UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


--------------------------





FORM
      10-K


---------------





**ANNUAL
      REPORT**


**PURSUANT
      TO SECTIONS 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**








(MARK
      ONE)





x  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      FISCAL YEAR ENDED: MAY 31, 2006


OR





o  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      TRANSITION PERIOD FROM ________________ TO ________________





COMMISSION
      FILE NUMBER: 001-15503


--------------------------





WORKSTREAM
      INC.


(Exact
      name of Registrant as specified in its charter)





CANADA
            N/A(State
                or other jurisdiction of
            (IRS
                Employer Identification No.)incorporation
                or organization)





495
                MARCH ROAD, SUITE 300OTTAWA,
                ONTARIO
            K2K
                3G1(Address
                of principal executive offices)
            (zip
                code)




(613)
                  270-0619(Registrant's
                  telephone number,including
                  area code)
 --------------------------










**SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:**





TITLE
                OF EACH CLASS
            NAME
                OF EACH EXCHANGE
              ON
                WHICH REGISTERED**COMMON
                SHARES, NO PAR****VALUE**
            **BOSTON
                STOCK EXCHANGE**





**SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:**





**COMMON
      SHARES, NO PAR VALUE**


(TITLE
      OF
      CLASS)





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





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Act. Yes o No
x





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes
x  No
o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. x




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (check
      one):


Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes o No
x





The
      aggregate market value of the outstanding voting and non-voting common equity
      held by non-affiliates of the registrant, computed by reference to the price
      at
      which the common equity was last sold as of the last business day of the
      registrant’s most recently completed second fiscal quarter was $56,415,000.
      Common shares held by each executive officer and director and by each person
      who
      owned 10% or more of the outstanding common shares as of such date have been
      excluded in that such persons may be deemed to be affiliates. This determination
      of affiliate status is not necessarily a conclusive determination for other
      purposes.










The
      total
      number of common shares, no par value, outstanding on July 10, 2006 was
      50,960,845, excluding 108,304 **** escrow
      shares.








DOCUMENTS
      INCORPORATED BY REFERENCE





Information
      required by Part III of this annual report is incorporated by reference to
      the
      registrant’s definitive proxy statement relating to its 2006 annual meeting of
      shareholders, which will be filed within 120 days of the close of the
      registrant’s fiscal year end.







WORKSTREAM
      INC.


FORM
      10-K


TABLE
      OF
      CONTENTS





**ITEM**
            
            **PAGE****PART
                I**1.
            Business
            61A.
            Risk
                Factors
            161B.
            Unresolved
                Staff Comments
            252.
            Properties
            253.
            Legal
                Proceedings
            264.
            Submission
                of Matters to a Vote of Security Holders
            264A.
            Executive
                Officers of the Registrant
            27**PART
                II**5.
            Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            286.
            Selected
                Financial Data
            357.
            Management's
                Discussion and Analysis of Financial Condition and Results of Operations
            367A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            478.
            Consolidated
                Financial Statements and Supplementary Data
            489.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            799A.
            Controls
                and Procedures
            799B.
            Other
                Information
            80**PART
                III**10.
            Directors
                and Executive Officers of the Registrant
            8111.
            Executive
                Compensation
            8112.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            8113.
            Certain
                Relationships and Related Transactions
            8114.
            Principal
                Accountant Fees and Services
            81**PART
                IV**15.
            Exhibits
                and Financial Statement Schedules
            82












THIS
      REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
      THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY HISTORICAL ARE
      FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
      ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
      1934,
      AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS
      CONTAINING THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE,"
      AND WORDS OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS
      OR
      INTENTIONS REGARDING OUR FUTURE PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS
      INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE
      HEREOF, AND WE HAVE NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
      OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS
      AND FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT
      OF
      CERTAIN FACTORS, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH UNDER "RISK
      FACTORS" WHICH BEGINS ON PAGE 16 ON THIS FORM 10-K AND OTHER FACTORS AND
      UNCERTAINTIES CONTAINED ELSEWHERE IN THIS FORM 10-K AND IN OUR OTHER FILINGS
      WITH THE SECURITIES AND EXCHANGE COMMISSION.




5





**PART
      I**




ITEM
      1.
      BUSINESS




OVERVIEW




We
      were
      incorporated on May 24, 1996 under the Canada Business Corporation Act under
      the
      name CareerBridge Corporation. In February 1999, we changed our name to
      E-Cruiter.com Inc., and in November 2001, we changed our name to Workstream
      Inc.
      (the “Company”). In 1997, we began operating an online regional job board, on
      which applicants posted their resumes and employers posted available positions,
      focused on the high-technology industry. In February 1999, we changed our
      business focus from the job board business to providing on-line recruitment
      services. Beginning in 2001, we began to expand our focus to provide a full
      range of services and web-based software for Human Capital Management (“HCM”).
      HCM is the process by which companies recruit, train, evaluate, motivate and
      retain their employees. Today, we offer software and services that address
      the
      needs of companies to more effectively manage their human capital management
      function. Workstream has two distinct business units: Enterprise Workforce
      Services and Career Networks. The Enterprise Workforce Services segment offers
      a
      complete suite of HCM software solutions, which addresses recruitment, benefits,
      performance, development, compensation and rewards. We offer each application
      on
      an individual basis, and we offer the comprehensive package through
      TalentCenter, which is a web-based portal that aggregates and integrates all
      of
      the applications. We also offer enterprise workforce management application
      tools for succession planning and organizational planning and charting. The
      Career Networks segment offers career transition, applicant sourcing and
      recruitment research services. We believe that our “one-stop-shopping” approach
      for our clients’ HCM needs is more efficient and effective than traditional
      methods of human resource management.




COMPANY
      SEGMENTS




**** The
      Company has two distinct operating segments, which are the Enterprise Workforce
      Services and Career Networks segments. Enterprise Workforce Services consists
      of
      revenue generated from HCM software and related professional services. In
      addition, Enterprise Workforce Services generates revenue from the sale of
      various products through the rewards and discounts modules of the HCM software.
      Career Networks primarily consists of revenue from career transition, applicant
      sourcing and recruitment research services. During fiscal 2005 after the most
      recent acquisitions, management changed the segments in order to more accurately
      reflect how management evaluates the business. Prior to the change, career
      transition services was considered a separate reportable segment (Career
      Transition Services), and applicant sourcing and recruitment research were
      included in the Enterprise Workforce Services segment.




Financial
      information about our segments and geographic areas can be found in note 14
      to
      our consolidated financial statements.




INDUSTRY
      BACKGROUND




Our
      target market includes any organization needing to manage their human capital
      function in a more effective and cost efficient manner. This includes providing
      solutions for recruiting, training, evaluating, motivating, developing and
      retaining their employees, evaluating performance and compensation,
      administering benefits, and planning the outplacement of their employees. Our
      market includes companies seeking to fulfill those functions through information
      technology skills and expertise. We believe that several factors require
      companies to hire additional personnel and place an emphasis on fulfilling
      the
      human capital function and, therefore, increase demand for our services. These
      factors include increased employee turnover and the shortage of knowledge
      workers in North America.




We
      believe that many organizations are seeking to overhaul their human resources
      information systems to take advantage of both new technologies and new human
      capital management concepts, and we anticipate that spending in human capital
      management will continue to shift away from the client-server human resources
      services to web-based and hosted services because of their lower cost and ease
      of implementation.




6




We
      believe that our suite of workforce management solutions directly addresses
      the
      major challenges facing employers, mainly, time, quality and cost of hiring
      and
      retaining employees.




STRATEGY




Our
      objective is to become the leading supplier of comprehensive, adaptive workforce
      solutions in North America. Our Career Network services can be used by any
      size
      organization; however, our Enterprise Workforce Solutions are presently
      configured for larger organizations. We believe that our products can address
      the needs of the entire human capital market and manage the entire employee
      lifecycle. We are able to provide enterprise workforce management solutions
      and
      services to companies of any size. We believe that our solutions help companies
      cost-effectively maximize workforce productivity and satisfaction by applying
      business discipline to key people processes. Our solutions include:




·
            automating
                and monitoring the recruitment process and the provision of links
                to
                external service providers, such as companies that specialize in
                skill
                testing or personality profiling;





·
            talent
                acquisition services ranging from job posting outreach to job
                boards;





·
            hosting
                a corporate career site;





·
            talent
                utilization services with job posting to internal company intranets;





·
            evaluation
                of talent performance and
                competencies;





·
            management
                of talent compensation;





·
            talent
                succession planning;





·
            talent
                reward, non-cash incentives and retention services;
                and





·
            talent
                separation services that encompass pre-termination planning, individual
                coaching, opportunity research and job marketing campaign
                development.







We
      believe we have developed a strategy that will achieve revenue growth in most
      economic conditions, and we are focused on achieving profitability through
      a
      combination of organic revenue growth, cost management and strategic
      acquisitions. Key elements of our strategy for business development are as
      follows:




·
            Enhancing
                and widening our service portfolio. We continue to integrate our
                different
                services within our technology platform and continue to expand our
                services to provide a more complete workforce management process
                through
                further product development and strategic acquisitions. We believe
                that
                this will give us the ability to grow revenues with each client,
                acquire
                new clients with different requirements, and further develop revenue
                stability in almost any market
                condition.





·
            Building
                a wider indirect sales channel for distribution of our products and
                services. We will continue to pursue reseller agreements for all
                of our
                services with human capital solution providers and recruiting companies.





·
            Expanding
                direct sales with vertical focus. We will continue to emphasize our
                direct
                sales efforts into targeted vertical industries, especially those
                with
                good current economic outlooks including financial services, retail,
                healthcare, pharmaceuticals and biotech, food services and some
                manufacturing sectors.





7




·
            Maintaining
                technological leadership. We plan to remain at the forefront of web-based
                human capital solutions by developing and hosting or licensing the
                latest
                available technologies taking advantage of the internet and offering
                our
                clients a comprehensive human capital management service in a hosted
                environment.





·
            Pursuing
                strategic acquisitions. From time-to-time, we will evaluate acquisition
                and investment opportunities in complementary businesses, products
                and/or
                technologies. Our objective is to increase our revenue growth, expand
                our
                customer base, add new services or new technologies for our existing
                client base and penetrate new markets.








We
      believe that our services allow organizations of every size to significantly
      improve their recruiting, hiring, evaluation, compensation, performance
      management, retention and outplacement cycles. Our systems automate those human
      capital management functions and most are accessible with any standard web
      browser and require no additional software or hardware deployment by clients.




PRINCIPAL
      SERVICES AND OPERATIONS




*ENTERPRISE
      WORKFORCE SERVICES*




Our
      Enterprise Workforce Services segment offers a complete suite of HCM software
      solutions and related professional services. Our products address recruitment,
      benefits, performance, compensation, development and rewards. During fiscal
      2005, we launched TalentCenter, which is an integrated, open portal solution
      that aggregates applications, content and services that companies use to manage
      all phases of the employee lifecycle - from recruitment to retirement. In fiscal
      2006, Enterprise Workforce Services generated approximately 72% of our revenue.




*TalentCenter*




The
      Workstream TalentCenter provides a unified view of all of our offerings. It
      is a
      role-based talent management portal that provides single sign-on authentication
      to all licensed applications and services. This streamlined approach facilitates
      rapid user adoption of our applications and services. Due to the fact that
      TalentCenter is a hosted solution, we manage virtually all of the integration
      and service complexities at our data center. Through a standard web browser,
      companies have access to our on-demand applications and can turn on those they
      need, when they need them. TalentCenter provides companies the flexibility
      to
      start small and grow over time or deploy the entire solution at once.




*Recruitment*




Workstream
      Recruitment helps companies automate and manage the entire recruitment process
      including job requisition, job profile creation, job posting, applicant
      attraction, screening and tracking, interview scheduling, offer letter
      generation and making the hire. Workstream Recruitment also provides companies
      with an extended network and industry database to help source key hires. The
      end
      result is a thoroughly researched and filtered list of qualified prospective
      candidates. Recruitment
      applications include the following:




·
            Candidate
                Management,for
                automating and streamlining the recruiting process used to attract,
                manage, screen and qualify candidates.




·
            Career
                Site,a
                custom-designed internal and external career website hosted and maintained
                by Workstream at our secure data center, used for attracting, routing
                and
                tracking job candidates.




·
            Compliance,reporting
                tools for preparing Equal Employment Opportunity Commission (EEOC)
                compliance reporting information and evaluating the staffing process.




·
            Document
                Builder,
                for automating and streamlining the creation process and management
                of
                candidate-facing letters, such as offer letters.




8








*Benefits*





Workstream
      Benefits is an integrated benefits solution that supports both benefits
      communication and transactions. Featuring flexible, out-of-the-box
      functionality, Workstream Benefits can be implemented quickly to help companies
      automate and streamline the entire benefits enrollment, communication and
      administration process.


Benefit
      applications included:




·
            Benefits
                Enrollment and Administrationis
                an out-of-the-box application that automates the benefits enrollment
                and
                administration process. It supports customers’ full enrollment cycle,
                including open, new hire and life event processing.




·
            Benefits
                Communicatorhelps
                organizations personalize and communicate benefit information as
                well as
                human resources policies and procedures via the web to their employees,
                in
                turn reducing the amount of inquiries into customers’ human resources
                staff supporting this process.




·
            Health
                Pagesis
                a one-stop source for the information employees need to make educated
                health care choices during benefits enrollment and year-round. Health
                Pages gives employees 24/7 access to personalized information on
                providers
                and plans specific to customers’ benefits programs and the tools they need
                to make well-informed decisions. All information comes from our
                continuously maintained database of more than 500,000 physicians,
                6,000
                hospitals and 400 health plans.




·
            Total
                Rewards Statementsgives
                employees one place to view, model and manage all of their
                corporate-sponsored compensation, financial and health benefits.
                Employees
                are able to grasp the full value of their wealth-related benefits
                programs
                and the contributions employers make on their
                behalf.




*Performance*




Workstream
      Performance enables organizations to translate business strategy into a fully
      aligned set of operational goals, provide real-time visibility and reporting
      on
      goal status, assess employee performance and gather employee feedback across
      the
      organization. These products supply the tools and information required to manage
      organizational performance effectively, including: goal setting, alignment,
      cascading and linkage; self, peer, multi-rater and 360 degree performance
      assessments; on-demand tracking and reporting of performance against established
      metrics; and the collaboration and evaluation capabilities necessary to assess
      results. The solution is also integrated with Workstream Compensation to help
      support organization's pay-for-performance programs. Performance
      applications include:




·
            Achievement,
                for aligning individual performance with top-level business goals,
                automating the process of managing, monitoring and assessing individual
                employee performance and integrating performance data into the
                compensation planning process.




·
            Development,for assessing, developing and mentoring specific competencies and
                behaviors with self-assessments, 180 degree, 360 degree and multi-rater
                assessments.




·
            Employee
                Surveys,
                for gathering employee feedback across the entire organization, analyzing
                and communicating the results.




*Compensation*




Workstream
      Compensation is a comprehensive set of products that enable end-to-end
      management of all types of enterprise compensation, including salary, merit
      increases, variable pay and stock awards.   As many organizations are
      beginning to introduce more complex, formula-driven variable pay plans, we
      feature an advanced variable pay product that provides the flexibility to use
      formula-based compensation plans and managerial discretion to reward the
      company's high achievers. All compensation-planning products are designed to
      provide managers and compensation professionals with the information and online
      decision support tools necessary to help them make more informed, policy-based
      pay decisions. The compensation planning products can be implemented separately
      or together, allowing organizations to achieve the goal of realizing a
      pay-for-performance philosophy at their own pace.  Compensation
      applications include:




·
            Focal
                Planning,for
                annual salary, basic variable pay and stock evaluation across the
                enterprise during a pre-determined planning window.




9




·
            Anniversary
                Planning,for
                evaluating individual employees on their 'effective' hiring dates
                throughout the year.




·
            Advanced
                Variable Pay,for
                formulaic variable pay plans that are administered throughout the
                year.




·
            Total
                Rewards Statements,a
                Web-based product for employees to access, view, model and manage
                all of
                their corporate-sponsored financial benefits.




*Rewards*




Workstream
      Rewards programs enable organizations to increase employee productivity, improve
      employee satisfaction and drive engagement. These solutions deliver convenience
      and productivity benefits to the entire workforce and help organizations
      identify and reward accomplishments and behaviors that drive desired operational
      results. This product line delivers several offerings using an enterprise class
      solution. Rewards applications include:




·
            Discount
                Programs,for
                enhancing employee satisfaction and productivity. This web-based
                incentive
                and employee discount platform offers employees savings on computers,
                movies, entertainment, travel, insurance and professional services
                from
                over 200 brand name providers.




·
            Incentive
                Programs,
                for motivating performance and driving results across the organization.
                This web-based incentive solution calculates and distributes non-cash
                incentive awards to employees for achieving specific results based
                upon
                predefined metrics strategically aligned with company goals.




·
            Recognition
                Programs,for
                rewarding years of service or other corporate milestones and outstanding
                performance achievement. This online recognition program rewards
                employees
                for attaining corporate milestones using online certificates with
                a
                selection from a non-cash awards catalog. The program also provides
                a
                company-wide online recognition tool for participants and managers
                to
                issue on-the-spot recognition certificates and awards when exceptional
                performance occurs or goals are achieved.




*Development*




Workstream
      Development is
      designed to allow organizations to maximize the value of their current workforce
      as well as ensuring that there will be strong leadership in the future. A
      modular solution, Workstream Development combines individual development
      planning (IDP), a competency-based assessment and development process with
      integrated succession planning and organizational charting capabilities. All
      based on the Workstream Competency Dictionary, which includes over 9,000
      technical and 60 behavioral competencies.




·
            Individual
                Development Plans (IDP) is thecreation and management of the entire employee development process.
                IDP
                compliance reports ensure that managers and employees are creating
                and
                approving the correct IDP’s.




·
            Workstream
                Development enables “true” competency assessment of both employee
                competency and behavioral levels. The product supports measurement
                of
                skills, knowledge and competencies requiring different scales and
                tracks
                employee attributes that may be important for succession planning
                or
                resourcing, such as additional education, certifications or licensing.




·
            Competency
                Definitions provides
                full competency definitions and assessment scale information in easy
                to
                use pop-up windows.




·
            Competency
                Health and Ranking Reportsaggregate competency gaps and rank employees based against specific
                competency profiles.




·
            Career
                Development****allows
                employees
                and their managers to graphically compare their personal portfolio
                of
                competencies to job requirements in their career path and identify
                suitable learning for each competency gap. Employees can address
                these
                gaps through classes, e-learning, books, and other developmental
                materials. Workstream Development includes pre-defined links to numerous
                courses and development tactics.




·
            Workstream
                Succession Planning allows incumbents and other managers to easily
                designate potential successors from queries to the employee database.
                Managers can indicate whether the incumbents are promotable or
                transferable; to which positions; when and what development they
                will need
                in order to be ready.




·
            Successors
                can easily be displayed and rank-ordered based on their competency
                assessments, readiness, availability or other selected fields.




·
            Succession
                Plan****Reports
                can be created for a specific position, for specific successors,
                and
                managing your entire succession plan.




·
            Organizational
                Chartinguses information customers already have to deliver information-rich
                corporate directories and organizational charts across an intranet
                site.




10




*CAREER
      NETWORKS*




Our
      Career Networks segment consists of career transition services, recruitment
      research and applicant sourcing. Career Networks accounted for approximately
      28%
      of total revenue for fiscal 2006.




*Career
      Transition Services*




Workstream’s
      career transition services provide a package of outplacement products and
      services, which are provided through our wholly-owned subsidiary Paula Allen
      Holdings, Inc., which we acquired in July 2001 and does business under the
      name of Allen
      and
      Associates .




Our
      career transition services provide job search services for displaced employees.
      We focus on creating professional career marketing materials that displaced
      employees need in order to immediately begin their new job campaign. This
      package includes a professionally written résumé, broadcast letter, custom cover
      letter and references. This assistance is provided to approximately 10,000
      job
      seekers each year in the areas of information technology, engineering, finance
      and marketing.




We
      market
      our career transition services to individuals seeking employment or other career
      opportunities in the marketplace. Career transition services are marketed to
      individuals predominantly by advertising on the internet as well as in local
      newspapers throughout North America. Individuals are charged on average between
      $1,500 and $3,500 for our resume development, career consulting and market
      research services.




*Applicant
      Sourcing*




6FigureJobs.com,
      which we acquired in October 2001, is an online applicant-sourcing portal where
      job seeking candidates and recruiting companies can interact. We believe that
      6FigureJobs customizes this experience to satisfy the needs of the upper-echelon
      management candidate and the companies looking to hire them. The site provides
      content appropriate for senior executives, directors and other managers, as
      well
      as containing job postings that meet their qualifications. The 6FigureJobs
      job
      board has evolved into one of the premier executive job boards. We employ
      screening to create this exclusive community of job seekers. On the candidate
      side, each job seeker is reviewed before his or her resume is allowed to reside
      in the site’s candidate database. On the recruiting side, all job openings must
      have a minimum aggregate compensation of $100,000. We generate revenue through
      6FigureJobs on a subscription basis from employers and recruiters that access
      our database of job seekers and use our tools to post, track and manage job
      openings. We also generate revenue by charging companies that advertise on
      our
      6FigureJobs website, which includes charging certain advertisers a fee based
      on
      a percentage of their sales generated through the advertisement on our website.




*Recruitment
      Research*




We
      currently provide recruitment research services through our subsidiary
      OMNIpartners, which we acquired in July 2001. Our recruitment research services
      are based on the outsourcing of the sourcing and screening work associated
      with
      recruiting. Our services are based on research provided to our clients on an
      hourly fee basis, and clients are billed once the project is completed. We
      believe this outsourcing formula allows clients to lower costs and gain access
      to specialized expertise that provides objectivity and ongoing value to the
      hiring process. Recruitment research services’ employees look for potential
      employees, interview and qualify them, and deliver all the information to the
      clients’ human resource departments. The OMNIresearch Report, delivered after
      completion of the recruitment assignment, details information about each
      individual uncovered during the search. OMNIresearch Reports may include
      information about candidates’ work histories, technical abilities, educational
      backgrounds, people skills, decision-making abilities, availability and salary
      expectations. The client can offer to hire any or all of the individuals
      presented, at any time, for no additional charge.




