximately $94,000Canadian ($81,000 U.S.) and in May 2007 we paid approximately $94,000 Canadian($86,000 U.S.) to the former owners of Hot Banana for the first and secondinstallments of the technology integration earn-out. In April 2007, we paidapproximately $336,000 Canadian ($299,000 U.S.) to the former owners of HotBanana for the final working capital adjustment.  We believe that it isprobable that Hot Banana’s performance will result in contingent payments forrevenue targets to the sellers of Hot Banana and, as a result, we have recorded$487,858 as a liability in the current and long-term portions of our BalanceSheet as of June 30, 2007.

Each of our fouracquisitions we have made require us to make additional earn-out payments tothe sellers of the businesses if certain conditions are met.  Copies ofthe acquisition agreements have been filed with the SEC and are discussedelsewhere herein.  (See Notes 6 and 13 of the Notes to ConsolidatedFinancial Statements).  We believe that some of these conditions arelikely to be met, and, therefore, have classified specified earn-outs on ourbalance sheet as short-term or long-term debt. Our principal use of cash in thefuture will be the payment of earn-outs and the pay down of debt. Based on ourcurrent projections, we believe that we will be able to make these paymentswith our available resources. If however, operating results deteriorate orother adverse events occur, we will not have adequate resources to make thesepayments.  We may be forced to seek additional resources and the cost ofthese resources, if available at all, may be prohibitive.

We are thesuccessor to NovaCare, Inc (“NovaCare”), which was a national leader inphysical rehabilitation services, orthotics and prosthetics and employeeservices. The changes to Medicare reimbursement in the late 1990’s haddeleterious effects on us and our competitors and customers.   The prior operating business most affected by the Medicare changes was thelong-term care services segment in which NovaCare provided therapists to skillednursing facilities.  This business was disposed of in fiscal 1999 with theshutdown of certain of its operations in the Western United States during thethird fiscal quarter and the sale of the remaining operations on June 1, 1999.NovaCare’s former outpatient services segment was disposed of through the salesof its orthotics and prosthetics (“O&P”) and physical rehabilitation andoccupational health (“PROH”) businesses. The O&P business was sold toHangar Orthopedic Group, Inc. in July of 1999 and the PROH business was sold toSelect Medical Corporation in November of 1999.  NovaCare’s formeremployee services segment was disposed of through the sale of NovaCare’sinterest in NovaCare Employee Services (“NCES”) in October of 1999 to asubsidiary of Plato Holdings, Inc. as part of a tender offer by Plato for allof NCES’s outstanding shares.  With cash raised from the sales of thesebusinesses, we repaid all of NovaCare’s bank debt in the summer of 1999, and inJanuary of 2000 we retired NovaCare’s publicly-traded subordinated debt.

We sold theNovaCare name as part of the sale of the PROH business and subsequently changedour name to NAHC, Inc. (“NAHC”).  On June 18, 2002, in a transactionapproved by our stockholders at a special meeting, NAHC merged with and intoHalsey, its wholly-owned subsidiary.   The purpose of the mergerbetween NAHC and Halsey was to implement transfer restrictions on our commonstock in order to preserve our federal income tax net operating losses.

Prior to theacquisitions of Lyris, EmailLabs, ClickTracks and Hot Banana, we spent severalyears maximizing remaining assets, including old accounts receivable, Medicarereceivables and appeals, and tax items, and minimizing liabilities retainedafter the sales of the operating businesses.  We have collected virtuallyall of the receivables, other than amounts which are the subject of litigationor arbitration or that have been written off, and also resolved all but onelitigation matter remaining from the prior operations.  None of our current executives or directorswere associated with us prior to, or at the time of, the sale of the NovaCarehealthcare operating businesses in 1999.

***Acquisitions Comparability of Operations***

Our results ofoperations for the fiscal year ended June 30, 2007, include the results of theacquisitions of ClickTracks and Hot Banana on August 18, 2006.  Our results of operations for the fiscal yearended June 30, 2006, include the results of the acquisition of EmailLabs on October11, 2005. Our results of operations for the fiscal year ended June 30, 2005,include the results of the acquisition of Lyris on May 12, 2005.  Theresults of these acquisitions must be factored into any comparison of our 2007results to the results of 2006 and 2005.

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***Critical Accounting Policies and Use of Estimates***

Our financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States, or GAAP.  The application of GAAP requiresthat we make estimates that affect our reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.  We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances.  We evaluate our estimates and assumptions on anongoing basis.  Our actual results may differ significantly from theseestimates.

We believe that ofour significant accounting policies, which are described in Note 2 to ourfinancial statements, the following accounting policies involve a greaterdegree of judgment and complexity. Accordingly, these are the policies webelieve are the most critical to aid in fully understanding and evaluating ourfinancial condition and results of operations.

·                  revenuerecognition

·                  valuationallowances and reserves

·                  losscontingencies

·                  accounting foracquisitions

·                  accounting forstock-based compensation

·                  accounting forgoodwill, long-lived assets and other intangible assets

·                  accounting forincome taxes

**Revenue Recognition**

We recognize revenue from the following primarysources:  (1) hosting software for use by customers; (2) licensingsoftware products; and (3) providing customers technical support (maintenance).

We generally recognize revenue when all of thefollowing conditions are satisfied:  (1) there is persuasive evidence ofan arrangement; (2) the service has been provided to the customer (in the caseof software licenses, revenue is recognized when the customer is givenelectronic access to the licensed software); (3) the amount of fees to be paidby the customer is fixed or determinable; and (4) the collection of fees isprobable.

Our hosted software arrangements are consideredservice arrangements in accordance with Emerging Issues Task Force (“EITF”)Issue No. 00-3,*  “Application of AICPA Statement of Position97-2, Software Revenue Recognition, to Arrangements That Include the Right toUse Software Stored on Another Entity’s Hardware,”* and with multipledeliverables under EITF 00-21, “*Accountingfor Revenue Arrangements with Multiple Deliverables.”*   Inaddition, because we provide our applications as a service, we follow theprovisions of Securities and Exchange Commission Staff Accounting Bulletin No.104,*“Revenue Recognition.”* Hosting revenue is recognized monthly based on the usage defined in theagreement.  Excess usage is billed and recognized as revenue is incurred.

We recognize software license revenue in accordancewith the provisions of SOP 97-2,*“SoftwareRevenue Recognition”* and SOP 98-9*“Modification of SOP 97-2, Software Revenue Recognition with Respect to CertainTransactions.” * We enter into certain revenue arrangements forwhich we are obligated to deliver multiple products and/or services (multipleelements).  For these arrangements, which generally include softwareproducts and maintenance, we allocate and defer revenue for the undeliveredelements based on their vendor-specific objective evidence of fair value (“VSOE”). Future discounts on unspecified items are considered post-contract customersupport, which are included in VSOE for undelivered elements.  Since VSOEexists for all elements (delivered and undelivered), we allocate the totalrevenue to be earned under the arrangement among the various elements, based ontheir relative fair value.  Maintenance revenues, including revenuesincluded in multiple element arrangements, are deferred and recognized ratablyover the related contract period, generally twelve months.

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**Deferred Revenue**

Deferred revenue represents customer billings made inadvance for annual support contracts and bulk purchases of emails to bedelivered in the future. Maintenance is typically billed on a per annum basisin advance and revenue is recognized ratably over the maintenance period. Bulk purchases are typically billed in advance, ranging from monthly toannually, and revenue is recognized in the periods in which emails aredelivered.

**Allowance for Doubtful Accounts**

Our policy for allowances for doubtful accounts forour current operations our previous healthcare discontinued operations are asfollows:

Continuing operations

We regularly assess our ability to collect outstandingcustomer invoices and in so doing must make estimates of the collectibility ofaccounts receivable.  We provide an allowance for doubtful accounts whenwe determine that the collection of an outstanding customer receivable is notprobable.  We specifically analyze accounts receivable and historical baddebts experience, and changes in our customer payment history when evaluatingthe adequacy of the allowance for doubtful accounts.  If any of thesefactors change, our estimates may also change, which could affect the level ofour future provision for doubtful accounts.

Discontinued operations

We maintain allowances for the collection of ourhealthcare receivables remaining from our discontinued healthcareoperations.  These allowances are the result of the inability orunwillingness of many of our former healthcare customers to makepayments.  Several of the key industries in which we previously operatedwere severely impacted by the Balanced Budget Act of 1997.  As a result ofthe provisions of this Act, many of our former healthcare customers wentbankrupt and many are nearly insolvent. Currently, we have outstandingreceivables from a few of these customers and we have recorded 100% allowancesagainst these receivables. We are pursuing collection from two of our formerhealthcare customers through litigation.

There are a few accounts that make up our receivablesremaining from discontinued healthcare operations, all of which are fullyreserved because of the difficulty in collection the money that is owed.

**Loss Contingencies**

We record estimated loss contingencies when informationis available that indicates that it is probable that an asset has been impairedor a liability has been incurred and the amount of the loss can be reasonablyestimated.  When no accrual is made for a loss contingency because one orboth of these conditions are not met, or if an exposure to loss exists inexcess of the amount accrued, we disclose such contingencies when there is atleast a reasonable possibility that a loss or an additional loss may have beenincurred.  Determining the likelihood of incurring a liability andestimating the amount of the liability involves significant judgment.  Ifthe outcome of the litigation is more adverse to us than management currentlyexpects, then we may have to record additional charges in the future.

**Accounting for Acquisitions**

Significant judgment is required to estimate the fairvalue of purchased assets and liabilities at the date of acquisition, includingestimating future cash flows from the acquired business, determiningappropriate discount rates, asset lives and other assumptions. Our process todetermine the fair value of the non-compete agreements, customer relationshipsand developed technology includes the use of estimates including: the potentialimpact on operating results if the non-compete agreements were not in place;revenue estimates for customers acquired through the acquisition based on anassumed customer attrition rate; estimated costs to be incurred to purchase thecapabilities gained through the developed technology model; and appropriate discountrates based on the particular business’s weighted average cost of capital. Ourestimates of an entity’s growth and costs are based on historical data, variousinternal estimates and a variety of external sources, and are developed as partof our routine planning process.

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**Stock-Based Compensation**

We account for stock-based compensation in accordancewith the provisions of SFAS No. 123 (Revised 2004), “*Share-Based Payment.”*  Under the fair value recognitionprovisions of SFAS No. 123R, stock-based compensation cost is estimated at thegrant date based on the fair value of the award and is recognized as expenseratably over the requisite service period of the award.  Determining theappropriate fair value model and calculating the value of stock-based awards,which includes estimates of stock price volatility, forfeiture rates andexpected lives, requires judgment that could materially impact our operatingresults.

**Goodwill, Long-Lived Assets and OtherIntangible Assets**

In accordance with the provisions of SFASNo. 141,*“Business Combinations”*(“SFAS 141”), the purchase price of an acquired company is allocated betweentangible and intangible assets acquired and liabilities assumed from theacquired business based on their estimated fair values, with the residual ofthe purchase price recorded as goodwill.

We assess the impairment of goodwill and indefinitelife intangibles on an annual basis in the fourth quarter. The potentialimpairment of finite life intangibles is assessed whenever events or a changein circumstances indicate the carrying value may not be recoverable. Factors weconsider important which could trigger an impairment review include thefollowing:

·                  significantunderperformance relative to historical or expected projected future operatingresults;

·                  significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business;

·                  significantnegative industry or economic trends;

·                  significantdecline in our stock price for a sustained period of time; and

·                  our marketcapitalization relative to net book value.

When we determine that the carrying value ofintangible assets, long-lived assets or goodwill may not be recoverable basedupon the existence of one or more of the above indicators of impairment, wemeasure any potential impairment based on a projected discounted cash flowmethod using a discount rate determined by our management to be commensuratewith the risk inherent in our current business model.

**Income Taxes**

We account for income taxes in accordance withSFAS No. 109, “*Accounting for IncomeTaxes*.” The objectives of accounting for income taxes are torecognize the amount of taxes payable for the current year and deferred taxassets and liabilities for future tax consequences of events that have beenrecognized in our financial statements or tax returns. We perform periodicevaluations of recorded tax assets and liabilities and maintain a valuationallowance if deemed necessary. The determination of taxes payable for thecurrent year includes estimates.  In theevent that actual results differ materially from management’s expectations, theestimated taxes payable could materially change, directly impacting ourfinancial position or results of operations.

We have net operating loss carryforwards.  Therealization of any benefit of these loss carryforwards is dependent on futureresults and the actual amount of these loss carryforwards may change overtime.  We do not recognize any benefit on our financial statements for anypreviously incurred losses and will not until we determine that it is morelikely than not that we will have taxable income to realize these benefits.Although we have reported net income in fiscal years 2007 and 2006 we have notgenerated taxable income since 1996.  Ifwe experience a change in ownership within the meaning of Section 382 of theInternal Revenue Code, we may have limitations on our ability to realize thebenefit of our net operating loss, capital loss and tax credit carryforwards.

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**Year Ended June 30, 2007, Comparedwith the Year Ended June 30, 2006**

Our results ofoperations for the fiscal year ended June 30, 2007, include the results of theacquisitions of ClickTracks and Hot Banana on August 18, 2006.  Ourresults of operations for the fiscal year ended June 30, 2006, include theresults of the acquisition of Lyris on May 12, 2005, and EmailLabs on October11, 2005.

*Revenue*

Total revenue was$39.0 million for the fiscal year ended June 30, 2007, compared to $24.4million for the fiscal year ended June 30, 2006, an increase of $14.6million.  Lyris’ hosted revenue increasedto approximately $9.6 million for the fiscal year ended June 30, 2007, fromapproximately $6.7 million for the fiscal year ended June 30, 2006. Additionally, the increase in revenue is due to the acquisition of EmailLabsapproximately one-half of the way into the quarter ended December 31, 2005, andthe acquisitions of ClickTracks and Hot Banana in the first quarter of fiscal2007.

The following is asummary of revenue for each of our subsidiaries for the twelve month periodsended June 30, 2007 and 2006:
|                         | ** ** | **Fiscal year ended** | ** ** | **Fiscal year ended** | ** ** |
|-------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **(in thousands)** | ** ** | **June 30, 2007**     | ** ** | **June 30, 2006**     | ** ** |
| ** **              | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Lyris  Technologies     |       | $                               | 19,642     |                            | $          | 15,792 |   |
| EmailLabs               |       | 14,768                          |       | 8,561                           |       |
| ClickTracks             |       | 3,501                           |       | —                          |       |
| Hot Banana              |       | 1,094                           |       | —                          |       |
|                    |       |                            |       |                            |       |
| Total                   |       | $                               | 39,005     |                            | $          | 24,353 |   |

 

*Cost ofrevenue*

Cost of revenuewas $12.0 million for the fiscal year ended June 30, 2007, compared to$6.8 million for the fiscal year ended June 30, 2006. The increase in costof revenue of $5.2 million is due to our acquisitions of EmailLabs, ClickTracksand Hot Banana. Cost of revenue primarily includes salary and personnel costsattributable to our engineering department, support services and hostingbusiness. Other costs allocated to cost of revenue include internet bandwidthcosts associated with providing our support and hosting services andamortization of developed technology of $2.3 million for the fiscal year endedJune 30, 2007, compared to $1.4 million for the fiscal year endedJune 30, 2006.

*Generaland administrative*

General andadministrative expenses were $11.1 million for the fiscal year ended June 30,2007, compared to $6.9 million for the fiscal year ended June 30, 2006. The primary reasons for the increase of approximately $4.2 million are due toour acquisitions of EmailLabs, ClickTracks and Hot Banana and increases inoperating expenses by the parent company.  Increases at the parent companyinclude increases in professional and consulting fees, legal fees, accountingfees, merger and acquisition related costs and other administrative operatingexpenses associated with integrating the newly-acquired companies. General and administrative expenses consist primarily of compensation foradministrative personnel, professional services, which include consultants,legal fees and accounting, audit and tax fees, and administrative expensesassociated with operating as a public company.

*Researchand development*

Research anddevelopment expenses were $1.4 million for the fiscal year ended June 30,2007, compared to $210,000 for the fiscal year ended June 30, 2006. Theincrease in research and development expense is due to spending on developmentof our next generation e-marketing technology platform.

*Salesand marketing*

Sales andmarketing expenses were $10.5 million for the fiscal year ended June 30, 2007,compared to $5.1 million for the fiscal year ended June 30, 2006. Theincrease in sales and marketing expenses of approximately $5.4 million is dueto our acquisitions of EmailLabs, ClickTracks and Hot Banana, as well asincreases of approximately $1.2 million at Lyris.  Sales and marketingexpenses consist primarily of salaries and related expenses for personneldedicated entirely to the sales and marketing

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as well as advertisingcosts and exhibits and tradeshow related expenses.

*Amortizationof customer relationships*

Amortization ofcustomer relationships was $1.7 million for the fiscal year ended June 30,2007, compared to $1.2 million for the fiscal year ended June 30, 2006. Theincrease reflects amortization expense related to intangible assets of customerrelationships that are recorded as intangible assets on our balance sheet as aresult of the acquisition of EmailLabs on October 11, 2005, and the acquisitionsof ClickTracks and Hot Banana on August 18, 2006. See Note 4 to theCondensed Consolidated Financial Statements for details on intangible assets.

*Interestexpense*

Interest expensewas $3.1 million for the fiscal year ended June 30, 2007, compared to $1.3 millionfor the fiscal year ended June 30, 2006. The increase in interest expense of approximately $1.9 million isprimarily due to $1.3 million of amortization, as non-cash interest expense, ofthe beneficial conversion feature of the $10 million promissory note issued toLDN Stuyvie Partnership on August 16, 2006; an increase of $437,000 due tointerest on the LDN Stuyvie promissory note; and an increase of $144,000 due tointerest on our revolving line of credit with Comerica.

*Provisionfor income taxes*

Duringthe fiscal year ended June 30, 2007, we recorded an income tax provisionof approximately $544,000, which consisted primarily of a provision for stateincome taxes on the earnings of three of our subsidiaries in the amount of$425,000 and a provision for federal income taxes of $119,000. During thefiscal year ended June 30, 2006, we recorded an income tax provision ofapproximately $827,000 which consisted primarily of a provision for stateincome taxes on the earnings of two of our subsidiaries in the amount of$691,000 and a provision for federal income taxes of $136,000.  See Note 15 to the Condensed ConsolidatedFinancial Statements for details on income taxes.

*DiscontinuedOperations*

Discontinuedoperations consist of gains or losses as a result of adjustments to the $374.1million loss on disposal of discontinued healthcare operations which wasoriginally recorded in fiscal year 2000.  Gains primarily include amountsreceived in excess of book value for trade accounts receivable and Medicare relatedindemnification receivables which were owed to us prior to the disposition ofNovaCare’s long-term care services business in 1999 as well as gains related tofederal income tax refunds. Losses primarily include expenses incurred oradjustments to liabilities which were owed by NovaCare prior to the dispositionof NovaCare’s long-term care services business in fiscal year 2000.

The gain ondisposal of discontinued operations, net of taxes, was $1.7 million compared to$407,000 for the prior year. These gains reflect adjustments to the $374.1million loss on disposal of discontinued operations that was recorded in fiscalyear 2000.  The gain of $1.7 million in fiscal year 2007 consistsprimarily of a gain of $493,000 resulting from the collection of accountsreceivable and cost report settlements that was previously written off, and again of $1.1 million resulting from reductions of expense accruals toadjust other liabilities remaining from discontinued operations and a gain of$156,000 resulting from a federal tax refund offset by a provision for federalalternative minimum taxes of $31,000. The reductions in expense accrualsinclude amounts for litigation related costs and legacy insurance expenses. Thegain of $407,000 in fiscal year 2006 consists primarily of a refund from astate insurance guarantee fund in the amount of $53,000, a gain of $31,000resulting from the collection of accounts receivable that were previouslywritten off by us and reductions of expense accruals of $348,000 to adjustother liabilities remaining from discontinued operations offset by a provisionfor federal alternative minimum taxes of $25,000.

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**Year Ended June 30, 2006, Comparedwith the Year Ended June 30, 2005**

Our results ofoperations for the fiscal year ended June 30, 2006, include the results of theacquisition of EmailLabs on October 11, 2005.  Our results of operationsfor the fiscal year ended June 30, 2005 include the results of the acquisitionof Lyris on May 12, 2005. The financial data below includes data of Lyrisbeginning from May 12, 2005 and data of EmailLabs beginning from October 11,2005.

*Revenue*

Total revenue wasapproximately $24.4 million for the fiscal year ended June 30, 2006 compared to2.2 million for the fiscal year ended June 30, 2005.  The increase inrevenue of approximately $22.2 million is due to our acquisitions of Lyris andEmailLabs.

The following is asummary of revenue for each of our subsidiaries for the fiscal years endedJune 30, 2006 and 2005:
|                         | ** ** | **Fiscal year ended** | ** ** | **Fiscal year ended** | ** ** |
|-------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **(in thousands)** | ** ** | **June 30, 2006**     | ** ** | **June 30, 2005**     | ** ** |
|                    |       |                            |       |                            |       |
| Lyris  Technologies     |       | $                               | 15,792     |                            | $          | 2,207 |   |
| EmailLabs               |       | 8,561                           |       | —                          |       |
|                    |       |                            |       |                            |       |
| Total                   |       | $                               | 24,353     |                            | $          | 2,207 |   |

 

*Cost ofrevenue*

*Cost of revenue was $6.8million for the fiscal year ended June 30, 2006, compared to $447,000 for thefiscal year ended June 30, 2005. The increase in cost of revenue ofapproximately $6.4 million is due to our acquisitions of Lyris and EmailLabs.  Cost of revenue primarily includes salary andpersonnel costs attributable to our engineering department, hosting businessand support services. Other costs allocated to cost of revenue includeamortization of developed technology of $1.4 million and computer and internet bandwidthcosts associated with providing our support and hosting services to ourcustomers.*

*Generaland administrative*

Generaland administrative expenses were $6.9 million for the fiscal year ended June30, 2006, compared to $2.2 million for the fiscal year ended June 30,2005.  The primary reasons for theincrease of approximately $4.7 million are due to our acquisitions of Lyris andEmailLabs and increases in operating expenses by the parent company.  Increases at the parent company includeincreases in professional and consulting fees, legal fees, accounting fees,merger and acquisition related costs and other administrative operatingexpenses associated with integrating the newly-acquired companies.  General and administrative expenses consistprimarily of compensation for administrative personnel, professional services,which include consultants, legal fees and accounting, audit and tax fees, andadministrative expenses associated with operating as a public company.