11




ACQUISITIONS




As
      part
      of our overall strategy, we have pursued our objective of offering an entire
      suite of HCM applications primarily through the acquisition of other companies
      offering services similar or complementary to ours. Through the acquisition
      of
      those companies, we have added the necessary technology and expanded our
      services enabling us to grow our revenue and to position ourselves for future
      profitability by consolidating operations and improving efficiencies. We
      completed one acquisition during the twelve months ended May 31, 2006 (“fiscal
      2006”), four acquisitions during the twelve months ended May 31, 2005 (“fiscal
      2005”), and three acquisitions during the twelve months ended May 31, 2004
      (“fiscal 2004”) that met our criteria.




FISCAL
      2006 ACQUISITION




*Exxceed,
      Inc.*




On
      January 13, 2006, we acquired certain assets of Exxceed, Inc. (“Exxceed”), a
      Delaware corporation, a developer and marketer of competency and performance
      management software. As consideration for the purchase, the Company issued
      to
      the shareholders of Exxceed 1,500,000 shares of common stock valued at
      $2,525,000, made a cash payment of $500,000, and issued a promissory note
      payable for $500,000. Up to an additional $1,000,000 in common shares may be
      issued upon the acquired company meeting certain billing targets within twelve
      months of the acquisition date. We recorded approximately $1.15 million in
      intangible assets and $2.44 million in goodwill as part of the
      acquisition.




FISCAL
      2005 ACQUISITIONS




*Peoplebonus.com
      LLC*




On
      June
      21, 2004, we acquired certain assets of Peoplebonus.com LLC (“Peoplebonus”), a
      Delaware limited liability company. As consideration for the sale, the Company
      issued to the shareholders of Peoplebonus 180,506 common shares (72,202 common
      shares valued at $200,000 and 108,304 common shares held in escrow), made a
      cash
      payment of $25,000 and assumed a promissory note for $100,000. In addition,
      the
      Company made a cash payment of $105,000 to Peoplebonus. Peoplebonus'
      products and services are designed to streamline **** the
      way a
      company processes and handles resumes. Peoplebonus’
      artificial intelligence data mining software can search for key words and
      phrases from within a resume and score the resume based on learned search
      criteria. We
      recorded approximately $427,000 in intangible assets as part of the acquisition.





*Bravanta,
      Inc.*





On
      July
      27, 2004, we acquired 100% of the outstanding shares of Bravanta, Inc.
      (“Bravanta”), a Delaware corporation. As consideration for the sale, the Company
      issued to the shareholders of Bravanta a total of 2,672,064 common shares.
      The
      total aggregate value of the shares was $7,107,693. In addition, the Company
      made cash payments of $2,051,120 to meet certain of Bravanta’s obligations prior
      to the finalization of the purchase agreement. Bravanta was a provider of
      enterprise incentive and recognition programs. We recorded approximately $2.2
      million in intangible assets and $7.3 million in goodwill as part of the
      acquisition.





*HRSoft,
      LLC*





On
      October 6, 2004, we acquired certain assets of HRSoft, LLC (“HRSoft”), a
      Delaware limited liability company. As consideration for the sale, the Company
      assumed $766,913 in bank debts and vendor obligations. In addition, the Company
      made cash payments of $100,000 to meet certain of HRSoft’s obligations prior to
      the finalization of the asset purchase agreement. We also agreed to reimburse
      the owners of HRSoft for the estimated individual tax liabilities arising from
      the transaction, which totaled $110,000. Finally, the Company issued a
      promissory note for $325,000 to the owners of HRSoft, under which the portion
      to
      be repaid to the Company is contingent on future revenue levels. HRSoft
      developed and marketed strategic talent management software solutions for
      succession planning and leadership development, performance management,
      competency management, career and development planning, organizational charting,
      modeling and hierarchy management. ** We
      recorded approximately $1.8 million in intangible assets as part of the
      acquisition.




12


*ProAct
      Technologies Corporation*





On
      December 30, 2004, we acquired certain assets of ProAct Technologies Corporation
      (“ProAct”), a Delaware corporation. As consideration for the sale, we made a
      cash payment of $5,500,000 and issued a promissory note for $1,530,000, which
      accrued interest at an annual rate of 6% with principal and interest due on
      June
      1, 2005. In addition, the Company issued to the shareholders of ProAct 913,551
      common shares valued at $2,822,873, of which 253,764 shares are being held
      in
      escrow as the exclusive source against which the Company can assert potential
      indemnification claims. ProAct was a provider of software and hosted web-based
      tools for employee benefits management. We recorded approximately $6.8 million
      in intangible assets and $3.3 million in goodwill as part of the acquisition.




FISCAL
      2004 ACQUISITIONS




*Perform,
      Inc.*




On
      September 11, 2003, the Company acquired certain assets of Perform, Inc.
      (“Perform”), a Delaware corporation, in connection with Perform’s voluntary
      petition for relief under Chapter 11 of the United States Bankruptcy Code.
      As
      consideration for the sale, we issued to the shareholders of Perform 189,873
      common shares valued at $300,000 and cash of $450,000. In addition, the Company
      advanced $72,000 to Perform to fund its operations prior to the finalization
      of
      the asset purchase agreement. Perform designed, developed and marketed Human
      Resource Information Systems and Performance Management Information Systems
      for
      mid-size and Global 2000 companies, enabling them to automate and have an
      effective performance management process of goal setting, employee appraisal
      and
      feedback. We recorded approximately $700,000 in intangible assets as part of
      the
      acquisition.




*Peopleview,
      Inc.*




On
      March
      27, 2004 as amended and effective for accounting purposes on May 27, 2004,
      the
      Company acquired certain assets of Peopleview, Inc. (“Peopleview”), a Nevada
      corporation. As consideration for the sale, the Company issued to the
      shareholders of Peopleview 246,900 common shares valued at $688,851 and warrants
      to purchase 50,000 common shares at $3.00 per share, which were valued at
      $46,500. The warrants were not exercised and expired in March 2006. In addition,
      the Company made a cash payment of $250,000. Peopleview designed, developed
      and
      marketed software that helps companies evaluate employee skills, competency
      and
      performance. In addition, Peopleview offers software that enables companies
      to
      survey their employees regarding the company’s environment and assess compliance
      with the Sarbanes-Oxley Act. We recorded approximately $900,000 in intangible
      assets as part of the acquisition.




*Kadiri,
      Inc.*




On
      May
      28, 2004, we acquired via merger 100% of the outstanding shares of Kadiri Inc.
      (“Kadiri”), a California based company. As consideration for the sale, we issued
      to the shareholders of Kadiri 4,450,000 common shares valued at $12,415,500.
      During fiscal 2005, an additional 1,042,891 shares valued at $2,532,111 were
      issued as additional contingent consideration after certain revenue and cash
      generation targets of the acquired entity were achieved. Kadiri was a provider
      of Enterprise Compensation Management solutions which enable companies to plan
      and manage compensation, performance evaluation, and monitor the granting of
      rewards. We recorded approximately $3.6 million in intangible assets and $14
      million in goodwill as part of the acquisition.




Some
      of
      these acquisitions were also made in consideration of additional common shares
      that were held in escrow to be released upon achievement of certain profit
      and/or revenue targets. As of May 31, 2006, 108,304 common shares related to
      the
      Peoplebonus acquisition remain in escrow.




13





FOREIGN
      OPERATIONS




We
      have
      operations in Canada and the United States, and, therefore, are subject to
      the
      risks typical of an international business, including, but not limited to,
      differing economic conditions, changes in political climate, differing tax
      structures, other regulations and restrictions, and foreign exchange rate
      volatility.




Our
      operations center is located in Ottawa, Canada and maintains our servers, which
      support all of our locations and the software that is accessed by our clients
      in
      an Application Service Provider (“ASP”) environment. Financial information about
      geographic areas and segments can be found in note 14 to our consolidated
      financial statements.




REVENUE
      SOURCES




The
      Enterprise Workforce Services segment derives revenue from various sources
      including the following: subscription and hosting fees; licensing of software;
      software maintenance fees; professional services related to software
      implementation, customization and training; and sale of products and tickets
      through the Company’s employee discount and rewards software module.  Clients
      enter into contracts which specifically address the products and services
      acquired, periods covered, and the billings terms. Contracts that include a
      software subscription component have a period of at least one year and
      typically, average three years. Clients are billed in advance according to
      the
      terms of the contract. In the case of annual or multiple year contracts, we
      bill
      our clients in advance monthly, quarterly or annually as deemed necessary when
      negotiating the contract. Any unearned revenue is disclosed in the balance
      sheet
      as deferred revenue and is recognized when the service is provided. Professional
      services are billed either on a time and material basis or on a fixed fee basis.
      Time and material engagements are billed monthly as the professional services
      hours are incurred. Fixed fee engagements are billed according to the terms
      of
      the contract, and revenue is recognized on a percentage of completion basis.
      Revenue from the sale of products and tickets through the discount and rewards
      software module is billed and recognized when the goods are shipped and title
      has transferred.




The
      Career Networks segment derives revenue from career transition, applicant
      sourcing and recruitment research services. For career transition services,
      clients are billed 50% when the assignment starts and the remaining 50% when
      the
      assignment is completed, which is generally in approximately ten days. For
      recruitment research services and applicant sourcing and exchange, customers
      are
      billed and revenue is recognized as services are provided. Revenue is recognized
      when the services have been completed.




RESEARCH
      AND DEVELOPMENT




From
      fiscal 2002 through fiscal 2005, the Company embarked on a new research and
      development strategy. Rather than relying solely on developing software
      internally, the Company began a strategy of obtaining new technology through
      the
      acquisition of companies that had already developed the technology and proven
      its success in the marketplace. During late fiscal 2005 and throughout 2006,
      the
      Company incurred significant research and development costs subsequent to the
      various acquisitions in order to merge the technologies developed by the
      individual entities prior to the acquisitions. The increase in costs was
      primarily due to the addition of internal resources as well as the use of
      offshore contractors. Research and development expense was approximately
      $5,422,000, $2,147,000, and $453,000 in fiscal 2006, fiscal 2005, and fiscal
      2004, respectively. All research and development expense was incurred in the
      Enterprise Workforce Services segment.




INTELLECTUAL
      PROPERTY




We
      rely
      upon a combination of copyright, trade secret and trademark laws and
      non-disclosure and other contractual arrangements to protect our proprietary
      rights. Many of the copyrights and trademarks we hold were obtained in
      connection with the acquisitions we have made since 2002. Currently, we have
      eight registered trademarks in Canada and eight in the United States. With
      the
      acquisition of Kadiri, we now have four registered trademarks in the European
      Union and two in Mexico. Our trademarks include Workstream, E-Cruiter, E-Cruiter
      Enterprise, E-Cruiting, Careerbridge, 6FigureJobs.com, RezLogic, Kadiri, Kadiri
      TotalComp, and Decisis. In addition, we have two service marks for OMNIpartners
      and OMNIresearch. We also have copyrights on some of our training manuals and
      internally developed software programs.




14




In
      1999,
      we changed our name from “Careerbridge” to “E-Cruiter”. In 2001, we changed our
      name to “Workstream”. We have registered the Workstream trademark in the U.S.
      and Canada, and such registrations expire in May 2014 and in May 2019,
      respectively. The U.S. trademark renews ten years at a time and the Canadian
      trademark renews fifteen years at a time.





The
      following registered trademarks, are registered and will expire as follows:
      E-Cruiter - December 2013, E-Cruiter Enterprise - December 2013, E-Cruiting
      -
      January 2014. These trademarks are renewable for fifteen years at a time. Our
      6FigureJobs.com and RezLogic trademark registrations expire in September 2010
      and March 2010, respectively, and are renewable for ten years at a time.





Our
      Kadiri trademarks are registered and expire as follows: United States: Kadiri,
      Decisis, and Kadiri TotalComp - January 2011. These trademarks are renewable
      for
      ten years at a time. Canada: Kadiri - September 2018, and Kadiri TotalComp
      -
      June 2019. These trademarks are renewable for fifteen years at a time. European
      Union: Decisis - October 2006, Kadiri - December 2010, and Kadiri TotalComp
      -
      June 2011. These trademarks are renewable for ten years at a time. Mexico:
      Kadiri and Kadiri TotalComp - July 2011. These trademarks are renewable for
      ten
      years at a time.





In
      connection with our acquisition of Kadiri, we acquired one U.S. patent issued
      July 31, 2001 for Automated Process Guidance System and Method Using Knowledge
      Management System by Kadiri Inc. In addition, we have three pending patent
      applications: (1) a Canadian patent application for Method for Traversing a
      Flowchart by Kadiri Inc, (2) a European patent application for Method for
      Traversing a Flowchart by Kadiri Inc, and (3) a U.S. patent application for
      Automated Process Guidance System and Method by Kadiri Inc.





We
      believe that the proprietary rights created by these trademarks, service marks
      and patents are important to our business. The measures we have taken to protect
      our proprietary rights, however, may not be adequate to deter misappropriation
      of proprietary information or protect us if misappropriation occurs. Policing
      unauthorized use of our technologies and other intellectual property is
      difficult, particularly because of the global nature of the internet. We may
      not
      be able to detect unauthorized use of our proprietary information and take
      appropriate steps to enforce our intellectual property rights.





We
      are
      not aware of any patent infringement charge or any violation of other
      proprietary rights claim by any third party relating to use of our products.
      However, the computer technology market is characterized by frequent and
      substantial intellectual property litigation.




SALES
      AND
      MARKETING





We
      market
      our services in both the United States and Canada. We utilize the internet,
      trade shows, seminars and newspapers to market our services. The Enterprise
      Workforce Services segment’s sales cycle is approximately six to nine months
      depending on the size of the potential client. Career Networks sales cycle
      is
      relatively short and of higher volume. The Enterprise Workforce Services segment
      has a sales team of approximately 15 (internal and external) located throughout
      the United States with one individual in Canada. The Career Networks segment
      has
      a sales team of approximately 30 located in five locations throughout the United
      States. In addition, we have approximately ten marketing personnel located
      throughout the United States and Canada. Both Career Networks and Enterprise
      Workforce Services sales teams sell only within their segment.




COMPETITION




The
      market for HCM services is highly fragmented and competitive with hundreds
      of
      companies offering products or services that compete with one or more of the
      services that we offer. Our Career Networks segment competes within the United
      States and Canada with internet recruitment services companies, outplacement
      services companies and human resource service providers. We compete for a
      portion of employer’s recruiting budgets with many types of competitors such as
      offline recruiting firms, offline advertising, resume processing companies
      and
      web-based recruitment companies. While we do not believe that any of our
      competitors offer the full suite of services that we provide, there are a number
      of companies that have products or services that compete with one or more of
      the
      services we provide. For instance, companies that compete with our recruiting
      systems services include Taleo Corporation, BrassRing, Webhire and Kenexa.
      Companies such as Monster Worldwide, Execunet and Netshare have products or
      services that compete with our applicant sourcing and exchange services. We
      also
      compete with vendors of enterprise resource planning software, such as
      Peoplesoft, Oracle, and SAP. In the area of outplacement services, we compete
      with companies such as McKenzie Scott and WSA Corp. Companies such as LifeCare,
      Next Jump and SparkFly compete with our employee portal. Oracle, SAP, Workscape
      and Authoria are our main competitors for our benefit products and Siebel,
      Kronos, Callidus, Softscape, Success Factors and Authoria compete with our
      compensation and performance product lines.




15




We
      believe that the primary competitive factors affecting our market include
      product functionality, product performance, quality service support and
      implementation and the cost of delivery. We believe that our principal
      competitive advantages include:




·
            our
                complete suite of HCM applications;


·
            our
                unique combination of services;


·
            our
                technology;


·
            our
                competitive and innovative packet and delivery
                model;


·
            our
                performance and reliability as an application service
                provider;


·
            our
                service reputation; and


·
            our
                experienced staff.




Although
      we believe we compete favorably with respect to such factors, there can be
      no
      assurance that we can maintain our position against current and potential
      competitors. A number of our competitors have longer operating histories and
      greater financial, technology and marketing resources, as well as better name
      recognition than we do.




EMPLOYEES




As
      of May
      31, 2006, we had 210 full-time employees. Our employees are not represented
      by
      a collective bargaining organization, and we have never experienced any work
      stoppage. We consider our relations with our employees to be good.




AVAILABLE
      INFORMATION




Our
      internet website address is *www.workstreaminc.com* *.* We
      provide free access to various reports that we file with or furnish to the
      United States Securities and Exchange Commission through our website, as soon
      as
      reasonably practicable after they have been filed or furnished. These reports
      include, but are not limited to, our annual reports on Form 10-K, quarterly
      reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
      reports. Our SEC reports can be accessed through the investor relations section
      of our website, or through *www.sec.gov* .
      Information on our website does not constitute part of this 10-K report or
      any
      other report we file or furnish with the SEC.





ITEM
      1A.
      RISK FACTORS





You
      should carefully consider the risk factors set forth as follows and elsewhere
      in
      this Annual Report on Form 10-K that pertain to our Company. The realization
      of
      such risks could result in a material adverse effect on our results of
      operations, financial condition, cash flows, business or the market for our
      common shares. We cannot assure you that we will successfully address any of
      these risks or address them on a continuing basis.




Keep
      these risk factors in mind when reading “forward-looking” statements elsewhere
      in this Form 10-K. (See “Cautionary Statement Concerning Forward-Looking
      Statements” in Item 7)




16




**We
      may not become profitable.**





Since
      our
      inception, we have incurred losses which have been substantial in relation
      to
      our operations. As of May 31, 2006, we had an accumulated deficit of
      $65,644,609. We reported net losses of $12,986,291, $15,158,975 and $5,536,899
      for the years ended May 31, 2006, 2005 and 2004, respectively. Revenues for
      fiscal 2006, 2005 and 2004 were $28,120,662, $26,818,587 and $17,166,880,
      respectively. Our ability to reduce our losses will be adversely affected if
      we
      continue to acquire companies reporting losses, if revenue grows slower than
      we
      anticipate or if operating expenses exceed our expectations. Even if we do
      achieve profitability, we may not sustain or increase profitability on a
      quarterly or annual basis. Failure to achieve or maintain profitability would
      materially adversely affect the market price of our common shares. We expect
      our
      operating expenses to moderate due to the scalability of our business model.




**We
      may encounter difficulties with acquisitions, which could
      harm**  **our
      business** .




From
      fiscal 2003 through fiscal 2006, we made several acquisitions of other companies
      and businesses, as part of our efforts to expand our operations, and we may
      continue to make acquisitions of complementary companies, products and
      businesses. The
      risks
      we may encounter in acquisitions include:




·
            difficulty
                and expense of assimilating the operations and personnel of acquired
                businesses;




·
            difficulty
                integrating the acquired technologies or products with our current
                products and technologies;





·
            potential
                exposure to product liability or intellectual property liability
                associated with the sale of the acquired company’s
                products;





·
            diversion
                of management time and attention and other
                resources;





·
            loss
                of key employees and customers as a result of changes in
                management;





·
            difficulty
                and expense of managing an increased number of employees over large
                geographic distances;





·
            our
                due diligence processes may fail to identify significant issues with
                product quality, product architecture, and legal and financial
                contingencies, among other things;





·
            potential
                exposure to unknown liabilities of acquired
                companies;





·
            the
                incurrence of amortization expenses;




·
            possible
                future goodwill impairment if the financial results and subsequent
                forecasted financial results are lower than those estimated at the
                time of
                the acquisition; and





·
            possible
                dilution to our shareholders.





In
      the
      past, we have acquired financially distressed businesses which had lost
      customers prior to our acquisition due in part to their financial instability.
      While we are generally successful in retaining the remaining customers of these
      businesses after we acquire them, we may be unable to recover customers already
      lost by these financially distressed businesses. We have also frequently used
      our common shares to pay the purchase price for acquisitions. Our common shares
      may not remain at a price at which they can be used for acquisitions without
      further diluting our existing shareholders, and potential acquisition candidates
      may not view our stock attractively. We
      may
      not be successful in overcoming these risks or any other problems encountered
      in
      connection with any acquisitions. These
      difficulties may increase our expenses, and our ability to achieve profitability
      may be adversely affected.




17





**Michael
      Mullarkey, our Chairman, Chief Executive Officer and President, may have
      interests that are different than other shareholders and may influence certain
      actions.**




As
      of May
      31, 2006, Michael Mullarkey, our Chairman, Chief Executive Officer and
      President, beneficially owned approximately 8% of our outstanding common shares.
      Mr. Mullarkey’s interests as a major shareholder may conflict with his fiduciary
      duties as an officer and director. Mr. Mullarkey’s interests may influence how
      Mr. Mullarkey votes on certain matters that require shareholder approval. Mr.
      Mullarkey may influence the outcome of various actions that require shareholder
      approval including the election of our directors, delaying or preventing a
      transaction in which shareholders might receive a premium over the prevailing
      market price for their shares and preventing changes in control or management.




**Future
      economic downturns may adversely affect the demand for our services.**




Historically,
      the general level of economic activity has significantly affected the demand
      for
      employment and recruitment services in our Career Networks segment. If the
      general level of economic activity slows, our clients may not require additional
      personnel and may delay or cancel plans that involve recruiting new personnel
      using our services and technology. Consequently, the time from initial contact
      with a potential client to the time of sale could increase and the demand for
      our services could decline, resulting in a loss of revenue harming our business,
      operating results and financial condition. In addition, it is expected that
      in
      times of economic growth, demand for our career transition services may
      decline.





**We
      may not be able to grow our client base and revenue because of competition
      we
      face** .




Our
      future success will depend to a large extent on our ability to grow and maintain
      our client base and revenue. This requires that we offer services that are
      superior to the services being offered by the competition that we face and
      that
      we price our services competitively. The market for human capital management,
      or
      HCM, services is highly fragmented and competitive, with numerous of companies
      offering products or services that compete with one or more of the services
      that
      we offer. We compete for a portion of employers’ recruiting budgets with many
      types of competitors, as employers typically utilize a variety of sources for
      recruiting, including:




·  traditional
      offline recruiting firms;





·  traditional
      offline advertising, such as print media;





·  resume
      processing companies;





·  Web-based
      recruitment companies;





·  Internet
      job posting companies; and





·  client-server-based
      software services.





In
      addition, many employers are developing or may develop their own software to
      satisfy their recruitment needs. We also compete with traditional offline and
      web-based outplacement service companies and human resource, or HR, service
      providers. While we do not believe that any of our competitors offer the full
      suite of services that we provide, there are a number of companies that have
      products or services that compete with one or more of the services we provide.
      For instance, companies that compete with our Recruitment Systems services
      include Taleo Corporation, Webhire and Kenexa. Companies such as Monster
      Worldwide, Execunet and Netshare have products or services that compete with
      our
      applicant sourcing and exchange services. We also compete with vendors of
      enterprise resource planning software, such as PeopleSoft, Oracle, and SAP.
      In
      the area of career transition services, we compete with companies such as
      McKenzie Scott and WSA Corp. Finally, companies such as LifeCare, Next Jump
      and
      SparkFly compete with our employee portal services.





We
      expect
      competition to increase and intensify in the future, with increased price
      competition developing for our services. A number of our current and potential
      competitors have longer operating histories and greater financial, technical
      and
      marketing resources and name recognition than we do, which could give them
      a
      competitive advantage. Our competitors may develop products or services that
      are
      equal or superior to ours or that achieve greater market acceptance than ours.
      It is also possible that new competitors may emerge and rapidly acquire
      significant market share. As a result, we may not be able to expand or maintain
      our market share and our ability to penetrate new markets may be adversely
      affected.




18





**If
      we experience client attrition, our operating results**  **will
      be adversely affected** .




Our
      Enterprise Workforce Services clients generally enter into subscription
      agreements covering various periods for at least one year and typically for
      an
      average of three years. We have no assurance that these clients will maintain
      a
      long-term relationship with us. If these clients fail to renew or cancel their
      subscriptions with us, our business, revenues, operating results and financial
      condition will be adversely affected. To the extent we experience significant
      client attrition, we must attract additional clients to maintain
      revenue.




**We
      may not be able to strengthen and maintain awareness of**  **our
      brand name** .




We
      believe that our success will depend to a large extent on our ability to
      successfully develop, strengthen and maintain the recognition and reputation
      of
      our Workstream brand name. In order to strengthen and maintain our Workstream
      brand recognition and reputation, we will need to increase our investment in
      our
      marketing efforts and continue to maintain high standards for actual and
      perceived quality, usefulness, reliability, security and ease of use of our
      services. If we fail to successfully promote and maintain our Workstream brand
      name, particularly after incurring significant expenses in promoting our
      Workstream brand name, or encounter legal obstacles which prevent our continued
      use of our Workstream brand name, our business, operating results and financial
      condition could be materially adversely affected and the market price of our
      common shares could decline. Moreover, even if we continue to provide quality
      service to our clients, factors outside of our control, including actions by
      organizations that are mistaken for us and factors generally affecting our
      industry, could affect our Workstream brand and the perceived quality of our
      services.




**Our
      failure to enter into strategic relationships with third parties may harm our
      business.**




If
      we are
      unable to enter into or maintain certain strategic relationships, our business
      will suffer. These relationships generally include those with job posting boards
      and other on-line recruitment services such as Monster.com and Yahoo!hotjobs
      pursuant to which our clients can post their job openings on such boards. These
      relationships allow us to expand the services that we provide our clients
      without our having to spend significant capital resources developing or
      acquiring such services. Because many of these third parties compete with each
      other, the existence of a relationship with any particular third party may
      limit
      or preclude us from entering into a relationship with that third party’s
      competitors. In addition, some of the third parties with which we seek to enter
      into relationships may view us as a competitor and refuse to do business with
      us. Any loss of an existing relationship or failure to establish new
      relationships may adversely affect our ability to improve our services, offer
      an
      attractive service in the new markets that we enter, or expand the distribution
      of our services .




**Because
      we have international operations, we may face special economic and regulatory
      challenges that we may not be able to meet.**




We
      expect
      to continue to expand our U.S. and Canadian operations through both organic
      growth and acquisitions and may spend significant financial and managerial
      resources to do so. Our international operations are subject to certain risks,
      including:




·
            changes
                in regulatory requirements, tariffs and trade
                barriers;




·
            changes
                in diplomatic and trade
                relationships;




·
            potentially
                adverse tax consequences;




·
            the
                impact of recessions in economies outside of
                Canada;




·
                the
                    burden of complying with a variety of foreign laws and regulations,
                    and
                    any unexpected changes
                    therein;




·
            political
                or economic constraints on international trade or instability;
                and




·
            fluctuations
                in currency exchange rates.




19




**We
      may lose business if we are unable to successfully**  **develop
      and introduce new products, services and features** .




If
      we are
      unable to develop and introduce new products, services, or enhancements to,
      or
      new features for, existing products or services, in a timely and successful
      manner, we may lose sales opportunities. The market for our services is
      characterized by rapid and significant technological advancements, the
      introduction of new products and services, changes in client demands and
      evolving industry standards. The adoption of new technologies or new industry
      standards may render our products obsolete and unmarketable. The process of
      developing new services or technologies is complex and requires significant
      continuing efforts. We may experience difficulties or funding shortages that
      could delay or prevent the successful development, introduction and sale of
      enhancements or new products and services. Moreover, new products, services
      or
      features which we introduce may not adequately address the needs of the
      marketplace or achieve significant market acceptance.




**Our
      business could suffer if financing is not available**  **when
      required or is not available on acceptable terms** .




Our
      future capital requirements depend on a number of factors, including our ability
      to generate positive cash flow, cash required by future acquisitions,
      anticipated capital expenditures, the development of new services or
      technologies and our projected operations. We believe that we have sufficient
      credit facilities, cash flow from operations and cash reserves, which, together
      with further cost reductions, will permit us to meet our working capital
      requirements and capital expenditure requirements through at least May 31,
      2007.
      However, it is possible that we may need to raise additional funds sooner than
      expected in order to fund expansion, develop new, and enhance existing, services
      or acquire complementary businesses or technologies or if our revenues are
      less
      or our expenses are greater than we expect. Our ability to obtain financing
      depends on a number of factors, including our ability to generate positive
      cash
      flow from operations, the amount of our cash reserves, the amount and terms
      of
      our existing debt arrangements, the availability of sufficient collateral and
      the prospects of our business. If financing is not available when required
      or is
      not available on acceptable terms, it may impair our ability to:




·  keep
      up
      with technological advances;





·  pursue
      acquisition opportunities;





·  develop
      product enhancements;





·  make
      capital expenditures;





·  respond
      to business opportunities;





·  address
      competitive pressures or adverse industry developments; or





·  withstand
      economic or business downturns.





**Future
      financings may be on terms adverse to your interests** .




In
      the
      past we have issued, and in the future we may issue, equity to raise additional
      funds. In July 2004, we issued 4,444,439 common shares at $2.25 per common
      share
      for a total of $9,999,988. In December 2004, we issued 4,996,667 common shares
      at $3.00 per share and warrants to purchase 2,498,333 common shares at $3.50
      per
      share resulting in aggregate proceeds of $14,994,001. If we issue additional
      securities, our existing shareholders may be further diluted and holders of
      those new securities may have dividend, liquidation, voting and other rights
      senior to those of the holders of our common shares.




20




**The
      power of our board of directors to designate and issue shares of stock could
      have an adverse effect on holders of our common shares.**




We
      are
      authorized to issue an unlimited number of common shares, which may be issued
      by
      our board of directors for such consideration as they may consider sufficient
      without seeking shareholder approval. The issuance of additional common shares
      in the future will reduce the proportionate ownership and voting power of
      current shareholders. Our Articles of Incorporation also authorize us to issue
      an unlimited number of Class A Preferred Shares, the rights and preferences
      of
      which may be designated by our board of directors without shareholder approval.
      The designation and issuance of Class A Preferred Shares in the future could
      create additional securities that would have dividend, liquidation and voting
      preferences prior in right to the outstanding common shares. These provisions
      could also impede a change of control.





**If
      we are characterized as a passive foreign investment**  **company,
      our U.S. shareholders may suffer adverse tax consequences** .




We
      believe that we were not a passive foreign investment company for U.S. federal
      income tax purposes for fiscal years 2004, 2005 and 2006. Generally, we may
      be
      characterized as a passive foreign investment company for U.S. federal income
      tax purposes if for any taxable year 75% of our gross income is passive income,
      or at least 50% of our assets are held for the production of, or produce,
      passive income. This characterization could result in adverse U.S. tax
      consequences to our shareholders. These consequences may include having gains
      realized on the sale of our common shares treated as ordinary income, rather
      than capital gain income, and having potentially punitive interest charges
      apply
      to the proceeds of share sales. U.S. shareholders should consult with their
      own
      U.S. tax advisors with respect to the U.S. tax consequences of investing in
      our
      common shares.




**Our
      business could be adversely affected if we are unable**  **to
      protect our proprietary technologies** .




Our
      success depends to a significant degree upon the protection of our proprietary
      technologies and brand names. The unauthorized reproduction or other
      misappropriation of our proprietary technologies could provide third parties
      with access to our technologies without payment. If this were to occur, our
      proprietary technologies would lose value and our business, operating results
      and financial condition could be materially adversely affected. We rely upon
      a
      combination of copyright, trade secret and trademark laws and non-disclosure
      and
      other contractual arrangements to protect our proprietary rights. The measures
      we have taken to protect our proprietary rights, however, may not be adequate
      to
      deter misappropriation of proprietary information or protect us if
      misappropriation occurs. Policing unauthorized use of our technologies and
      other
      intellectual property is difficult, particularly because of the global nature
      of
      the internet. We may not be able to detect unauthorized use of our proprietary
      information and take appropriate steps to enforce our intellectual property
      rights. If we resort to legal proceedings to enforce our intellectual property
      rights, the proceedings could be burdensome and expensive and could involve
      a
      high degree of risk.




**Third
      parties could claim that we infringe upon their**  **proprietary
      technologies** .




Our
      products, services, content and brand names may be found to infringe valid
      copyrights, trademarks or other intellectual property rights held by third
      parties. In the event of a successful infringement claim against us and our
      failure or inability to modify our technologies or services, develop
      non-infringing technology or license the infringed or similar technology, we
      may
      not be able to offer our services. Any claims of infringement, with or without
      merit, could be time consuming to defend, result in costly litigation, divert
      management attention, require us to enter into costly royalty or licensing
      arrangements, modify our technologies or services or prevent us from using
      important technologies or services, any of which could harm our business,
      operating results and financial condition.




**We
      may become subject to burdensome government regulation which could increase
      our
      costs of doing business, restrict our**  **activities
      and/or subject us to liability** .




Uncertainty
      and new regulations relating to the internet could increase our costs of doing
      business, prevent us from providing our services, slow the growth of the
      internet or subject us to liability, any of which could adversely affect our
      business, operating results and prospects. In addition to new laws and
      regulations being adopted, existing laws may be applied to the internet. There
      are currently few laws and regulations directly governing access to, or commerce
      on, the internet. However, due to the increasing popularity and use of the
      internet, the legal and regulatory environment that pertains to the internet
      is
      uncertain and continues to change. New and existing laws may cover issues which
      include:




21




·  user
      privacy;





·  pricing
      controls;





·  consumer
      protection;





·  libel
      and
      defamation;





·  copyright
      and trademark protection;





·  characteristics
      and quality of services;





·  sales
      and
      other taxes; and





·  other
      claims based on the nature and control of Internet materials.





The
      Canadian Federal Government enacted privacy legislation which requires us to
      appoint an individual responsible for the administration of personal
      information, to implement policies and practices to protect personal
      information, to provide access to information and to deal with complaints.
      We
      must obtain individual consents for each collection, use or retention of
      personal information. We implemented procedures to comply with this new privacy
      legislation. The privacy legislation increases our cost of doing business due
      to
      the administrative burden of these laws, restricts our activities in light
      of
      the consent requirement and potentially subjects us to monetary liability for
      breach of these laws.





**Computer
      viruses or software errors may disrupt our operations, subject us to a risk
      of
      loss and/or expose us to liability** .




Computer
      viruses may cause our systems to incur delays or other service interruptions.
      In
      addition, the inadvertent transmission of computer viruses or software errors
      in
      new services or products not detected until after their release could expose
      us
      to a material risk of loss or litigation and possible liability. Moreover,
      if a
      computer virus affecting our system is highly publicized or if errors are
      detected in our software after it is released, our reputation and brand name
      could be materially damaged and we could lose clients.




**We
      may experience reduced revenue, loss of clients and harm**  **to
      our reputation and brand name in the event of system
      failures** .




We
      may
      experience reduced revenue, loss of clients and harm to our reputation and
      brand
      name in the event of unexpected network interruptions caused by system failures.
      Our servers and software must be able to accommodate a high volume of traffic.
      If we are unable to add additional software and hardware to accommodate
      increased demand, we could experience unanticipated system disruptions and
      slower response times. Our systems are vulnerable to damage or interruption
      from
      earthquakes, floods, fires, power loss, telecommunication failures, terrorist
      attacks, computer viruses and similar events. While we have established
      redundant systems and implemented disaster recovery procedures, they may not
      be
      sufficient for all eventualities. We have occasionally experienced delays in
      providing our customers access to their data in the past, and we believe these
      system interruptions could continue to occur from time to time in the future.
      Any catastrophic failure at our network operations center could prevent us
      from
      serving our clients for a number of days, or possibly weeks, and any failure
      of
      our internet service provider may adversely affect our network’s performance.
      Most of our system interruptions are due to heavy internet traffic and minor
      equipment failures which generally result in our customers being unable to
      access their data for a few seconds or several minutes. Our clients may become
      dissatisfied by any system failure that interrupts our ability to provide our
      services to them or results in slower response times. Our subscription
      agreements generally provide that our customers will be able to access their
      data during certain guaranteed times. If we fail to meet the service levels
      specified under our subscription agreements as a result of repeated outages,
      the
      customer can terminate its agreement with us. Our business interruption
      insurance may not adequately compensate us for any losses that may occur due
      to
      any failures in our system or interruptions in our services.




22




**Breaches
      of our network security could be costly** .




If
      unauthorized persons penetrate our network security, they could misappropriate
      proprietary information or cause interruptions in our services. We may be
      required to spend capital and resources to protect against or to alleviate
      these
      problems. In addition, because we host data for our clients, we may be liable
      to
      any of those clients that experience losses due to our security failures. While
      we have implemented measures to strengthen and improve our intrusion protection
      system and have also passed a SAS 70 Type 1 best practices evaluation, this
      is
      not an absolute guarantee that security breakdowns will not occur. As a result,
      a material security breach could have a material adverse effect on our business
      and the market price of our common shares may decline.




**Our
      business may be adversely affected if internet service providers fail to provide
      satisfactory service to our clients to enable them to use
      our**  **services
      and access job seeker candidates on-line** .




Failure
      of internet service providers or on-line service providers to provide access
      to
      the internet to our clients and job seekers would prevent them from accessing
      our web board, which would cause our business to suffer. Many of the internet
      service providers, on-line service providers and other web site operators on
      which we depend have experienced significant service slowdowns, malfunctions,
      outages and capacity limitations. If users experience difficulties using our
      services due to the fault of third parties, our reputation and brand name could
      be harmed.




**Failure
      of the internet infrastructure to support current and future user activity
      may
      adversely affect our business.**




We
      cannot
      assure you that the Internet infrastructure will continue to effectively support
      the demands placed on it as the internet continues to experience increased
      numbers of users, greater frequency of use and increased bandwidth requirements
      of users. In the past, the internet has experienced a variety of outages and
      other delays. The internet is also subject to actions of terrorists or hackers
      who may attempt to disrupt specific web sites or Internet traffic generally.
      Any
      future outages or delays could affect the willingness of employers to use our
      on-line recruitment offerings and of job seekers to post their resumes on the
      internet. If any of these events occur, our business, operating results and
      financial condition could be materially adversely affected.




**We
      may not expand and upgrade our systems and hardware in a timely manner in order
      to accommodate growth in our business, which could adversely affect our
      business.**




We
      must
      expand and upgrade our systems and network hardware in order to accommodate
      growth in our business. While we are currently in the process of updating and
      refreshing our data center capabilities and have secured lease financing for
      the
      required equipment, there is no assurance that such changes and upgrades will
      be
      made in a timely manner to accommodate any growth in our business, our business,
      financial condition and operating results could be adversely
      affected.




**Our
      common shares have traded at prices below $1.00 and could be subject to
      delisting by NASDAQ.**




Our
      common stock currently trades on the NASDAQ Small Cap Market and the Boston
      Stock Exchange. Under the NASDAQ requirements, a stock can be delisted and
      not
      allowed to trade on the NASDAQ if the closing bid price of the stock over a
      30
      consecutive trading-day period is less than $1.00. The Boston Stock Exchange,
      however, does not maintain a similar minimum price requirement. During the
      fourth quarter of fiscal 2003, our common stock failed to meet the NASDAQ
      minimum bid price requirement because the closing bid price for 30 consecutive
      trading days was below $1.00. In July 2003, NASDAQ gave us notice that we
      regained compliance with the minimum bid price rule because the closing bid
      price of our common shares had been $1.00 or more for at least 10 consecutive
      trading days. No assurance can be given that the closing bid price of our common
      shares will continue to satisfy the NASDAQ minimum bid price requirements and
      thus continue to trade on the NASDAQ Small Cap Market. Although our common
      shares may remain listed on the Boston Stock Exchange, if our common shares
      are
      delisted from the NASDAQ Small Cap Market, there may be a limited market for
      our
      shares, trading our stock may become more difficult and our share price could
      decrease even further. If our common shares are not listed on a national
      securities exchange or NASDAQ, potential investors may be prohibited from or
      be
      less likely to purchase our common shares, limiting the trading market for
      our
      stock even further.




23




**We
      may become subject to the SEC’s penny stock rules, which may decrease the
      liquidity of our common shares and negatively impact the ability of purchasers
      of our common shares to sell our common shares in the secondary market.**




SEC
      regulations generally define a penny stock as an equity security that has a
      market price of less than $5.00 per share, subject to certain exceptions. We
      are
      not currently subject to the penny stock rules because our common shares qualify
      for two separate exceptions to the SEC’s penny stock rules. The first exception
      from the penny stock rules for which we qualify is an exception for companies
      that have an equity security that is quoted on the NASDAQ Stock Market. Since
      our common shares are traded on the NASDAQ Small Cap Market, we are not subject
      to the penny stock rules. The second exception from the penny stock rules for
      which we qualify is an exception for companies that have average revenue of
      at
      least $6,000,000 for the last three years. Our revenue for fiscal 2006, fiscal
      2005, and fiscal 2004 was $28,120,662, $26,818,587 and $17,166,880 ,
      respectively, resulting in an average revenue of $24,035,376. If
      our
      common shares are delisted or removed from the NASDAQ Small Cap Market and
      if we
      fail to meet the average revenue exception to the penny stock rules, our common
      shares may become subject to the penny stock rules, which impose additional
      sales practice requirements on broker-dealers who sell our common shares. For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchaser of such securities and have received
      the purchaser’s written agreement to the transaction prior to purchase. In
      addition, unless an exception is available, the regulations require the
      delivery, prior to any transaction involving a penny stock, of a disclosure
      schedule explaining the penny stock market and the risks associated with it.
      If
      our common shares were considered penny stock, the ability of broker-dealers
      to
      sell our common shares and the ability of our shareholders to sell their
      securities in the secondary market would be limited. As a result, the market
      liquidity for our common shares would be severely and adversely affected. We
      cannot assure you that trading in our securities will not be subject to these
      or
      other regulations in the future which would negatively affect the market for
      our
      common shares.




**The
      price of our common shares historically has been volatile, which may make it
      more difficult for you to resell our common shares when you want at prices
      you
      find attractive.**




The
      market price of our common shares has been highly volatile in the past, and
      may
      continue to be volatile in the future. For example, since June 1, 2004, the
      closing sale price of our common shares on the NASDAQ Small Cap Market has
      fluctuated between $1.20 and $5.35 per share. The following factors may
      significantly affect the market price of our common shares:




·
            quarterly
                variations in our results of
                operations;




·
                announcement
                    of new products, product enhancements, joint ventures and other
                    alliances
                    by our competitors or
                    us;




·
            technological
                innovations by our competitors or us;




·
            general
                market conditions or market conditions specific to particular industries;
                and




·
                the
                    operating and stock price performance of other companies that
                    investors
                    may deem comparable to us.




In
      addition, the stock market in general, and the market prices for
      internet-related companies in particular, have experienced extreme volatility
      that often has been unrelated to the operating performance of such companies.
      These broad market and industry fluctuations may adversely affect the price
      of
      our common shares, regardless of our operating performance. (See Risk Factor
      “Our common shares have traded at prices below $1.00 and could be subject to
      delisting by NASDAQ.”)




24




**The
      use of performance-based payment provisions in our acquisitions may result
      in
      costly legal proceedings.**




We
      often
      require that a portion of the total purchase price in our acquisitions be
      contingent upon the acquired company’s achievement of certain performance-based
      milestones. We believe that the use of contingent performance-based payment
      provisions more closely matches the price we pay with the value we receive.
      However, the use of these provisions has resulted and may continue to result
      in
      disputes over whether the performance-based milestones have been achieved.
      Resolving these disputes could result in costly legal proceedings and divert
      management attention.




**We
      depend on our key employees to manage our business effectively, and if we are
      unable to retain our key employees, our business may be adversely
      affected.**




Our
      success depends on the efforts, abilities and expertise of our senior management
      and other key employees, including in particular, Michael Mullarkey, our
      President and Chief Executive Officer, and Stephen Lerch, our Executive Vice
      President, Chief Operation and Financial Officer. There can be no assurance
      that
      we will be able to retain our key employees. If any of our key employees leave
      before suitable replacements are found, there could be an adverse effect on
      our
      business. There can be no assurance that suitable replacements could be hired
      without incurring substantial additional costs, or at all.





ITEM
      1B.
      UNRESOLVED STAFF COMMENTS





None.





ITEM
      2.
      PROPERTIES





Our
      corporate headquarters and principal research and development, customer support,
      and network operations are located in approximately 17,100 square feet of leased
      office space in Ottawa, Ontario, Canada. Our lease for this facility expires
      in
      September 2010.




In
      addition, we lease approximately 20,700 square feet of office space in Maitland,
      Florida, which serves as the headquarters of our subsidiary, Paula Allen
      Holdings. In addition, our finance and human resources department and our
      internal sales team reside in this space. Our lease for this premise expires
      in
      April 2009.




As
      part
      of the acquisitions over the past several years, we assumed several facility
      leases, some of which we extended beyond the assumed term. We lease
      approximately 7,100 square feet of office space in Burlingame, California that
      was assumed as part of the Kadiri acquisition and expires in April 2008. We
      lease approximately 15,700 square feet of office space in White Plains, New
      York
      that was assumed as part of the ProAct acquisition and expires in September
      2007. We lease approximately 9,400 square feet of office space in Fairfield,
      Iowa that was assumed as part of the HRSoft acquisition and expires in February
      2008. Finally, we lease 2,500 square feet of office space in Chicago, Illinois
      month to month and 1,500 square feet of office space in Victoria, British
      Columbia, Canada that expires in April 2007. Both of these leases were assumed
      as part of the Exxceed acquisitions.