*Researchand development*

Research and developmentexpenses were $210,000 for the fiscal year ended June 30, 2006, comparedto none for the fiscal year ended June 30, 2005. The increase in researchand development expense is due to spending on development of our nextgeneration e-marketing technology platform.

*Salesand marketing*

Salesand marketing expenses were $5.1 million for the fiscal year ended June 30,2006, compared to $290,000 for the fiscal year ended June 30, 2005. Theincrease in sales and marketing expenses of approximately $4.8 million is dueto our acquisitions of Lyris and EmailLabs. Sales and marketing expenses consist primarily of salaries and relatedexpenses for personnel dedicated entirely our sales and marketing efforts.Other sales and marketing costs include advertising costs and costs associatedwith exhibits and tradeshows.

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*Amortizationof customer relationships*

Amortizationof customer relationships was $1.2 million for the fiscal year ended June 30,2006, compared to $94,000 for the fiscal year ended June 30, 2005. The increasereflects amortization expense related to intangible assets of customerrelationships that are recorded as intangible assets on our balance sheet as aresult of the acquisition of Lyris on May 12, 2005, and the acquisition ofEmailLabs on October 11, 2005. See Note 4 to the Condensed ConsolidatedFinancial Statements for details on intangible assets.

*Interestexpense*

Interestexpense was $1.3 million for the fiscal year ended June 30, 2006, compared to$77,000 for the fiscal year ended June 30, 2005.  The increase in interest expense ofapproximately $1.2 million is primarily due to an increase of $480,000 ofinterest on the $5.6 million promissory note payable to the John Buckman andJan Hanford Trust; and an increase of $711,000 due to interest on our revolvingline of credit with Comerica. 

*Provisionfor income taxes*

Duringthe fiscal year ended June 30, 2006, we recorded an income tax provision ofapproximately $827,000 which consisted primarily of a provision for stateincome taxes on the earnings of two of our subsidiaries in the amount of$691,000 and a provision for federal alternative minimum income taxes of$136,000. We recorded an income tax provision of approximately $77,000 forstate income taxes on the earnings of Lyris for the fiscal year ended June 30,2005.  See Note 15 to the CondensedConsolidated Financial Statements for details on income taxes.

*DiscontinuedOperations*

Discontinuedoperations consist of gains or losses as a result of adjustments to the $374.1million loss on disposal of discontinued healthcare operations which wasoriginally recorded in fiscal year 2000. Gains primarily include amounts received in excess of book value fortrade accounts receivable and Medicare related indemnification receivableswhich were owed to us prior to the disposition of NovaCare’s long-term careservices business in 1999 as well as gains related to federal income taxrefunds. Losses primarily include expenses incurred or adjustments toliabilities which were owed by NovaCare prior to the disposition of NovaCare’slong-term care services business in fiscal year 2000.

Thegain on disposal of discontinued operations, net of taxes, was $407,000 for thefiscal year ended June 30, 2006 compared to $281,000 for the prior year. Thesegains reflect adjustments to the $374.1 million loss on disposal ofdiscontinued operations that was recorded in fiscal year 2000.  The gain of $407,000 in fiscal year 2006consists primarily of a refund from a state insurance guarantee fund in theamount of $53,000, a gain of $31,000 resulting from the collection of accountsreceivable that were previously written off by us and reductions of expenseaccruals of $348,000 to adjust other liabilities remaining from discontinuedoperations offset by a provision for federal alternative minimum taxes of$25,000. The reductions in expense accruals include amounts for litigationrelated costs and legacy insurance expenses. The gain in fiscal year 2005 of$281,000 primarily relates to the collection of previously reserved receivablesin the amount of $460,000 and the collection of a federal income tax refund of$400,000, offset by increases in expense accruals of $579,000, to reflectadditional legal costs, collection costs and to adjust other liabilitiesremaining from discontinued operations.

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**QuarterlyFinancial Information (unaudited)**

**YearEnded June 30, 2007:**
| **(in thousands)**                                                          | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                                       | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Software  revenues                                                               |       | $                  | 1,538      |                | $          | 2,070              |       | $                   | 2,288      |   | $ | 2,149 |   |
| Services  revenues                                                               |       | 6,838              |       | 7,433               |       | 8,060              |       | 8,629               |       |
| Total Revenues                                                                   |       | 8,376              |       | 9,503               |       | 10,348             |       | 10,778              |       |
| Cost of revenues                                                                 |       | 2,549              |       | 3,126               |       | 3,224              |       | 3,141               |       |
| Gross Profit                                                                     |       | 5,827              |       | 6,377               |       | 7,124              |       | 7,637               |       |
| Operating  expenses                                                              |       | 6,504              |       | 8,145               |       | 6,637              |       | 6,454               |       |
| (Loss) income  from continuing operations before income taxes                    |       | (677               | )          | (1,768              | )          | 487                |       | 1,183               |       |
| Income tax  provision                                                            |       | 62                 |       | 91                  |       | 174                |       | 217                 |       |
| (Loss) income  from continuing operations                                        |       | (739               | )          | (1,859              | )          | 313                |       | 966                 |       |
| (Loss) gain on  disposal of discontinued operations, net of tax                  |       | (35                | )          | 522                 |       | 73                 |       | 1,110               |       |
| Net (loss) income                                                                |       | $                  | (774       | )                   | $          | (1,337             | )          | $                   | 386        |   | $ | 2,076 |   |
| (Loss) income  per share from continuing operations: basic and diluted           |       | $                  | (0.01      | )                   | $          | (0.02              | )          | $                   | 0.00       |   | $ | 0.01 |   |
| (Loss) gain per  share on disposal of discontinued operations: basic and diluted |       | $                  | (0.00      | )                   | $          | 0.01               |       | $                   | 0.00       |   | $ | 0.01 |   |
| Net (loss) income per  share: basic and diluted                                  |       | $                  | (0.01      | )                   | $          | (0.02              | )          | $                   | 0.00       |   | $ | 0.02 |   |

 

**YearEnded June 30, 2006:**
| **(in thousands)**                                                          | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                                       | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Software  revenues                                                               |       | $                  | 1,243      |                | $          | 1,297              |       | $                   | 1,302      |   | $ | 1,489 |   |
| Services  revenues                                                               |       | 2,284              |       | 4,878               |       | 5,693              |       | 6,167               |       |
| Total Revenues                                                                   |       | 3,527              |       | 6,175               |       | 6,995              |       | 7,656               |       |
| Cost of revenues                                                                 |       | 988                |       | 1,680               |       | 1,811              |       | 2,277               |       |
| Gross Profit                                                                     |       | 2,539              |       | 4,495               |       | 5,184              |       | 5,379               |       |
| Operating  expenses                                                              |       | 2,020              |       | 3,750               |       | 4,171              |       | 4,670               |       |
| Income from  continuing operations before income taxes                           |       | 519                |       | 745                 |       | 1,013              |       | 709                 |       |
| Income tax  provision                                                            |       | 123                |       | 154                 |       | 246                |       | 304                 |       |
| Income from  continuing operations                                               |       | 396                |       | 591                 |       | 767                |       | 405                 |       |
| Gain (loss) on  disposal of discontinued operations, net of tax                  |       | 130                |       | 210                 |       | 108                |       | (41                 | )          |
| Net income                                                                       |       | $                  | 526        |                | $          | 801                |       | $                   | 875        |   | $ | 364 |   |
| Income per share  from continuing operations: basic and diluted                  |       | $                  | 0.01       |                | $          | 0.01               |       | $                   | 0.01       |   | $ | 0.00 |   |
| Gain (loss) per  share on disposal of discontinued operations: basic and diluted |       | $                  | 0.00       |                | $          | 0.00               |       | $                   | 0.00       |   | $ | (0.00 | ) |
| Net income per share:  basic and diluted                                         |       | $                  | 0.01       |                | $          | 0.01               |       | $                   | 0.01       |   | $ | 0.00 |   |

 

**Liquidityand Capital Resources**

*Liquidityand Cash Flows*

***Cash and cashequivalents***

At June 30, 2007,cash and cash equivalents totaled approximately $659,000 compared toapproximately $255,000 at June 30, 2006. The increase in cash was mainlyattributable to cash collected on fully reserved receivables from discontinuedoperations.

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***Net Cash Flow fromOperating Activities***

Net cash fromoperating activities was approximately $4.2 million for the fiscal year endedJune 30, 2007.  The net increase in cashresulted from a net income of 351,000, add back of non-cash items of $4.8million related to depreciation and amortization and $694,000 related tostock-based compensation, $638,000 related to provision for bad debt, $437,000related to interest on related party promissory note, $1.3 million related tobeneficial conversion feature of convertible promissory note, offset by($156,000) related to deferred income tax, changes in working capital assetsand liabilities of ($2.3 million) and add-back of gain on disposal ofdiscontinued operations of ($1.6 million).

Net cash fromoperating activities was approximately $5.5 million for the fiscal year endedJune 30, 2006.  The net increase in cashresulted from a net income of $2.6 million, add back of non-cash items of $3.0million related to depreciation and amortization and $343,000 related tostock-based compensation, $328,000 related to provision for bad debt offset by($102,000) related to deferred income tax, changes in working capital assetsand liabilities of ($246,000) and add-back of gain on disposal of discontinuedoperations of ($407,000).

Net cash fromoperating activities was approximately ($656,000) for the fiscal year endedJune 30, 2005.  The net cash usedresulted from a net loss of ($230,000), changes in working capital assets andliabilities of ($381,000), add-back of gain on disposal of discontinuedoperations of ($281,000), offset by-non cash items of $236,000 related todepreciation and amortization.

We are developinga next generation e-marketing application.  We are currently evaluatingwhat resources to devote to this potential new product.  We may dedicate aportion of our future operating cash flow to the development, marketing andsale of this new product.

***Net Cash Flow fromInvesting Activities***

Net cash used ininvesting activities was approximately $13.5 million for the fiscal year endedJune 30, 2007, which represented cash paid for the acquisitions of ClickTracksand Hot Banana of $13.1 million and $1.5 million used for capitalexpenditures.  These expenditures were partially offset by the collectionof $1.3 million of restricted cash that was paid to us by one of our workers’compensation insurance carriers.

Net cash used ininvesting activities was approximately $17.8 million for the fiscal year endedJune 30, 2006, which represented cash paid for the acquisition of EmailLabs of$17.4 million and $854,000 used for capital expenditures.  Theseexpenditures were partially offset by the collection of $600,000 of restrictedcash that was paid to us by one of our workers’ compensation insurancecarriers.

Net cash used ininvesting activities was approximately $24.6 million, for the fiscal year endedJune 30, 2005, which represented cash paid for the acquisition of Lyris of$24.6 million and the purchase of property and equipment of $20,000.

***Net Cash Flow fromFinancing Activities***

Net cash providedby financing activities was $9.3 million for the fiscal year ended June 30, 2007,which represented proceeds of $27.5 million from Comerica Bank (“Comerica”)plus proceeds of a loan from LDN Stuyvie Partnership of $10.0 million. These amounts were offset by repayments to Comerica Bank of $28.2 million.

Net cash providedby financing activities was $9.8 million for the fiscal year ended June 30,2006, which represented proceeds of $22.4 million from Comerica Bank (“Comerica”). This amount was offset by repayments of $12.5 million and financing fees of$100,000.

Net cash providedby financing activities was $232,000, for the fiscal year ended June 30, 2005,which represented cash received as the result of the sale of 773,333 shares ofour common stock held in treasury.

OnOctober 11, 2005, we entered into a Loan and Security Agreement withComerica Bank, (the “Loan and Security Agreement”), which provided a revolvingline of credit to us.  The initial borrowings under the Loan and SecurityAgreement were used to consummate the acquisition of EmailLabs and forgeneral corporate purposes.  Under the original Loan and SecurityAgreement, interest on outstanding balances was charged at a floating rateequal to either Comerica’s base rate plus 0.75% or Comerica’s LIBOR rate plus3.75%. The original amount available to us was $18.5 million and that amountwas reduced monthly beginning October 31, 2005.  Monthly reductionswere $250,000 through September 30, 2007 and $347,222 thereafter throughthe maturity date.  In addition, the Loan and Security Agreement containscertain financial covenants and requires us to maintain certain financialratios.  Failure to meet these financial covenants and ratios constitutean event of default.

34

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From April 2006through January 2007, we entered into four amendments to the Security and LoanAgreement.  These amendments adjustedComerica’s lending commitment, adjusted the rate at which outstandingborrowings bear interest and revised existing financial and other covenants.

Effective as of March 31, 2007, we entered into aFifth Amendment to the Loan and Security Agreement (the “Fifth Amendment”) withComerica.  The Fifth Amendment increasesthe amounts available under the revolving line of credit to fifteen milliondollars ($15,000,000), extends the term to five years from the date of theFifth Amendment and provides that the amounts available under the line arereduced in equal monthly installments. The Amendment modifies the definition ofEBITDA to allow for adjustments related to discontinued operations, subject tocertain limitations, and also modifies the financial covenants.  Thefinancial covenant requirements, measured on a monthly basis are as follows:(a) fixed charge coverage of at least 1.25 to 1.00, calculated as the ratio ofannualized rolling three-month EBITDA minus cash taxes and capitalized expendituresto the sum of cash interest expense plus the current portion of allindebtedness to bank; (b) minimum EBITDA, on a rolling three-month basis of atleast (i) $1,500,000 for the three-month period ending March 31, 2007, throughthe three-month period ending August 31, 2007, (ii) $1,750,000 for thethree-month period ending September 30, 2007, through the three month periodending February 28, 2008; and (iii) $2,000,000 for each three-month periodthereafter; (c) senior debt to EBITDA, calculated on an annualized rollingthree-month basis of not greater than: (i) 2.50 to 1.00 for the measuringperiods ending March 31, 2007, through February 28, 2008, and (ii) 2.00 to 1.00at all times thereafter; (d) Liquidity, defined as cash held at Comerica plusavailability under the revolving line, of not less than (i) $2,000,000 for themeasuring periods ending March 31, 2007, through August 31, 2007, and (ii)$1,000,000 at all times thereafter.

*RelatedParty Convertible Bridge Loan*

The ClickTracksand Hot Banana acquisitions were financed primarily with a $10 million bridgeloan made by our largest stockholder, LDN Stuyvie Partnership.   LDNStuyvie is controlled by the Chairman of our Board of Directors, William T.Comfort III.  The bridge loan from LDN Stuyvie was evidenced by apromissory note (the “LDN Stuyvie Note”) bearing interest at the rate of 9.5%per annum, or 11.5% per annum in the event of default, and under its terms wasto become due upon the first to occur of:

(i)                                  Theclosing under the Backstop Agreement (discussed below);

(ii)                               Thedate on which the board of directors resolved to abandon the rights offering;

(iii)                            Thedate on which any order issued by a governmental entity of competentjurisdiction or any other legal restraint prohibited the consummation of therights offering;

(iv)                           Thedate on which any law or order by any governmental entity of competentjurisdiction made the rights offering illegal;

(v)                                February1, 2007, if the registration statement filed in connection with rights offeringwas not declared effective by the SEC by 5:30 p.m. ET on January 31, 2007; or

(vi)                             April1, 2007, if the registration statement filed in connection with rights offeringhas been declared effective by SEC by 5:30 p.m. ET on January 31, 2007,but the rights offering has not expired by 11:59 p.m. ET on March 31, 2007.

Because aregistration statement for the rights offering was not effective on January 31,2007, the LDN Stuyvie Note became due and payable and, in accordance with itsterms, we issued to LDN Stuyvie a total of 12,279,130 shares of our commonstock as payment in full of the principal and accrued interest on the LDNStuyvie Note.   In accordance with the terms of the LDN Stuyvie Note,the common stock was valued at $0.85 per share for an aggregate price of $10,437,260.27,representing $10,000,000 for the principal and $437,260.27 for the accruedinterest under the LDN Stuyvie Note.  The shares of common stock wereissued in a private placement in reliance on Rule 506 under the Securities Actof 1933.

In connection withthe LDN Stuyvie Note, we and LDN Stuyvie entered into a backstop agreement,pursuant to which LDN Stuyvie agreed to purchase an amount of our common stockat $0.85 per share so that, together with all shares of common stock sold by usin a proposed rights offering at the same price, we would have received atleast $10 million in proceeds.  Also pursuant to the BackstopAgreement, we granted to LDN Stuyvie the exclusive right to purchase up to anadditional $10 million of common stock at a price of $0.85 per share in respectof each right granted to our stockholders pursuant to the proposed rightsoffering which remained unexercised.

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The conversionprice of $0.85 per common share contained a beneficial conversion feature of$0.11 per share to the August 16, 2006 closing price of $0.96.  The aggregate amount of this beneficialconversion feature was approximately $1,294,000 and this amount was fullyamortized though interest expense during fiscal year 2007.  A corresponding amount was credited tostockholders’ additional paid in capital.

On February 5,2007, we issued a press release announcing repayment of the LDN Stuyvie Note,termination of the Backstop Agreement in accordance with its terms andcancellation of the previously announced rights offering.

*Legal Claims*

We are currentlydefending one lawsuit (NovaCare v. Stratford, see Item 3) and managementbelieves that we will prevail in this case. We have accrued for the potentialcosts of litigating this claim, but we have not accrued for the payments thatcould result from an adverse ruling, judgment or a settlement of this claim andwill not accrue for the payments until we believe that it is probable that sucha payment will be made.

*Off-BalanceSheet Arrangements*

We have no off-balancesheet arrangements.

*Long-TermContractual Obligations*

The following table summarizes by period the paymentsdue for contractual obligations estimated as of June 30, 2007:
| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| Contractual Obligations             |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt  obligations(1)      |       | 15,275                                    |       | 1,453 |   | 6,947 |   | 6,875 |   | — |   |
| Operating Lease  Obligations (2)    |       | 1,686                                     |       | 862 |   | 824 |   | — |   | — |   |
| Contingent Merger  Consideration(3) |       | 2,213                                     |       | 2,050 |   | 163 |   | — |   | — |   |

 

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(1)          Note payable, includinginterest thereon, and revolving line of credit

(2)          Property leases

(3)          Earn-outs

36

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***Future Payments on recent acquisitions***

We believe that wewill likely be required to pay certain earn-outs to sellers of the Lyris,EmailLabs and Hot Banana businesses.  A payment to the sellers ofEmailLabs in the amount of $1.725 million is due on October 11, 2007 and apayment to the sellers of Lyris will be required to be paid of approximately$6.1 million, $1.4 million due February 12, 2008 and $4.7 million due November12, 2008, pursuant to the earn-out provisions of those acquisitions.

As a result of theacquisition of Hot Banana we will be obligated to pay the sellers of Hot Bananainstallments totaling up to approximately $562,500 Canadian dollars(approximately $487,858 U.S. dollars) if they achieve specified revenue targetsin the first and second year following the closing.

***Revolving Line of Credit***

On October 11,2005, we entered into the Loan and Security Agreement with Comerica Bank. The initial borrowings under the Loan and Security Agreement were used toconsummate the acquisition of EmailLabs and for general corporatepurposes.  Under the original Loan and Security Agreement, interest onoutstanding balances was charged at a floating rate equal to either Comerica’sbase rate plus 0.75% or Comerica’s LIBOR rate plus 3.75%. The original amountavailable to us was $18.5 million and that amount was reduced monthly beginningOctober 31, 2005.  Monthly reductions were $250,000 throughSeptember 30, 2007 and $347,222 thereafter through the maturitydate.  In addition, the Loan and Security Agreement contains certainfinancial covenants and requires us to maintain certain financial ratios. Failure to meet these financial covenants and ratios constitute an event ofdefault.

From April 2006through January 2007, we entered into four amendments to the Security and LoanAgreement.  These amendments adjustedComerica’s lending commitment, adjusted the rate at which outstandingborrowings bear interest and revised existing financial and other covenants.

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Effective as of March 31, 2007, we entered into aFifth Amendment to the Loan and Security Agreement.  The Fifth Amendment increases the amountsavailable under the revolving line of credit to fifteen million dollars($15,000,000), extends the term to five years from the date of the FifthAmendment and provides that the amounts available under the line are reduced inequal monthly installments. The Amendment modifies the definition of EBITDA toallow for adjustments related to discontinued operations, subject to certainlimitations, and also modifies the financial covenants.  The financialcovenant requirements, measured on a monthly basis are as follows: (a) fixedcharge coverage of at least 1.25 to 1.00, calculated as the ratio of annualizedrolling three-month EBITDA minus cash taxes and capitalized expenditures to thesum of cash interest expense plus the current portion of all indebtedness tobank; (b) minimum EBITDA, on a rolling three-month basis of at least (i)$1,500,000 for the three-month period ending March 31, 2007, through thethree-month period ending August 31, 2007, (ii) $1,750,000 for the three-monthperiod ending September 30, 2007, through the three month period endingFebruary 28, 2008; and (iii) $2,000,000 for each three-month period thereafter;(c) senior debt to EBITDA, calculated on an annualized rolling three-monthbasis of not greater than: (i) 2.50 to 1.00 for the measuring periods endingMarch 31, 2007, through February 28, 2008, and (ii) 2.00 to 1.00 at all timesthereafter; (d) Liquidity, defined as cash held at Comerica plus availabilityunder the revolving line, of not less than (i) $2,000,000 for the measuringperiods ending March 31, 2007, through August 31, 2007, and (ii) $1,000,000 atall times thereafter.