We
      also
      lease space for sales and corporate offices in another five locations, primarily
      under one to three year leases, usually with renewal options. We believe that
      our facilities are adequate for our current needs.




25




ITEM
      3.
      LEGAL PROCEEDINGS





In
      July
      2005, a direct competitor filed a complaint against the Company in U.S. District
      Court in the District of Massachusetts. The plaintiff asserted that Workstream
      interfered with the contractual relationship between it and a former member
      of
      its executive management team. This issue was resolved during the second quarter
      of fiscal 2006 with a payment of approximately $60,000.





On
      or
      about August 10, 2005, a class action lawsuit was filed against the Company,
      its
      Chief Executive Officer and its former Chief Financial Officer in the United
      States District Court for the Southern District of New York.  The action,
      brought on behalf of a purported class of purchasers of the Company’s common
      shares during the period from January 14, 2005 to and including April 14, 2005, alleges ,
      among
      other things, that management provided the market misleading guidance as to
      anticipated revenues for the quarter end ed February
      28, 2005, and failed to correct this guidance on a timely basis.  The
      action claims violations of Section 10(b) of the Securities Exchange Act of
      1934
      (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, as well as Section
      20(a) of the Exchange Act, and seeks compensatory damages in an unspecified
      amount as well as the award of reasonable costs an d
      expenses, including counsel and expert fees and costs . 
      In December 2005, the plaintiffs filed an amended complaint which
      added additional plaintiffs and sought to elaborate on the allegations
      contained in the complaint. The defendant’s counsel filed a motion to dismiss
      the complaint, which motion was denied. Plaintiffs have moved to confirm a
      class
      of purchases of the Company’s shares during the class period. Briefing on that
      motion is expected to conclude in the fall of 2006. Discovery remains in the
      early stages, and the Company intends to defend the action vigorously. We expect
      the trial to occur in or about late 2007.





The
      Company is subject to other legal proceedings and claims which arise in the
      ordinary course of business. The Company does not believe that the resolution
      of
      such actions will materially affect the Company’s business, results of
      operations or financial condition.





ITEM
      4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year covered by this report.




26


ITEM
      4A.
      EXECUTIVE OFFICERS OF THE REGISTRANT





The
      following table sets forth information concerning our executive officers,
      including their ages, positions and tenure as of May 31, 2006:




Name
            Age
            Officer
                Since
            PositionMichael
                Mullarkey
            38
            2001
            Chairman
                of the Board of Directors, President and Chief Executive OfficerStephan
                Lerch
            52
            2005
            Executive
                Vice President, Chief Operating and Financial
                Officer







*Michael
      Mullarkey* has been
      the Chairman of our Board of Directors since November 2001 and our Chief
      Executive Officer since April 2001. In April 2003, Mr. Mullarkey assumed the
      responsibilities of President, a position he previously held from April 2001
      until November 2001. From January 2001 to April 2001, Mr. Mullarkey was the
      President, Secretary and a Director of Paula Allen Holdings, Inc., a full
      service outplacement firm in the United States, which we acquired in April
      2001.
      From October 1999 to December 2000, Mr. Mullarkey returned to Sony Corporation
      where he served as General Manager. From January 1998 to September 1999, Mr.
      Mullarkey was the co-founder and managing director of Information Technology
      Mergers & Acquisitions, LLC, an investment capital group managing private
      equity funding and investing in emerging technology markets and organizations.
      From October 1989 to February 1997, Mr. Mullarkey was employed by Sony
      Corporation of America, a subsidiary of Sony Corporation, where his most recent
      position was Vice President and General Manager. Prior to serving as Sony
      Corporation of America’s Vice President and General Manager, Mr. Mullarkey
      served as its National Sales Manager, a position he held from 1992 to 1994,
      and
      prior to that he served as one of its Sales Executives.




*Stephen
      Lerch* has
      been
      our Executive Vice President, Chief Operating and Financial Officer since April
      2005. He is in charge of our financial, human resources, legal and
      administrative affairs and has operational oversight responsibility. From April
      2003 to January 2004, Mr. Lerch was the Executive Vice President and Chief
      Operating Officer of Rewards Network Inc/iDine Rewards Network Inc. Rewards
      Network Inc. is a provider of dining and hotel rewards and credit card loyalty
      programs. In this position, Mr. Lerch directed operations of merchant sales
      and
      support, contract administration, information technology and corporate and
      partner development. Prior to this position, Mr. Lerch held the position of
      Executive Vice President and Chief Financial Officer from February 1997 to
      August 2003 where he was responsible for all traditional CFO responsibilities
      including internal and external reporting, budgeting, treasury, banking, human
      resources and Audit Committee and Board meetings.




27





**PART
      II**





ITEM
      5.
      MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





MARKET
      PRICE OF COMMON SHARES





Our
      common shares are listed on the NASDAQ Small Cap Market under the symbol “WSTM”
and on the Boston Stock Exchange under the symbol “ERM.” The principal United
      States market for our common shares is the NASDAQ Small Cap Market. The
      following table sets forth, for the periods indicated, the high and low sales
      prices of our common shares as reported on the NASDAQ Small Cap Market. As
      of
      July 10, 2006, there were approximately 220 holders of record of our common
      shares.





PRICE
                OF COMMON SHARESPeriod
            High
            LowJune
                1, 2004 - August 31, 2004
            $3.09
            $2.26September
                1, 2004 - November 30, 2004
            $3.44
            $2.56December
                1, 2004 - February 29, 2005
            $4.75
            $2.60March
                1, 2005 - May 31, 2005
            $5.35
            $1.68June
                1, 2005 - August 31, 2005
            $1.80
            $1.48September
                1, 2005 - November 30, 2005
            $1.72
            $1.20December
                1, 2005 - February 28, 2006
            $2.17
            $1.23March
                1, 2006 - May 31, 2006
            $2.47
            $1.30








DIVIDEND
      POLICY





We
      have
      not paid any cash dividends on our common shares and do not anticipate paying
      cash dividends in the foreseeable future. We intend to retain future earnings
      for use in our business.





There
      is
      no law or government decree or regulation in Canada that restricts the export
      or
      import of capital, or that affects the remittance of dividends, interest or
      other payments to a non-resident holder of common shares, other than withholding
      tax requirements. See “Taxation.”





There
      is
      no limitation imposed by Canadian law or by our articles or other charter
      documents on the right of a non-resident of Canada to hold or vote our common
      shares, other than as provided in the Investment Canada Act, as amended,
      referred to as the Investment Act.





The
      Investment Act generally prohibits implementation of a reviewable investment
      by
      an individual, government or agency thereof, corporation, partnership, trust
      or
      joint venture that is not a "Canadian" as defined in the Investment Act,
      referred to as a non-Canadian, unless, after review, the minister responsible
      for the Investment Act is satisfied that the investment is likely to be of
      net
      benefit to Canada. If an investment by a non-Canadian is not a reviewable
      investment, it nevertheless requires the filing of a short notice which may
      be
      given at any time up to 30 days after the implementation of the investment.





An
      investment in our common shares by a non-Canadian that is a WTO investor
      (defined below) would be reviewable under the Investment Act if it were an
      investment to acquire direct control, through a purchase of our assets or voting
      interests, and the gross book value of our assets equaled or exceeded $237
      million, the threshold established for 2004, as indicated in our financial
      statements for our fiscal year immediately preceding the implementation of
      the
      investment. In subsequent years, such threshold amount may be increased or
      decreased in accordance with the provisions of the Investment Act. A WTO
      investor is an investment by an individual or other entity that is a national
      of, or has the right of permanent residence in, a member of the World Trade
      Organization, current members of which include the European Community, Germany,
      Japan, Mexico, the United Kingdom and the United States, or a World Trade
      Organization (WTO) investor-controlled entity, as defined in the Investment
      Act.




28





An
      investment in our common shares by a non-Canadian, other than a WTO investor,
      would be subject to review under the Investment Act if it were an investment
      to
      acquire our direct control and the value of the assets were $5.0 million or
      more, as indicated on our financial statements for our fiscal year immediately
      preceding the implementation of the investment.





A
      non-Canadian, whether a WTO investor or otherwise, would acquire control in
      us
      for the purposes of the Investment Act if he, she or it acquired a majority
      of
      our common shares or acquired all or substantially all of the assets used in
      conjunction with our business. The acquisition of less than a majority, but
      one-third or more of our common shares, would be presumed to be an acquisition
      of control in us unless it could be established that we were not controlled
      in
      fact by the acquirer through the ownership of common shares.





The
      Investment Act would not apply to certain transactions in relation to our common
      shares including:





(a)
            an
                acquisition of our common shares by any person if the acquisition
                were
                made in the ordinary course of that person's business as a trader
                or
                dealer in securities;





(b)
            an
                acquisition of control in us in connection with the realization of
                security granted for a loan or other financial assistance and not
                for any
                purpose related to the provisions of the Investment Act;
                and





(c)
            an
                acquisition of control in us by reason of an amalgamation, merger,
                consolidation or corporate reorganization following which the ultimate
                direct or indirect control in fact in us through the ownership of
                voting
                interests, remains unchanged.




PURCHASES
      OF EQUITY SECURITIES




We
      did
      not repurchase any common shares or other equity securities during fiscal
      2006.




TAXATION




MATERIAL
      CANADIAN FEDERAL INCOME TAX CONSIDERATIONS




The
      following is a summary of the material Canadian federal income tax
      considerations generally applicable to a person who acquires our common shares
      and who, for purposes of the Income Tax Act (Canada) and the Canada-United
      States Income Tax Convention, 1980, as applicable, and at all relevant times,
      is
      a U.S. holder. Readers are cautioned that this is not a complete technical
      analysis or listing of all potential tax effects that may be relevant to holders
      of our common shares. In particular, this discussion does not deal with the
      tax
      consequences applicable to all categories of investors, some of which may be
      subject to special rules, and does not address the tax consequences under
      Canadian provincial or territorial tax laws, or tax laws of jurisdictions
      outside of Canada. Accordingly, you should consult your own advisor regarding
      the particular tax consequences to you of an investment in our common shares.
      This summary is based on the advice of our Canadian counsel, Perley-Robertson,
      Hill & McDougall.




For
      purposes of the Income Tax Act (Canada) and the Canada-United States Income
      Tax
      Convention, 1980, a U.S. holder is a person that:




·
            Through
                the period during which the person owns our common shares is not
                resident
                in Canada and is a resident of the United
                States;




·
            Holds
                our common shares as capital assets, that is generally as
                investments;




·
            Deals
                at arm’s length with us within the meaning of the Income Tax Act
                (Canada);




·
            Does
                not have a permanent establishment or fixed base in Canada, as defined
                by
                the Canada-United States Income Tax Convention, 1980; and




·
            Does
                not own and is not treated as owning, 10% or more of our outstanding
                voting shares.





29




Special
      rules, which we do not address in this discussion, may apply to a U.S. holder
      that is (a) an insurer that carries on an insurance business in Canada and
      elsewhere, or (b) a financial institution subject to special provisions of
      the
      Income Tax Act (Canada) applicable to income gain or loss arising from
      mark-to-market property.




This
      discussion is based on the current provisions of the Canada-United States Income
      Tax Convention, 1980, the Income Tax Act (Canada) and their regulations, all
      specific proposals to amend the Income Tax Act (Canada) and regulations, all
      specific proposals to amend the Income Tax Act (Canada) and regulations
      announced by the Minster of Finance (Canada) before the date of this annual
      report and counsel’s understanding of the current published administrative
      practices of Canada Customs and Revenue Agency. This discussion is not
      exhaustive of all potential Canadian tax consequences to a U.S. holder and
      does
      not take into account or anticipate any other changes in law, whether by
      judicial, governmental or legislative decision or action, nor does it take
      into
      account the tax legislation or considerations of any province, territory or
      foreign jurisdiction.




TAXATION
      OF DIVIDENDS




Dividends
      paid or credited or deemed to be paid or credited on common shares owned by
      a
      U.S. holder will be subject to Canadian withholding tax under the Income Tax
      Act
      (Canada) at a rate of 25% on the gross amount of the dividends. The rate of
      withholding tax generally is reduced under the Canada-United States Income
      Tax
      Convention, 1980 to 15% where the U.S. holder is the beneficial owner of the
      dividends. Under the Canada-United States Income Tax Convention, 1980, dividends
      paid to religious, scientific, charitable and similar tax exempt organizations
      and pension organizations that are resident and exempt from tax in the United
      States and that have complied with the administrative procedures specified
      in
      the Tax Convention are exempt from this Canadian withholding tax.




TAXATION
      OF CAPITAL GAINS




Gain
      realized by a U.S. holder on a sale, disposition or deemed disposition of our
      common shares generally will not be subject to tax under the Income Tax Act
      (Canada) unless the common shares constitute taxable Canadian property within
      the meaning of the Income Tax Act (Canada) at the time of the sale, disposition
      or deemed disposition. Our common shares generally will not be taxable Canadian
      property provided that: (a) they are listed on a prescribed stock exchange,
      and
      (b) at no time during the five-year period immediately preceding the sale,
      disposition or deemed disposition, did the U.S. holder, persons with whom the
      U.S. holder did not deal at arm’s length, or the U.S. Holder acting together
      with those persons, own or have an interest in or a right to acquire 25% or
      more
      of the issued shares of any class or series of our shares. A deemed disposition
      of common shares will occur on the death of a U.S. holder.




If
      our
      common shares are taxable Canadian property to a U.S. holder, any capital gain
      realized on a disposition or deemed disposition of those shares will generally
      be exempt from tax under the Income Tax Act (Canada) by the Canada-United States
      Income Tax Convention, 1980, so long as the value of our common shares at the
      time of the sale, disposition or deemed disposition is not derived principally
      from real property situated in Canada, as defined by the Canada-United States
      Income Tax Convention, 1980. We have advised that currently our common shares
      do
      not derive their value principally from real property situated in Canada;
      however, the determination as to whether Canadian tax would be applicable on
      a
      sale, disposition or deemed disposition of common shares must be made at the
      time of that sale, disposition or deemed disposition.




30




UNITED
      STATES FEDERAL INCOME TAX CONSIDERATIONS




GENERAL




Subject
      to the limitations described below, the following discussion describes the
      material United States federal income tax consequences to a U.S. Holder (as
      defined below) that is a beneficial owner of the common shares of Workstream
      Inc. and that holds them as capital assets. For purposes of this summary, a
      “U.S. Holder” is a beneficial owner of common shares who or that is for United
      States federal income tax purposes (i) a citizen or resident of the United
      States, (ii) a corporation (or other entity treated as a corporation for United
      States federal tax purposes) created or organized in the United States or under
      the laws of the United States or of any state or the District of Columbia,
      (iii)
      an estate, the income of which is includible in gross income for United States
      federal income tax purposes regardless of its source, or (iv) a trust, if a
      court within the United States is able to exercise primary supervision over
      the
      administration of the trust and one or more U.S. persons have the authority
      to
      control all substantial decisions of the trust.




This
      summary is for general information purposes only. It does not purport to be
      a
      comprehensive description of all of the tax considerations that may be relevant
      to owning the common shares. AS THIS IS A GENERAL SUMMARY, OWNERS OF COMMON
      SHARES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE U.S.
      FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS TO NON-U.S. TAX
      CONSEQUENCES, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF COMMON SHARES
      APPLICABLE TO THEIR PARTICULAR TAX SITUATIONS.




This
      discussion is based on current provisions of the U.S. Internal Revenue Code
      of
      1986, as amended, current and proposed U.S. Treasury regulations promulgated
      thereunder, and administrative and judicial decisions, as of the date hereof,
      all of which are subject to change, possibly on a retroactive basis. This
      discussion does not address all aspects of United States federal income taxation
      that may be relevant to any particular holder based on such holder’s individual
      circumstances. In particular, this discussion does not address the potential
      application of the alternative minimum tax or the United States federal income
      tax consequences to holders that are subject to special treatment,
      including:




·
            broker-dealers,
                including dealers in securities or
                currencies;




·
            insurance
                companies, regulated investment companies or real estate investment
                trusts;




·
            taxpayers
                that have elected mark-to-market
                accounting;




·
            tax-exempt
                organizations;




·
            financial
                institutions or “financial services
                entities”;




·
            taxpayers
                who hold common shares as part of a straddle, “hedge” or “conversion
                transaction” with other investments;




·
            holders
                owning directly, indirectly or by attribution at least 10% of our
                voting
                power;




·
            non-resident
                aliens of the United States;




·
            taxpayers
                whose functional currency is not the U.S. dollar; and




·
            taxpayers
                who acquire common shares as
                compensation.




This
      discussion does not address any aspect of United States federal gift or estate
      tax, or state, local or non-United States laws. Additionally, the discussion
      does not consider the tax treatment of partnerships or persons who hold common
      shares through a partnership or other pass-through entity. Certain material
      aspects of United States federal income tax relevant to a beneficial owner
      other
      than a U.S. Holder (a “Non-U.S. Holder”) also are discussed below.




31




EACH
      HOLDER OF COMMON SHARES IS ADVISED TO CONSULT SUCH PERSON’S OWN TAX ADVISOR WITH
      RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF PURCHASING, HOLDING
      OR DISPOSING OF COMMON SHARES.




TAXATION
      OF DIVIDENDS PAID ON COMMON SHARES




We
      have
      never paid cash dividends, and we currently do not intend to pay cash dividends
      in the foreseeable future. In the event that we do pay a dividend, and subject
      to the discussion of the passive foreign investment company, or PFIC, rules
      below, a U.S. Holder will be required to include in gross income as ordinary
      income the amount of any distribution paid on our common shares, including
      any
      Canadian taxes withheld from the amount paid, on the date the distribution
      is
      received to the extent the distribution is paid out of our current or
      accumulated earnings and profits, as determined for United States federal income
      tax purposes. In the case of non-corporate U.S. Holders, dividends may qualify
      for favorable tax treatment. Distributions in excess of such earnings and
      profits will be applied against and will reduce the U.S. Holder’s basis in the
      common shares and, to the extent in excess of such basis, will be treated as
      a
      gain from the sale or exchange of the common shares.




Distributions
      of current or accumulated earnings and profits paid in a currency other than
      the
      U.S. dollar to a U.S. Holder will be includible in the income of a U.S. Holder
      in a U.S. dollar amount calculated by reference to the exchange rate on the
      date
      the distribution is received. A U.S. Holder that receives a distribution in
      a
      currency other than the U.S. dollar and converts the non-U.S. currency into
      U.S.
      dollars subsequent to its receipt will have foreign exchange gain or loss based
      on any appreciation or depreciation in the value of the non-U.S. currency
      against the U.S. dollar, which will generally be U.S. source ordinary income
      or
      loss.




U.S.
      Holders will have the option of claiming the amount of any Canadian income
      taxes
      withheld at source either as a deduction from gross income or as a
      dollar-for-dollar credit against their United States federal income tax
      liability. Individuals who do not claim itemized deductions, but instead utilize
      the standard deduction, may not claim a deduction for the amount of any Canadian
      income taxes withheld, but such individuals may still claim a credit against
      their United States federal income tax liability. The amount of foreign income
      taxes which may be claimed as a credit in any year is subject to complex
      limitations and restrictions, which must be determined on an individual basis
      by
      each shareholder. The total amount of allowable foreign tax credits in any
      year
      cannot exceed the pre-credit U.S. tax liability for the year attributable to
      foreign source taxable income.




A
      U.S.
      Holder will be denied a foreign tax credit with respect to Canadian income
      tax
      withheld from dividends received on our common shares:




·
            if
                such U.S. Holder has not held the common shares for at least 16 days
                of
                the 30-day period beginning on the date which is 15 days before the
                ex-dividend date; or




·
            to
                the extent such U.S. Holder is under an obligation to make related
                payments on substantially similar or related
                property.




Any
      days
      during which a U.S. Holder has substantially diminished its risk of loss on
      the
      common shares are not counted toward meeting the 15-day holding period required
      by the statute. In addition, distributions of current or accumulated earnings
      and profits will be foreign source passive income for United States foreign
      tax
      credit purposes and will not qualify for the dividends received deduction
      otherwise available to corporations.




TAXATION
      OF THE DISPOSITION OF COMMON SHARES




Subject
      to the discussion of the PFIC rules below, upon the sale, exchange or other
      disposition of our common shares, a U.S. Holder will generally recognize capital
      gain or loss in an amount equal to the difference between the amount realized
      on
      the disposition and such U.S. Holder’s tax basis in the common shares (tax basis
      is usually the U.S. dollar cost of such common shares). If the common shares
      are
      publicly traded, a disposition of common shares will be considered to occur
      on
      the “trade date,” regardless of the U.S. Holder’s method of accounting. A U.S.
      Holder that uses the cash method of accounting calculates the U.S. dollar value
      of the proceeds received on the sale as of the date that the sale settles.
      However, a U.S. Holder that uses the accrual method of accounting is required
      to
      calculate the value of the proceeds of the sale as of the “trade date” and may
      therefore realize foreign currency gain or loss, unless such U.S. Holder has
      elected to use the settlement date to determine its proceeds of sale for
      purposes of calculating such foreign currency gain or loss. Capital gain from
      the sale, exchange or other disposition of the common shares held more than
      one
      year is long-term capital gain. Gain or loss recognized by a U.S. Holder on
      a
      sale, exchange or other disposition of common shares generally will be treated
      as United States source income or loss for United States foreign tax credit
      purposes. The deductibility of a capital loss recognized on the sale, exchange
      or other disposition of common shares is subject to limitations. In addition,
      a
      U.S. Holder that receives non-U.S. currency upon disposition of our common
      shares and converts the non-U.S. currency into U.S. dollars subsequent to its
      receipt will have foreign exchange gain or loss based on any appreciation or
      depreciation in the value of the non-U.S. currency against the U.S. dollar,
      which will generally be United States source ordinary income or
      loss.




32




PASSIVE
      FOREIGN INVESTMENT COMPANY CONSIDERATIONS




We
      will
      be a passive foreign investment company, or PFIC, for United States federal
      income tax purposes, if 75% or more of our gross income in a taxable year,
      including the pro rata share of the gross income of any company, U.S. or
      foreign, in which we are considered to own 25% or more of the shares by value,
      is passive income. Alternatively, we will be considered to be a PFIC if 50%
      or
      more of our assets in a taxable year, averaged over the year and ordinarily
      determined based on fair market value and including the pro rata share of the
      assets of any company in which we are considered to own 25% or more of the
      shares by value, are held for the production of, or produce, passive income.
      Passive income includes amounts derived by reason of the temporary investment
      of
      funds raised in our public offerings.




If
      we
      were a PFIC, and a U.S. Holder did not make a qualifying election either to
      (i)
      treat us as a “qualified electing fund” (a “QEF”) (as described below), or (ii)
      mark our common shares to market (as discussed below), excess distributions
      by
      us to a U.S. Holder would be taxed under special rules. “Excess distributions”
are amounts received by a U.S. Holder with respect to shares in a PFIC in any
      taxable year that exceed 125% of the average distributions received by such
      U.S.
      Holder from the PFIC in the shorter of either the three previous years or such
      U.S. Holder’s holding period for such shares before the present taxable year.
      Excess distributions must be allocated ratably to each day that a U.S. Holder
      has held shares in a PFIC. A U.S. Holder must include amounts allocated to
      the
      current taxable year in its gross income as ordinary income for that year.
      Further, a U.S. Holder must pay tax on amounts allocated to each prior PFIC
      taxable year at the highest rate in effect for that year on ordinary income
      and
      the tax is subject to an interest charge at the rate applicable to deficiencies
      for income tax. The entire amount of gain that is realized by a U.S. Holder
      upon
      the sale or other disposition of our common shares will also be treated as
      an
      excess distribution and will be subject to tax as described above. A. U.S.
      Holder’s tax basis in our common shares that were acquired from a decedent who
      was a U.S. Holder would not receive a step-up to fair market value as of the
      date of the decedent’s death but would instead be equal to the decedent’s basis,
      if lower. If we were a PFIC, a U.S. Holder of our common shares will be subject
      to the PFIC rules as if such holder owned its pro-rata share of any of our
      direct or indirect subsidiaries which are themselves PFICs. Accordingly, a
      U.S.
      Holder of our common shares will be subject to tax under the PFIC rules with
      respect to distributions to us by, and dispositions by us of stock of, any
      direct or indirect PFIC stock held by us, as if such holder received directly
      its pro-rata share of either the distribution or proceeds from such
      disposition.




The
      special PFIC rules described above will not apply to a U.S. Holder if the U.S.
      Holder makes an election to treat us as a “qualified electing fund” in the first
      taxable year in which the U.S. Holder owns common shares and if we comply with
      certain reporting requirements. Instead, a shareholder of a QEF is required
      for
      each taxable year to include in income a pro rata share of the ordinary earnings
      of the qualified electing fund as ordinary income and a pro rata share of the
      net capital gain of the QEF as long-term capital gain, subject to a separate
      election to defer payment of taxes, which deferral is subject to an interest
      charge. The QEF election is made on a shareholder-by-shareholder basis and
      can
      be revoked only with the consent of the U.S. Internal Revenue Service, (“IRS”).
      A shareholder makes a QEF election by attaching a completed IRS Form 8621,
      including the PFIC annual information statement, to a timely filed United States
      federal income tax return and by filing such form with the IRS Service Center
      in
      Philadelphia, Pennsylvania. Even if a QEF election is not made, a shareholder
      in
      a PFIC who is a U.S. person must file a completed IRS Form 8621 every year.
      We
      have agreed to supply U.S. Holders with the information needed to report income
      and gain pursuant to a QEF election in the event we are classified as a
      PFIC.




A
      U.S.
      Holder of PFIC stock which is publicly traded could elect to mark the stock
      to
      market annually, recognizing as ordinary income or loss each year an amount
      equal to the difference as of the close of the taxable year between the fair
      market value of the PFIC stock and the U.S. Holder’s adjusted tax basis in the
      PFIC stock. Losses would be allowed only to the extent of net mark-to-market
      gain previously included by the U.S. Holder under the election for prior taxable
      years. If the mark-to-market election were made, then the rules set forth above
      would not apply for periods covered by the election.




33




We
      believe that we were not a PFIC for the fiscal years ending May 2006 and May
      2005, and we believe that we will not be a PFIC for the fiscal year ending
      May
      2007. The tests for determining PFIC status, however, are applied annually,
      and
      it is difficult to make accurate predictions of future income and assets, which
      are relevant to this determination. Accordingly, there can be no assurance
      that
      we will not become a PFIC. U.S. Holders who hold common shares during a period
      when we are a PFIC will be subject to the foregoing rules, even if we cease
      to
      be a PFIC, subject to certain exceptions for U.S. Holders who made a QEF
      election. U.S. Holders are strongly urged to consult their tax advisors about
      the PFIC rules, including the consequences to them of making a mark-to-market
      or
      QEF election with respect to common shares in the event that we qualify as
      a
      PFIC.




TAX
      CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON SHARES




Except
      as
      described in “U.S. Information Reporting and Backup Withholding” below, a
      Non-U.S. Holder who is a beneficial owner of our common shares will not be
      subject to United States federal income or withholding tax on the payment of
      dividends on, and the proceeds from the disposition of, our common shares,
      unless:




·
            Such
                item is effectively connected with the conduct by the Non-U.S. Holder
                of a
                trade or business in the United States and, in the case of a resident
                of a
                country which has a treaty with the United States, such item is
                attributable to a permanent establishment or, in the case of an
                individual, a fixed place of business, in the United
                States;




·
            The
                Non-U.S. Holder is an individual who holds the common shares as capital
                assets and is present in the United States for 183 days or more in
                the
                taxable year of the disposition and does not qualify for an exemption;
                or




·
            The
                Non-U.S. Holder is subject to tax pursuant to the provisions of United
                States tax law applicable to U.S.
                expatriates.




U.S.
      INFORMATION REPORTING AND BACKUP WITHHOLDING




U.S.
      Holders generally are subject to information reporting requirements with respect
      to dividends paid in the United States on common shares. In addition, U.S.
      Holders are subject to U.S. backup withholding at a rate of up to 28% on
      dividends paid in the United States on common shares unless the U.S. Holder
      provides an IRS Form W-9 or otherwise establishes an exemption. U.S. Holders
      are
      subject to information reporting and backup withholding at a rate of up to
      28%
      on proceeds paid from the sale, exchange, redemption or other disposition of
      common shares unless the U.S. Holder provides an IRS Form W-9 or otherwise
      establishes an exemption.




Non-U.S.
      Holders generally are not subject to information reporting or backup withholding
      with respect to dividends paid on, or proceeds upon the sale, exchange,
      redemption or other disposition of, common shares, provided that such Non-U.S.
      Holder provides a taxpayer identification number, certifies to its foreign
      status, or otherwise establishes an exemption.




The
      amount of any backup withholding will be allowed as a credit against such U.S.
      Holder’s or Non-U.S. Holder’s United States federal income tax liability and may
      entitle such holder to a refund, provided that the required information is
      furnished to the IRS.




RECENT
      SALES OF UNREGISTERED SECURITIES




None.




34




ITEM
      6.
      SELECTED FINANCIAL DATA





The
      data
      set forth below should be read in conjunction with "Management's Discussion
      and
      Analysis of Financial Condition and Results of Operations" and the Consolidated
      Financial Statements and Notes thereto included elsewhere in this Form
      10-K.





FISCAL
                YEAR ENDED MAY 31,(IN
                THOUSANDS, EXCEPT PER SHARE DATA)2006
            
            2005
            
            2004
            
            2003
            
            2002Statement
                of Operations DataRevenue,
                net
            
            $
            28,121
            
            $
            26,819
            
            $
            17,167
            
            $
            17,837
            
            $
            14,752Cost
                of revenues
            
            
            7,808
            
            
            7,014
            
            
            1,587
            
            
            3,040
            
            
            2,858Selling
                and marketing
            
            
            6,934
            
            
            7,211
            
            
            4,362
            
            
            6,058
            
            
            6,649General
                and administrative
            
            
            14,253
            
            
            17,838
            
            
            9,799
            
            
            9,582
            
            
            6,724Research
                and development
            
            
            5,423
            
            
            2,147
            
            
            453
            
            
            1,086
            
            
            750Amortization
                and depreciation
            
            
            6,685
            
            
            8,535
            
            
            5,602
            
            
            6,097
            
            
            1,796Impairment
                write-down of goodwill
            
            
            -
            
            
            -
            
            
            -
            
            
            2,133
            
            
            2,810Operating
                loss
            
            
            (12,982
            )
            
            (15,926
            )
            
            (4,636
            )
            
            (10,159
            )
            
            (6,835
            )Other
                (expense) income, net
            
            
            60
            
            
            (45
            )
            
            (2,635
            )
            
            (1,146
            )
            
            (155
            )Loss
                before income taxes
            
            
            (12,922
            )
            
            (15,971
            )
            
            (7,271
            )
            
            (11,305
            )
            
            (6,990
            )Recovery
                of deferred income tax
            
            
            -
            
            
            848
            
            
            1,789
            
            
            1,586
            
            
            29Current
                income tax (expense) recovery
            
            
            (64
            )
            
            (36
            )
            
            (55
            )
            
            42
            
            
            -Net
                loss for the year
            
            $
            (12,986
            )
            $
            (15,159
            )
            $
            (5,537
            )
            $
            (9,677
            )
            $
            (6,961
            )Basic
                and diluted net loss per share
            
            $
            (0.26
            )
            $
            (0.35
            )
            $
            (0.22
            )
            $
            (0.52
            )
            $
            (0.52
            )Weighted
                average number ofcommon
                stock outstanding
            
            
            49,828
            
            
            43,462
            
            
            25,036
            
            
            18,608
            
            
            13,281








MAY
                31,(IN
                THOUSANDS)




2006
            
            2005
            
            2004
            
            2003
            
            2002Balance
                Sheet DataWorking
                capital (deficit)
            
            $
            (1,087
            )
            $
            6,797
            
            $
            (351
            )
            $
            (3,412
            )
            $
            (1,677
            )Total
                assets
            
            
            66,270
            
            
            75,657
            
            
            48,882
            
            
            30,618
            
            
            23,276Long
                term obligations
            
            
            288
            
            
            192
            
            
            1,259
            
            
            5,312
            
            
            1,557Total
                liabilities
            
            
            13,248
            
            
            12,718
            
            
            11,143
            
            
            11,594
            
            
            8,519Stockholders'
                equity
            
            
            53,022
            
            
            62,939
            
            
            37,739
            
            
            19,024
            
            
            14,757








35








ITEM
      7.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





CAUTIONARY
      STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS





THIS
      REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
      THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY HISTORICAL ARE
      FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
      ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
      1934,
      AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS
      CONTAINING THE WORDS "ANTICIPATES," "BELIEVES," " EXPECTS," "INTENDS," "FUTURE,"
      AND WORDS OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS
      OR
      INTENTIONS REGARDING OUR FUTURE PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS
      INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE
      HEREOF, AND WE HAVE NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
      OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS
      AND FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT
      OF
      CERTAIN FACTORS, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH ABOVE IN ITEM
      1A
      AND ELSEWHERE IN THIS REPORT AND IN OUR OTHER FILINGS WITH THE SECURITIES AND
      EXCHANGE COMMISSION.





OVERVIEW




We
      are a
      provider of services and web-based software for Human Capital Management
      (“HCM”). HCM is the process by which companies recruit, train, evaluate,
      motivate, develop and retain their employees. We offer software and services
      that address the needs of companies to more effectively manage their human
      capital management function. We believe that our “one-stop-shopping” approach
      for our clients’ HCM needs is more efficient and effective than traditional
      methods of human resource management.





We
      have
      two distinct operating segments, which are the Enterprise Workforce Services
      and
      Career Networks segments. The Enterprise Workforce Services segment primarily
      consists of HCM software, professional services and products sold as part of
      reward and discount programs. Specifically, our Enterprise Workforce Services
      segment offers a complete suite of HCM software solutions, which address
      recruitment, benefits, performance, compensation, development and rewards.
      The
      Career Networks segment consists of career transition, applicant sourcing and
      recruitment research services.




Our
      business changed significantly beginning in fiscal 2002. During fiscal 2002,
      we
      completed the acquisitions of Paula Allen Holdings, OMNIpartners,
      6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. During fiscal 2003,
      we
      completed the acquisitions of Icarian, PureCarbon and Xylo. During fiscal 2004,
      we completed the acquisitions of Perform, Peopleview and Kadiri. During fiscal
      2005, we completed the acquisitions of Peoplebonus, Bravanta, HRSoft and ProAct.
      During fiscal 2006, we acquired Exxceed, Inc. These acquisitions have enabled
      us
      to expand and enhance our HCM software, increase our service offerings and
      increase our revenue streams. Subsequent to the acquisitions, we have
      concentrated on integrating the acquired entities, expanding the reach of the
      existing business and identifying other potential acquisition targets. When
      we
      complete an acquisition, we combine the business of the acquired entity into
      the
      Company’s existing operations. We expect that this will significantly reduce the
      administrative expenses associated with the business prior to the acquisition.
      The acquired business is not maintained as a standalone business operation.
      Therefore, we do not separately account for the acquired business, including
      its
      profitability. Rather, it is included in one of our two distinct business
      segments and is evaluated as part of the entire segment.




36




To
      monitor our results of operations and financial condition, we review key
      financial information including net revenues, gross profit, earnings per share,
      and cash flow from operations. As acquired entities are integrated and our
      business evolves, we continue to seek methods to more efficiently monitor and
      manage our business performance.





CRITICAL
      ACCOUNTING POLICIES





Our
      most
      critical accounting policies relate to revenue recognition, the assessment
      of
      goodwill impairment, the valuation of acquired intangible assets, the assessment
      of intangible asset impairment and the valuation of deferred tax assets and
      related allowances. Management makes estimates and assumptions that affect
      the
      value of assets and the reported amounts of revenues. Changes in assumptions
      used would impact our financial position and results.





The
      Company derives revenue from various sources including the following:
      subscription and hosting fees; licensing of software; software maintenance
      fees;
      professional services related to software implementation, customization and
      training; sale of products and tickets through the Company’s employee discount
      and rewards software module; career transition services; recruitment research
      services; and, applicant sourcing.





In
      general, the Company recognizes revenue when all of the revenue recognition
      criteria are met, which is typically when:


·
            Evidence
                of an arrangement exists


·
            Services
                have been provided or goods have been
                delivered


·
            The
                price is fixed or determinable


·
            Collection
                is reasonably assured.





The
      Company sells various HCM software applications and also provides these
      applications as an on-demand application service. Revenue is generated through
      a
      variety of contractual arrangements.





Subscription
      and hosting fees and software maintenance fees are billed in advance on a
      monthly, quarterly or annual basis. Amounts that have been invoiced are recorded
      in accounts receivable and in deferred revenue or revenue, depending on whether
      the revenue recognition criteria have been met. Quarterly and annual payments
      are deferred and recognized monthly over the service period on a straight-line
      basis. Set up fees are deferred and recognized monthly on a straight-line basis
      over the contractual lives, which approximates the expected lives of the
      customer relationships.





Hosting
      revenues consist of subscription fees from customers accessing our on-demand
      application service. The Company follows the provisions of SEC Staff Accounting
      Bulletin No. 104, *Revenue
      Recognition* and
      Emerging Issues Task Force Issue No. 00-21, *Revenue
      Arrangements with Multiple Deliverables* .
      For
      revenue arrangements with multiple deliverables, the Company allocates the
      total
      customer arrangement to the separate units of accounting based on their relative
      fair values, as determined by the price of the undelivered items when sold
      separately. Professional services included in an application services
      arrangement with multiple deliverables are accounted for separately when these
      services have value to the customer on a standalone basis, and there is
      objective and reliable evidence of fair value of each deliverable of the
      arrangement. When accounted for separately, revenues are recognized as the
      services are rendered.





License
      revenues consist of fees earned from the granting of licenses to use the
      software products. The Company recognizes revenue from the sale of software
      licenses in accordance with American Institute of Certified Public Accountants
      ("AICPA") Statement of Position ("SOP") No. 97-2, *Software
      Revenue Recognition* ,
      and SOP
      No. 98-9, *Modification
      of SOP 97-2, Software Revenue Recognition, with Respect to Certain
      Transactions,* when all
      of the following conditions are met: a signed contract exists; the software
      has
      been shipped or electronically delivered; the license fee is fixed or
      determinable; and the Company believes that the collection of the fees is
      reasonably assured. License revenue is recorded upon delivery with an
      appropriate deferral for maintenance services, if applicable, provided all
      of
      the other relevant conditions have been met. The total fee from the arrangement
      is allocated based on Vendor Specific Objective Evidence ("VSOE") of fair value
      of each of the undelivered elements. Maintenance agreements are typically priced
      based on a percentage of the product license fee and have a one-year term,
      renewable annually. VSOE of fair value for maintenance is established based
      on
      the stated renewal rates. Services provided to customers under maintenance
      agreements include technical product support and unspecified product upgrades.
      VSOE of fair value for the professional service element is based on the standard
      hourly rates the Company charges for services when such services are sold
      separately.




37





Professional
      services revenue is generated from implementation and customization of software
      and from training and general consulting. In addition, revenue is generated
      from
      technical support not included in the software maintenance. The majority of
      professional services revenue is billed based on an hourly rate and recognized
      on a monthly basis as services are provided. For certain contracts which involve
      significant implementation or other services which are essential to the
      functionality of the software and which are reasonably estimable, the license
      and implementation services revenue is recognized using contract accounting,
      as
      prescribed by SOP 81-1, *Accounting
      for Performance of Construction-Type and Certain Production-Type
      Contracts* .
      Revenue
      is recognized over the period of each implementation using the
      percentage-of-completion method. Labor hours incurred is used as the measure
      of
      progress towards completion, and management believes its estimates to completion
      are reasonably dependable. A provision for estimated losses on engagements
      is
      made in the period in which the losses become probable and can be reasonably
      estimated.





One
      of
      the software applications offered by the Company allows customer companies
      to
      offer rewards and benefits (discounted goods and tickets) in an effort to
      promote their employee retention. The Company generates subscription revenues
      from the customer company. In addition, the Company generates revenue from
      the
      sale of products and tickets to the customers’ employees through a website. The
      Company recognizes revenue when all of the revenue recognition criteria are
      met,
      which is typically when the goods are shipped and title has transferred.





For
      career transition services, the Company bills the client 50% when the assignment
      starts and the remaining 50% when the assignment is completed. The Company
      recognizes revenue when all of the revenue recognition criteria are met, which
      is typically when services have been completed.





For
      applicant sourcing services, the Company bills its clients in advance on a
      monthly, quarterly and annual basis. The Company recognizes revenue when all
      of
      the revenue recognition criteria are met, which is typically on a straight-line
      basis as services have been completed. Unrecognized revenue is included in
      deferred revenue.





For
      resume management services and recruitment services, the Company bills its
      clients for job postings and matching of resumes per descriptions that the
      client provides and for quantity-based job posting packages. The Company
      recognizes revenue when all of the revenue recognition criteria are met, which
      is typically when the services have been completed.





Goodwill
      is assessed for impairment on an annual basis or more frequently if
      circumstances warrant. We assess goodwill related to reporting units for
      impairment and write down the carrying amount of goodwill as required. We have
      two distinct reporting units: Enterprise Workforce Services and Career Networks.
      Each reporting unit represents a distinct business unit that offers different
      products and services. Management monitors each unit separately. Enterprise
      Workforce Services, which includes revenue from software and related services,
      is a developing business unit, whereas Career Networks is a more established
      business unit. We estimate the fair value of each business unit by preparing
      a
      discounted cash flow model, using a 15% discount rate. The model is prepared
      by
      projecting results for five years making different assumptions for each
      reporting unit. For the calculation done at the end of fiscal 2006, we estimated
      that individual reporting unit annual revenue growth rates would range from
      6%
      to 27%, that gross profit would increase slightly, and that operating expenses
      would increase but would decrease as a percentage of revenues. We estimated
      the
      terminal rate as a multiple of revenue after the fifth year to be between 1.5
      and 3.0. An impairment charge is recorded if the implied fair value of goodwill
      of a reporting unit is less than the book value of goodwill for that unit.
      Changes in the discount rate used, or in other assumptions in the model, would
      result in wide fluctuations in the value of goodwill that is supported. Any
      such
      changes may result in additional impairment write-downs.





We
      value
      acquired intangible assets, which includes acquired technologies, customer
      base
      and intellectual property, based on the estimated fair value of the assets
      at
      the time of the acquisition. The estimated fair value is primarily based on
      projected cash flows associated with the assets and the customer attrition
      rates. Different assumptions were used in estimating the intangible assets
      acquired in each business acquisition. If the future cash flows or the customer
      attrition rates differ significantly from our estimates, we may be required
      to
      record an impairment of intangible assets. Changes in circumstances impacting
      other assumptions used to value intangible assets could also lead to future
      impairments.




38





We
      apply
      significant judgment in recording deferred tax assets, which primarily are
      the
      result of loss carry forwards of companies that we acquired and loss carry
      forwards internally generated. In addition, we make certain assumptions about
      if
      and when these deferred tax assets will be utilized. These determinations
      require estimates of future profits to be forecasted. Actual results may differ
      from amounts estimated.





FISCAL
      2006 COMPARED TO FISCAL 2005





REVENUES





Consolidated
      revenues were $28,120,662 for fiscal 2006 compared to $26,818,587 for fiscal
      2005, an increase of $1,302,075 or 5%.





Enterprise
      Workforce Services revenues for fiscal 2006 were $20,157,009 compared to
      $17,862,949 for fiscal 2005, an increase of $2,294,060 or 13%. The increase
      in
      revenue was due to the following: a $1,912,698 increase in software revenue
      and
      a $821,976 increase in reward and discount product sales partially offset by
      a
      $440,614 decrease in professional services revenue. The increase in software
      revenue was due to the combination of the increase in revenue subsequent to
      the
      various acquisitions in fiscal 2005 and 2006 (Peoplebonus, HRSoft, ProAct and
      Exxceed) and revenue generated from existing products. The increase in rewards
      and discount revenue was primarily due to the fact that we acquired Bravanta
      in
      late July 2004 so fiscal 2005 revenue only included ten months of
      Bravanta-related reward product revenue.





Career
      Networks revenues for fiscal 2006 were $7,963,653 compared to $8,955,638 for
      fiscal 2005, a decrease of $991,985 or 11%. The decrease was primarily the
      result of the decrease in recruitment research revenue of $579,007 and career
      transition revenue of $592,922. Beginning in fourth quarter 2005, management
      began to reevaluate the recruitment research business in efforts to increase
      profitability and decided to downsize the workforce. The downsizing resulted
      in
      less recruitment research revenue, and it also resulted in higher revenue per
      sales person and productivity gains that management anticipates will allow
      this
      revenue source to increase in the next fiscal year. Career transition services
      revenue decreased year over year but showed significant increases in fourth
      quarter 2006. Management anticipates this trend to continue in fiscal 2007.
      These decreases were partially offset by an increase in applicant sourcing
      services of $179,944.