O’Leary v. Joyner SportsMedicine

We are a defendantin one professional liability claim and had previously purchased professionalliability insurance policies from PHICO Insurance Company.  On February 2,2002, a Pennsylvania court authorized state insurance regulators to liquidatethe insolvent PHICO Insurance Company, which had provided professionalliability insurance policies to us. As a result, PHICO will not be permitted topay any claims on our behalf; however, the remaining claims were transferred tovarious state guaranty funds.  Since 2002, state insurance guaranty fundshave paid the amounts due for liability claims settlements on our behalf. Based on our discussion with the state guaranty funds and a review of claimsduring the third quarter of 2004, we now believe that a payment may be requiredto settle the professional liability claim that may exceed the amount availableto us under the applicable state guaranty fund limits.  We recorded anaccrual and related expense in the third quarter of 2004 equal to the estimatedcost to settle that claim less the amount that would be paid by the stateguaranty fund.  A ruling in February 2006, by the Superior Court of NewJersey may free this state guarantee fund from contributing their limit to anysettlement on our behalf.  Because of this ruling, we have increased ourreserve for this liability claim.  There is no insurance policy in placethat would pay any settlement or award for this claim; therefore, in the eventthat our current reserve assessment is incorrect, we will be required to fundany amount in excess of the reserve amount.

**RecentAccounting Pronouncements**

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (SFAS) No. 157,*“FairValue Measurements,”* (“SFAS No. 157”).  This Statement definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles (GAAP), and expands disclosures about fair valuemeasurements.  This Statement is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years.  We are currently evaluating the impact of SFASNo. 157 on our consolidated financial statements.

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In July 2002,*“The Public Company Accounting Reform and InvestorProtection Act of 2002”* (the “Sarbanes-Oxley Act”) wasenacted.  Section 404 of the Sarbanes-Oxley Act stipulates thatpublic companies must take responsibility for maintaining an effective systemof internal control.  The Sarbanes-Oxley Act requires public companies toreport on the effectiveness of their control over financial reporting andobtain an attestation report from their independent registered publicaccounting firm about management’s report.  The Sarbanes-Oxley Actrequires most public companies (large accelerated and accelerated filers) toreport on their internal control over financial reporting for years ending onor after November 15, 2004.  Other public companies (non-acceleratedfilers) must begin to comply with the new requirements related to internalcontrol over financial reporting for their first year ending on or after July 15,2007 under the latest extension granted by the SEC.  The SEC recently hasextended the compliance date for non-accelerated filers to include a report oneffectiveness of controls over financial reporting to the year ending on orafter December 15, 2007, and has extended the date by which non-acceleratedfilers must file an auditor’s attestation report on internal controls overfinancial reporting in their annual reports until the first annual report for afiscal year ending on or after December 15, 2008.  We are anon-accelerated filer and we expect to be able to comply with these filingrequirements.

In June 2006,the FASB issued FASB Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement 109*”(“FIN 48”).  FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FASB Statement of Financial AccountingStandards (SFAS) 109, “*Accounting for IncomeTaxes*.”  This Interpretation definesthe minimum recognition threshold a tax position is required to meet beforebeing recognized in the financial statements. FIN 48 is effective forfiscal years beginning after December 15, 2006.  We have determined that the adoption of Fin48 did not have an impact on our financial position and results of operations.

InSeptember 2006, the SEC issued Staff Accounting Bulletin No. 108,Section N to Topic 1, titled “*Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*” (“SAB 108”). SAB 108 requires theevaluation of prior-year misstatements using both the balance sheet approachand the income statement approach. In the initial year of adoption shouldeither approach result in quantifying an error that is material in light ofquantitative and qualitative factors, SAB 108 guidance allows for aone-time cumulative-effect adjustment to beginning retained earnings. In yearssubsequent to adoption, previously undetected misstatements deemed materialshall result in the restatement of previously issued financial statements inaccordance with FAS 154. SAB 108 is effective for us on June 30,2007 with earlier adoption encouraged. Management determined that SAB 108 hadno impact on us in the fiscal year ended June 30, 2007.

In February 2007, the FASB issued Statement ofFinancial Accounting Standards No. 159, “*TheFair Value Option for Financial Assets & Financial Liabilities — Includingan Amendment of SFAS No. 115,”* (“SFAS 159”). SFAS 159 permitscompanies to choose to measure certain financial instruments and other items atfair value. The standard requires that unrealized gains and losses are reportedin earnings for items measured using the fair value option. SFAS 159 willbecome effective for fiscal years beginning after November 15, 2007. Weare in the process of determining what effect, if any, the adoption of SFAS 159will have on our consolidated financial statements.

**ITEM 7A.       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

***Foreign Currency Exchange Risks***

One of oursubsidiaries, Hot Banana, has its operations in Canada and has a functionalcurrency of Canadian Dollars.  Eachfinancial period, all assets, including goodwill, and liabilities of Hot Bananaare translated into U.S. dollars, our reporting currency, using the closingrate method.

There areprincipally two types of foreign exchange risk: transaction risks andtranslation risks. Transaction risks may impact the results of operations andtranslation risks may impact comprehensive income.  These are discussed more fully below.

***Transaction risks***

Transactions incurrencies other than the functional currency are translated at either anexchange rate used for the month in which the transaction took place (toapproximate to the exchange rate at the date of transactions for that month) orin some cases the rate in effect at the date of the transaction. Differences in exchange rates during the period between the date a transactiondenominated in a foreign currency is consummated and the date on which it issettled or translated, are recognized in the consolidated statements ofoperations as foreign exchange transaction gains and losses.

39

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Hot Banana’s cashbalances consist of Canadian Dollars and U.S. Dollars. This exposes us to foreigncurrency exchange rate risk in the Statement of Operations. The change inexposure from period to period is related to the change in the balance of thebank accounts based on timing of event receipts and payments.  At June 30,2007, Hot Banana held approximately $40,000 in U.S. Dollars in a cash accountand remains exposed to changes in the foreign currency rate. As of June 30,2007, a 10% increase or decrease in the level of the U.S. Dollar exchange rateagainst the Canadian Dollar with all other variables held constant would resultin a realized gain or loss of approximately $4,000.

***Translation risks***

The financialstatements of Hot Banana with a functional currency of Canadian dollars aretranslated into U.S. dollars using the current rate method.  Accordingly, assets and liabilities aretranslated at period-end exchange rates while revenue, expenses and cash flowsare translated at monthly weighted average exchange rates.  Adjustments resulting from these translationsare accumulated and reported as a component of other comprehensive loss instockholders’ equity.

The fluctuation inthe exchange rates resulted in foreign currency translation losses reflected asa component of comprehensive gain in stockholders’ equity of $228,000 at June30, 2007.  Future changes in the value ofthe U.S. dollar to Canadian dollar could have a material impact on ourfinancial position.

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**ITEM 8.****      FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**
| **Index to Consolidated Financial Statements**                                                                                        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** |
| Report of Independent  Registered Public Accounting Firm – Burr, Pilger & Mayer LLP                                          |       |
|                                                                                                                                  |       |
| Consolidated  Balance Sheets as of June 30, 2007 and 2006                                                                             |       |
|                                                                                                                                  |       |
| Consolidated  Statements of Operations for the years ended June 30, 2007, 2006  and 2005                                         |       |
|                                                                                                                                  |       |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended June 30, 2007, 2006 and 2005 |       |
|                                                                                                                                  |       |
| Consolidated  Statements of Cash Flows for the years ended June 30, 2007, 2006  and 2005                                         |       |
|                                                                                                                                  |       |
| Notes to Consolidated Financial Statements                                                                                            |       |

 

41

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**Report of Independent RegisteredPublic Accounting Firm**

To the Board of Directors and Stockholders of J.L. Halsey Corporation:

We have audited the accompanying consolidated balance sheets of J.L.Halsey Corporation and Subsidiaries (the “Company”) as of June 30, 2007 and2006 and the related statements of operations, stockholders’ equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod ended June 30, 2007.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  The Company is not required to have, nor were we engaged toperform, an audit of the Company’s internal control over financialreporting.  An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of J.L. HalseyCorporation and Subsidiaries as of June 30, 2007 and 2006, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended June 30, 2007, in conformity with accounting principles generallyaccepted in the United States of America.

As discussed in Note 17 to the financial statements, the Companychanged the manner in which it accounts for share-based compensation in fiscalyear 2006.
| /s/ Burr, Pilger & Mayer  LLP |   |
|-----------------------------------|--------|
| San Francisco,  California        |
| September 24,  2007               |

 

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**J.L. HALSEY CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share amounts)**
| ** **                                                                                                                                    | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                    | ** ** | **2007**          | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                    | ** ** | ** **        | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                               |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                     |       | $                 | 659        |   | $ | 255 |   |
| Accounts receivable, net of allowance of $365 and  $181 respectively at June 30, 2007 and 2006                                                |       | 6,903             |       | 4,661 |   |
| Prepaid expenses                                                                                                                              |       | 713               |       | 1,160 |   |
| Deferred acquisition costs                                                                                                                    |       | —            |       | 231 |   |
| Deferred income taxes                                                                                                                         |       | 580               |       | 492 |   |
| Deferred financing fees                                                                                                                       |       | 147               |       | 97 |   |
| Prepaid expenses related to discontinued operations                                                                                           |       | 6                 |       | 213 |   |
| Total current assets                                                                                                                          |       | 9,008             |       | 7,109 |   |
| Property and  equipment, net                                                                                                                  |       | 2,452             |       | 1,675 |   |
| Restricted cash  related to discontinued operations                                                                                           |       | 200               |       | 1,675 |   |
| Restricted cash                                                                                                                               |       | 96                |       | 94 |   |
| Intangible  assets, net                                                                                                                       |       | 22,414            |       | 19,776 |   |
| Goodwill                                                                                                                                      |       | 36,021            |       | 27,390 |   |
| Total assets                                                                                                                                  |       | $                 | 70,191     |   | $ | 57,719 |   |
|                                                                                                                                          |       |              |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                | ** ** | ** **        | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                                         |       |              |       |   |   |
| Accounts payable and accrued expenses                                                                                                         |       | $                 | 2,580      |   | $ | 2,126 |   |
| Contingent acquisition consideration – short-term                                                                                        |       | 2,050             |       | 2,207 |   |
| Note payable – current portion                                                                                                           |       | 1,049             |       | 5,496 |   |
| Accrued interest                                                                                                                              |       | 70                |       | 634 |   |
| Income taxes payable                                                                                                                          |       | 218               |       | 433 |   |
| Accrued expenses remaining from discontinued  operations                                                                                      |       | 722               |       | 2,310 |   |
| Deferred revenue                                                                                                                              |       | 3,893             |       | 2,664 |   |
| Total current liabilities                                                                                                                     |       | 10,582            |       | 15,870 |   |
| Revolving line  of credit                                                                                                                     |       | 9,134             |       | 9,867 |   |
| Note payable –  long-term                                                                                                                |       | 4,360             |       | — |   |
| Contingent  acquisition consideration – long-term                                                                                        |       | 163               |       | 1,725 |   |
| Deferred income  taxes                                                                                                                        |       | —            |       | 98 |   |
| Other long-term  liabilities                                                                                                                  |       | 146               |       | 93 |   |
| Total liabilities                                                                                                                             |       | 24,385            |       | 27,653 |   |
| Commitments and  contingencies (Note 18)                                                                                                      |       | —            |       | — |   |
| Stockholders’  equity:                                                                                                                   |       |              |       |   |   |
| Common stock, $.01 par value; authorized 200,000,000  shares; issued 98,430,598 and 89,522,280 shares respectively at June 30, 2007  and 2006 |       | 984               |       | 895 |   |
| Additional paid-in capital                                                                                                                    |       | 252,172           |       | 274,064 |   |
| Accumulated deficit                                                                                                                           |       | (207,578          | )          | (207,929 | ) |
| Treasury stock (at cost), 0 and 6,313,948 shares  respectively, at June 30, 2007 and 2006                                                     |       | —            |       | (36,964 | ) |
| Cumulative foreign currency translation adjustment                                                                                            |       | 228               |       | — |   |
| Total stockholders’ equity                                                                                                               |       | 45,806            |       | 30,066 |   |
| Total  liabilities and stockholders’ equity                                                                                              |       | $                 | 70,191     |   | $ | 57,719 |   |

 

The accompanyingnotes are an integral part of these financial statements.

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**J.L. HALSEY CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except share and per share amounts)**
| ** **                                                                                                                                            | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Software and  services revenues:                                                                                                                      |       |                                    |       |   |   |   |   |
| Software revenues                                                                                                                                     |       | $                                       | 8,045      |   | $ | 5,331 |   | $ | 796 |   |
| Services revenues                                                                                                                                     |       | 30,960                                  |       | 19,022 |   | 1,411 |   |
| Total revenues                                                                                                                                        |       | 39,005                                  |       | 24,353 |   | 2,207 |   |
| Cost of  revenues:                                                                                                                                    |       |                                    |       |   |   |   |   |
| Software and services                                                                                                                                 |       | 9,739                                   |       | 5,346 |   | 344 |   |
| Amortization of developed technology                                                                                                                  |       | 2,301                                   |       | 1,410 |   | 103 |   |
| Total cost of  revenues                                                                                                                               |       | 12,040                                  |       | 6,756 |   | 447 |   |
| Gross profit                                                                                                                                          |       | 26,965                                  |       | 17,597 |   | 1,760 |   |
| Operating  expenses:                                                                                                                                  |       |                                    |       |   |   |   |   |
| General and administrative expenses                                                                                                                   |       | 11,087                                  |       | 6,901 |   | 2,223 |   |
| Research & development                                                                                                                            |       | 1,448                                   |       | 210 |   | — |   |
| Sales & marketing                                                                                                                                 |       | 10,539                                  |       | 5,097 |   | 290 |   |
| Amortization of customer relationships                                                                                                                |       | 1,741                                   |       | 1,217 |   | 94 |   |
| Income (loss) from operations                                                                                                                         |       | 2,150                                   |       | 4,172 |   | (847 | ) |
| Interest income                                                                                                                                       |       | 24                                      |       | 98 |   | 490 |   |
| Interest expense                                                                                                                                      |       | (3,130                                  | )          | (1,268 | ) | (77 | ) |
| Other income                                                                                                                                          |       | 181                                     |       | — |   | — |   |
| Loss on sale of  assets                                                                                                                               |       | —                                  |       | (16 | ) | — |   |
| (Loss) income from continuing operations before  income taxes                                                                                         |       | (775                                    | )          | 2,986 |   | (434 | ) |
| Income tax  provision                                                                                                                                 |       | 544                                     |       | 827 |   | 77 |   |
| Net (loss) income from continuing operations                                                                                                          |       | (1,319                                  | )          | 2,159 |   | (511 | ) |
| Gain on disposal  of discontinued operations, net of income tax benefit (expense) of $125,  ($25) and $0 respectively at June 30, 2007, 2006 and 2005 |       | 1,670                                   |       | 407 |   | 281 |   |
| Net income (loss)                                                                                                                                     |       | $                                       | 351        |   | $ | 2,566 |   | $ | (230 | ) |
| (Loss) income  per share from continuing operations — basic and diluted                                                                          |       | $                                       | (0.01      | ) | $ | 0.03 |   | $ | (0.01 | ) |
| Income (loss)  per share - basic and diluted                                                                                                          |       | $                                       | 0.00       |   | $ | 0.03 |   | $ | (0.00 | ) |
| Weighted average  number of shares outstanding – basic                                                                                           |       | 90,706,301                              |       | 83,126,803 |   | 82,296,880 |   |
| Weighted average number  of shares outstanding – diluted                                                                                         |       | 92,904,183                              |       | 84,485,747 |   | 82,296,880 |   |

 

The accompanyingnotes are an integral part of these financial statements.

44

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**J.L. HALSEY CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**(Inthousands, except share amounts)**
| ** **                                                    | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated** | ** ** | **Foreign  Currency  Translation** | ** ** | **Treasury Stock** | ** **   | **Total  Stockholders’** | ** ** | **Comprehensive** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|------------------------------------|------------|-------------------------|--------------|-------------------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit**                        | ** ** | **Adjustment**          | ** **   | **Shares**                    | ** ** | **Amount**        | ** ** | **Equity** | ** ** | **Income (loss)** | ** ** |
|                                                          |       |                  |       |                    |       |            |       |                               |       |                    |         |                          |       |              |       |   |   |   |   |
| **Balance  at June 30, 2004**                                 | ** ** | **89,522,280**        | ** ** | **$**                   | **895**    | ** **      | **$**      | **275,064**                        | ** ** | **$**                   | **(205,965** | **)**                         | **$**      | **—**        | ** ** | **(7,329,217** | **)** | **$** | **(42,914** | **)** | **$** | **27,080** | ** ** | **$** | **—** | ** ** |
|                                                          |       |                  |       |                    |       |            |       |                               |       |                    |         |                          |       |              |       |   |   |   |   |
| Treasury stock sale                                           |       | **—**            |       | **—**              |       | **—**      |       | (4,300                             | )          | **—**              |         | 773,333                       |       | 4,532             |       | 232 |   | **—** |   |
| Net loss                                                      |       | **—**            |       | **—**              |       | **—**      |       | (230                               | )          | **—**              |         | **—**                    |       | **—**        |       | (230 | ) | (230 | ) |
| Comprehensive loss                                            |       | **—**            |       | **—**              |       | **—**      |       | **—**                         |       | **—**              |         | **—**                    |       | **—**        |       | **—** |   | (230 | ) |
| **Balance  at June 30, 2005**                                 | ** ** | **89,522,280**        | ** ** | **895**                 | ** ** | **275,064**     | ** ** | **(210,495**                       | **)**      | **—**              | ** **   | **(6,555,884**                | **)**      | **(38,382**       | **)**      | **27,082** | ** ** | ** ** | ** ** |
|                                                          |       |                  |       |                    |       |            |       |                               |       |                    |         |                          |       |              |       |   |   |   |   |
| Treasury stock sale                                           |       | **—**            |       | **—**              |       | (1,343          | )          | **—**                         |       | **—**              |         | 241,936                       |       | 1,418             |       | 75 |   | **—** |   |
| Stock based compensation                                      |       | **—**            |       | **—**              |       | 343             |       | **—**                         |       | **—**              |         | **—**                    |       | **—**        |       | 343 |   | **—** |   |
| Net income                                                    |       | **—**            |       | **—**              |       | **—**      |       | 2,566                              |       | **—**              |         | **—**                    |       | **—**        |       | 2,566 |   | 2,566 |   |
| Comprehensive income                                          |       |                  |       |                    |       |            |       |                               |       |                    |         |                          |       |              |       |   |   | 2,566 |   |
| **Balance at June 30, 2006**                                  | ** ** | **89,522,280**        | ** ** | **895**                 | ** ** | **274,064**     | ** ** | **(207,929**                       | **)**      | **—**              | ** **   | **(6,313,948**                | **)**      | **(36,964**       | **)**      | **30,066** | ** ** | ** ** | ** ** |
|                                                          |       |                  |       |                    |       |            |       |                               |       |                    |         |                          |       |              |       |   |   |   |   |
| Stock issued for exercise of stock options                    |       | 112,250               |       | 1                       |       | (97             | )          | **—**                         |       | **—**              |         | 31,250                        |       | 183               |       | 87 |   | **—** |   |
| Stock issued for acquisition of ClickTracks                   |       | **—**            |       | **—**              |       | (13,653         | )          | **—**                         |       | **—**              |         | 2,799,636                     |       | 16,406            |       | 2,753 |   | **—** |   |
| Stock issued for related party promissory note                |       | 8,796,068             |       | 88                      |       | (10,130         | )          | **—**                         |       | **—**              |         | 3,483,062                     |       | 20,375            |       | 10,333 |   | **—** |   |
| Stock based compensation                                      |       | **—**            |       | **—**              |       | 694             |       | **—**                         |       | **—**              |         | **—**                    |       | **—**        |       | 694 |   | **—** |   |
| Beneficial conversion feature of convertible  promissory note |       | **—**            |       | **—**              |       | 1,294           |       | **—**                         |       | **—**              |         | **—**                    |       | **—**        |       | 1,294 |   | **—** |   |
| Cumulative translation adjustment                             |       |                  |       |                    |       |            |       |                               |       | 228                     |         |                          |       |              |       | 228 |   | 228 |   |
| Net income                                                    |       | **—**            |       | **—**              |       | **—**      |       | 351                                |       | **—**              |         | **—**                    |       | **—**        |       | 351 |   | 351 |   |
| Comprehensive income                                          |       |                  |       |                    |       |            |       |                               |       |                    |         |                          |       |              |       |   |   | $ | 579 |   |
| **Balance at June 30, 2007**                                  | ** ** | **98,430,598**        | ** ** | **$**                   | **984**    | ** **      | **$**      | **252,172**                        | ** ** | **$**                   | **(207,578** | **)**                         | **$**      | **228**           | ** ** | **—** | ** ** | **$** | **—** | ** ** | **$** | **45,806** | ** ** | ** ** | ** ** |

 

The accompanyingnotes are an integral part of these financial statements.

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**J.L. HALSEY CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Inthousands)**
| ** **                                                                                                        | ** ** | **For the Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash Flow  from Operating Activities:**                                                                         | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                 |       | $                                                         | 351        |   | $ | 2,566 |   | $ | (230 | ) |
| Adjustments to reconcile net income (loss) to net  cash flows from operating activities of continuing operations: |       |                                                      |       |   |   |   |   |
| Gain on disposal of discontinued operations, net of  tax                                                          |       | (1,670                                                    | )          | (407 | ) | (281 | ) |
| Stock-based compensation expense                                                                                  |       | 694                                                       |       | 343 |   | — |   |
| Depreciation and amortization                                                                                     |       | 4,852                                                     |       | 3,045 |   | 236 |   |
| Provision for bad debt                                                                                            |       | 638                                                       |       | 328 |   | — |   |
| Deferred income tax benefit                                                                                       |       | (156                                                      | )          | (102 | ) | — |   |
| Loss on sale of assets                                                                                            |       | —                                                    |       | 16 |   | — |   |
| Interest on related party promissory note                                                                         |       | 437                                                       |       | — |   | — |   |
| Beneficial conversion feature of convertible  promissory note                                                     |       | 1,294                                                     |       | — |   | — |   |
| Changes in assets and liabilities:                                                                                |       |                                                      |       |   |   |   |   |
| Accounts receivable                                                                                               |       | (2,473                                                    | )          | (1,739 | ) | (526 | ) |
| Prepaid expenses                                                                                                  |       | (79                                                       | )          | (328 | ) | (126 | ) |
| Accounts payable and accrued expenses                                                                             |       | (7                                                        | )          | 176 |   | 157 |   |
| Accrued interest                                                                                                  |       | (457                                                      | )          | 557 |   | 77 |   |
| Deferred revenue                                                                                                  |       | 879                                                       |       | 679 |   | (40 | ) |
| Income taxes payable                                                                                              |       | (182                                                      | )          | 409 |   | 77 |   |
| Net cash flows provided by (used in) continuing  operations                                                       |       | 4,121                                                     |       | 5,543 |   | (656 | ) |
| Net cash flows provided by (used in) discontinued  operations                                                     |       | 447                                                       |       | (380 | ) | (714 | ) |
| Net cash flows provided by (used in) operating  activities                                                        |       | 4,568                                                     |       | 5,163 |   | (1,370 | ) |
| **Cash  Flows from Investing Activities:**                                                                        | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations:                                                                                            |       |                                                      |       |   |   |   |   |
| Acquisition costs                                                                                                 |       | —                                                    |       | (32 | ) | — |   |
| Reduction of note payable                                                                                         |       | (195                                                      | )          | (104 | ) | — |   |
| Additions to property and equipment                                                                               |       | (1,523                                                    | )          | (854 | ) | (20 | ) |
| Payment for businesses acquired, net of cash  acquired                                                            |       | (13,051                                                   | )          | (17,450 | ) | (24,620 | ) |
| Discontinued operations:                                                                                          |       |                                                      |       |   |   |   |   |
| Release of restricted cash                                                                                        |       | 1,318                                                     |       | 600 |   | — |   |
| Net cash flows used in investing activities                                                                       |       | (13,451                                                   | )          | (17,840 | ) | (24,640 | ) |
| **Cash  Flows from Financing Activities:**                                                                        | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from sale of treasury stock                                                                              |       | 87                                                        |       | 75 |   | 232 |   |
| Financing fees                                                                                                    |       | (75                                                       | )          | (112 | ) | — |   |
| Proceeds from debt and credit arrangements                                                                        |       | 27,453                                                    |       | 22,384 |   | — |   |
| Proceeds from convertible debt from related party                                                                 |       | 10,000                                                    |       | — |   | — |   |
| Payment of debt and credit arrangements                                                                           |       | (28,186                                                   | )          | (12,517 | ) | — |   |
| Net cash flows provided by financing activities                                                                   |       | 9,279                                                     |       | 9,830 |   | 232 |   |
| Net increase  (decrease) in cash and cash equivalents                                                             |       | 396                                                       |       | (2,847 | ) | (25,778 | ) |
| Effect of  exchange rates on cash and cash equivalents                                                            |       | 8                                                         |       | — |   | — |   |
| Cash and cash  equivalents, beginning of year                                                                     |       | 255                                                       |       | 3,102 |   | 28,880 |   |
| Cash and cash  equivalents, end of year                                                                           |       | $                                                         | 659        |   | $ | 255 |   | $ | 3,102 |   |
|                                                                                                              |       |                                                      |       |   |   |   |   |
| Supplemental  disclosures of cash flow information:                                                               |       |                                                      |       |   |   |   |   |
| Cash paid for interest                                                                                            |       | $                                                         | 1,786      |   | $ | 709 |   | $ | — |   |
| Cash paid for taxes                                                                                               |       | $                                                         | 862        |   | $ | 565 |   | $ | — |   |
| Supplemental  disclosure of non-cash transactions:                                                                |       |                                                      |       |   |   |   |   |
| Stock issued for acquisition of ClickTracks                                                                       |       | $                                                         | 2,753      |   | $ | — |   | $ | — |   |
| Conversion of convertible debt and accrued interest  to equity                                                    |       | $                                                         | 10,437     |   | $ | — |   | $ | — |   |
| Beneficial  conversion feature of convertible promissory note                                                     |       | $                                                         | 1,294      |   | $ | — |   | $ | — |   |

 

The accompanyingnotes are an integral part of these financial statements.

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**J.L. HALSEY CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**June30, 2007**

**1.    TheCompany**

J.L. HalseyCorporation, through its wholly owned subsidiaries, Lyris Technologies, Inc. (“Lyris”),Uptilt, Inc. (d/b/a “EmailLabs”), ClickTracks Analytics, Inc. (“ClickTracks”),and Hot Banana Software, Inc. (“Hot Banana”) is a leading digital marketingtechnology and services firm.  Our email marketing software and servicesprovide clients with solutions for creating, managing and delivering onlinepermission-based direct marketing programs, newsletters, discussion groups andother digital communications to clients whose email lists require specializedtechnology in order to effectively communicate with their members andcustomers.  We offer our email solutions in two forms: as software that isdownloaded and installed on customers’ computers, and as a hosted solution inwhich customers use our software through an internet connection.  Throughour acquisitions of ClickTracks and Hot Banana, we also offer website analyticssoftware and services, and website content management software and services.

On May 12, 2005,we acquired all of the outstanding capital stock of Lyris for $30.7 million,which included cash payments of $25.1 million (including acquisition costs andworking capital adjustments of $1.2 million) and $5.6 million in the form of apromissory note payable, subject to Lyris achieving specified revenue targets,on May 12, 2007, with interest accruing at 10% per annum.  Thespecified revenue targets stated in the promissory note were attained.  OnMarch 31, 2007, the note was amended to extend the maturity date to November12, 2008.  In addition, the amendmentprovided for the following payments (constituting both principal and interest):(a) $1,000,000 due May 12, 2007; (b) $1,453,447 due February 12, 2008; and (c)$4,687,666 due November 12, 2008. We paid $1,000,000 on May 14, 2007 and have recorded the remainingpayments as a liability in the current and long-term portions of our BalanceSheet as of June 30, 2007.

On October 11,2005, we acquired all of the outstanding capital stock of EmailLabs for $24.5million (including acquisition costs and working capital adjustments of$612,000).   Of this purchase price,$19.5 million was paid in cash at closing with $2.3 million funded by EmailLabs’available cash and the remainder funded with the proceeds of the Loan andSecurity Agreement between Halsey and Comerica Bank (See Note 7. RevolvingLine of Credit).  $500,000 of thispurchase price was held back pursuant to minimum working capitalrequirements.  This holdback, less the final working capital adjustment,was paid during the quarter ended March 31, 2006.  The EmailLabs purchaseagreement also includes contingent consideration consisting of two equalearn-out payments of $1.725 million due on the first and second anniversary ofthe closing date if EmailLabs achieves specified revenue targets.  We paidthe first $1.725 million installment to the former EmailLabs’ stockholders onOctober 13, 2006.  EmailLabs has achieved all revenue targets and, as aresult, we have recorded the second installment of $1.725 million as aliability in the current portion of our Balance Sheet at June 30, 2007. Additionally, the former stockholders of EmailLabs were to receive any incometax refunds related to the period ending on and including the closingdate.  The tax refunds totaled $482,000 and were paid in September2006.    With the acquisitions of Lyris and EmailLabs, we becamea leading email marketing company with over 5,000 customers worldwide.

On August 18,2006, we acquired all of the outstanding capital stock of ClickTracks forapproximately $8.5 million in cash, $2.8 million of our common stock (2,799,636shares) issued to certain security holders of ClickTracks and $337,000 ofacquisition costs.  The common stock issued as a result of thisacquisition was from our shares held in treasury. In December 2006 we paidapproximately $141,000 to the former owners of ClickTracks for the final workingcapital adjustment.  Pursuant to the purchase agreement, we agreed toadditional payments totaling approximately $3.8 million in the eventClickTracks achieves future revenue targets.  In accordance with anagreement between us and John Marshall, the former President of ClickTracksAnalytics, Inc. dated March 13, 2007, Mr. Marshall, acting in his capacityas the representative of the former stockholders of ClickTracks, acknowledgedthat the revenue targets for the initial post-closing payment would not be met.  Then, pursuant to an agreement between us andMr. Marshall (again acting as representative of the former ClickTracksstockholders), dated June 8, 2007, Mr. Marshall waived all rights to any futurepayments under the original purchase agreement.

On August 18,2006, we also acquired all of the outstanding capital stock of Hot Banana forapproximately $1.9 million Canadian ($1.8 million U.S. based on thethen-applicable exchange rate), with additional installments of up to $750,000Canadian ($664,108 U.S.) if Hot Banana achieves specified revenue andtechnology integration targets, and up to an additional $500,000 Canadian($447,107 U.S.) payable subject to working capital and other adjustments.  In March 2007 we paid approximately $94,000Canadian ($81,000 U.S.) and in May 2007 we paid approximately $94,000 Canadian($86,000 U.S.) to the former owners of Hot Banana for the first and secondinstallments of the technology integration earn-out. In April 2007, we paidapproximately $336,000 Canadian ($299,000 U.S.) to the former owners of HotBanana for the final working capital adjustment.  We believe that it isprobable that Hot Banana’s performance will result in contingent payments forrevenue targets to the sellers of Hot Banana and, as a result, we have recorded$487,858 as a liability in the current and long-term portions of our BalanceSheet as of June 30, 2007.

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Each of our fouracquisitions we have made require us to make additional earn-out payments tothe sellers of the businesses if certain conditions are met.  Copies ofthe acquisition agreements have been filed with the SEC and are discussedelsewhere herein.  (See Notes 6 and 13 of the Notes to ConsolidatedFinancial Statements).  We believe that some of these conditions are likelyto be met, and, therefore, have classified specified earn-outs on our balancesheet as short-term or long-term debt. Our principal use of cash in the futurewill be the payment of earn-outs and the pay down of debt. Based on our currentprojections, we believe that we will be able to make these payments with ouravailable resources. If however, operating results deteriorate or other adverseevents occur, we will not have adequate resources to make these payments. We may be forced to seek additional resources and the cost of these resources,if available at all, may be prohibitive.

We are thesuccessor to NovaCare, Inc (“NovaCare”), which was a national leader inphysical rehabilitation services, orthotics and prosthetics and employeeservices. The changes to Medicare reimbursement in the late 1990’s haddeleterious effects on us and our competitors and customers.   The prior operating business most affected by the Medicare changes was thelong-term care services segment in which NovaCare provided therapists toskilled nursing facilities.  This business was disposed of in fiscal 1999with the shutdown of certain of its operations in the Western United Statesduring the third fiscal quarter and the sale of the remaining operations onJune 1, 1999. NovaCare’s former outpatient services segment was disposed ofthrough the sales of its orthotics and prosthetics (“O&P”) and physicalrehabilitation and occupational health (“PROH”) businesses. The O&Pbusiness was sold to Hangar Orthopedic Group, Inc. in July of 1999 and the PROHbusiness was sold to Select Medical Corporation in November of 1999. NovaCare’s former employee services segment was disposed of through the sale ofNovaCare’s interest in NovaCare Employee Services (“NCES”) in October of 1999to a subsidiary of Plato Holdings, Inc. as part of a tender offer by Plato forall of NCES’s outstanding shares.  With cash raised from the sales ofthese businesses, we repaid all of NovaCare’s bank debt in the summer of 1999,and in January of 2000 we retired NovaCare’s publicly-traded subordinated debt.

We sold theNovaCare name as part of the sale of the PROH business and subsequently changedour name to NAHC, Inc. (“NAHC”).  OnJune 18, 2002, in a transaction approved by our stockholders at a specialmeeting, NAHC merged with and into Halsey, its wholly-ownedsubsidiary.   The purpose of the merger between NAHC and Halsey wasto implement transfer restrictions on our common stock in order to preserve ourfederal income tax net operating losses.

Prior to theacquisitions of Lyris, EmailLabs, ClickTracks and Hot Banana, we spent severalyears maximizing remaining assets, including old accounts receivable, Medicarereceivables and appeals, and tax items, and minimizing liabilities retainedafter the sales of the operating businesses.  We have collected virtuallyall of the receivables, other than amounts which are the subject of litigationor arbitration or that have been written off, and also resolved all but onelitigation matter remaining from our prior operations. None of our current executivesor directors were associated with us prior to, or at the time of, the sale ofthe NovaCare healthcare operating businesses in 1999.

**2.****    Summaryof Significant Accounting Policies**

*Principlesof Consolidation*

The consolidatedfinancial statements include the accounts of J.L. Halsey and its wholly-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated.

*Use ofEstimates*

The preparation offinancial statements in conformity with generally accepted accounting principlesin the United States of America requires our management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of expenses during the reportingperiod.  Estimates are used for, but notlimited to, the accounting for the allowance for doubtful accounts,amortization and depreciation (estimated useful lives used), goodwill andintangible assets valuation, valuation of options, calculation of stockcompensation, current and deferred taxes, and contingencies.  Management also uses estimates to reportassets and liabilities remaining from discontinued operations. We estimatereserves against potential assets from discontinued operations as well as inthe reporting of potential liabilities from discontinued operations. We adjustthese estimates as facts and circumstances require.  Actual results could differ from thoseestimates.

*CertainSignificant Risks and Uncertainties*

We operate in ahighly competitive and dynamic market and accordingly, can be affected by avariety of factors.  For example, our management believes that any of thefollowing could have a negative effect on us in terms of our future financialposition and results of operations; ability to obtain rights to or protect ourintellectual property; changes in regulations; ability to develop new productsaccepted in the marketplace; competition including, but not limited to, pricingand products or product features and services; litigation or claims against us;and the hiring, training and retention of key employees.

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*Concentrationof Credit Risk*

FinancialInstruments that potentially subject us to a concentration of credit riskconsist primarily of cash and trade receivables.  We sell our productsprimarily to customers throughout the United States.  We monitor thecredit status of our customers on an ongoing basis and we do not require ourcustomers to provide collateral for purchases on credit.  No singlecustomer or vendor accounts for greater than 10% of our trade receivables.

*FairValue of Financial Instruments*

The fair value ofcertain of our financial instruments, including cash and cash equivalents,restricted cash, accounts receivable and accounts payable, and certain otheraccrued liabilities, approximate cost because of their short maturities.

###### *Reclassifications*

Certain prior yearamounts have been reclassified to conform to the current yearpresentation.  The reclassification hadno effect on our net earnings or stockholders’ equity as previously reported.

*Cashand Cash Equivalents*

We consider cashon hand, cash in banks, and cash investments with maturities of three months orless when purchased as cash and cash equivalents.  Our holdings consist ofcash in banks. These holdings are recorded on our balance sheet at currentvalue, which includes cost plus earned interest.  We maintain cashbalances with banks in excess of FDIC insured limits. We limit credit risk bymaintaining accounts with financial institutions of high credit standing.

*RestrictedCash*

Our restricted cash balances consist of the following:
|                                                                           | ** ** | **As of June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**                                                   | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Cash balance in  support of self-insured workers compensation liabilities |       | $                                 | 200        |   | $ | 1,675 |   |
|                                                                      |       |                              |       |   |   |
| Certificate of deposit  in support of operating lease agreement           |       | 96                                |       | 94 |   |
|                                                                           |            |                                   |            |  |  |  |  |

 

The restrictedcash account is a result of an agreement between us and our previous workerscompensation insurance carrier from our healthcare discontinued operations andis restricted at the discretion of the insurance carrier. We have been workingwith the insurance carriers to settle the four remaining workers compensationclaims. The change in the restricted cash balance represents a release of therestricted cash that we received in fiscal year 2007 in the amount of $1.145million, payment for new policy of $349,000 offset by interest income of$21,000.

The certificate ofdeposit is required by the terms of the lease for the headquarters of EmailLabs.

*Propertyand Equipment*

Property andequipment are stated at cost, less accumulated depreciation andamortization.  Depreciation and amortization is computed using thestraight-line method over the shorter of the estimated useful lives of the assets,generally two years to seven years, or the lease term including any lease termextensions that we have the right and intention to execute, if applicable.Repair and maintenance costs are expensed in the period incurred.

*RevenueRecognition*

We recognizerevenue from providing services and licensing our software products to ourcustomers.

We generallyrecognize revenue when all of the following conditions are satisfied:  (1)there is persuasive evidence of an arrangement; (2) the service has beenprovided to the customer (in the case of software licenses, revenue isrecognized when the customer is given electronic access to the licensedsoftware); (3) the amount of fees to be paid by the customer is fixed ordeterminable; and (4) the collection of fees is probable.

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*Services Revenue*

Services revenue is derived from the hosting of software for use bycustomers and from providing technical support (maintenance) services.

Our hostedsoftware arrangements are considered service arrangements in accordance with EmergingIssues Task Force (“EITF”) Issue No. 00-3,*“Applicationof AICPA Statement of Position 97-2, Software Revenue Recognition, toArrangements That Include the Right to Use Software Stored on Another Entity’sHardware,”* and with multiple deliverables under EITF 00-21,*“Accounting for Revenue Arrangements with MultipleDeliverables.”*  In addition, because we provide ourapplications as a service, we follow the provisions of Securities and ExchangeCommission Staff Accounting Bulletin No. 104,*“Revenue Recognition.”*  Hosting revenue is recognized monthlybased on the usage defined in the agreement.  Excess usage is billed andrecognized as revenue is incurred. Technical support (maintenance) revenue is recognized ratably over theterm of the agreement, generally one year.

*SoftwareRevenue*

We recognizesoftware license revenue in accordance with the provisions of SOP 97-2,*“Software Revenue Recognition,”* and SOP98-9*“Modification of SOP 97-2, SoftwareRevenue Recognition with Respect to Certain Transactions.” * Weenter into certain revenue arrangements for which we are obligated to delivermultiple products and/or services (multiple elements).  For thesearrangements, which generally include software products and maintenance, weallocate and defer revenue for the undelivered elements based on theirvendor-specific objective evidence of fair value (“VSOE”).  Futurediscounts on unspecified items are considered post-contract customer support,which are included in VSOE for undelivered elements.  Since VSOE existsfor all elements (delivered and undelivered), we allocate the total revenue tobe earned under the arrangement among the various elements, based on theirrelative fair value. Maintenance revenues, including revenues included inmultiple element arrangements, are deferred and recognized ratably over therelated contract period, generally twelve months.

*DeferredRevenue*

Deferred revenuerepresents customer billings made in advance for annual support contracts andbulk purchases of emails to be delivered in the future. Maintenance istypically billed on a per annum basis in advance and revenue is recognizedratably over the maintenance period.  Bulk purchases are typically billedin advance, ranging from monthly to annually, and revenue is recognized in theperiods in which emails are delivered.

*AdvertisingCosts*

Advertising costsare expensed as incurred or the first time the advertising takes place. Advertising costs for the fiscal years ended June 30, 2007, 2006 and2005 were approximately $3.2 million, $1.5 million and $90,000, respectively.

*Researchand Development Costs*

Research anddevelopment costs are expensed as incurred.  Research and developmentcosts for the fiscal years ended June 30, 2007, 2006 and 2005 wereapproximately $1.4 million, $210,000 and $0, respectively.

*SignificantCustomer Information and Segment Reporting*

SFAS No. 131,*“Disclosure about Segments of anEnterprise and Related Information*,*”*establishes standards for the reporting by business enterprises of informationabout operating segments, products and services, geographic areas and majorcustomers.  The method for determining what information to report is basedon the way that management organizes our operations for making operationaldecisions and assessments of financial performance.

Our chiefexecutive officer (“CEO”) is considered to be the chief operatingdecision-maker.  The CEO reviews financial information presented on aconsolidated basis for purposes of making operating decisions and assessingfinancial performance.  We have determined that we operate in a singleoperating segment, specifically, e-marketing technology and services, and haveno significant customers.

*Allowancefor Doubtful Accounts*

Our policy forallowances for doubtful accounts for our current operations (Lyris, EmailLabs,ClickTracks and Hot Banana) and our previous healthcare discontinued operationsare as follows:

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Continuing operations

We regularlyassess our ability to collect outstanding customer invoices and in so doingmust make estimates of the collectibility of accounts receivable.  Weprovide an allowance for doubtful accounts when we determine that thecollection of an outstanding customer receivable is not probable.  Wespecifically analyze accounts receivable and historical bad debts experience,and changes in our customer payment history when evaluating the adequacy of theallowance for doubtful accounts.  If any of these factors change, ourestimates may also change, which could affect the level of our future provisionfor doubtful accounts.

Discontinued operations

We maintainallowances for the collection of receivables remaining from discontinuedhealthcare operations.  These allowances are the result of the inabilityor unwillingness of many of the former healthcare customers to make payments. Several of the key industries in which we previously operated were severelyimpacted by the Balanced Budget Act of 1997.  As a result of theprovisions of this Act, many former healthcare customers went bankrupt and manyare nearly insolvent. Currently, we have outstanding receivables from a few ofthese customers and have recorded 100% allowances against these receivables. Weare pursuing collection from two of our former healthcare customers throughlitigation.

*LossContingencies*

We record estimatedloss contingencies when information is available that indicates that it isprobable that an asset has been impaired or a liability has been incurred andthe amount of the loss can be reasonably estimated.  When no accrual ismade for a loss contingency because one or both of these conditions are notmet, or if an exposure to loss exists in excess of the amount accrued, wedisclose such contingencies when there is at least a reasonable possibilitythat a loss or an additional loss may have been incurred.  Determining thelikelihood of incurring a liability and estimating the amount of the liabilityinvolves significant judgment.   If the outcome of the litigation is moreadverse to us than management currently expects, then we may have to record additionalcharges in the future.  See Note 18 fordetails on contingencies.

*Accountingfor Acquisitions*

Significantjudgment is required to estimate the fair value of purchased assets andliabilities at the date of acquisition, including estimating future cash flowsfrom the acquired business, determining appropriate discount rates, asset livesand other assumptions. Our process to determine the fair value of thenon-compete agreements, customer relationships and developed technologyincludes the use of estimates including: the potential impact on operatingresults if the non-compete agreements were not in place; revenue estimates forcustomers acquired through the acquisition based on an assumed customerattrition rate; estimated costs to be incurred to purchase the capabilitiesgained through the developed technology model; and appropriate discount ratesbased on the particular business’s weighted average cost of capital. Ourestimates of an entity’s growth and costs are based on historical data, variousinternal estimates and a variety of external sources, and are developed as partof our planning process.