COST
      OF
      REVENUES





Cost
      of
      revenue for fiscal 2006 was $7,808,115 compared to $7,013,980 for fiscal 2005,
      an increase of $794,135 or 11%. Gross profits for fiscal 2006 were $20,312,547
      or 72% of revenues compared to $19,804,607 or 74% of revenues for fiscal 2005.





Enterprise
      Workforce Services cost of revenues accounted for $7,078,405 of the total cost
      of revenue for fiscal 2006 and $6,074,570 for fiscal 2005, an increase of
      $1,003,753 or 17%. Enterprise Workforce Services gross profit was $13,078,604
      or
      65% of revenues for fiscal 2006 compared to $11,788,297 or 66% of revenues
      for
      fiscal 2005. The increase in cost of revenue of 17% was higher than the increase
      in revenue of 13% primarily due to the fact that the rewards and discount
      product revenue increased as a percentage of total Enterprise Workforce Services
      revenue. The rewards and discount product revenue has the lowest margins of
      the
      Enterprise Workforce Services revenue streams.





Career
      Networks cost of revenues accounted for $729,710 of the total cost of revenues
      for fiscal 2006 and $939,328 for fiscal 2005, a decrease of $209,618 or 22%.
      Career Networks gross profit was $7,233,943 or 91% of revenues for fiscal 2006
      compared to $8,016,310 or 90% of revenues for fiscal 2005. The decrease in
      cost
      of revenues of 22% was higher than the decrease in revenue of 11% due to the
      decrease in certain employee costs in the career transition services group,
      which reflects a general increase in efficiency. This improvement resulted
      in a
      slight increase in the gross profit margin.




39





SELLING
      AND MARKETING





Selling
      and marketing expenses were $6,934,056 for fiscal 2006 compared to $7,210,996
      for fiscal 2005, a decrease of $276,940 or 4%. The decrease in selling and
      marketing expense is due to decreases in employee costs and in advertising
      expenses in the Career Networks segment partially offset by the creation of
      an
      account management group and a business development unit within Enterprise
      Workforce Services segment. The decrease in Career Networks employee costs
      reflects the decrease in employees in the career transition services group
      due
      to a change in business strategy whereby the focus is on increasing revenue
      per
      salesperson while using a smaller, more effective sales force. The decrease
      in
      Career Networks advertising costs is due to a decrease in the cost of sales
      leads within the career transition services group as we further leveraged our
      internal lead generation resources. The creation of the account management
      group
      and a business development unit within Enterprise Workforce Services has
      increased employee costs and travel expenses.




GENERAL
      AND ADMINISTRATIVE





General
      and administrative expenses were $14,253,037 for fiscal 2006 compared to
      $17,837,777 for fiscal 2005, a decrease of $3,584,740 or 20%. The net decrease
      is due to significant reductions in employee costs, bad debt expense, and
      various other operating expenses partially offset by an increase in professional
      fees. The decrease in employee costs reflects the gradual reduction in the
      number of general and administrative employees subsequent to the various
      acquisitions. In addition, certain other expenses, including travel, telephone,
      internet and software costs, have also gradually decreased subsequent to the
      acquisitions as the administrative headcount decreases and as the Company
      eliminates redundant services and consolidates providers. The decrease in bad
      debt expense reflects the resolution of certain large collection issues for
      which bad debt was expensed in fiscal 2005 and fewer problem receivable balances
      identified in fiscal 2006. The increase in professional fees is due to the
      use
      of various consultants for departmental projects as well as the expenses
      associated with the Company’s first SAS 70 audit. Management continues to
      investigate additional cost containment opportunities and anticipates continued
      reductions in certain general and administrative expenses in fiscal 2007.




RESEARCH
      AND DEVELOPMENT





Research
      and development expenses were $5,422,309 for fiscal 2006 and $2,147,251 for
      fiscal 2005, an increase of $3,275,058 or 153%. The increase in research and
      development expenses during fiscal 2006 was a calculated decision by management
      to invest in further development of the Company’s software suite. Subsequent to
      the various acquisitions, we continue to incur costs necessary to update the
      acquired technology, to standardize the software applications now owned by
      the
      Company, and to build out the platform. The increase in research and development
      expenses reflect the increase in employee costs of approximately $1,877,000
      and
      the increase in professional fees of $1,335,000 as the Company uses both
      internal and external resources. Management expects the research and development
      spending to decrease in fiscal 2007 compared to fiscal 2006.





AMORTIZATION
      AND DEPRECIATION EXPENSE





Amortization
      and depreciation expense was $6,684,880 for fiscal 2006 compared to $8,534,715
      for fiscal 2005, a decrease of $1,849,835 or 22%. Amortization and depreciation
      expense for the Enterprise Workforce Services segment was $6,532,749 in fiscal
      2006 compared to $8,126,809 for fiscal 2005, a decrease of $1,594,060 or 20%.
      The decrease is the net result of certain acquired intangible assets becoming
      fully amortized offset by the amortization expense associated with intangible
      assets acquired through recent acquisitions, specifically Exxceed. Amortization
      and depreciation expense for the Career Networks segment was $152,131 in fiscal
      2006 compared to $407,906 in fiscal 2005, a decrease of $255,775 or 63%. The
      decrease was due to certain intangible assets with three-year lives (customer
      base and acquired technology) included in the Career Networks segment becoming
      fully amortized during fiscal 2005. Amortization expense will continue to
      decrease in fiscal 2007 unless the Company acquires additional intangible assets
      through business acquisitions.




40




INTEREST
      INCOME AND OTHER INCOME




Interest
      and other income was $223,722 in fiscal 2006 compared to $189,851 in fiscal
      2005, an increase of $33,871 or 18%. The increase in interest and other income
      was due to on average higher interest-earning cash and investment balances
      in
      fiscal 2006 compared to fiscal 2005. The higher average balances reflect the
      fact that we raised funds through equity financing during fiscal 2005.





INTEREST
      AND OTHER EXPENSE




Interest
      and other expense was $163,504 for fiscal 2006 compared to $234,451 for fiscal
      2005, a decrease of $70,947 or 30%. During fiscal 2005, the Company paid off
      a
      non-interest term loan which was originally assumed as part of the Paula Allen
      Holdings acquisition. The interest expense relating to the discount on the
      loan
      totaled $51,636 during the first quarter 2005. In addition, during fiscal 2005,
      the Company recognized interest expense relating to the note payable entered
      into as part of the ProAct acquisition, which was substantially paid down in
      June 2005.




FISCAL
      2005 COMPARED TO FISCAL 2004





GENERAL





Workstream
      made the following business acquisitions during fiscal 2005: Peoplebonus on
      June
      21, 2004; Bravanta on July 27, 2004; HRSoft on October 6, 2004; and ProAct
      on
      December 30, 2004. In addition, Workstream acquired Kadiri on May 28, 2004,
      which was three days prior to fiscal 2004 year end. Absorbing each of these
      entities’ activities subsequent to the acquisition date was the primary reason
      for many of the variances discussed in the following paragraphs. For this
      reason, Kadiri, Peoplebonus, Bravanta, HRSoft and ProAct are referred to as
      the
“acquired entities”. The acquired entities are all included in the Enterprise
      Workforce Services segment.





REVENUES




Consolidated
      revenues were $26,818,587 for fiscal 2005 compared to $17,166,880 for fiscal
      2004, an increase of $9,651,707 or 56%. Revenues from acquired entities
      represented $11,802,803 for fiscal 2005. Revenues from all other companies
      (“existing companies”) were $15,015,784 for fiscal 2005 compared to $17,166,880
      for fiscal 2004, a decrease of $2,151,096 or 13%.




Enterprise
      Workforce Services revenues for fiscal 2005 were $17,862,949 compared to
      $7,181,564 for fiscal 2004, an increase of $10,681,385 or 149%. $11,802,803
      of
      revenues for fiscal 2005 was contributed by the acquired entities. These
      increases were partially offset by a decrease in revenues from our older, more
      mature products for which the customer base was reduced. During fiscal 2005,
      Enterprise Workforce Solutions revenue consisted of software revenue of
      $9,096,241, professional services revenue of $3,320,556 and rewards and discount
      product revenue of $5,446,152.




Career
      Networks revenues for fiscal 2005 were $8,955,638 compared to $9,985,316 for
      fiscal 2004, a decrease of $1,029,678 or 10%. This decrease was due to a
      decrease in career transition services revenue of $1,650,209. During fiscal
      2005, we changed our strategy with regards to career transition services whereby
      we significantly decreased our sales force and focused on higher revenue
      customers. This resulted in a decrease in revenues but an increase in revenue
      per customer. This decrease was partially offset by an increase in applicant
      sourcing and exchange services revenue of $504,456. Applicant sourcing and
      exchange services revenue increased due to a strong executive job market,
      particularly in financial positions.




41




COST
      OF
      REVENUES





Cost
      of
      revenues for fiscal 2005 was $7,013,980 compared to $1,586,989 for fiscal 2004,
      an increase of $5,426,991 or 342%. Gross profits were $19,804,607 for fiscal
      2005 or 74% of revenues compared to $15,579,891 or 91% of revenues for fiscal
      2004. Costs of revenues of the acquired entities was $5,860,618 during fiscal
      2005. The decrease in gross profit as a percent of revenues was due to the
      lower
      gross profit margins generated by the acquired companies. The gross profit
      margins of these companies was lower because the software products required
      more
      implementation and customization services, which traditionally had lower
      margins. In addition, the rewards and discount product revenue generated
      subsequent to the Bravanta acquisition had lower margins. Finally, several
      of
      the acquired companies entered into fixed fee contracts prior to our
      acquisition, and the costs associated with these contracts were higher than
      anticipated.




Enterprise
      Workforce Services cost of revenues accounted for $6,074,652 of the total cost
      of revenues for fiscal 2005 and $403,760 for fiscal 2004, an increase of
      $5,670,892. Cost of revenues in the Enterprise Workforce Services segment during
      fiscal 2005 increased $5,860,618 as a result of costs incurred in connection
      with the acquired entities. Enterprise Workforce Services gross profit was
      $11,788,297 or 66% of Enterprise Workforce Services revenues for fiscal 2005
      compared to $6,777,804 or 94% of Enterprise Workforce Services revenue for
      fiscal 2004. The decrease in the Enterprise Workforce Services gross profit
      as a
      percent of revenues directly corresponded to the increase in professional
      services revenue and reward and discount product revenue as discussed
      previously.




Career
      Networks cost of revenues accounted for $939,328 of the total cost of revenues
      for fiscal 2005 and $1,183,229 for fiscal 2004, a decrease of $243,901 or 21%.
      Career Networks gross profit was $8,016,310 or 90% of revenues for fiscal 2005
      compared to $8,802,087 or 88% of revenue for fiscal 2004. The gross profit
      margin increased slightly due to general efficiencies gained relating to career
      transition services.




SELLING
      AND MARKETING EXPENSE




Selling
      and marketing expenses were $7,210,996 for fiscal 2005 compared to $4,362,292
      for fiscal 2004, an increase of $2,848,704 or 65%. This increase is primarily
      attributable to selling and marketing expenses of $2,277,236 incurred by the
      acquired companies during fiscal 2005. Selling and marketing expenses for
      existing companies was $4,933,760 in fiscal 2005 compared to $4,362,292 for
      fiscal 2004, an increase of $571,468 or 13%. The increase in sales and marketing
      expense was primarily due to an increase of $2,179,153 in employee costs. The
      employee costs in the sales force and marketing department in the Enterprise
      Workforce Services segment increased by approximately $2.6 million as a result
      of the various acquisitions. This increase is partially offset by a decrease
      in
      the sales force in the Career Networks segment as we refocused efforts on
      increasing revenue per salesperson as opposed to gross revenue. Selling and
      marketing expenses also increased in the Enterprise Workforce Services segment
      due to our hosting of a user conference and attending more industry conferences
      during fiscal 2005.




GENERAL
      AND ADMINISTRATIVE EXPENSE




General
      and administrative expenses were $17,837,777 for fiscal 2005 compared to
      $9,798,440 for fiscal 2004, an increase of $8,039,337 or 82%. The acquired
      companies accounted for $8,741,418 of general and administrative expenses during
      fiscal 2005. General and administrative expenses for existing companies
      accounted for $9,096,359 during fiscal 2005 compared to $9,798,440 during fiscal
      2004, a decrease of $702,081 or 7%. The decrease in general and administrative
      expense for existing companies was primarily due to less expense allocated
      to
      these entities as certain allocations are based on revenue, which was spread
      over several additional entities in fiscal 2005. The increase in general and
      administrative expense was due to the following: employee costs increased
      $4,244,140; travel and entertainment increased $567,774; professional fees
      increased $1,084,641 and bad debt expense increased $526,392. The employee
      costs
      increased during fiscal 2005 primarily due to the additional employees being
      added from the various acquisitions. Typically, employee costs will increase
      for
      a period of time after an acquisition until the appropriate downsizing occurs.
      The majority of the downsizing benefit was anticipated to occur with the
      employee costs included in general and administrative expenses. Travel expense
      increased in fiscal 2005 primarily due to travel required before and after
      the
      acquisitions. Professional fees increased primarily due to the legal fees,
      including those associated with a dispute with the former shareholders of
      6FigureJobs.com, and due to the increased audit costs associated with
      Sarbanes-Oxley. Bad debt expense increased due to the decrease in the aging
      of
      certain accounts receivable, primarily relating to projects started by an
      acquired entity prior to the acquisition.




42




RESEARCH
      AND DEVELOPMENT EXPENSE




Research
      and development costs were $2,147,251 for fiscal 2005 compared to $453,247
      for
      fiscal 2004, an increase of $1,694,004 or 374%. $1,826,041 of the research
      and
      development costs incurred in fiscal 2005 was attributable to the acquired
      companies. Research and development costs for existing companies during fiscal
      2005 were $321,210 compared to $453,247 for fiscal 2004, a decrease of $132,037
      or 29%. The increase in research and development expense was primarily due
      to an
      increase of $1,077,017 in employee costs and an increase of $395,540 in
      professional fees. During fiscal 2005 subsequent to the acquisitions, we
      incurred costs necessary to continue updating the acquired software and to
      standardize the various software applications now owned by the Company. In
      the
      second half of fiscal 2005, we began outsourcing some of this work to overseas
      vendors, which resulted in the increase in professional fees.




DEPRECIATION
      AND AMORTIZATION EXPENSE




Depreciation
      and amortization expense was $8,534,715 for fiscal 2005 compared to $5,601,910
      for fiscal 2004, an increase of $2,932,805 or 52%. The acquired companies
      incurred $3,679,856 of depreciation and amortization expense in fiscal 2005.
      Amortization and depreciation expense for existing companies during fiscal
      2005
      was $4,854,859 compared to $5,601,910 during fiscal 2004, a decrease of $747,051
      or 13%. The decrease in the existing companies’ expense was due to certain
      capital and intangible assets becoming fully depreciated and amortized.
      Amortization and depreciation expense for the Enterprise Workforce Services
      segment was $8,126,808 for fiscal 2005 compared to $4,451,332 for fiscal 2004,
      an increase $3,675,476 or 83%. All of the companies acquired in fiscal 2004
      and
      2005 are included in the Enterprise Workforce Services. Each acquisition
      resulted in acquired intangible assets, which are being amortized over three
      to
      five years. The increase in the fiscal 2005 amortization and depreciation
      expense is due to the increase in amortizable intangible assets. In fiscal
      2005,
      the Career Networks segment amortization and depreciation expense was $407,907
      compared to $1,150,578 in fiscal 2004, a decrease of $742,671 or 65%. The
      decrease is due to the intangible assets with a three-year life (customer base
      and acquired technology) included in the Career Networks segment becoming fully
      amortized during fiscal 2005.




INTEREST
      INCOME AND OTHER INCOME




Interest
      and other income was $189,851 for fiscal 2005 compared to $11,959 for fiscal
      2004, an increase of $177,892. The increase in interest and other income during
      fiscal 2005 was due to higher interest-earning cash, short-term investment
      and
      restricted cash balances compared to fiscal 2004. The increase in the
      interest-earning deposits was primarily due to the funds raised during the
      equity financing in fiscal 2005.




INTEREST
      AND OTHER EXPENSE




Interest
      and other expense was $234,451 for fiscal 2005 compared to $2,647,265 for fiscal
      2004, a decrease of $2,412,814. The decrease in interest and other expense
      was
      due to the cessation of the amortization of the discount related to 8% senior
      subordinated convertible notes that were paid in full in fiscal 2004.




GOODWILL




Goodwill
      was $44,721,859 at May 31, 2006 compared to $42,283,442 at May 31, 2005, a
      net
      increase of $2,438,417 or 6%. The increase represents an increase of $2,441,372
      relating to the acquisition of Exxceed in January 2006 offset slightly by $2,955
      in various final purchase price adjustments relating to the Bravanta and ProAct
      acquisitions.




43





LIQUIDITY
      AND CAPITAL RESOURCES




At
      May
      31, 2006, we maintained $7,974,585, in cash and cash equivalents, restricted
      cash and short-term investments. Working capital, which represents current
      assets less current liabilities, was negative $1,266,164.





At
      May
      31, 2006, $3,095,348 of short-term investments was restricted from use in order
      to collateralize various borrowing, lease arrangements and a bond. Specifically,
      these deposits were restricted as security for an outstanding term loan, a
      line
      of credit and two letters of guarantee provided to landlords for facility
      leases. In the third quarter 2006, an additional certificate of deposit was
      established to support a bond relating to an on-going legal dispute in
      California. The dispute was resolved for $90,000, which will be paid in fiscal
      2007. As the outstanding term loan and line of credit balances change, the
      restricted cash balance guaranteeing them will change accordingly. In addition,
      when we make lease payments, the restricted cash guaranteeing the leases will
      periodically decrease according to the terms of the lease agreements.





For
      fiscal 2006, cash used in operations totaled $4,909,626, consisting primarily
      of
      the net loss for the year of $12,986,301 offset by an increase in working
      capital of $846,608 and non-cash expenses, including amortization and
      depreciation of $6,684,880, provision for bad debts of $372,696, and non-cash
      compensation of $183,817.




Net
      cash
      used for investing activities during fiscal 2006 was $812,553. Investing
      outflows consisted mainly of cash paid for business acquisitions of $500,000
      and
      $682,702 in capital expenditures.





Net
      cash
      used for financing activities was $1,498,979 for fiscal 2006. Outflows consisted
      primarily of repayments on long-term obligations of $1,712,286, which included
      a
      principal payment of $1,434,408 made in June 2005 on the note payable entered
      into as part of the ProAct acquisition. Outflows were partially offset by
      proceeds from the exercise of options and warrants of $304,170.





We
      have
      had operating losses since our inception, and during fiscal 2006, we had an
      operating loss of $12,981,735 and cash used in operating activities of
      $4,909,626. Cash, cash equivalents and short-term investments on hand at May
      31,
      2006 totaled $4,879,237. These trends raise concerns about the sufficiency
      of
      the Company’s liquidity levels to be able to support its operations in the near
      term.





Management
      believes that operating cash flows will increase in the future as a result
      of
      increased revenue and continued decreases in cash expenses. The significant
      research and development expenses incurred in fiscal 2006 have resulted in
      new
      releases in certain product offerings that we believe provide us with high
      quality software solutions that will ultimately generate gradual increases
      in
      revenue. In addition, career services revenue showed solid increases in the
      fourth quarter in fiscal 2006, which we believe will continue through fiscal
      2007 and beyond. Research and development expenses in fiscal 2006 totaled
      $5,422,309. Subsequent to this significant investment, management anticipates
      reductions in research and development expenditures. In addition, management
      has
      identified certain other expenses, most significant being legal expenses, that
      should decrease. Legal expenses were significant in fiscal 2005 and 2006
      primarily due to legal issues following the various acquisitions. These issues
      have been resolved, which should result in a decrease in the related expenses.
      Many of the costs necessary to consolidate the operations after the various
      acquisitions of fiscal 2004 and 2005 should not be recurring in the future.
      Finally, management is committed to reducing costs to appropriate levels if
      the
      projected revenue increases do not materialize.





While
      management believes that the anticipated improvement in operating cash flows
      together with our current cash reserves will be sufficient to meet our working
      capital and capital expenditure requirements through at least May 31, 2007,
      we
      have recently engaged an investment advisor to help us evaluate opportunities
      such as raising additional capital.




44





CONTRACTUAL
      OBLIGATIONS





At
      May
      31, 2006 maturities of debt outstanding, capital leases, operating leases and
      contractual obligations are as follows:








Year
                Ended May 31,2007
            
            2008
            
            2009
            
            2010
            
            2011
            
            TotalDebt
            
            $
            896,293
            
            $
            201,633
            
            $
            59,476
            
            $
            18,464
            
            $
            8,696
            
            $
            1,184,562Capital
                leases
            
            
            245,594
            
            
            152,487
            
            
            22,138
            
            
            22,138
            
            
            11,069
            
            
            453,426Operating
                leases
            
            
            1,284,472
            
            
            1,060,829
            
            
            647,585
            
            
            361,916
            
            
            -
            
            
            3,354,802Total
            
            $
            2,426,359
            
            $
            1,414,949
            
            $
            729,199
            
            $
            402,518
            
            $
            19,765
            
            $
            4,992,790








ACQUISITIONS





As
      part
      of our overall strategy, we have pursued growth through the acquisition of
      other
      companies offering services similar or complementary to ours. Through the
      acquisition of those companies we have expanded our service offerings enabling
      us to grow our revenue and to position ourselves for future profitability by
      consolidating operations and improving efficiencies.




On
      May
      28, 2004, we acquired via merger 100% of the outstanding shares of Kadiri Inc.,
      a California based company. As consideration for the sale, we issued to the
      shareholders of Kadiri 4,450,000 common shares valued at $12,415,500. During
      fiscal 2005, an additional 1,042,891 shares valued at $2,532,111 were issued
      as
      additional contingent consideration after certain revenue and cash generation
      targets of the acquired entity were achieved. Kadiri was a provider of
      Enterprise Compensation Management solutions which enable companies to plan
      and
      manage compensation, performance evaluation and monitor the granting of rewards.
      We recorded approximately $3.6 million in intangible assets and $14 million
      in
      goodwill as part of the acquisition.




On
      June
      21, 2004, we acquired certain assets of Peoplebonus.com LLC, a Delaware limited
      liability company. As consideration for the sale, the Company issued to the
      shareholders of Peoplebonus 180,506 common shares (72,202 common shares valued
      at $200,000 and 108,304 common shares held in escrow), made a cash payment
      of
      $25,000 and assumed a promissory note for $100,000. In addition, the Company
      made a cash payment of $105,000 to Peoplebonus. Peoplebonus'
      products and services are designed to streamline **** the
      way a
      company processes and handles resumes. Peoplebonus’
      artificial intelligence data mining software can search for key words and
      phrases from within a resume and score the resume based on learned search
      criteria. We
      recorded approximately $427,000 in intangible assets as part of the acquisition.





On
      July
      27, 2004, we acquired 100% of the outstanding shares of Bravanta, Inc., a
      Delaware corporation. As consideration for the sale, the Company issued to
      the
      shareholders of Bravanta 2,672,064 common shares. The total aggregate value
      of
      the shares was $7,107,693. In addition, the Company made cash payments of
      $2,051,120 to meet certain of Bravanta’s obligations prior to the finalization
      of the purchase agreement. Bravanta was a provider of enterprise incentive
      and
      recognition programs. We recorded approximately $2.2 million in intangible
      assets and $7.3 million in goodwill as part of the acquisition.





On
      October 6, 2004, we acquired certain assets of HRSoft, LLC, a Delaware limited
      liability company. As consideration for the sale, the Company assumed $766,913
      in bank debts and vendor obligations. In addition, the Company made cash
      payments of $100,000 to meet certain of HRSoft’s obligations prior to the
      finalization of the asset purchase agreement. We also agreed to reimburse the
      owners of HRSoft for the estimated individual tax liabilities arising from
      the
      transaction,which totaled $110,000. Finally, the Company issued a promissory
      note for $325,000 to the owners of HRSoft, under which the portion to be repaid
      to the Company is contingent on future revenue levels. HRSoft developed and
      marketed strategic talent management software solutions for succession planning
      and leadership development, performance management, competency management,
      career and development planning, organizational charting, modeling and hierarchy
      management. ** We
      recorded approximately $1.8 million in intangible assets as part of the
      acquisition.




45





On
      December 30, 2004, we acquired certain assets of ProAct Technologies
      Corporation, a Delaware corporation. As consideration for the sale, we made
      a
      cash payment of $5,500,000 and issued a promissory note for $1,530,000, which
      accrued interest at an annual rate of 6% with principal and interest due on
      June
      1, 2005. In addition, the Company issued to the shareholders of ProAct 913,551
      common shares valued at $2,700,000, of which 253,764 shares are being held
      in
      escrow as the exclusive source against which the Company can assert potential
      indemnification claims. The actual number of common shares issued at closing
      was
      determined based on the average of the closing price of the Company’s common
      shares for the 20 business days prior to the closing date. Under accounting
      principles generally accepted in the United States, the common shares were
      valued at $2,822,873. ProAct was a provider of software and hosted web-based
      tools for employee benefits management. We recorded approximately $6.8 million
      in intangible assets and $3.3 million in goodwill as part of the acquisition.




On
      January 13, 2006, we acquired certain assets of Exxceed, Inc., a Delaware
      corporation, a developer and marketer of competency and employee development
      software solutions. As consideration for the sale, we made a cash payment of
      $500,000 and issued a promissory note for $500,000. In addition, the Company
      issued the shareholders of Exxceed 1,500,000 common shares valued at $2,525,000.
      We recorded approximately $1.1 million in intangible assets and $2.4 million
      in
      goodwill as part of the acquisition.




In
      the
      past we have generally acquired companies and businesses through the issuance
      of
      our common shares. We anticipate that we will continue to finance future
      acquisitions in whole or in part by issuing our common shares. However, to
      the
      extent that we use cash to fund acquisitions, the amount of funds available
      to
      satisfy our working capital needs will be reduced.




We
      believe that these acquisitions have been important to our evolution from a
      recruitment application service provider into an HCM business process
      aggregator. We believe that these additions will continue to broaden our revenue
      base and diversify our product offerings.




RECENT
      ACCOUNTING PRONOUNCEMENTS




In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), *Accounting
      for Share-Based Payments* (“SFAS
      123R”). SFAS 123R requires that the compensation cost relating to share-based
      payment transactions be recognized in financial statements with the cost
      measured based on the estimated fair value of the equity or liability
      instruments issued. SFAS 123R states that its effective date is for interim
      periods beginning after June 15, 2005, but the SEC deferred the effective date
      to annual periods beginning after June 15, 2005. Accordingly, the Company will
      adopt the new requirements beginning with fiscal 2007, or June 1, 2006. As
      a
      result, the Company expects to record non-cash, stock based compensation
      expense, which will have a material impact on results of operations. The full
      impact is dependent on various factors, including the timing of when new
      employees are hired, the total number of stock awards granted, and the fair
      value of the stock awards at the time of grant. Had the Company adopted SFAS
      123R in prior periods, the total stock-based expense for all awards would have
      approximated the impact of expensing stock awards as described in the financial
      statement footnote disclosure of pro forma net income (loss) and net income
      (loss) per share.





In
      June
      2005, the FASB issued SFAS 154, *Accounting
      Changes and Error Corrections* (“SFAS
      154”), which replaces APB 20, *Accounting
      Changes* (“APB
      20”), and SFAS 3, *Reporting
      Accounting Changes in Interim Financial Statements* .
      SFAS
      154 applies to all voluntary changes in accounting principles and changes in
      requirements for accounting for and reporting of a change in accounting
      principle. SFAS 154 requires retroactive application to prior period financial
      statements of a voluntary change in accounting principles unless it is
      impracticable. APB 20 previously required that most voluntary changes in
      accounting principles be recognized by including in net income of the period
      of
      the change the cumulative effect of changing to the new accounting principle.
      SFAS 154 carries forward many other provisions of APB 20 without change,
      including the provisions related to the reporting of a change in accounting
      estimate, a change in the reporting entity and the correction of an error.
      The
      Company will adopt this standard effective June 1, 2006.




46





ITEM
      7A.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.




We
      are
      primarily exposed to market risks associated with fluctuations in interest
      rates
      and foreign currency exchange rates.





INTEREST
      RATE RISKS





Our
      exposure to interest rate fluctuations relates primarily to our short-term
      investment portfolio and our bank loans. We invest our surplus cash in an
      investment trust established by a Canadian chartered bank and in a certificate
      of deposit in a bank in the United States. The investment trust holds various
      short-term, low-risk instruments and can be withdrawn without penalty at any
      time. The interest income from these investments is subject to interest rate
      fluctuations, which we believe will not have a material impact on our financial
      position.




We
      have
      established a CDN $3,000,000 line of credit with a Canadian bank which bears
      interest at the bank’s prime rate plus 1%. We have drawn CDN $2,794,777 on this
      facility as of May 31, 2006. We also have a term loan with the bank in the
      amount of CDN $36,663 as of May 31, 2006. The term loan bears interest at the
      bank’s prime rate plus 2%. Additionally, we have two letters of credit issued in
      May 2002 as collateral on leased facilities in the amounts of $71,676 and CDN
      $400,000. We pay an annual fee of 1.2% on these letters of credit.  ****




The
      majority of our interest rates are variable, and, therefore, we have exposure
      to
      risks associated with interest rate fluctuations. However, management believes
      that the exposure is limited as the majority of the exposure is related to
      the
      CDN $3,000,000 line of credit, which is fully collateralized with our restricted
      cash and therefore can be liquidated immediately if faced with a rising interest
      rate environment.




The
      impact on net interest income of a 100 basis point adverse change in interest
      rates for the fiscal year ended May 31, 2006 would have been less than $26,000.




FOREIGN
      CURRENCY RISK





We
      have
      monetary assets and liabilities denominated in Canadian dollars. As a result,
      fluctuations in the exchange rate of the Canadian dollar against the U.S. dollar
      will impact our reported net asset position and net income or loss. A 10% change
      in foreign exchange rates would result in a change in our reported net asset
      position of approximately $40,000, and a change in the reported net loss for
      the
      year ended May 31, 2006 of approximately $290,000.




47





ITEM
      8:
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Shareholders of Workstream Inc.




We
      have
      completed integrated audits of Workstream Inc.’s 2006 and 2005 consolidated
      financial statements and of its internal control over financial reporting as
      of
      May 31, 2006 and an audit of its 2004 consolidated financial statements in
      accordance with the standards of the Public Company Accounting Oversight Board
      (United States). Our opinions, based on our audits, are presented below.




Consolidated
      financial statements




In
      our
      opinion, the accompanying consolidated balance sheets and the related
      consolidated statements of operations, statements of stockholders equity and
      statements of cash flows appearing on pages 50 through 78 of this Annual
      Report to the Shareholders present fairly, in all material respects, the
      financial position of Workstream Inc. and its subsidiaries (the “Company”) at
      May 31, 2006 and 2005 and the results of its operations and its cash flows
      for
      each of the three years in the period ended May 31, 2006 in conformity with
      accounting principles generally accepted in the United States of America. These
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits. We conducted our audits of these statements in accordance with
      the
      standards of the Public
      Company Accounting Oversight Board  (United
      States). Those standards require that we plan and perform the audit to obtain
      reasonable assurance about whether the financial statements are free of material
      misstatement. An audit of financial statements includes examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.




Internal
      control over financial reporting




Also,
      in
      our opinion, management’s assessment, included in Management’s Report on
      Internal Control Over Financial Reporting, appearing on page 79 of this Annual
      Report to the Shareholders, that the Company maintained effective internal
      control over financial reporting as of May
      31,
      2006 based
      on
      criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
      is fairly stated, in all material respects, based on those criteria.
      Furthermore, in our opinion, the Company maintained, in all material respects,
      effective internal control over financial reporting as of May
      31,
      2006 ,
      based
      on criteria established in *Internal
      Control - Integrated Framework* issued
      by
      the COSO. The Company’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express opinions on management’s assessment and on the effectiveness
      of the Company’s internal control over financial reporting based on our audit.
      We conducted our audit of internal control over financial reporting in
      accordance with the standards of the Public Company Accounting Oversight Board
      (United States). Those standards require that we plan and perform the audit
      to
      obtain reasonable assurance about whether effective internal control over
      financial reporting was maintained in all material respects. An audit of
      internal control over financial reporting includes obtaining an understanding
      of
      internal control over financial reporting, evaluating management’s assessment,
      testing and evaluating the design and operating effectiveness of internal
      control, and performing such other procedures as we consider necessary in the
      circumstances. We believe that our audit provides a reasonable basis for our
      opinions.




48





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (i) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company;
      (ii) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of financial statements in accordance with
      generally accepted accounting principles, and that receipts and expenditures
      of
      the company are being made only in accordance with authorizations of management
      and directors of the company; and (iii) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use,
      or
      disposition of the company’s assets that could have a material effect on the
      financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.






PRICEWATERHOUSECOOPERS
      LLP




Ottawa,
      Ontario


July
      28,
      2006




49







**WORKSTREAM
                INC.****CONSOLIDATED
                BALANCE SHEETS**May
                31, 2006
            
            May
                31, 2005ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            4,577,040
            
            $
            11,811,611Restricted
                cash
            
            
            3,095,348
            
            
            3,063,368Short-term
                investments
            
            
            302,197
            
            
            312,322Accounts
                receivable, net
            
            
            3,100,779
            
            
            3,409,654Prepaid
                expenses and other assets
            
            
            527,876
            
            
            648,539Total
                current assets
            
            
            11,603,240
            
            
            19,245,494Property
                and equipment, net
            
            
            1,789,739
            
            
            1,224,332Other
                assets
            
            
            87,468
            
            
            89,570Acquired
                intangible assets, net
            
            
            8,067,423
            
            
            12,814,525Goodwill
            
            
            44,721,859
            
            
            42,283,442TOTAL
                ASSETS
            
            $
            66,269,729
            
            $
            75,657,363LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            2,690,388
            
            $
            2,520,038Accrued
                liabilities
            
            
            2,132,470
            
            
            1,568,306Line
                of credit
            
            
            2,537,246
            
            
            2,326,612Accrued
                compensation
            
            
            1,073,239
            
            
            1,005,950Notes
                payable
            
            
            558,776
            
            
            1,530,000Current
                portion of long-term obligations
            
            
            337,517
            
            
            208,966Deferred
                revenue
            
            
            3,360,766
            
            
            3,288,964Total
                current liabilities
            
            
            12,690,402
            
            
            12,448,836Long-term
                obligations
            
            
            288,269
            
            
            192,258Deferred
                revenue
            
            
            268,727
            
            
            77,156Total
                liabilities
            
            
            13,247,398
            
            
            12,718,250Commitments
                and contingencies
            
            
            -
            
            
            -STOCKHOLDERS’
                EQUITYCommon
                stock, no par value: 50,960,845 and 49,182,772shares
                issued and outstanding, respectively
            
            
            111,991,328
            
            
            109,019,358Additional
                paid-in capital
            
            
            7,547,393
            
            
            7,506,376Accumulated
                other comprehensive loss
            
            
            (871,781
            )
            
            (928,303
            )Accumulated
                deficit
            
            
            (65,644,609
            )
            
            (52,658,318
            )Total
                stockholders’ equity
            
            
            53,022,331
            
            
            62,939,113TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            66,269,729
            
            $
            75,657,363











See
      accompanying notes to these consolidated financial statements.




50




**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF OPERATIONS**Years
                ended May 31,2006
            
            2005
            
            2004Software
            
            $
            11,008,939
            
            $
            9,096,241
            
            $
            6,297,871Professional
                services
            
            
            2,879,942
            
            
            3,320,556
            
            
            486,609Rewards
                and discount products
            
            
            6,268,128
            
            
            5,446,152
            
            
            323,378Career
                services
            
            
            7,963,653
            
            
            8,955,638
            
            
            10,059,022Revenues,
                net
            
            
            28,120,662
            
            
            26,818,587
            
            
            17,166,880Rewards
                and discount products
            
            
            4,722,467
            
            
            3,955,663
            
            
            302,021Other
            
            
            3,085,648
            
            
            3,058,317
            
            
            1,284,968Cost
                of revenues (exclusive of amortization and depreciation expense noted
                below)
            
            
            7,808,115
            
            
            7,013,980
            
            
            1,586,989Gross
                profit
            
            
            20,312,547
            
            
            19,804,607
            
            
            15,579,891Operating
                expenses:Selling
                and marketing
            
            
            6,934,056
            
            
            7,210,996
            
            
            4,362,292General
                and administrative
            
            
            14,253,037
            
            
            17,837,777
            
            
            9,798,440Research
                and development
            
            
            5,422,309
            
            
            2,147,251
            
            
            453,247Amortization
                and depreciation
            
            
            6,684,880
            
            
            8,534,715
            
            
            5,601,910Total
                operating expenses
            
            
            33,294,282
            
            
            35,730,739
            
            
            20,215,889Operating
                loss
            
            
            (12,981,735
            )
            
            (15,926,132
            )
            
            (4,635,998
            )Interest
                and other income
            
            
            223,722
            
            
            189,851
            
            
            11,959Interest
                and other expense
            
            
            (163,504
            )
            
            (234,451
            )
            
            (2,647,265
            )Other
                income (expense), net
            
            
            60,218
            
            
            (44,600
            )
            
            (2,635,306
            )Loss
                before income tax
            
            
            (12,921,517
            )
            
            (15,970,732
            )
            
            (7,271,304
            )Recovery
                of deferred income taxes
            
            
            -
            
            
            847,920
            
            
            1,789,235Current
                income tax expense
            
            
            (64,774
            )
            
            (36,163
            )
            
            (54,830
            )NET
                LOSS
            
            $
            (12,986,291
            )
            $
            (15,158,975
            )
            $
            (5,536,899
            )Weighted
                average number ofcommon
                shares outstanding
            
            
            49,827,925
            
            
            43,461,514
            
            
            25,036,056Basic
                and diluted net loss per share
            
            $
            (0.26
            )
            $
            (0.35
            )
            $
            (0.22
            )








See
      accompanying notes to these consolidated financial statements.




51





**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS' EQUITY**AccumulatedAdditional
            
            Other
            
            
            
            TotalCommon
                Stock
            
            Paid-In
            
            Accumulated
            
            Accumulated
            
            Stockholders'Shares
            
            Amount
            
            Capital
            
            Loss
            
            Deficit
            
            EquityBalance
                at June 1, 2003
            
            
            19,951,570
            
            $
            47,158,583
            
            $
            4,721,516
            
            $
            (893,316
            )
            $
            (31,962,444
            )
            $
            19,024,339Issuance
                of shares and warrants,net
                of issue costs
            
            
            5,454,168
            
            
            6,055,639
            
            
            823,584
            
            
            -
            
            
            -
            
            
            6,879,223Issuance
                of shares andwarrants
                for acquisitions
            
            
            4,836,773
            
            
            13,404,351
            
            
            46,500
            
            
            -
            
            
            -
            
            
            13,450,851Issuance
                of shares and warrantsfor
                services
            
            
            332,000
            
            
            542,590
            
            
            73,500
            
            
            -
            
            
            -
            
            
            616,090Issuance
                of shares throughexercise
                of stock options
            
            
            136,665
            
            
            139,997
            
            
            -
            
            
            -
            
            
            -
            
            
            139,997Issuance
                of shares throughexercise
                of warrants
            
            
            465,697
            
            
            1,174,343
            
            
            (475,798
            )
            
            
            
            
            
            
            
            698,545Conversion
                of convertible note
            
            
            2,424,999
            
            
            4,284,078
            
            
            (1,584,078
            )
            
            -
            
            
            -
            
            
            2,700,000Share
                repurchases
            
            
            (26,989
            )
            
            (53,978
            )
            
            -
            
            
            -
            
            
            -
            
            
            (53,978
            )Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,536,899
            )
            
            (5,536,899
            )Cumulative
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            (178,986
            )
            
            -
            
            
            (178,986
            )Balance
                at May 31, 2004
            
            
            33,574,883
            
            
            72,705,603
            
            
            3,605,224
            
            
            (1,072,302
            )
            
            (37,499,343
            )
            
            37,739,182Issuance
                of shares and warrants,net
                of issue costs
            
            
            9,684,439
            
            
            19,519,485
            
            
            4,820,653
            
            
            -
            
            
            -
            
            
            24,340,138Issuance
                of shares for acquisitions
            
            
            4,700,708
            
            
            13,491,066
            
            
            -
            
            
            -
            
            
            -
            
            
            13,491,066Issuance
                of shares throughexercise
                of stock options
            
            
            331,260
            
            
            950,390
            
            
            -
            
            
            -
            
            
            -
            
            
            950,390Issuance
                of shares throughexercise
                of warrants
            
            
            891,482
            
            
            2,352,814
            
            
            (919,501
            )
            
            -
            
            
            -
            
            
            1,433,313Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (15,158,975
            )
            
            (15,158,975
            )Cumulative
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            143,999
            
            
            -
            
            
            143,999Balance
                at May 31, 2005
            
            
            49,182,772
            
            
            109,019,358
            
            
            7,506,376
            
            
            (928,303
            )
            
            (52,658,318
            )
            
            62,939,113Issuance
                of shares for acquisition
            
            
            1,500,000
            
            
            2,525,000
            
            
            -
            
            
            -
            
            
            -
            
            
            2,525,000Issuance
                of shares throughexercise
                of stock options
            
            
            104,740
            
            
            104,170
            
            
            -
            
            
            -
            
            
            -
            
            
            104,170Issuance
                of shares throughexercise
                of warrants
            
            
            133,333
            
            
            290,000
            
            
            (90,000
            )
            
            -
            
            
            -
            
            
            200,000Issuance
                of shares throughvesting
                of restricted stock units
            
            
            40,000
            
            
            52,800
            
            
            -
            
            
            -
            
            
            -
            
            
            52,800Expensing
                of restricted stock unit grants
            
            
            -
            
            
            -
            
            
            131,017
            
            
            -
            
            
            -
            
            
            131,017Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (12,986,291
            )
            
            (12,986,291
            )Cumulative
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            56,522
            
            
            -
            
            
            56,522Balance
                at May 31, 2006
            
            
            50,960,845
            
            $
            111,991,328
            
            $
            7,547,393
            
            $
            (871,781
            )
            $
            (65,644,609
            )
            $
            53,022,331








See
      accompanying notes to these consolidated financial statements.




52




**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS**Years
                ended May 31,2006
            
            2005
            
            2004Cash
                provided by (used in) operating activities:Net
                loss for the year
            
            $
            (12,986,291
            )
            $
            (15,158,975
            )
            $
            (5,536,899
            )Adjustments
                to reconcile net loss to net cash (used in) provided byoperating
                activities:Amortization
                and depreciation
            
            
            6,684,880
            
            
            8,534,715
            
            
            5,601,910Leasehold
                inducement amortization
            
            
            (53,835
            )
            
            (40,100
            )
            
            (29,544
            )Non-cash
                interest on convertible notes and notes payable
            
            
            -
            
            
            53,746
            
            
            2,318,444Provision
                for bad debts
            
            
            159,704
            
            
            577,362
            
            
            55,966Recovery
                of deferred income taxes
            
            
            -
            
            
            (847,920
            )
            
            (1,758,049
            )Non-cash
                compensation
            
            
            226,326
            
            
            210,296
            
            
            642,590Change
                in long-term portion of deferred revenue
            
            
            191,571
            
            
            77,156
            
            
            -Net
                change in operating components of working capital:Accounts
                receivable
            
            
            1,119,129
            
            
            (430,955
            )
            
            361,434Prepaid
                expenses and other assets
            
            
            (13,215
            )
            
            663,145
            
            
            (56,054
            )Accounts
                payable and accrued liabilities
            
            
            661,216
            
            
            (2,828,592
            )
            
            (1,386,478
            )Deferred
                revenue
            
            
            (899,111
            )
            
            250,064
            
            
            (140,100
            )Net
                cash (used in) provided by operating activities
            
            
            (4,909,626
            )
            
            (8,940,058
            )
            
            73,220Cash
                provided by (used in) investing activities:Purchase
                of property and equipment
            
            
            (682,702
            )
            
            (333,799
            )
            
            (222,098
            )Cash
                paid for business combinations
            
            
            (500,000
            )
            
            (8,838,592
            )
            
            (416,385
            )(Increase)/decrease
                in restricted cash
            
            
            319,856
            
            
            (196,811
            )
            
            (1,485,665
            )Sale
                (purchase) of short-term investments
            
            
            50,293
            
            
            98,659
            
            
            (242,780
            )Net
                cash used in investing activities
            
            
            (812,553
            )
            
            (9,270,543
            )
            
            (2,366,928
            )Cash
                provided by (used in) financing activities:Proceeds
                from issuance of common stock and warrants
            
            
            -
            
            
            24,993,989
            
            
            8,248,545Costs
                related to the registration and issuance of common stock
            
            
            -
            
            
            (904,051
            )
            
            (670,775
            )Repayment
                of long-term obligations
            
            
            (1,712,286
            )
            
            (1,050,292
            )
            
            (2,452,023
            )Proceeds
                from exercise of options and warrants
            
            
            304,170
            
            
            2,383,703
            
            
            39,997Line
                of credit, net activity
            
            
            (90,863
            )
            
            186,289
            
            
            1,488,180Repayment
                related to lease settlement
            
            
            -
            
            
            -
            
            
            (120,000
            )Net
                cash (used in) provided by financing activities
            
            
            (1,498,979
            )
            
            25,609,638
            
            
            6,533,924Effect
                of exchange rate changes on cash and cash equivalents
            
            
            (13,413
            )
            
            74,108
            
            
            (156,923
            )Net
                (decrease) increase in cash and cash equivalents
            
            
            (7,234,571
            )
            
            7,473,145
            
            
            4,083,293Cash
                and cash equivalents, beginning of year
            
            
            11,811,611
            
            
            4,338,466
            
            
            255,173Cash
                and cash equivalents, end of year
            
            $
            4,577,040
            
            $
            11,811,611
            
            $
            4,338,466








53







**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS (CONTINUED)**Years
                ended May 31,2006
            
            2005
            
            2004Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            162,609
            
            $
            141,690
            
            $
            367,893Taxes
                paid
            
            $
            70,593
            
            $
            50,736
            
            $
            633Equipment
                acquired under capital leases
            
            $
            485,677
            
            
            -
            
            
            -Issuance
                of common shares as contingent consideration
            
            
            -
            
            $
            2,532,111
            
            
            -Conversion
                of notes to common shares
            
            
            -
            
            
            -
            
            $
            2,700,000








See
      accompanying notes to these audited financial statements .