*Stock-BasedCompensation*

Effective July 1,2005, we adopted the provisions of Statement of Financials Accounting Standards(“SFAS”) No. 123 (Revised 2004), “*Shared-Based Payments*”(“SFAS No. 123(R)”), and selected the modified prospective method to initiallyreport stock-based compensation amounts in the consolidated financialstatements.  Prior to adoption of SFAS No. 123(R), we provided thedisclosures required under SFAS No. 123, “*Accounting for Stock-BasedCompensation*,” as amended by SFAS No. 148, “*Accountingfor Stock-Based Compensation — Transition and Disclosures*.” Under this method, compensation expense was recorded only if the market priceof the underlying stock on the date of grant exceeded the exercise price. Previously reported amounts have not been restated.

*Goodwill,Long-Lived Assets and Other Intangible Assets*

In accordance withthe provisions of SFAS No. 141,*“BusinessCombinations”* (“SFAS 141”), the purchase price of an acquiredcompany is allocated between tangible and intangible assets acquired andliabilities assumed from the acquired business based on their estimated fairvalues, with the residual of the purchase price recorded as goodwill.

We assess theimpairment of goodwill and indefinite life intangibles on an annual basis inthe fourth quarter.  The potentialimpairment of finite life intangibles is assessed whenever events or a changein circumstances indicate the carrying value may not be recoverable. Factors weconsider important which could trigger an impairment review include thefollowing:

·                  significantunderperformance relative to historical or expected projected future operatingresults;

·                  significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business;

·                  significantnegative industry or economic trends;

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·                  significantdecline in our stock price for a sustained period of time; and

·                  our marketcapitalization relative to net book value.

When we determinethat the carrying value of intangible assets, long-lived assets or goodwill maynot be recoverable based upon the existence of one or more of the aboveindicators of impairment, we measure any potential impairment based on aprojected discounted cash flow method using a discount rate determined by ourmanagement to be commensurate with the risk inherent in our current businessmodel.

We completedannual goodwill impairment tests during the fourth quarter of 2007 and determinedthat the carrying amount of our goodwill was not impaired.

*Accountsand Notes Receivables Remaining from Discontinued Operations*

At June 30, 2007,the accounts and notes receivables remaining from discontinued operationsprimarily consist of trade accounts receivable and Medicare related receivableswhich were owed us prior to the disposition of NovaCare’s healthcare operatingsegments in 1999.  We have reserved these receivables at 100% to reducethese assets to their net realizable value of zero as we believe that we arenot likely to collect any of these amounts. Adjustments to reserves are chargedor credited to gain (loss) on discontinued operations, net of tax.

*AccruedExpenses Remaining from Discontinued Operations*

At June 30, 2007,the accrued expenses remaining from discontinued operations primarily consistof liabilities which arose prior to or as a result of the dispositiontransactions. These liabilities include workers compensation, uninsuredprofessional liability claims and credit and collection expenses. We adjustthese accrual amounts based on current information available to management andthese adjustments are charged or credited to gain (loss) on discontinuedoperations, net of tax.

*InterestExpense*

We record interestexpense related to our revolving line of credit and note payable.  Allinterest expense is related to continuing operations therefore no interestexpense is allocated to discontinued operations.

*IncomeTaxes*

We account forincome taxes under the provisions of SFAS No. 109,*“Accounting for Income Taxes.” *Under this method, deferred tax assets andliabilities are determined based on the differences between the financialstatements carrying amounts of existing assets and liabilities and theirrespective tax basis.

We record deferredtax assets and liabilities for the expected future tax consequences of eventsthat have been recognized in our financial statements or income taxreturns.  Due to our rapid growth through acquisitions, we cannotcurrently determine when it is more likely than not that deferred taxes will berealized in future periods.  As a result, we are maintaining a valuationallowance on significantly all the future federal tax benefits.  As wedevelop reliable revenue projections and determine that the future benefitswill likely be utilized, we will adjust the valuation reserve.

We utilize certaintax strategies to lower taxable income.  We believe that we will be ableto establish with state tax authorities that we are entitled to all or most ofthe benefits from these strategies.  However, these tax strategies aresubject to certain assumptions and interpretations of the relevant legislationand judicial history that may or may not be accepted by the taxauthorities.  Based on our assessment on any challenges from state taxauthorities, we recognize a liability on uncertain tax positions.

*Foreigncurrency translation*

Atentity level, transactions denominated in currencies other than the entity’sfunctional currency are translated into the entity’s functional currency at theexchange rate ruling on the date of the transaction. Monetary assets andliabilities denominated in foreign currencies are retranslated at the exchangerate ruling on the balance sheet date. Currency translation differences arerecognized in the statement of income for the period. One of our operatingentities uses the Canadian Dollar as its functional currency.

Onconsolidation, the results of operations and cash flows of entities whosefunctional currency is other than the U.S. dollar are translated into U.S.dollars at the average exchange rate for the period and their assets andliabilities are translated into U.S. dollars at the exchange rate ruling on thebalance sheet date. Currency translation differences are recognized withinother comprehensive income as a separate component of shareholders’ equity. Inthe event that such an operation is sold, the cumulative currency translationdifferences that are attributable to the operation are reclassified to income.

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*NetIncome (Loss) Per Share*

Basic net income(loss) per share (“EPS”) is calculated using the weighted average number ofcommon shares outstanding during each period. Diluted net income (loss) pershare is calculated using basic EPS adjusted for the effects of stock optionsand convertible debt if such instruments are dilutive.

*ComprehensiveIncome*

The followingtable shows the computation of comprehensive income:
|                                          | ** ** | **Twelve months ended** | ** ** | **Twelve months ended** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | **June 30, 2007**       | ** ** | **June 30, 2006**       | ** ** |
| ** **                               | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Net income                               |       | $                                 | 351        |                              | $          | 2,566 |   |
| Other  comprehensive income:             |       |                              |       |                              |       |
| Foreign currency translation adjustments |       | 228                               |       | —                            |       |
| Total  comprehensive income              |       | $                                 | 579        |                              | $          | 2,566 |   |

 

The financialstatements of Hot Banana, with a functional currency of Canadian Dollars, aretranslated into U.S. dollars using the current rate method. Accordingly, assetsand liabilities are translated at period-end exchange rates while revenue,expenses and cash flows are translated at the period’s weighted averageexchange rates. Adjustments resulting from these translations are accumulatedand reported as a component of other comprehensive income (loss) instockholders’ equity section of the balance sheet.

*NewAccounting Pronouncements*

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (SFAS) No. 157,*“FairValue Measurements,”* (“SFAS No. 157”).  This Statement definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles (GAAP), and expands disclosures about fair valuemeasurements.  This Statement is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years.  We are currently evaluating the impact of SFASNo. 157 on our consolidated financial statements.

In July 2002,*“The Public Company Accounting Reform and InvestorProtection Act of 2002”* (the “Sarbanes-Oxley Act”) wasenacted.  Section 404 of the Sarbanes-Oxley Act stipulates thatpublic companies must take responsibility for maintaining an effective systemof internal control.  The Sarbanes-Oxley Act requires public companies toreport on the effectiveness of their control over financial reporting andobtain an attestation report from their independent registered publicaccounting firm about management’s report.  The Sarbanes-Oxley Actrequires most public companies (large accelerated and accelerated filers) toreport on their internal control over financial reporting for years ending onor after November 15, 2004.  Other public companies (non-acceleratedfilers) must begin to comply with the new requirements related to internalcontrol over financial reporting for their first year ending on or afterJuly 15, 2007 under the latest extension granted by the SEC.  The SECrecently has extended the compliance date for non-accelerated filers to includea report on effectiveness of controls over financial reporting to the yearending on or after December 15, 2007, and has extended the date by whichnon-accelerated filers must file an auditor’s attestation report on internalcontrols over financial reporting in their annual reports until the firstannual report for a fiscal year ending on or after December 15, 2008.  Weare a non-accelerated filer and we expect to be able to comply with thesefiling requirements.

In June 2006,the FASB issued Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes — an interpretation of FASB Statement 109,*”(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement of Financial Accounting Standards (SFAS) 109, “*Accounting for Income Taxes*.” This Interpretation definesthe minimum recognition threshold a tax position is required to meet beforebeing recognized in the financial statements. FIN 48 is effective forfiscal years beginning after December 15, 2006. We have determined thatthe adoption of FIN 48 did not have an impact on our financial positionand results of operations.

InSeptember 2006, the SEC issued Staff Accounting Bulletin No. 108,Section N to Topic 1, titled “*Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*” (“SAB 108”). SAB 108 requires the evaluationof prior-year misstatements using both the balance sheet approach and theincome statement approach. In the initial year of adoption should eitherapproach result in quantifying an error that is material in light ofquantitative and qualitative factors, SAB 108 guidance allows for aone-time cumulative-effect adjustment to beginning retained earnings. In yearssubsequent to adoption, previously undetected misstatements deemed materialshall result in the restatement of previously issued financial statements inaccordance with FAS 154. SAB 108 is effective for us on June 30,2007 with earlier adoption encouraged. Management has determined thatSAB 108 had no impact to us in the fiscal year ended June 30, 2007.

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InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, “*The Fair Value Option forFinancial Assets & Financial Liabilities — Including an Amendment of SFASNo. 115,”* (“SFAS 159”). SFAS 159 permits companies to choose tomeasure certain financial instruments and other items at fair value. Thestandard requires that unrealized gains and losses are reported in earnings foritems measured using the fair value option. SFAS 159 will become effective for fiscal years beginning afterNovember 15, 2007. We are in the process of determining what effect, ifany, the adoption of SFAS 159 will have on our consolidated financialstatements.

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**3.**  **Acquisitions of ClickTracks and Hot Banana**

As discussed inNote 1, on August 18, 2006, we acquired ClickTracks and Hot Banana. The acquisitionswere accounted for as purchases, and, accordingly, the results of operations ofClickTracks and Hot Banana have been included in the consolidated financialstatements commencing on the date of acquisition. In connection with theacquisitions, the preliminary estimated fair values of the assets acquired andthe liabilities assumed at the date of acquisition, which may be subject tochange, were as follows:
| Description (in thousands)    | ** ** | **ClickTracks** | ** ** | **Hot Banana** | ** ** |
|-----------------------------------------|------------|-----------------|------------|---------------------|------------|
| ** **                              | ** ** | ** **      | ** ** | ** **          | ** ** |
| Assets:                                 |       |            |       |                |       |
| Cash                                    |       | $               | 56         |                | $          | 146 |   |
| Trade receivables                       |       | 269             |       | 137                 |       |
| Other current assets                    |       | 55              |       | 14                  |       |
| Property and equipment                  |       | 37              |       | 19                  |       |
| Goodwill                                |       | 5,891           |       | 1,818               |       |
| Trademarks and intangible assets        |       | 5,900           |       | 1,490               |       |
| Total assets acquired                   |       | 12,208          |       | 3,624               |       |
| Liabilities:                            |       |            |       |                |       |
| Accounts payable and accrued expenses   |       | 225             |       | 108                 |       |
| Deferred revenue                        |       | 231             |       | 119                 |       |
| Other liabilities                       |       | 47              |       | —              |       |
| Income taxes payable                    |       | —          |       | 34                  |       |
| Total liabilities                       |       | 503             |       | 261                 |       |
| Net assets  acquired                    |       | $               | 11,705     |                | $          | 3,363 |   |
|                                    |       |            |       |                |       |
| Represented by:                         |       |            |       |                |       |
| Cash paid at closing                    |       | $               | 8,474      |                | $          | 1,786 |   |
| Acquisition costs                       |       | 337             |       | 614                 |       |
| Common stock issued from treasury       |       | 2,753           |       | —              |       |
| Holdback and working capital adjustment |       | 141             |       | 299                 |       |
| Contingent consideration                |       | —          |       | 664                 |       |
|                                    |       | $               | 11,705     |                | $          | 3,363 |   |

 

The unaudited proforma financial information in the table below summarizes the combined resultsof Halsey, ClickTracks and Hot Banana for the fiscal year ended June 30, 2007,and the fiscal year ended June 30, 2006, as though the companies had beencombined as of July 1, 2005. The pro forma financial information is presentedfor information purposes only and is not indicative of the results ofoperations that would have been achieved if the acquisition had taken place atthe beginning of each period, or that may result in the future.
| (in thousands) | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Revenue             |       | $        | 39,633     |     | $          | 29,241 |   |
| Net loss            |       | (81      | )          | (112     | )          |
| Loss per share      |       | $        | (0.00      | )        | $          | (0.00 | ) |

 

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**4.**  **Intangible Assets**

Intangible assetsconsist of the following:
|                                               | ** ** | **As of June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**                       | ** ** | **2007**                          | ** ** | **2006** | ** ** |
|                                          |       |                              |       |   |   |
| Depreciable  intangibles:                     |       |                              |       |   |   |
| Customer relationships                        |       | $                                 | 9,512      |   | $ | 7,373 |   |
| Developed technology                          |       | 12,008                            |       | 8,158 |   |
|                                          |       | 21,520                            |       | 15,531 |   |
| Less:  accumulated amortization               |       | (6,880                            | )          | (2,825 | ) |
|                                          |       | 14,640                            |       | 12,706 |   |
| Non-depreciable  intangibles:                 |       |                              |       |   |   |
| Trade names                                   |       | 7,774                             |       | 7,070 |   |
| Total intangible  assets, net of amortization |       | $                                 | 22,414     |   | $ | 19,776 |   |

 

The following table outlines our intangible assets, byacquisition, as of June 30, 2007:
|                                                | ** ** | ** **            | ** ** | ** **       | ** ** | **Balance at** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|------------------|------------|---------------------|------------|
| ** **                                     | ** ** | ** **            | ** ** | **Accumulated**  | ** ** | **June 30,**   | ** ** |
| **(in thousands)**                        | ** ** | **Gross amount** | ** ** | **amortization** | ** ** | **2007**            | ** ** |
| Lyris  Technologies:                           |       |                  |       |             |       |                |       |
| Customer relationships                         |       | $                     | 4,113      |             | $          | (1,586              | )          | $ | 2,527 |   |
| Developed technology                           |       | 4,078                 |       | (1,743           | )          | 2,335               |       |
| Tradenames                                     |       | 4,720                 |       | —           |       | 4,720               |       |
| Subtotal                                       |       | 12,911                |       | (3,329           | )          | 9,582               |       |
|                                           |       |                  |       |             |       |                |       |
| EmailLabs:                                     |       |                  |       |             |       |                |       |
| Customer relationships                         |       | 3,260                 |       | (1,124           | )          | 2,136               |       |
| Developed technology                           |       | 4,080                 |       | (1,406           | )          | 2,674               |       |
| Tradenames                                     |       | 1,569                 |       | —           |       | 1,569               |       |
| Subtotal                                       |       | 8,909                 |       | (2,530           | )          | 6,379               |       |
|                                           |       |                  |       |             |       |                |       |
| ClickTracks:                                   |       |                  |       |             |       |                |       |
| Customer relationships                         |       | 1,600                 |       | (280             | )          | 1,320               |       |
| Developed technology                           |       | 3,100                 |       | (542             | )          | 2,558               |       |
| Tradenames                                     |       | 1,200                 |       | —           |       | 1,200               |       |
| Subtotal                                       |       | 5,900                 |       | (822             | )          | 5,078               |       |
|                                           |       |                  |       |             |       |                |       |
| Hot Banana:                                    |       |                  |       |             |       |                |       |
| Customer relationships                         |       | 510                   |       | (63              | )          | 447                 |       |
| Developed technology                           |       | 710                   |       | (123             | )          | 587                 |       |
| Tradenames                                     |       | 270                   |       | —           |       | 270                 |       |
| Cumulative foreign currency translation effect |       | 84                    |       | (13              | )          | 71                  |       |
| Subtotal                                       |       | 1,574                 |       | (199             | )          | 1,375               |       |
|                                           |       |                  |       |             |       |                |       |
| Total of all  acquired intangibles             |       | $                     | 29,294     |             | $          | (6,880              | )          | $ | 22,414 |   |

 

Amortizationexpense for the fiscal years ended June 30, 2007, 2006 and 2005 was $4.0million, $2.6 million and $197,000, respectively. During the fiscal years endedJune 30, 2007, 2006 and 2005, amortization expense classified as cost ofrevenue and related to amortization of developed technology was $2.3 million,$1.4 million and $103,000, respectively.

Netintangible assets have increased for the fiscal year ended June 30, 2007, by$71,000 as a result of changes in the foreign currency exchange rate betweenthe U.S. Dollar and Canadian Dollar.

Customerrelationship-based intangible assets have a weighted average amortizationperiod of 5.46 years and developed technology-based intangible assets have aweighted average amortization period of 5 years.

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The estimatedfuture amortization expense related to intangible assets, assuming no futureimpairment of the underlying assets as of June 30, 2007, is as follows:
| (in thousands) | ** ** | ** **        | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------|------------|-------------------|------------|----------------|------------|------------|------------|
| **Fiscal**          | ** ** | **Customer**      | ** ** | **Developed**  | ** ** | ** ** | ** ** |
| **Year**            | ** ** | **Relationships** | ** ** | **Technology** | ** ** | **Total**  | ** ** |
| 2008                |       | $                 | 1,707      |           | $          | 2,406      |       | $ | 4,113 |   |
| 2009                |       | 1,699             |       | 2,405          |       | 4,104      |       |
| 2010                |       | 1,699             |       | 2,281          |       | 3,980      |       |
| 2011                |       | 1,146             |       | 996            |       | 2,142      |       |
| 2012 and thereafter |       | 204               |       | 97             |       | 301        |       |
| Total               |       | $                 | 6,455      |           | $          | 8,185      |       | $ | 14,640 |   |

 

The roll-forward of theintangible assets for June 30, 2006, through June 30, 2007, is as follows:
|                                                                        | ** ** | **Amount**              | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                             | ** ** | **(in thousands)** | ** ** |
|                                                                   |       |                    |       |
| Beginning  balance at June 30, 2006                                    |       | $                       | 19,776     |   |
| ClickTracks initial preliminary intangible assets at  acquisition date |       | 5,900                   |       |
| Hot Banana initial preliminary intangible assets at  acquisition date  |       | 1,490                   |       |
| Adjustment to EmailLabs intangible assets                              |       | (781                    | )          |
| Amortization for the twelve month period ended June  30, 2007          |       | (4,042                  | )          |
| Foreign currency translation adjustment                                |       | 71                      |       |
|                                                                   |       |                    |       |
| Ending balance at June  30, 2007                                       |       | $                       | 22,414     |   |

 

**5.    Goodwill**

Goodwill iscalculated as the difference between the cost of acquisition and the fair valueof the net assets acquired of any business that is acquired.  Hot Bananaoperates in Canada and uses the Canadian Dollar as its functionalcurrency.  Consequently goodwill related to the acquisition of Hot Bananais accounted for as a Canadian Dollar functional currency asset.  Eachfinancial period, all assets, including goodwill, and liabilities of groupentities with a non U.S. dollar functional currency are translated into U.S.dollars, JL Halsey’s reporting currency, using the closing rate method.

The followingtable outlines our goodwill, by acquisition:
|                         | ** ** | **As of June 30,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| **(in thousands)** | ** ** | **2007**                          | ** ** | **2006** | ** ** |
|                    |       |                              |       |   |   |
| Lyris  Technologies     |       | $                                 | 17,491     |   | $ | 17,491 |   |
| EmailLabs               |       | 10,680                            |       | 9,899 |   |
| ClickTracks             |       | 5,891                             |       | — |   |
| Hot Banana              |       | 1,959                             |       | — |   |
|                    |       |                              |       |   |   |
| Total                   |       | $                                 | 36,021     |   | $ | 27,390 |   |

 

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The roll-forward ofgoodwill for June 30, 2006, through June 30, 2007, is as follows:
|                                                               | ** ** | **Amount**              | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **(in thousands)** | ** ** |
|                                                          |       |                    |       |
| Beginning  balance at June 30, 2005                           |       | $                       | 17,749     |   |
| EmailLabs initial preliminary goodwill at  acquisition date   |       | 9,879                   |       |
| Payment of additional EmailLabs acquisition costs             |       | 55                      |       |
| Adjustment to EmailLabs deferred tax asset                    |       | (35                     | )          |
| Adjustment to Lyris deferred tax asset                        |       | (258                    | )          |
| Balance at June  30, 2006                                     |       | $                       | 27,390     |   |
| ClickTracks initial preliminary goodwill at  acquisition date |       | 6,260                   |       |
| Hot Banana initial preliminary goodwill at  acquisition date  |       | 1,455                   |       |
| Adjustment to EmailLabs goodwill balance                      |       | 781                     |       |
| Adjustment to ClickTracks working capital estimate            |       | (369                    | )          |
| Payment of additional Hot Banana acquisition costs            |       | 50                      |       |
| Adjustment to Hot Banana opening balance sheet  liabilities   |       | (4                      | )          |
| Adjustment to Hot Banana working capital estimate             |       | (171                    | )          |
| Accrue Hot Banana revenue earn-outs                           |       | 488                     |       |
| Foreign currency translation adjustment                       |       | 141                     |       |
|                                                          |       |                    |       |
| Ending balance at June  30, 2007                              |       | $                       | 36,021     |   |

 

**6.****   NotePayable**

CommodoreResources (Nevada), Inc. (“Commodore”), one of our wholly-ownedsubsidiaries, executed a promissory note with The John Buckman and Jan HanfordTrust (the “Trust”) in the amount of $5.6 million as part of theacquisition of Lyris Technologies on May 12, 2005. The note bears interestat the rate of 10% per annum. The note and accrued interest were to become dueon May 12, 2007, subject to the satisfaction of the following conditions:

·                  Total Revenue ofLyris Technologies for the twelve month periods ended March 31, 2006 and2007, taken in the aggregate, must be equal to or greater than $24.0million.  The total revenue of LyrisTechnologies for the twenty-four month period ended March 31, 2007 isapproximately $36.3 million, which exceeds the specified revenue target of$24.0 million as stated in the note.

·                  The amounts dueon the note are reduced by certain royalty payments that we are required tomake.  In the quarter ended June 30, 2006 we reduced the note by $103,760,in the quarter ended December 31, 2006 we reduced the note by $99,756 and inthe quarter ended March 31, 2007 we reduced the note by $94,953 related tothese payments.

On March 31, 2007, we executed an amended and restatedpromissory note, effective as of May 12, 2005, in the principal amount of$5,600,000 (the “Amended and Restated Note”) payable to the Trust.  Underthe terms of the Amended and Restated Note, the maturity has been extended toNovember 12, 2008, and we are obligated to make the following payments(constituting both principal and interest, in accordance with the terms of theAmended and Restated Note) to the Trust: (a) $1,000,000 due May 12, 2007; (b)$1,453,447 due February 12, 2008; (c) $4,687,666 due November 12, 2008.

We paid $1,000,000on May 14, 2007, and have recorded the remaining payments in the current andlong-term portions of our Balance Sheet as of June 30, 2007.

We have accrued$70,000 of interest owed on this note as of June 30, 2007. During the fiscalyear ended June 30, 2007, we accrued $543,000 of interest on this note andrecorded this amount as interest expense in the statement of operations foryear ended June 30, 2007.

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**7.**  **Revolving Line of Credit**

OnOctober 11, 2005, we entered into a Loan and Security Agreement withComerica Bank, (the “Loan and Security Agreement”), which provided a revolvingline of credit to us.  The initial borrowings under the Loan and SecurityAgreement were used to consummate the acquisition of EmailLabs and forgeneral corporate purposes.  Under the original Loan and SecurityAgreement, interest on outstanding balances was charged at a floating rateequal to either Comerica’s base rate plus 0.75% or Comerica’s LIBOR rate plus3.75%. The original amount available to us was $18.5 million and that amountwas reduced monthly beginning October 31, 2005.  Monthly reductionswere $250,000 through September 30, 2007 and $347,222 thereafter throughthe maturity date.  In addition, the Loan and Security Agreement containscertain financial covenants and requires us to maintain certain financialratios.  Failure to meet these financial covenants and ratios constitutean event of default.

From April 2006through January 2007, we entered into four amendments to the Security and LoanAgreement.  These amendments adjustedComerica’s lending commitment, adjusted the rate at which outstandingborrowings bear interest and revised existing financial and other covenants.

Effective as of March 31, 2007, we entered into a FifthAmendment to the Loan and Security Agreement (the “Fifth Amendment”) withComerica.  The Fifth Amendment increasesthe amounts available under the revolving line of credit to fifteen milliondollars ($15,000,000), extends the term to five years from the date of theFifth Amendment and provides that the amounts available under the line arereduced in equal monthly installments of $208,333. The Amendment modifies thedefinition of EBITDA to allow for adjustments related to discontinuedoperations, subject to certain limitations, and also modifies the financialcovenants.  The financial covenant requirements, measured on a monthlybasis are as follows: (a) fixed charge coverage of at least 1.25 to 1.00,calculated as the ratio of annualized rolling three-month EBITDA minus cashtaxes and capitalized expenditures to the sum of cash interest expense plus thecurrent portion of all indebtedness to bank; (b) minimum EBITDA, on a rollingthree-month basis of at least (i) $1,500,000 for the three-month period endingMarch 31, 2007, through the three-month period ending August 31, 2007, (ii)$1,750,000 for the three-month period ending September 30, 2007, through thethree month period ending February 28, 2008; and (iii) $2,000,000 for eachthree-month period thereafter; (c) senior debt to EBITDA, calculated on anannualized rolling three-month basis of not greater than: (i) 2.50 to 1.00 forthe measuring periods ending March 31, 2007, through February 28, 2008, and(ii) 2.00 to 1.00 at all times thereafter; (d) Liquidity, defined as cash heldat Comerica plus availability under the revolving line, of not less than (i)$2,000,000 for the measuring periods ending March 31, 2007, through August 31,2007, and (ii) $1,000,000 at all times thereafter.

The effectiveinterest rate on the Revolving Line of Credit was 8.42% for the fiscal yearended June 30, 2007.

Although we are incompliance with our financial covenants at June 30, 2007, there can be noassurance that we will be able to meet these covenants in the future.

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**The aggregatematurities of line of credit by fiscal year as of June 30, 2007 are as follows(in thousands)**
| 2008   |   | $      | — |   |
|--------|--------|--------|--------|--------|
| 2009   |   | — |   |
| 2010   |   | 2,259  |   |
| 2011   |   | 2,500  |   |
| 2012   |   | 4,375  |   |
|   |   | $      | 9,134  |   |

** **

**The aggregatematurities of debt (line of credit and note payable) by fiscal year as of June30, 2007 are as follows (in thousands)**
| 2008   |   | $     | 1,049  |   |
|--------|--------|-------|--------|--------|
| 2009   |   | 4,360 |   |
| 2010   |   | 2,259 |   |
| 2011   |   | 2,500 |   |
| 2012   |   | 4,375 |   |
|   |   | $     | 14,543 |   |

 

**8.****              Convertible BridgeLoan, Rights Offering**

The ClickTracks andHot Banana acquisitions were financed primarily with a $10 million bridge loanmade by our largest stockholder, LDN Stuyvie Partnership.  LDNStuyvie is controlled by the Company’s Chairman, William T. Comfort III. The bridge loan from LDN Stuyvie was evidenced by a promissory note (the “LDNStuyvie Note”) bearing interest at the rate of 9.5% per annum, or 11.5% perannum in the event of default, and under its terms was to become due upon thefirst to occur of:

(i)                                     Theclosing under the Backstop Agreement (discussed below);

(ii)                                  Thedate on which the board of directors resolves to abandon the rights offering;

(iii)                               Thedate on which any order issued by a governmental entity of competentjurisdiction or any other legal restraint prohibits the consummation of therights offering;

(iv)                              Thedate on which any law or order by any governmental entity of competentjurisdiction makes the rights offering illegal;

(v)                                 February1, 2007, if the registration statement filed in connection with rights offeringhas not been declared effective by the SEC by 5:30 p.m. ET on January 31, 2007;or

(vi)                              April1, 2007, if the registration statement filed in connection with rights offeringhas been declared effective by the SEC by 5:30 p.m. ET on January 31, 2007, butthe rights offering has not expired by 11:59 p.m. ET on March 31, 2007.

Because aregistration statement for the rights offering was not effective on January 31,2007, the LDN Stuyvie Note became due and payable and, in accordance with itsterms, the Company issued to LDN Stuyvie a total of 12,279,130 shares of commonstock as payment in full of the principal and accrued interest on the LDNStuyvie Note.   In accordance with the terms of the LDN Stuyvie Note,the common stock was valued at $0.85 per share for an aggregate price of$10,437,260, representing $10,000,000 for the principal and $437,260 for theaccrued interest under the LDN Stuyvie Note.  The shares of common stockwere issued in a private placement in reliance on Rule 506 under the SecuritiesAct of 1933.

In connection withthe LDN Stuyvie Note, the Company and LDN Stuyvie entered into a backstopagreement, pursuant to which LDN Stuyvie agreed to purchase an amount of theCompany’s common stock at $0.85 per share so that, together with all shares ofcommon stock sold by the Company in a proposed rights offering at the sameprice, the Company would receive at least $10 million in proceeds (the “BackstopAgreement”).   Also, pursuant to the Backstop Agreement, the Companygranted to LDN Stuyvie the exclusive right to purchase up to an additional $10million of common stock at a price of $0.85 per share in respect of each rightgranted to the Company’s stockholders pursuant to the proposed rights offeringwhich remained unexercised.

The conversionprice of $0.85 per common share contained a beneficial conversion feature of$0.11 per share to the August 16, 2006 closing price of $0.96.  The aggregate amount of this beneficialconversion feature was approximately $1,294,000 and this amount was fullyamortized though interest expense during fiscal year 2007.  A corresponding amount was credited tostockholders’ additional paid in capital.

On February 5,2007, the Company issued a press release announcing repayment of the LDNStuyvie Note, termination of

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the Backstop Agreement inaccordance with its terms and cancellation of the previously announced rightsoffering.

**9.****              DiscontinuedOperations**

Assets andliabilities from discontinued operations consisted of the following:
|                                                                         | ** ** | **As of June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** (in thousands)**                                           | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Restricted cash in  support of workers’ compensation liabilities   |       | $                                 | 200        |   | $ | 1,675 |   |
| Prepaid expenses  pertaining to insurance deposits                      |       | 6                                 |       | 213 |   |
| Accounts receivable  remaining from discontinued operations             |       | 583                               |       | 583 |   |
| Allowance for doubtful  accounts remaining from discontinued operations |       | (583                              | )          | (583 | ) |
| Total assets  related to discontinued operations                        |       | 206                               |       | 1,888 |   |
|                                                                    |       |                              |       |   |   |
| Accrued expenses  remaining from discontinued operations                |       | 722                               |       | 2,310 |   |
| Total  liabilities related to discontinued operations                   |       | $                                 | 722        |   | $ | 2,310 |   |

 

At June 30, 2007,we believe that the probability of collecting these receivables is low andaccordingly, have fully reserved these receivables to reduce their netrealizable value to zero. If any of these receivables are collected, we willrecord a gain in the period of collection.

The change in therestricted cash balance represents interest income of $19,000 less $1.145million of restricted cash that was returned to us and $349,000 in premiumpayment for the purchase of a workers’ compensation insurance policy to coverfuture payments remaining on deductibles for one of the policies coveringformer NovaCare employees.

The accruedexpenses remaining from discontinued operations primarily consist ofliabilities, which arose prior to or as a result of the dispositiontransactions. These liabilities include costs for litigation, workers’compensation claims, professional liability claims and other liabilities.

We accrue anestimate of the legal costs necessary to defend ourselves against legal claimsrelated to our discontinued operations. The costs of litigation are difficultto estimate because of the high variability of possible outcomes. As a result,the actual costs could differ significantly from these estimates.

The $1.7 milliongain on disposal of discontinued operations, net of taxes, recorded in fiscalyear 2007 relates to adjustments to the $374.1 million loss on disposal ofdiscontinued operations which was originally recorded in fiscal year2000.  The adjustments consist primarily of a gain of $493,000 resultingfrom the collection of accounts receivable and cost report settlements that waspreviously written off by us and a gain of $1.1 million resulting fromreductions of expense accruals to adjust other liabilities remaining fromdiscontinued operations and a gain of $156,000 resulting from a federal taxrefund offset by a provision for federal alternative minimum taxes of $31,000.The reductions in expense accruals include amounts for litigation related costsand legacy insurance expenses.

The $407,000 gainon disposal of discontinued operations, net of taxes, recorded in fiscal year2006 relates to adjustments to the $374.1 million loss on disposal ofdiscontinued operations which was originally recorded in fiscal year2000.  The adjustments consist primarily of a refund from a stateinsurance guarantee fund in the amount of $53,000, a gain of $31,000 resultingfrom the collection of accounts receivable that were previously written off byus and reductions of expense accruals of $348,000 to adjust other liabilitiesremaining from discontinued operations offset by a provision for federalalternative minimum income taxes of $25,000. The reductions in expense accrualsinclude amounts for litigation related costs and legacy insurance expenses.

The $281,000 gainon disposal of discontinued operations, net of taxes, recorded in fiscal year2005 relates to adjustments to the $374.1 million loss on disposal ofdiscontinued operations which was originally recorded in fiscal year2000.  The adjustments consist of decreases in reserves for certainreceivables totaling $460,000 and income tax refunds totaling $400,000, offsetby increases in expense accruals of $579,000, to reflect additional costsrelated to collections, legal costs, lawsuits (see Note 18), and to adjustother liabilities remaining from discontinued operations.

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**10.****       Net (Loss) Income per Share**

The followingtable sets forth the computation and reconciliation of net income (loss) pershare:
|                                                                           | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **(in thousands)**                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Software  revenues                                                        |       | $                                       | 8,045      |   | $ | 5,331 |   | $ | 796 |   |
| Services  revenues                                                        |       | 30,960                                  |       | 19,022 |   | 1,411 |   |
| Total revenues                                                            |       | 39,005                                  |       | 24,353 |   | 2,207 |   |
| Cost of revenues                                                          |       | 12,040                                  |       | 6,756 |   | 447 |   |
| Gross profit                                                              |       | 26,965                                  |       | 17,597 |   | 1,760 |   |
| (Loss) income  from continuing operations before income taxes             |       | (775                                    | )          | 2,986 |   | (434 | ) |
| Income tax  provision                                                     |       | (544                                    | )          | (827 | ) | (77 | ) |
| (Loss) income  from continuing operations                                 |       | (1,319                                  | )          | 2,159 |   | (511 | ) |
| Gain on disposal  of discontinued operations, net of tax                  |       | 1,670                                   |       | 407 |   | 281 |   |
| Net income (loss)                                                         |       | $                                       | 351        |   | $ | 2,566 |   | $ | (230 | ) |
|                                                                      |       |                                    |       |   |   |   |   |
| Weighted average  shares outstanding:                                     |       |                                    |       |   |   |   |   |
|                                                                      |       |                                    |       |   |   |   |   |
| Basic                                                                     |       | 90,706,301                              |       | 83,126,803 |   | 82,296,880 |   |
| **Effect  of dilutive securities:**                                       | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| stock options                                                             |       | 2,197,882                               |       | 1,358,944 |   | — |   |
|                                                                      |       |                                    |       |   |   |   |   |
| Diluted                                                                   |       | 92,904,183                              |       | 84,485,747 |   | 82,296,880 |   |
|                                                                      |       |                                    |       |   |   |   |   |
| (Loss) income  per share from continuing operations: basic and diluted    |       | $                                       | (0.01      | ) | $ | 0.03 |   | $ | (0.01 | ) |
| Gain per share  on disposal of discontinued operations: basic and diluted |       | 0.01                                    |       | 0.00 |   | 0.01 |   |
|                                                                      |       |                                    |       |   |   |   |   |
| Net income (loss) per  share: basic and diluted                           |       | $                                       | 0.00       |   | $ | 0.03 |   | $ | (0.00 | ) |

 

The dilutive lossper common share calculated for the fiscal years ended June 30, 2007, 2006, and2005 excludes the effect of 3.3 million, 2.1 million, and 6.4 millionoptions outstanding. These amounts were excluded since their inclusion would beanti-dilutive.

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**11.****       Property and Equipment**

Property andequipment consists of the following at June 30:
| (in thousands)             | ** ** | **2007** | ** ** | **2006** | ** ** | **Estimated  Useful Lives  (Years)** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-------------------------------------------|------------|
| Computers                       |       | $        | 2,912      |     | $          | 1,708                                     |       | 5 |   |
| Furniture and fixtures          |       | 264      |       | 123      |       | 3 - 4                                     |       |
| Leasehold improvements          |       | 52       |       | 17       |       | 4                                         |       |
| Software                        |       | 357      |       | 175      |       | 3                                         |       |
| Other equipment                 |       | 135      |       | 113      |       | 2 - 5                                     |       |
| Total Cost                      |       | 3,720    |       | 2,136    |       |                                      |       |
| Less: accumulated  depreciation |       | (1,268   | )          | (461     | )          |                                      |       |
| Net property and  equipment     |       | $        | 2,452      |     | $          | 1,675                                     |       |   |   |

 

Depreciationexpense for the fiscal years ended June 30, 2007, 2006 and 2005 wasapproximately $807,000, $417,000, and $39,000, respectively.

**12.****       Accounts Payable andAccrued Expenses**

Accounts payableand accrued expenses are summarized as follows:
|                                    | ** ** | **As of June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**            | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Accounts payable                   |       | $                                 | 1,217      |   | $ | 1,039 |   |
| Accrued  compensation and benefits |       | 1,087                             |       | 882 |   |
| Other                              |       | 276                               |       | 205 |   |
| Total                              |       | $                                 | 2,580      |   | $ | 2,126 |   |

 

**13.****       Contingent Consideration**

As discussed inNote 1, on October 11, 2005, we acquired all of the outstanding capital stockof EmailLabs.  The agreement includes contingent consideration consistingof two equal earn-out payments of $1.725 million due on the first and secondanniversary of the closing date if EmailLabs achieves specified revenuetargets.  We paid the first $1.725 million installment to the formerEmailLabs’ stockholders on October 13, 2006. EmailLabs has achieved all revenue targets and, as a result, we haveaccrued the liability for the second installment in the current portion of ourBalance Sheet at June 30, 2007.  Additionally, the former stockholders ofEmailLabs were to receive any income tax refunds related to the period ended onand including the closing date.  Theserefunds were paid in September, 2006.

As discussed inNote 1, on August 18, 2006, we acquired all of the outstanding capital stock ofHot Banana.  As a result of theacquisition we will be obligated to pay the sellers of Hot Banana installmentstotaling up to approximately $562,500 Canadian dollars (approximately $487,858U.S. dollars) if they achieve specified revenue targets in the first and secondyear following the closing.

Contingentconsideration is summarized as follows:
|                                             | ** ** | **As of June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**                     | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| **Current:**                                | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Earn-out payment                            |       | $                                 | 2,050      |   | $ | 1,725 |   |
| Income tax  refunds                         |       | —                            |       | 482 |   |
| Total current contingent consideration      |       | 2,050                             |       | 2,207 |   |
|                                        |       |                              |       |   |   |
| **Non-current:**                            | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Earn-out payment                            |       | 163                               |       | 1,725 |   |
| Total  non-current contingent consideration |       | $                                 | 163        |   | $ | 1,725 |   |

 

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**14.****       Operating Leases**

We have various non-cancelable operating leases for office space thatexpire at various times through 2010.
| (in thousands) | ** ** | ** ** | ** ** |
|---------------------|------------|------------|------------|
| 2008                |       | $          | 862        |   |
| 2009                |       | 589        |       |
| 2010                |       | 235        |       |
| 2011                |       | —     |       |
| 2012                |       | —     |       |
| Total               |       | $          | 1,686      |   |

 

Total rent expensecharged to operations was approximately $967,000, $662,000, and $147,000 infiscal 2007, 2006 and 2005, respectively.

**15.****       Income Taxes**

The components offederal and state income tax expense as of June 30, 2007, 2006 and 2005 were asfollows:
|                           | ** ** | **Years ended June 30,** | ** ** |
|---------------------------|------------|-----------------------------------------|------------|
| **(in thousands)**   | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current                   |       |                                    |       |   |   |   |   |
| Federal                   |       | $                                       | 119        |   | $ | 121 |   | $ | — |   |
| State                     |       | 525                                     |       | 740 |   | 111 |   |
|                      |       |                                    |       |   |   |   |   |
| Deferred                  |       |                                    |       |   |   |   |   |
| Federal                   |       | —                                  |       | 15 |   | — |   |
| State                     |       | (100                                    | )          | (49 | ) | (34 | ) |
|                      |       |                                    |       |   |   |   |   |
| Total income tax  expense |       | $                                       | 544        |   | $ | 827 |   | $ | 77 |   |

 

The components ofnet deferred tax assets (liabilities) as of June 30, 2007 and 2006 were asfollows:
|                                                                  | ** ** | **As of June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                       | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Accruals and  reserves not currently deductible for tax purposes |       | $                                 | 3,426      |   | $ | 3,286 |   |
| Net operating  loss, capital loss and tax credit carryforwards   |       | 69,544                            |       | 70,712 |   |
| Gross deferred  tax assets                                       |       | 72,970                            |       | 73,998 |   |
| Valuation  allowance                                             |       | (72,390                           | )          | (73,506 | ) |
| Net deferred tax  assets                                         |       | 580                               |       | 492 |   |
| Other, net                                                       |       | —                            |       | (98 | ) |
| Gross deferred  tax liabilities                                  |       | —                            |       | (98 | ) |
| Net deferred tax asset                                           |       | $                                 | 580        |   | $ | 394 |   |

 

We have recorded avaluation allowance to reflect the estimated amount of deferred tax assetswhich relate to federal and state net operating loss carry forwards, in excessof amounts carried back to prior years, and tax credit carryforwards that maynot be realized.

We have federalnet operating loss carryforwards of approximately $171.2 million and a capitalloss carryforwards of approximately $2.8 million to offset future taxableincome and taxable gains.  The net operating loss carryforwards start to expirein 2019. The capital loss carryforwards expire in 2008. In addition, we havestate net operating loss carryforwards of approximately $11.0 million, whichbegin to expire in 2018. The change in the valuation allowance was a decreaseof approximately $1.7 million for the fiscal year ended June 30, 2007 and adecrease of approximately $1.2 million for the fiscal year ended June 30,2006.  If we experience a change of ownership within the meaning ofSection 382 of the Internal Revenue Code, we may have limitations on ourability to realize the benefit of our net operating loss, capital loss and taxcredit carryforwards.

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The reconciliationof the expected tax (benefit) expense (for income from continuing operationsbefore income taxes) to actual tax (benefit) expense was as follows:
| ** **                                                       | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** |
|                                                             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Expected federal income  tax expense (benefit) at statutory rate |       | $                                       | (271       | ) | (35.0 | )% | $ | 1,045 |   | 35.0 | % | $ | (92 | ) | (35.0 | )% |
| State income taxes, net  of federal benefit                      |       | 219                                     |       | 28.3 | % | 341 |   | 11.4 | % | 77 |   | 29.2 | % |
| Utilization of NOL  carryover                                    |       | (1,905                                  | )          | (245.8 | )% | (1,446 | ) | (48.4 | )% | — |   | — |   |
| Expiration of capital  loss carryover                            |       | —                                  |       | — |   | — |   | — |   | (12,763 | ) | (4844.4 | )% |
| Reduction in state NOL  carryover                                |       | —                                  |       | — |   | — |   | — |   | (1,296 | ) | (491.9 | )% |
| Effect of valuation  allowance on current year losses            |       | —                                  |       | — |   | — |   | — |   | 14,734 |   | 5592.5 | % |
| Amortization of  intangible assets                               |       | 1,350                                   |       | 174.2 | % | 920 |   | 30.8 | % | 81 |   | 30.7 | % |
| Refund of federal  income tax                                    |       | —                                  |       | — |   | — |   | — |   | (151 | ) | (57.3 | )% |
| Beneficial conversion  feature within convertible note           |       | 453                                     |       | 58.4 | % |   |   |   |   |   |   |   |   |
| Other, net                                                       |       | 698                                     |       | 90.1 | % | (33 | ) | (1.1 | )% | (513 | ) | (194.7 | )% |
|                                                             |       | $                                       | 544        |   | 70.1 | % | $ | 827 |   | 27.7 | % | $ | 77 |   | 29.2 | % |

 

The amount ofincome taxes refunded during fiscal 2007, 2006 and 2005 amounted toapproximately $179,000, $0, and $368,000 respectively. The amount of incometaxes paid during fiscal 2007, 2006 and 2005 was approximately $862,000,$565,000 and $0 respectively.

**16.****       Stockholders Equity**

**CommonStock**

On June 19, 2002,NAHC, Inc. (“NAHC”) merged with and into its wholly owned subsidiary J.L.Halsey, with Halsey being the surviving corporation.  At the time of thismerger all outstanding shares of NAHC were cancelled and converted into theright to receive one (1) share of Halsey common stock.  At June 30, 2007,590,591 shares of NAHC and 8,486 shares of NovaCare, Inc. have not beenexchanged for shares of Halsey.  These unredeemed shares are included asoutstanding in our financial statements.

**TreasuryStock**

Repurchased sharesof our common stock are held as treasury shares until they are reissued. Whenwe reissue treasury stock, if the proceeds from the sale are more than theaverage price we paid to acquire the shares we record an increase in additionalpaid-in capital. Conversely, if the proceeds from the sale are less than theaverage price we paid to acquire the shares, we record a decrease in additionalpaid-in capital to the extent of increases previously recorded for similartransactions and a decrease in retained earnings for any remaining amount.

**17.****       Benefit Plans**

*Stock Option Plan*

Effective July 1,2005, we adopted the provisions of Statement of Financials Accounting Standards(“SFAS”) No. 123 (Revised 2004), “*Shared-Based Payments*”(“SFAS No. 123(R)”), and selected the modified prospective method to initiallyreport stock-based compensation amounts in the consolidated financial statements. Prior to adoption of SFAS No. 123(R), we provided the disclosures requiredunder SFAS No. 123, “*Accounting for Stock-BasedCompensation*,” as amended by SFAS No. 148, “*Accountingfor Stock-Based Compensation — Transition and Disclosures*.” Under this method, compensation expense was recorded only if the market priceof the underlying stock on the date of grant exceeded the exercise price. Previously reported amounts have not been restated.

Weestablished the J.L. Halsey Corporation 2005 Equity Based Compensation Plan (“EquityBased Compensation Plan”) on May 6, 2005. The Equity Based Compensation Planprovides for grants of stock options and stock-based awards to employees,directors, and our consultants. Stock options issued in connection with theEquity Based Compensation Plan are granted with an exercise price per shareequal to the fair market value of a share of our common stock at the date ofgrant. All stock options have ten-year maximum terms and vest, either quarterlyor annually, within four years of grant date. The total number of shares ofcommon stock issuable under the Equity Based Compensation Plan is 13,200,000.At June 30, 2007, there were 1,887,415 shares available for grant under theEquity Based Compensation Plan.

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Thefair value of each option grant was estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:
|                                                 | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free rate range                            |       | 4.51 – 4.94                                   | %          | 3.82 – 5.23 | % | 3.57 | % |
| Expected dividends                              |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Expected market price  volatility               |       | 47 – 50                                       | %          | 50 – 55 | % | 97 | % |
| Expected years until  exercise                  |       | 4.5 years                                          |       | 4.5 years |   | 5.0 years |   |
| Weighted Average fair value per share of grants |       | $                                                  | 0.43       |   | $ | 0.32 |   | $ | 0.16 |   |

 

Expectedvolatility is estimated using the historical volatility of our common stock toestimate future volatility.  The risk-free rates are taken from theFederal Yield Curve Rates as published by the Federal Reserve and represent theyields on actively traded treasury securities for terms equal or approximatelyequal to the expected term of the options.  The expected term calculationis based on observed historical exercise behavior of employees in our peergroup and the options’ contractual terms.  The dividend yield is zerobased on the fact that we have no intention of paying dividends in the nearterm.

The following tablesummarizes stock option activity from July 1, 2005, to June 30, 2007:
|                                        | ** ** | **Options  Granted**    | ** ** | **Weighted Average  Contractual Term** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|----------------------------------------|------------|-------------------------|------------|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **(in thousands)** | ** ** | ** **                                       | ** ** | ** **                                 | ** ** |
| Options outstanding at  June 30, 2004  |       | —                  |       |                                             |       | $                                          | —     |   |
|                                   |       |                    |       |                                             |       |                                       |       |
| Options granted                        |       | 6,370                   |       |                                             |       | 0.31                                       |       |
| Options exercised                      |       | —                  |       |                                             |       | —                                     |       |
| Forfeited, Cancelled                   |       | —                  |       |                                             |       | —                                     |       |
| Options outstanding at  June 30, 2005  |       | 6,370                   |       |                                             |       | $                                          | 0.31       |   |
| Options granted                        |       | 3,699                   |       |                                             |       | 0.64                                       |       |
| Options exercised                      |       | —                  |       |                                             |       | —                                     |       |
| Forfeited, Cancelled                   |       | (820                    | )          |                                             |       | 0.54                                       |       |
| Options outstanding at,  June 30, 2006 |       | 9,249                   |       |                                             |       | $                                          | 0.42       |   |
| Options granted                        |       | 4,469                   |       |                                             |       | 0.92                                       |       |
| Options exercised                      |       | (143                    | )          |                                             |       | 0.61                                       |       |
| Forfeited, Cancelled                   |       | (2,648                  | )          |                                             |       | 0.80                                       |       |
| Options outstanding at,  June 30, 2007 |       | 10,927                  |       | 8.38                                             |       | $                                          | 0.53       |   |
|                                   |       |                    |       |                                             |       |                                       |       |
| Options exercisable at  June 30, 2007  |       | 3,878                   |       |                                             |       | $                                          | 0.37       |   |
|                                   |       |                    |       |                                             |       |                                       |       |
| Options exercisable at July 1, 2006    |       | 1,668                   |       |                                             |       | $                                          | 0.30       |   |

 

The totalintrinsic value of the options exercised during fiscal 2007, 2006 and 2005 were$34,000, none and none.

The adoption ofSFAS no. 123(R) increased compensation expense by approximately $694,000(pre-tax) in the fiscal year ended June 30, 2007.  The following tablesummarizes the allocation of stock-based compensation expense:
|                                         | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**                 | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| Cost of revenues                        |       | $                                                  | 132        |   | $ | 71 |   |
| General and  administrative             |       | 382                                                |       | 199 |   |
| Research and  development               |       | 18                                                 |       | — |   |
| Sales and  marketing                    |       | 162                                                |       | 73 |   |
| Total  stock-based compensation expense |       | $                                                  | 694        |   | $ | 343 |   |

 

Ifwe had expensed stock-based awards in fiscal year 2005, the total expense wouldhave been approximately $40,000.

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As of June 30,2007, the unrecorded deferred stock-based compensation balance related to stockoptions was approximately $2.7 million before estimated forfeitures and will berecognized over an estimated weighted average 1.93 years.

As of June 30,2007, the aggregate intrinsic value of stock options outstanding andexercisable was approximately $3.4 million and $1.7 million, respectively.  The intrinsic value represents the pre-taxintrinsic value, based on our closing stock price on June 29, 2007 (the lastday of trading for the fiscal year ended June 30, 2007), which would have beenreceived by the option holders had all option holders exercised their optionsas of that date.

During the twelvemonths ended June 30, 2007, we granted 4,469,288 stock options with anestimated total grant-date fair value of $1.9 million.  Of this amount, weestimated that the stock-based compensation for awards not expected to vest wasapproximately $473,000.

The following tablesummarizes information about stock options outstanding at June 30, 2007:
| **Options Outstanding**            | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted-Average  Remaining  Contractual  Life** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| ** **                              | ** ** | **(in thousands)**      | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| $0.30 to 0.30                           |       | 5,862                        |       | 7.85 years |   | $ | 0.30 |   | 3,111 |   | $ | 0.30 |   |
| $0.46 to 0.70                           |       | 1,909                        |       | 8.30 years |   | $ | 0.62 |   | 645 |   | $ | 0.61 |   |
| $0.71 to 0.90                           |       | 1,523                        |       | 9.66 years |   | $ | 0.85 |   | 68 |   | $ | 0.85 |   |
| $0.91 to 0.91                           |       | 144                          |       | 9.66 years |   | $ | 0.91 |   | — |   | $ | — |   |
| $0.95 to 0.95                           |       | 400                          |       | 9.13 years |   | $ | 0.95 |   | — |   | $ | — |   |
| $0.96 to 0.96                           |       | 1,089                        |       | 9.13 years |   | $ | 0.96 |   | 54 |   | $ | 0.96 |   |
|                                    |       | 10,927                       |       | 8.38 |   | $ | 0.53 |   | 3,878 |   | $ | 0.37 |   |

 

*Retirement Plans*

We have a definedcontribution 401(k) Plan covering substantially all of our employees.  Beginning September 2006 we began makingmatching contributions to the Plan. Contributions during fiscal 2007 were approximately $174,000.

**18.****                               Commitmentsand Contingencies**

NovaCare v.Stratford Nursing Home.  We filed this collectionlawsuit in August, 1999 to collect on a receivable of approximately $146,000,which we have fully reserved.  Stratford counter-claimed with numeroustheories asserting that we instead owed Stratford money.  AlthoughStratford’s principal claims were dismissed by the court, Stratford, in thelast quarter of fiscal year 2003, had quantified its remaining counter-claimsat approximately $1 million.  We believe that the theories on which thesedamages are based are inconsistent with the contract between the parties andwith the conduct of each party.  As of June 30, 2007, this case is pendingin the U.S. District Court for the Southern District of New Jersey(Camden).  The outcome of this action is not possible to predict and wehave reserved an estimate of the cost of litigating this action; however, thisestimate does not reflect the possibility of an adverse ruling or a judgmentagainst us, or a settlement.

*Other Cases and Claims*

O’Leary v. JoynerSports Medicine We are a defendant in one professionalliability claim and had previously purchased professional liability insurancepolicies from PHICO Insurance Company.  On February 2, 2002, aPennsylvania court authorized state insurance regulators to liquidate theinsolvent PHICO Insurance Company, which had provided professional liabilityinsurance policies to us. As a result, PHICO will not be permitted to pay anyclaims on our behalf; however, the remaining claims were transferred to variousstate guaranty funds.  Since 2002, state insurance guaranty funds havepaid the amounts due for liability claims settlements on our behalf. Based on our discussion with the state guaranty funds and a review of claimsduring the third quarter of 2004, we now believe that a payment may be requiredto settle the professional liability claim that may exceed the amount availableto us under the applicable state guaranty fund limits. We recorded anaccrual and related expense in the third quarter of 2004 equal to the estimatedcost to settle that claim less the amount that would be paid by the stateguaranty fund.  A ruling in February 2006, by the Superior Court of NewJersey may free this state guarantee fund from contributing their limit to anysettlement on our behalf. Because of this ruling, we have increased ourreserve for this liability claim.  There is no insurance policy in placethat would pay any settlement or award for this claim; therefore, in the eventour current reserve assessment is incorrect, we will be required to fund anyamount in excess of the reserve amount.

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**19.****                               QuarterlyResults (Unaudited)**

The followingtable sets forth unaudited selected financial information for the periodsindicated. This information has been derived from unaudited consolidatedfinancial statements, which, in the opinion of management, include alladjustments (consisting only of normal recurring adjustments) necessary for afair presentation of such information. The results of operations for anyquarter are not necessarily indicative of the results to be expected for anyfuture period.
|                                                                                  | ** ** | **First   Quarter** | ** ** | **Second   Quarter** | ** ** | **Third   Quarter** | ** ** | **Fourth   Quarter (1)** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|--------------------------|------------|------------------------------------|------------|
| **Year Ended June 30, 2007:**                                                    |       |                     |       |                      |       |                     |       |                               |       |
| Software revenues                                                                |       | $                        | 1,538      |                      | $          | 2,070                    |       | $                                  | 2,288      |   | $ | 2,149 |   |
| Services revenues                                                                |       | 6,838                    |       | 7,433                     |       | 8,060                    |       | 8,629                              |       |
| Total Revenues                                                                   |       | 8,376                    |       | 9,503                     |       | 10,348                   |       | 10,778                             |       |
| Cost of revenues                                                                 |       | 2,549                    |       | 3,126                     |       | 3,224                    |       | 3,141                              |       |
| Gross Profit                                                                     |       | 5,827                    |       | 6,377                     |       | 7,124                    |       | 7,637                              |       |
| Operating  expenses                                                              |       | 6,504                    |       | 8,145                     |       | 6,637                    |       | 6,454                              |       |
| (Loss) income  from continuing operations before income taxes                    |       | (677                     | )          | (1,768                    | )          | 487                      |       | 1,183                              |       |
| Income tax  provision                                                            |       | 62                       |       | 91                        |       | 174                      |       | 217                                |       |
| (Loss) income  from continuing operations                                        |       | (739                     | )          | (1,859                    | )          | 313                      |       | 966                                |       |
| (Loss) gain on  disposal of discontinued operations, net of tax                  |       | (35                      | )          | 522                       |       | 73                       |       | 1,110                              |       |
| Net (loss)  income                                                               |       | $                        | (774       | )                         | $          | (1,337                   | )          | $                                  | 386        |   | $ | 2,076 |   |
| (Loss) income  per share from continuing operations: basic and diluted           |       | $                        | (0.01      | )                         | $          | (0.02                    | )          | $                                  | 0.00       |   | $ | 0.01 |   |
| (Loss) gain per  share on disposal of discontinued operations: basic and diluted |       | $                        | (0.00      | )                         | $          | 0.01                     |       | $                                  | 0.00       |   | $ | 0.01 |   |
| Net (loss) income per  share: basic and diluted                                  |       | $                        | (0.01      | )                         | $          | (0.02                    | )          | $                                  | 0.00       |   | $ | 0.02 |   |

 
|                                                                                  | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter(2)** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|------------------------|------------|
| **Year Ended June 30, 2006:**                                                    | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **             | ** ** |
| Software revenues                                                                |       | $                  | 1,243      |                | $          | 1,297              |       | $                      | 1,302      |   | $ | 1,489 |   |
| Services revenues                                                                |       | 2,284              |       | 4,878               |       | 5,693              |       | 6,167                  |       |
| Total Revenues                                                                   |       | 3,527              |       | 6,175               |       | 6,995              |       | 7,656                  |       |
| Cost of revenues                                                                 |       | 988                |       | 1,680               |       | 1,811              |       | 2,277                  |       |
| Gross Profit                                                                     |       | 2,539              |       | 4,495               |       | 5,184              |       | 5,379                  |       |
| Operating  expenses                                                              |       | 2,020              |       | 3,750               |       | 4,171              |       | 4,670                  |       |
| Income from  continuing operations before income taxes                           |       | 519                |       | 745                 |       | 1,013              |       | 709                    |       |
| Income tax  provision                                                            |       | 123                |       | 154                 |       | 246                |       | 304                    |       |
| Income from  continuing operations                                               |       | 396                |       | 591                 |       | 767                |       | 405                    |       |
| Gain (loss) on  disposal of discontinued operations, net of tax                  |       | 130                |       | 210                 |       | 108                |       | (41                    | )          |
| Net income                                                                       |       | $                  | 526        |                | $          | 801                |       | $                      | 875        |   | $ | 364 |   |
| Income per share  from continuing operations: basic and diluted                  |       | $                  | 0.01       |                | $          | 0.01               |       | $                      | 0.01       |   | $ | 0.00 |   |
| Gain (loss) per  share on disposal of discontinued operations: basic and diluted |       | $                  | 0.00       |                | $          | 0.00               |       | $                      | 0.00       |   | $ | (0.00 | ) |
| Net income per share:  basic and diluted                                         |       | $                  | 0.01       |                | $          | 0.01               |       | $                      | 0.01       |   | $ | 0.00 |   |

 

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(1)          Includesfourth quarter 2007 gains (losses) on disposal of discontinued operations of:

·                  $735,000 toreduce other miscellaneous accruals.

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·                  $455,000 forcollection of receivables that were previously written off by us

·                  $(19,000) toincrease accruals pertaining to our workers compensation liability.

·                  $(22,000) torecord provision for federal alternative minimum income taxes.

·                  $(39,000)relating to other miscellaneous expenses.

(2)          Includesfourth quarter 2006 gains (losses) on disposal of discontinued operations of:

·                  $20,000 toreduce other miscellaneous accruals.

·                  $(3,000) toincrease liability accruals pertaining to costs associated with lawsuits.

·                  $(9,000) toincrease accruals pertaining to our workers compensation liability.

·                  $(2,000) toincrease liability accruals pertaining to our collection related costs.

·                  $(25,000) torecord provision for federal alternative minimum income taxes.

·                  $(22,000)relating to other miscellaneous expenses.

**20.****                               Valuationand qualifying accounts**

**VALUATIONAND QUALIFYING ACCOUNTS**

**YearsEnded June 30, 2007, 2006 and 2005**

**(inthousands)**
| ** **                              | ** ** | **Balance At**   | ** ** | **Charged To** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **                   | ** ** |
|-----------------------------------------|------------|-----------------------|------------|---------------------|------------|------------|------------|----------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | ** ** | ** ** | ** **     | ** ** | **Balance At End** | ** ** |
| **Description**                         | ** ** | **Period**            | ** ** | **Expenses**        | ** ** | **Other**  | ** ** | **Deductions** | ** ** | **of Period**           | ** ** |
|                                    | ** ** |                  |       |                |       |       |       |           |       |                         |       |
| Year ended June 30,  2007:              |       |                  |       |                |       |       |       |           |       |                         |       |
| Allowance for  uncollectible accounts   |       | $                     | 764        |                | $          | 638        |       | $              | 140        |                         | $          | (594 | )(4) | $ | 948 | (1) |
| Deferred tax asset  valuation allowance |       | 73,506                |       | —              |       | 52         |       | (1,709         | )(6)       | 71,849                       |       |
|                                    | ** ** |                  |       |                |       |       |       |           |       |                         |       |
| Year ended June 30,  2006:              |       |                  |       |                |       |       |       |           |       |                         |       |
| Allowance for  uncollectible accounts   |       | 1,119                 |       | 328                 |       | 68         |       | (751           | )(4)       | 764                          | (2)        |
| Deferred tax asset  valuation allowance |       | 74,714                |       | —              |       | 995        |       | (2,203         | )(6)       | 73,506                       |       |
|                                    |       |                  |       |                |       |       |       |           |       |                         |       |
| Year ended June 30,  2005:              |       |                  |       |                |       |       |       |           |       |                         |       |
| Allowance for  uncollectible accounts   |       | 1,689                 |       | 12                  |       | (400       | )(5)       | (182           | )(4)       | 1,119                        | (3)        |
| Deferred tax asset valuation allowance  |       | 89,450                |       | —              |       | (14,736    | )(7)       | —         |       | 74,714                       |       |
|                                         |            |                       |            |                     |            |            |            |                |            |                              |            |  |  |  |  |  |

 

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(1)                          Includesallowance for uncollectible accounts for Lyris of $145,000, EmailLabs $133,000,ClickTracks of $35,000, Hot Banana of $52,000 and for the Halsey discontinuedoperations of $583,000.

(2)                          Includesallowance for uncollectible accounts for Lyris of $54,000, EmailLabs of$127,000 and for the Halsey discontinued operations of $583,000.

(3)                          Includesallowance for uncollectible accounts for Lyris of $10,000 and for the Halseydiscontinued operations of $1.1 million.

(4)                          Primarilywrite-offs.

(5)                          Primarilythe collection of previously reserved amounts.

(6)                          Utilizationof NOL carryforward at minimum tax rates.

(7)                          Primarilyexpiration of capital loss carryforward and reduction in state NOLcarryforward.

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**21.  SubsequentEvents**

On July 2, 2007,we purchased 2,226,006 shares of our common stock at a purchase price of $0.75per share, (or $1,669,504.50 in the aggregate) from John Marshall, the formerpresident of ClickTracks in accordance with an Agreement that was entered intobetween us and Mr. Marshall on June 8, 2007. These shares represented thenumber of shares Mr. Marshall received from us on August 18, 2006, as part ofour acquisition of ClickTracks.

On September 15,2007, following extensive discussions with the Company’s management and theCompany’s registered public accounting firm, the Company’s Audit Committeeconcluded that the Company needed to restate previously-issued financialstatements included in the Company’s Quarterly Reports on Form 10-Q for thefiscal quarters ended September 30, 2006, December 31, 2006, and March 31, 2007(the “Restatement”).  The amended Forms10-Q for such quarters were filed with the SEC on September 25, 2007.  The Company made the Restatement in order toinclude changes in the financial statements reflecting applicable accountingguidance relating to the calculation, as a non-cash interest expense, of theintrinsic value of beneficial conversion feature of the $10 million promissorynote issued by the Company to LDN Stuyvie Partnership on August 16, 2006. LDN Stuyvie Partnership is the Company’s largest stockholder and is controlledby the Chairman of the Company’s Board of Directors, William T. Comfort, III.

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**ITEM9.****                                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

**None**

**ITEM9A(T).****                            CONTROLSAND PROCEDURES**

*Evaluationof disclosure controls and procedures*

An evaluation wascarried out under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures (as defined inRule 13a-15(e) and Rule 15d-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”)) as of the end of the fiscalyear covered by this report.  Asdescribed below under “—*Management’s annualreport on internal control over financial reporting*”, the Companyhas identified a material weakness in its internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).  A material weakness is a significantdeficiency, or a combination of significant deficiencies, that results in amore than remote likelihood that a material misstatement of the Company’sannual or interim financial statements will not be prevented or detected.  A significant deficiency is a controldeficiency, or combination of control deficiencies, that adversely affects theCompany’s ability to initiate, authorize, record, process, or report externalfinancial data reliably in accordance with generally accepted accountingprinciples such that there is more than a remote likelihood that a misstatementof the Company’s annual or interim financial statements that is more thaninconsequential will not be prevented or detected.  Our Chief Executive Officer and ChiefFinancial Officer have concluded that as a result of this material weakness, asof the end of the period covered by this Annual Report on Form 10-K, ourdisclosure controls and procedures were not effective.

*Management’sannual report on internal control over financial reporting*

Our management is responsible for establishing and maintaining effectiveinternal control over financial reporting as defined in Rule 13a-15(f) under theExchange Act. Our internal control over financial reporting is designed toprovide reasonable assurance to our management and Board of directors regardingthe preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Therefore, even thosesystems determined to be effective can provide only reasonable assurance withrespect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control overfinancial reporting as of June 30, 2007. In making this assessment, managementused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission in *Internal Control —Integrated Framework*.  Basedon management’s assessment, we believe that, as noted below, as of June 30,2007, there existed a material weakness in our internal control over financialreporting.

On September 15, 2006, the Company’s Audit Committee, after discussionswith the Company’s management and registered public accounting firm, concludedthat the Company needed to restate certain of the Company’s consolidatedfinancial statements to reflect applicable accounting guidance relatingto the calculation, as a non-cash interest expense, of the intrinsic value ofbeneficial conversion feature of the $10 million promissory note issued by theCompany to LDN Stuyvie Partnership on August 16, 2006 (the “LDN Stuyvie Note”). LDN Stuyvie Partnership is the Company’s largest stockholder and is controlledby the Chairman of the Company’s Board of Directors, William T. Comfort,III.  The decision to restate thefinancial statements was made in connection with the audit of the consolidatedfinancial statements included in this Annual Report on Form 10-K, afterevaluation of various interpretations of technical and complex accountingguidance related to beneficial conversion features and the intrinsic value of embedded conversion options within convertibleinstruments.

Controls over the application of accounting policiesare within the scope of disclosure controls. Therefore, management has concluded that there existed a materialweakness in the Company’s internal controls over financial reporting as of theend of the period covered by this Annual Report on Form 10-K.  Management of the Company and the AuditCommittee have considered what changes, if any, are necessary to the Company’sdisclosure controls and procedures to ensure that the error described abovewould not re-occur and to provide that material information is recorded,processed, summarized and reported by management of the Company on a timelybasis in order to comply with the Company’s disclosure obligations under theExchange Act, and the rules and regulations promulgated thereunder.  In its review, management and the AuditCommittee noted that the error described above did not result from the failureof the Company’s disclosure controls and procedures to make known to management(including the Chief Executive Officer and Chief Financial Officer) and theCompany’s registered public accounting firm the facts concerning the Company’sissuance of the LDN Stuyvie Note, or the terms thereof.  Rather, the error resulted from the lack ofunderstanding by the Company’s accounting staff of the technical andcomplicated guidance related to accounting for beneficial conversion featureswithin convertible instruments such as the LDN Stuyvie Note.  Accordingly, the Audit Committee, inconsultation with management, has determined that these matters may be bestaddressed by: (a) reviewing accounting literature and other technical materialswith the Company’s

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independentregistered public accounting firm to ensure that the appropriate personnel havea full awareness and understanding of the applicable accounting pronouncementsand how they are to be implemented, (b) additional education and professionaldevelopment for the Company’s accounting staff, including the Chief FinancialOfficer, on new and existing accounting pronouncements and their application,and (c) requiring senior accounting staff and outside consultants withtechnical accounting expertise to review complex transactions to evaluate andapprove the accounting treatment for such transactions, including those itemsfor which the Company has restated its financial statements.  Accordingly, the Audit Committee hasrecommended to management and management has agreed that the Company’saccounting staff, including its Chief Financial Officer, undertake additionaltraining on an accelerated basis and that such training, in view of thecomplexity of certain generally accepted accounting principles and othermatters, be ongoing.

This Annual Report on Form 10-K does not include an attestation of ourregistered public accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by our registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit us to provideonly management’s report in this Annual Report on Form 10-K.

*Changesin internal controls*

Other than asnoted above, there have been no changes in our internal controls or in otherfactors that have materially affected, or are reasonably likely to materiallyaffect, our internal controls during the fourth quarter, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

**ITEM9B.****                       OTHERINFORMATION**

**None**

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**PART III**

**ITEM 10.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

Information in thedefinitive proxy statement for the annual meeting of our stockholders  to be held December 11, 2007, under theheadings “Executive Officers,” “Directors,” “Director Independence,” “Meetingsand Committees of Directors,” “Section 16(a) Beneficial OwnershipReporting Compliance,” and “Annual Report and Other Information,” isincorporated herein by reference.

**ITEM 11.****                                              EXECUTIVECOMPENSATION**

Informationin the definitive proxy statement for the annual meeting of stockholders to beheld on December 11, 2007, under the headings “Compensation Discussion andAnalysis,” “Executive Compensation,” “Director Compensation,” “CompensationCommittee Interlocks and Insider Participation,” “Meetings and Committees ofDirectors – Compensation Committee,” and “Compensation Committee Report onExecutive Compensation” is hereby incorporated by reference.

**ITEM 12.****                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS**

Information in thedefinitive proxy statement for the annual meeting of stockholders to be held onDecember 11, 2007, under the headings “Equity Compensation Plan Information”and “Security Ownership of Principal Stockholders and Management and RelatedStockholder Matters” is hereby incorporated by reference.

**ITEM13.****                                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

Information in thedefinitive proxy statement for the annual meeting of stockholders to be held onDecember 11, 2007, under the headings “Certain Relationships and RelatedTransactions” and “Director Independence” is hereby incorporated by reference.

**ITEM 14.****                                              PRINCIPALACCOUNTANT FEES AND SERVICES**

Information in thedefinitive proxy statement for the annual meeting of stockholders to be held onDecember 11, 2007, under the heading “Audit Fees” is hereby incorporated byreference.

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**PART IV**

**ITEM 15.****                           EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

(a) The financial statements filed as part of thisAnnual Report at Item 8 are listed in the Financial Statements andSupplementary Data on page 39 of this Annual Report.  All other consolidated financial schedulesare omitted because they are inapplicable, not required, or the information isincluded elsewhere in the consolidated financial statements or the notesthereto.

(b) The following documents are filed or incorporatedby reference as exhibits to this Report:

**EXHIBITINDEX**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                 |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(a)(i)     |       | Stock Purchase Agreement dated as of April 2, 1999,  by and among NovaCare, Inc., NC Resources, Inc., Hanger Orthopedic Group,  Inc. and HPO Acquisition Corp. (incorporated by reference to Exhibit 2(a) to  NAHC, Inc.’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on July 1, 1999).                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(a)(ii)    |       | Amendment No. 1 to Stock Purchase Agreement made as  of May 19, 1999, by and among NovaCare, Inc., NC Resources, Inc., Hanger  Orthopedic Group, Inc. and HPO Acquisition Corp. (incorporated by reference  to the Exhibit 2 (b) to NAHC, Inc.’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on July 1, 1999). |
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(a)(iii)   |       | Amendment No. 2 to Stock Purchase Agreement made as  of June 30, 1999, by and among NovaCare, Inc., NC Resources, Inc., Hanger  Orthopedic Group, Inc. and HPO Acquisition Corp. (incorporated by reference  to Exhibit 2(c) to NAHC, Inc.’s Current Report on Form 8-K filed with the  Securities and Exchange Commission on July 1, 1999).               |
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(b)(i)     |       | Stock Purchase Agreement dated as of June 1, 1999,  by and among NovaCare, Inc., NC Resources, Inc. and Chance Murphy, Inc.  (incorporated by reference to Exhibit 2(a) to NAHC, Inc.’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on June 1, 1999).                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(b)(ii)    |       | Amendment No. 1 to Stock Purchase Agreement made as  of June 1, 1999, by and among NovaCare, Inc., NC Resources, Inc. and Chance  Murphy, Inc. (incorporated by reference to Exhibit 2(b) to NAHC, Inc.’s  Current Report on Form 8-K filed with the Securities and Exchange Commission  on June 1, 1999).                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(c)        |       | Stockholder Agreement dated as of September 8, 1999,  among Plato Holdings, Inc., New Plato Acquisition, Inc., NC Resources, Inc.  and NovaCare, Inc. (incorporated by reference to Exhibit 2(a) to NAHC, Inc.’s  Current Report on Form 8-K filed with the Securities and Exchange Commission  on October 14, 1999).                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(d)(i)     |       | Stock Purchase Agreement dated as of October 1,  1999, by and among NovaCare, Inc. NC Resources, Inc. and Select Medical  Corporation (incorporated by reference to Exhibit 2(b) to NAHC, Inc.’s  Current Report on Form 8-K filed with the Securities and Exchange Commission  on October 14, 1999).                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(d)(ii)    |       | First Amendment dated November 19, 1999, to the  Stock Purchase Agreement dated October 1, 1999, among NovaCare, Inc., NC  Resources, Inc. and Select Medical Corporation (incorporated by reference to  Exhibit 2(a) to NAHC, Inc.’s Current Report on Form 8-K filed with the  Securities and Exchange Commission on December 6, 1999).                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                            |
| 2(d)(iii)   |       | Opinion of Warburg Dillon Read LLC dated as of  October 1, 1999 (incorporated by reference to Exhibit 99(a) to NAHC, Inc.’s  Current Report on Form 8-K filed with the Securities and Exchange Commission  on October 14, 1999).                                                                                                                           |

 

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| Exhibit No.      | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2(e)             |       | Stock Purchase Agreement by and among Commodore  Resources, Inc., Lyris Technologies, Inc., John Buckman, Jan Hanford, The  John Buckman and Jan Hanford Trust and the Company, for certain limited  purposes contained therein, dated May 6, 2005 (incorporated by reference to  Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the  Securities and Exchange Commission on May 12, 2005).                                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2(f)             |       | Agreement and Plan of Merger by and among Commodore  Resources (Nevada), Inc., Halsey Acquisition Delaware, Inc, Uptilt Inc.,  David Sousa, in his capacity as Representative, and the Company, dated  October 3, 2005 (incorporated by reference to the Company’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on October 14,  2005).                                                                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2(g)             |       | Agreement and Plan of Merger, dated as of  August 16, 2006, by and among the Company, Commodore Resources (Nevada),  Inc., Halsey Acquisition California, Inc., ClickTracks Analytics, Inc., the  Shareholders listed therein and John Marshall (as representative)  (incorporated by reference to Exhibit 2.1 to the Company’s Current  Report on Form 8-K filed with the Securities and Exchange Commission on  August 22, 2006).                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2(h)             |       | Share Purchase Agreement, dated August 18,  2006, by and among 1254412 Alberta ULC, an unlimited liability company formed  under the laws of the Province of Alberta, the Company, Krista Lariviere,  Chris Adams, 1706379 Ontario Inc., a corporation formed under the laws of the  Province of Ontario and 1706380 Ontario Inc., a corporation formed under the  laws of the Province of Ontario (incorporated by reference to  Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with  the Securities and Exchange Commission on August 22, 2006). |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3(a)(i)*         |       | Certificate of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3(a)(ii)*        |       | Certificate of Amendment to Certificate of  Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3(a)(iii)*       |       | Certificate of Ownership and Merger, merging NAHC,  Inc. with and into J. L. Halsey Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3(b)             |       | First Amended and Restated Bylaws of the Company, as  amended as of February 14, 2007 (incorporated by reference to Exhibit 3.2 to  the Company’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on February 21, 2007).                                                                                                                                                                                                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4(a)(i)†    |       | J. L. Halsey Corporation 2005 Equity-Based  Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s  current report on Form 8-K filed with the Securities and Exchange Commission  on May 12, 2005).                                                                                                                                                                                                                                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4(a)(ii)* † |       | First Amendment to the J. L. Halsey Corporation 2005  Equity-Based Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(a)†      |       | Amended and Restated Employment Agreement dated as  of September 27, 2000, between NAHC Inc. and David R. Burt (incorporated by  reference to Exhibit 10(k)(i) to NAHC, Inc.’s Annual Report on Form 10-K  for the year ended June 30, 2000).                                                                                                                                                                                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(b)†      |       | Convertible Subordinated Note dated as of  September 27, 2000, issued by NAHC Inc. to David R. Burt  (incorporated by reference to Exhibit 10(k)(ii) to NAHC, Inc.’s Annual  Report on Form 10-K for the year ended June 30, 2000).                                                                                                                                                                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(c)(i)†   |       | Indemnification Agreement, dated May 4, 2000, by and  between NAHC, Inc. and David R. Burt (the “Burt Indemnification  Agreement”) (incorporated by reference to Exhibit 10(f)(i) to the Company’s  Annual Report on Form 10-K for the year ended June 30, 2002).                                                                                                                                                                                                                                                                                                      |

 

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| Exhibit No.     | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                          |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(c)(ii)† |       | Assignment and Assumption Agreement, dated as of  June 1, 2002, by and between NAHC, Inc. and J. L. Halsey Corporation,  assigning the obligations of NAHC under the Burt Indemnification Agreement to  Halsey (incorporated by reference to Exhibit 10(f)(ii) to the Company’s  Annual Report on Form 10-K for the year ended June 30, 2002).      |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(d)†     |       | Form of Indemnification Agreement entered into by  and between the Company and each of Charles E. Finelli, William T.  Comfort, III, Andrew Richard Blair and Nicolas DeSantis Cuadra (incorporated  by reference to Exhibit 10(g) to the Company’s Annual Report on Form 10-K for  the year ended June 30, 2002).                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(e)           |       | Stock Purchase Agreement, dated as of December 13,  2002, by and between the Company and The University of Chicago Law School  (incorporated by reference to Exhibit 10(h) to the Company’s Annual Report on  Form 10-K for the year ended June 30, 2004).                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(f)†     |       | Form of Nonstatutory Stock Option Agreement under  the J. L. Halsey Corporation 2005 Equity-Based Compensation Plan  (incorporated by reference to Exhibit 10.2 to the Company’s current report on  Form 8-K filed with the Securities and Exchange Commission on May 12, 2005).                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(g)(i)        |       | Promissory Note from Commodore Resources, Inc., a  subsidiary of the Company, in favor of The John Buckman and Jan Hanford  Trust, dated May 12, 2005 (incorporated by reference to Exhibit 10(j) to the  Company’s Annual Report on Form 10-K for the year ended June 30, 2005).                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(g)(ii)       |       | Amended and Restated Promissory Note dated March 31,  2007, by Commodore Resources, Inc. in favor of The John Buckman and Jan  Hanford Trust (incorporated by reference to Exhibit 10.2 to the Company’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on April 5, 2007).                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(g)(iii)      |       | Subordination Agreement dated March 31, 2007, by and  between The John Buckman and Jan Hanford Trust and Comerica Bank  (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on April 5, 2007).                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(h)           |       | Guaranty, entered into by the Company on May 12,  2005, guaranteeing payment by Commodore Resources, Inc. to The John Buckman  and Jan Hanford Trust of the amount specified in the Promissory Note dated  May 12, 2005 (incorporated by reference to Exhibit 10(k) to the Company’s  Annual Report on Form 10-K for the year ended June 30, 2005). |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(i)†     |       | Employment Agreement effective May 12, 2005, between  Lyris and Luis A. Rivera (incorporated by reference to Exhibit 10(l) to the  Company’s Annual Report on Form 10-K for the year ended June 30, 2005).                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(j)*†    |       | Employment Agreement effective May 12, 2005, between  Lyris and Robb Wilson.                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(k)†     |       | Employment Agreement dated as of August 29, 2005,  between Lyris and Joseph Lambert (incorporated by reference to Exhibit 10(m)  to the Company’s Annual Report on Form 10-K for the year ended June 30,  2005).                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(l)*†    |       | Employment Agreement effective August 17, 2006,  between the Company and Peter Biro.                                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10(m)(i)        |       | Loan and Security Agreement, dated October 4, 2005,  by and among Comerica Bank, Commodore Resources (Nevada), Inc., Lyris  Technologies, Inc. and Uptilt, Inc. (incorporated by reference to Exhibit  10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2005).                                              |

 

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| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(m)(ii)   |       | First Amendment to Loan and Security Agreement,  effective as of April 25, 2006, by and among Comerica Bank and Commodore  Resources (Nevada), Inc., Lyris Technologies, Inc. and Uptilt Inc.  (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended March 31, 2006).                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(m)(iii)  |       | Second Amendment to Loan and Security Agreement,  effective as of August 18, 2006, by and among Comerica Bank and Commodore  Resources (Nevada), Inc., Lyris Technologies, Inc. and Uptilt Inc.  (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2006).                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(m)(iv)   |       | Third Amendment to Loan and Security Agreement,  effective as of November 30, 2006, by and among Comerica Bank, Commodore  Resources (Nevada), Inc., Lyris Technologies, Uptilt Inc., MCC Nevada, Inc.  and ClickTracks Analytics, Inc. (incorporated by reference to Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on December 6, 2006).                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(m)(v)    |       | Fourth Amendment to Loan and Security Agreement,  effective as of January 30, 2007, by and among Comerica Bank and Commodore  Resources (Nevada), Inc., Lyris Technologies, Inc., Uptilt, Inc., MCC Nevada,  Inc. and ClickTracks Analytics, Inc. (incorporated by reference to Exhibit  10.1 to the Company’s Current Report on Form 8-K filed with the Securities  and Exchange Commission on March 5, 2007).                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(m)(vi)   |       | Fifth Amendment to Loan and Security Agreement,  effective as of March 31, 2007, by and among Comerica Bank and Commodore  Resources (Nevada), Inc., Lyris Technologies, Inc., Uptilt, Inc., MCC Nevada,  Inc., ClickTracks Analytics, Inc., Admiral Management Company and the Company  (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on April 5,  2007). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(n)       |       | Unconditional Guaranty, dated October 4, 2005,  executed by the Company in favor of Comerica Bank (incorporated by reference  to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2005).                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(o)† |       | Restricted Stock Award Agreement, dated October 11,  2005, by and between the Company and Nicolas DeSantis Cuadra (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  with the Securities and Exchange Commission on October 14, 2005).                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(p)       |       | Promissory Note, dated August 16, 2006, in the  amount of $10,000,000 from the Company to LDN Stuyvie Partnership  (incorporated by reference to Exhibit 2.3 to the Company’s Current  Report on Form 8-K filed with the Securities and Exchange Commission on  August 22, 2006).                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(q)(i)    |       | Backstop Agreement, dated August 16, 2006, by  and between the Company and LDN Stuyvie Partnership (incorporated by  reference to Exhibit 2.4 to the Company’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on August 22,  2006).                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(q)(ii)   |       | First Amendment to Backstop Agreement, dated as of  December 5, 2006, by and between the Company and LDN Stuyvie Partnership  (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on December 6,  2006).                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(r)† |       | Agreement and Mutual Release, dated March 8, 2007,  by and among the Company, LDN Stuyvie Partnership, Texas Addison Limited  Partnership, David R. Burt and Andrew Richard Blair (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  with the Securities and Exchange Commission on March 12, 2007).                                                                                                            |

 

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| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 10(s)       |       | Agreement and Waiver, entered into as of June 8,  2007, by and among the Company, Commodore Resources (Nevada), Inc., Lyris  Technologies, Inc., ClickTracks Analytics, Inc., John Marshall and Lisa  Deverse (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed with the Securities and Exchange Commission on June  14, 2007). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 14          |       | Code of Business Conduct and Ethics, adopted by the  Company on September 25, 2003 (incorporated by reference to Exhibit 14 to the  Company’s Annual Report on Form 10-K for the year ended June 30, 2003).                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 21*         |       | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1*       |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2*       |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1*       |       | Section 1350 Certification                                                                                                                                                                                                                                                                                                                                                       |

 

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*                                         Filedherewith

†                                           Indicatesmanagement contracts or compensatory plans, contracts or arrangements in whichany director or named executive officer participates.

Copies of the exhibitsfiled with this Annual Report on Form 10-K or incorporated by reference hereindo not accompany copies hereof for distribution to our stockholders. We willfurnish a copy of any of such exhibits to any stockholder requesting the same.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| Dated: September 26, 2007 |   |                           |                                   |   |
|---------------------------|--------|--------------------------------|----------------------------------------|--------|
|                      |   |                           |                                   |   |
|                      |   | J. L. HALSEY CORPORATION, INC. |
|                      |   |                           |
|                      |   | By:                            | /s/ Luis A. Rivera                     |   |
|                      |   |                           | LUIS A. RIVERA                         |
|                      |   |                           | Chief Executive  Officer and President |
|                           |        |                                |                                        |        |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.
| Signature                   | ** ** | **Title**                                     | ** **                                               | **Date** | ** **         |
|-----------------------------|------------|-----------------------------------------------|----------------------------------------------------------|----------|--------------------|
|                        |       |                                          |                                                     |     |               |
| /S/ William T. Comfort, III |       |                                          | Chairman of the Board  and Director                      |     | September 26, 2007 |   |
| (WILLIAM T. COMFORT, III)   |       |                                          |                                                     |     |               |
|                        |       |                                          |                                                     |     |               |
| /S/ LUIS A. RIVERA          |       |                                          | Chief Executive  Officer, President (Principal Executive |     | September 26, 2007 |   |
| (LUIS A. RIVERA)            |       | Officer) and Director                         |                                                     |     |               |
|                        |       |                                          |                                                     |     |               |
| /S/ Andrew Richard Blair    |       |                                          | Director                                                 |     | September 26, 2007 |   |
| (ANDREW RICHARD BLAIR)      |       |                                          |                                                     |     |               |
|                        |       |                                          |                                                     |     |               |
| /S/ Nicolas DeSantis Cuadra |       |                                          | Director                                                 |     | September 26, 2007 |   |
| (NICOLAS DESANTIS CUADRA)   |       |                                          |                                                     |     |               |
|                        |       |                                          |                                                     |     |               |
| /S/ James A. Urry           |       |                                          | Director                                                 |     | September 26, 2007 |   |
| (JAMES A. URRY)             |       |                                          |                                                     |     |               |
|                        |       |                                          |                                                     |     |               |
| /S/ Joseph Lambert          |       |                                          | Chief Financial Officer  (Principal Financial and        |     | September 26, 2007 |   |
| (JOSEPH LAMBERT)            |       | Accounting Officer), Secretary  and Treasurer |                                                     |     |               |
|                             |            |                                               |                                                          |          |                    |  |  |  |

 

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