54




**Note
      1.**  **Description
      of Company and Significant Accounting Policies**





***Description
      of the Company***





Workstream
      Inc. (“Workstream” or the “Company”), is a provider of services and software for
      Human Capital Management (“HCM”). HCM is the process by which companies recruit,
      train, evaluate, motivate and retain their employees. Workstream offers software
      and services that address the needs of companies to more effectively manage
      their human capital management function. Workstream has two distinct reporting
      units: Enterprise Workforce Services and Career Networks. The Enterprise
      Workforce Services segment offers a suite of HCM software solutions, which
      includes recruitment, benefits administration and enrollment, performance
      management, succession planning, compensation management and employee awards
      and
      discounts programs. The Career Networks segment offers recruitment research,
      resume management and career transition services. In addition, Career Networks
      provides services through a web-site where job-seeking senior executives can
      search job databases and post their resumes, and companies and recruiters can
      post position openings and search for qualified senior executive candidates.
      Workstream conducts its business primarily in the United States and
      Canada.




***Principles
      of Consolidation***




The
      consolidated financial statements include the accounts of Workstream and its
      wholly-owned subsidiaries. The earnings of the subsidiaries are included from
      the date of acquisition. All intercompany accounts and transactions have been
      eliminated in consolidation.





***Use
      of Estimates***





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions affecting the amounts reported in the consolidated
      financial statements and the accompanying notes. Changes in these estimates
      and
      assumptions may have a material impact on the financial statements and
      accompanying notes.





Significant
      estimates and assumptions made by management include the assessment of goodwill
      impairment. When assessing goodwill for possible impairment, significant
      estimates include future cash flow projections, future revenue growth rates
      and
      the appropriate discount rate. It is reasonably possible that those estimates
      may change in the near-term, significantly affecting future assessments of
      goodwill impairment. Other significant estimates include the
      determination of the provision for doubtful accounts receivable, valuing and
      estimating useful lives of intangible assets, valuing assets and liabilities
      acquired through business acquisitions, and estimating tax valuation allowances.





***Reclassifications***





Certain
      prior year amounts have been reclassified to conform to the current year
      presentation.





***Cash
      Equivalents and Short-Term Investments***





Cash
      equivalents and short-term investments are stated at cost plus accrued interest,
      which approximates fair value. Cash equivalents are defined as highly liquid
      investments with terms to maturity at acquisition of three months or less.
      Short-term investments are defined as highly liquid investments with terms
      to
      maturity of more than three months but less than one year at the date of
      acquisition. All cash equivalents and short-term investments are classified
      as
      available for sale.





***Restricted
      Cash***





Restricted
      cash consists of short-term investment balances used to collateralize the
      outstanding line of credit and term loan balances as well as certain lease
      agreements. The line of credit, term loan and facility leases form part of
      current operations, and, accordingly, the restricted cash is classified as
      a
      current asset.




55







***Property
      and Equipment***





Property
      and equipment are recorded at cost. Depreciation is based on the estimated
      useful life of the asset and is recorded as follows:





Furniture
                and fixtures
            5
                years straight lineOffice
                equipment
            5
                years straight lineComputers
                and software
            3
                years straight lineLeasehold
                improvements
            Shorter
                of lease term or useful life





The
      carrying values are reviewed for impairment whenever events or changes in
      circumstances indicate that the carrying amounts of such assets may not be
      recoverable. The determination of whether any impairment exists includes a
      comparison of estimated undiscounted future cash flows anticipated to be
      generated during the remaining life of the asset to the net carrying value
      of
      the asset. The amount of any impairment recognized is the difference between
      the
      carrying value and the fair value.





***Leasehold
      Inducements***





Leasehold
      inducements are amortized over the term of the leases as a reduction in rent
      expense.





***Goodwill
      and Acquired Intangible Assets***




Management
      assesses goodwill related to reporting units for impairment at least annually
      and writes down the carrying amount of goodwill as required. The Company
      estimates the fair value of each reporting unit by preparing a discounted cash
      flow model. An impairment charge is recorded if the implied fair value of
      goodwill of a reporting unit is less than the book value of goodwill for that
      unit.





Intangible
      assets with a finite useful life recorded as a result of acquisition
      transactions are amortized over their estimated useful lives as
      follows:




Acquired
                technologies
            3
                years straight lineCustomer
                base
            3
                years straight lineIntellectual
                property
            5
                years straight line





The
      Company evaluates its intangible assets for impairment whenever events or
      changes in circumstances indicate that the carrying value of such assets may
      not
      be recoverable. To determine recoverability, the Company compares the carrying
      value of the assets to the estimated future cash flows. If the carrying amount
      of an asset exceeds its estimated future cash flows, an impairment charge is
      recognized for the amount by which the carrying amount of the asset exceeds
      the
      fair value of the asset.





***Income
      Taxes***





The
      Company uses the liability method of accounting for income taxes. Under this
      method, deferred tax assets and liabilities are determined based on temporary
      differences between the financial statement and tax basis of assets and
      liabilities and net operating loss and credit carryforwards using enacted tax
      rates in effect for the year in which the differences are expected to reverse.
      The effect on deferred tax assets and liabilities of a change in tax rates
      is
      recognized in income in the period that includes the enactment date. Valuation
      allowances are established when necessary to reduce deferred tax assets to
      the
      amounts expected to be realized.





***Investment
      Tax Credits***





Investment
      tax credits, which are earned as a result of qualifying Canadian research and
      development expenditures, are recognized when the expenditures are made and
      their realization is reasonably assured.




56





***Revenue
      Recognition***




The
      Company derives revenue from various sources including the following:
      subscription and hosting fees; licensing of software; software maintenance
      fees;
      professional services related to software implementation, customization and
      training; sale of products and tickets through the Company’s employee discount
      and rewards software module; career transition services; recruitment research
      services; and, applicant sourcing.





In
      general, the Company recognizes revenue when all of the revenue recognition
      criteria are met, which is typically when:


·
            Evidence
                of an arrangement exists


·
            Services
                have been provided or goods have been
                delivered


·
            The
                price is fixed or determinable


·
            Collection
                is reasonably assured.





The
      Company sells various HCM software applications and also provides these
      applications as an on-demand application service. Revenue is generated through
      a
      variety of contractual arrangements.





Subscription
      and hosting fees and software maintenance fees are billed in advance on a
      monthly, quarterly or annual basis. Amounts that have been invoiced are recorded
      in accounts receivable and in deferred revenue or revenue, depending on whether
      the revenue recognition criteria have been met. Quarterly and annual payments
      are deferred and recognized monthly over the service period on a straight-line
      basis. Set up fees are deferred and recognized monthly on a straight-line basis
      over the contractual lives, which approximates the expected lives of the
      customer relationships.





Hosting
      revenues consist of subscription fees from customers accessing our on-demand
      application service. The Company follows the provisions of SEC Staff Accounting
      Bulletin No. 104, *Revenue
      Recognition* and
      Emerging Issues Task Force Issue No. 00-21, *Revenue
      Arrangements with Multiple Deliverables* .
      For
      revenue arrangements with multiple deliverables, the Company allocates the
      total
      customer arrangement to the separate units of accounting based on their relative
      fair values, as determined by the price of the undelivered items when sold
      separately. Professional services included in an application services
      arrangement with multiple deliverables are accounted for separately when these
      services have value to the customer on a standalone basis, and there is
      objective and reliable evidence of fair value of each deliverable of the
      arrangement. When accounted for separately, revenues are recognized as the
      services are rendered.





License
      revenues consist of fees earned from the granting of licenses to use the
      software products. The Company recognizes revenue from the sale of software
      licenses in accordance with American Institute of Certified Public Accountants
      ("AICPA") Statement of Position ("SOP") No. 97-2, *Software
      Revenue Recognition* ,
      and SOP
      No. 98-9, *Modification
      of SOP 97-2, Software Revenue Recognition, with Respect to Certain
      Transactions,* when all
      of the following conditions are met: a signed contract exists; the software
      has
      been shipped or electronically delivered; the license fee is fixed or
      determinable; and the Company believes that the collection of the fees is
      reasonably assured. License revenue is recorded upon delivery with an
      appropriate deferral for maintenance services, if applicable, provided all
      of
      the other relevant conditions have been met. The total fee from the arrangement
      is allocated based on Vendor Specific Objective Evidence ("VSOE") of fair value
      of each of the undelivered elements. Maintenance agreements are typically priced
      based on a percentage of the product license fee and have a one-year term,
      renewable annually. VSOE of fair value for maintenance is established based
      on
      the stated renewal rates. Services provided to customers under maintenance
      agreements include technical product support and unspecified product upgrades.
      VSOE of fair value for the professional service element is based on the standard
      hourly rates the Company charges for services when such services are sold
      separately.




57





Professional
      services revenue is generated from implementation and customization of software
      and from training and general consulting. In addition, revenue is generated
      from
      technical support not included in the software maintenance. The majority of
      professional services revenue is billed based on an hourly rate and recognized
      on a monthly basis as services are provided. For certain contracts which involve
      significant implementation or other services which are essential to the
      functionality of the software and which are reasonably estimable, the license
      and implementation services revenue is recognized using contract accounting,
      as
      prescribed by SOP 81-1, *Accounting
      for Performance of Construction-Type and Certain Production-Type
      Contracts* .
      Revenue
      is recognized over the period of each implementation using the
      percentage-of-completion method. Labor hours incurred is used as the measure
      of
      progress towards completion, and management believes its estimates to completion
      are reasonably dependable. A provision for estimated losses on engagements
      is
      made in the period in which the losses become probable and can be reasonably
      estimated.





One
      of
      the software applications offered by the Company allows customer companies
      to
      offer rewards and benefits (discounted goods and tickets) in an effort to
      promote their employee retention. The Company generates subscription revenues
      from the customer company. In addition, the Company generates revenue from
      the
      sale of products and tickets to the customers’ employees through a website. The
      Company recognizes revenue when all of the revenue recognition criteria are
      met,
      which is typically when the goods are shipped and title has transferred.





For
      career transition services, the Company bills the client 50% when the assignment
      starts and the remaining 50% when the assignment is completed. The Company
      recognizes revenue when all of the revenue recognition criteria are met, which
      is typically when services have been completed.





For
      applicant sourcing services, the Company bills its clients in advance on a
      monthly, quarterly and annual basis. The Company recognizes revenue when all
      of
      the revenue recognition criteria are met, which is typically on a straight-line
      basis as services have been completed. Unrecognized revenue is included in
      deferred revenue.





For
      resume management services and recruitment services, the Company bills its
      clients for job postings and matching of resumes per descriptions that the
      client provides and for quantity-based job posting packages. The Company
      recognizes revenue when all of the revenue recognition criteria are met, which
      is typically when the services have been completed.




***Deferred
      Revenues***





As
      described in the Revenue Recognition policy above, the Company defers certain
      revenues received and recognizes them ratably over the applicable service
      period. If the revenue is expected to be recognized within the following twelve
      months, it is classified as a current liability on the consolidated balance
      sheet.





***Accounting
      for Stock-Based Compensation***





The
      Company grants stock options and restricted stock units to employees, directors
      and consultants under the 2002 Amended and Restated Stock Option Plan (the
      “Plan”), which was most recently amended in October 2004. Under the Plan, as
      amended, the Company is authorized to issue up to 4,000,000 shares of common
      stock upon the exercise of stock options and an additional 1,000,000 shares
      of
      common stock for issuance of restricted stock unit grants.





The
      Company accounts for compensation expense for its stock-based employee
      compensation plan using the intrinsic value method prescribed in Accounting
      Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      25”) and complies with the disclosure provisions of Statement of Financial
      Accounting Standards (“SFAS”) No. 123, *Accounting
      for Stock-Based.* Under
      APB
      25, compensation expense is measured at the grant date based on the intrinsic
      value of the award and is recognized on a straight-line basis over the service
      period, which is usually the option-vesting period.




58





Pro
      forma
      information regarding the results of operations is determined as if the Company
      had accounted for its employee stock options using the fair-value method. The
      fair value of options granted was estimated at the date of grant using the
      Black
      Scholes option-pricing model with the following assumptions:





2006
            
            2005
            
            2004Weighted-average
                risk free interest rates
            4.30%
            
            3.68%
            
            2.99%Expected
                dividend yield
            0%
            
            0%
            
            0%Weighted-average
                expected volatility
            82%
            
            72%
            
            90%Expected
                life (in years)
            3.5
            
            3.5
            
            3.5





Because
      the determination of the fair value of all options is based on the assumptions
      described in the preceding paragraph and because additional option grants are
      expected to be made in future periods, this pro forma information is not likely
      to be representative of the effect on reported net income or loss for future
      periods.




The
      following reflects the impact on results of operations if the Company had
      recorded additional compensation expense relating to the employee stock
      options:




2006
            
            2005
            
            2004Net
                loss, as reported
            
            $
            (12,986,291
            )
            $
            (15,158,975
            )
            $
            (5,536,899
            )Add:
                stock-based compensation expense included in reported net
                loss
            
            
            55,356
            
            
            -
            
            
            -Deduct:
                total stock-based compensation expense determined under fair value
                based
                method for all awards
            
            
            (948,651
            )
            
            (896,621
            )
            
            (508,059
            )Net
                loss, pro forma
            
            $
            (13,879,586
            )
            $
            (16,055,596
            )
            $
            (6,044,958
            )Weighted
                average common sharesoutstanding
                during the year
            
            
            49,827,925
            
            
            43,461,514
            
            
            25,036,056Basic
                and diluted loss per share:As
                reported
            
            $
            (0.26
            )
            $
            (0.35
            )
            $
            (0.22
            )Pro
                forma
            
            $
            (0.28
            )
            $
            (0.37
            )
            $
            (0.24
            )





***Research
      and Development Costs***





The
      Company accounts for research and development costs associated with computer
      software development under the provisions of SFAS No. 86, *Accounting
      for the Costs of Computer Software to be Sold, Leased or Otherwise
      Marketed* .
      Costs
      are expensed as incurred until technological feasibility has been established.
      Technological feasibility is established upon completion of a working model;
      thereafter, all software production costs are capitalized and subsequently
      reported at the lower of unamortized cost or net realizable value. To date,
      the
      time period between the establishment of technological feasibility and
      completion of software development has been short, and as a result, no
      significant development costs have been incurred during that period.
      Accordingly, the Company has not capitalized any research and development costs
      to date associated with computer software products to be sold, leased, or
      otherwise marketed.





Research
      and development costs primarily include salaries and related costs, costs
      associated with using outside vendors and miscellaneous administrative
      expenses.




59





***Foreign
      Currency Translation***





These
      consolidated financial statements are presented in U.S. dollars. The parent
      company is located in Canada, and the functional currency of the parent company
      is the Canadian dollar. The Company’s subsidiaries use their local currency,
      which is the U.S. dollar, as their functional currency. Adjustments resulting
      from translating foreign functional currency financial statements into U.S.
      dollars are recorded as a separate component of stockholders’ equity. All assets
      and liabilities denominated in a foreign currency are translated into U.S.
      dollars at the exchange rate on the balance sheet date. Revenues and expenses
      are translated at the average exchange rate during the period. Equity
      transactions are translated using historical exchange rates. Foreign currency
      transaction gains and losses are included in net loss for the year and have
      not
      been material during the year ended May 31, 2006.





***Concentration
      of Credit Risk***





The
      Company’s financial instruments that are exposed to concentrations of credit
      risk consist primarily of cash and cash equivalents, restricted cash, short-term
      investments and accounts receivable. At times, the Company’s deposits may exceed
      federally insured limits. Management believes that the use of credit quality
      financial institutions minimizes the risk of loss associated with these
      deposits. Collateral is not required for accounts receivables.





***Interest
      Rate Risk***





The
      Company’s restricted cash and short-term investments earn interest at fixed
      rates. The Company’s line of credit and term loan accrue interest at a variable
      rate based on the bank’s prime rate. Fluctuations in the prime rate could impact
      the Company’s financial results. Management believes that the exposure to
      interest rate fluctuations is limited as the line of credit and the term loan
      are fully collateralized with restricted cash and can be liquidated if faced
      with rising interest rates.





***Fair
      Value of Financial Instruments***





The
      carrying amounts of the Company’s financial instruments, including cash and cash
      equivalents, short-term investments, restricted cash, accounts receivable,
      accounts payable, and accrued expenses, approximate their fair values due to
      their short maturities. Based on borrowing rates currently available to the
      Company for similar terms, the carrying value of the line of credit, capital
      lease obligations, notes payable and long-term obligations approximate fair
      value.





***Business
      Combinations and Valuation of Intangible Assets***





The
      Company accounts for business combinations in accordance with SFAS No.
      141, *Business Combinations* (“SFAS
      141”). SFAS 141 requires business combinations to be accounted for using the
      purchase method of accounting and includes specific criteria for recording
      intangible assets separate from goodwill. Results of operations of acquired
      businesses are included in the financial statements of the Company from the
      date
      of acquisition. Net assets of the acquired company are recorded at their fair
      value at the date of acquisition. As required by SFAS No. 142, *Goodwill and Other Intangible Assets* (“SFAS
      142”), the Company does not amortize goodwill but instead tests goodwill for
      impairment periodically and if necessary, would record any impairment in
      accordance with SFAS 142. Identifiable intangibles, such as the acquired
      customer base, are amortized over their expected economic lives.




60





***Management
      Assessment of Liquidity***





The
      Company has grown primarily through acquisition over the past five years and
      has
      incurred operating losses throughout the period. For the current fiscal year,
      the Company had a net loss of approximately $13 million, including $6.7 million
      in depreciation and amortization, used approximately $4.9 million in cash in
      operations, and had a working capital deficit of $1.1 million. During fiscal
      2006, management focused on integrating the various acquired technologies on
      to
      a common platform while simultaneously endeavoring to rationalize operating
      expenses to more closely align with current levels of revenue. The result was
      a
      series of product releases during the year that enhanced the product offering,
      increased revenue and margins and reduced operating expenses such that by the
      fourth quarter the operating loss before depreciation and amortization was
      lowered to $743,000 (unaudited) and gross profit increased and net loss decreased compared
      to the prior seven unaudited quarters (see Note 16).





The
      Company has prepared a 2007 budget that, among other things, assumes a reduced
      level of investment in product and research and development spending, increased
      revenue from both operating segments, an overall lower level of recurring
      operating expenses compared to the prior year and a net positive cash flow
      yield
      from operations for the year. If the Company is unable to meet its objectives
      and generate cash flow from operations, it may become cash constrained and
      would
      take certain actions, including but not limited to cutting back new product
      development initiatives and reducing general and administrative expenses
      further. Additionally, in April of 2006, the Company engaged an investment
      banker to assist in evaluating strategic alternatives, including the raising
      of
      capital.





***Recent
      Accounting Pronouncements***





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), *Accounting
      for Share-Based Payments* (“SFAS
      123R”). SFAS 123R requires that the compensation cost relating to share-based
      payment transactions be recognized in financial statements with the cost
      measured based on the estimated fair value of the equity or liability
      instruments issued. SFAS 123R states that its effective date is for interim
      periods beginning after June 15, 2005, but the SEC deferred the effective date
      to annual periods beginning after June 15, 2005. Accordingly, the Company will
      adopt the new requirements beginning with fiscal 2007, or June 1, 2006. As
      a
      result, the Company expects to record non-cash, stock based compensation
      expense, which will have a material impact on results of operations. The full
      impact is dependent on various factors, including the timing of when new
      employees are hired, the total number of stock awards granted, and the fair
      value of the stock awards at the time of grant. Had the Company adopted SFAS
      123R in prior periods, the total stock-based expense for all awards would have
      approximated the impact of expensing stock awards as described in the previous
      disclosure of pro forma net income (loss) and net income (loss) per share.





In
      June
      2005, the FASB issued SFAS 154, *Accounting
      Changes and Error Corrections* (“SFAS
      154”), which replaces APB 20, *Accounting
      Changes* (“APB
      20”), and SFAS 3, *Reporting
      Accounting Changes in Interim Financial Statements* .
      SFAS
      154 applies to all voluntary changes in accounting principles and changes in
      requirements for accounting for and reporting of a change in accounting
      principle. SFAS 154 requires retroactive application to prior period financial
      statements of a voluntary change in accounting principles unless it is
      impracticable. APB 20 previously required that most voluntary changes in
      accounting principles be recognized by including in net income of the period
      of
      the change the cumulative effect of changing to the new accounting principle.
      SFAS 154 carries forward many other provisions of APB 20 without change,
      including the provisions related to the reporting of a change in accounting
      estimate, a change in the reporting entity and the correction of an error.
      The
      Company will adopt this standard effective June 1, 2006.




61





**Note
      2.**  **Business
      Acquisition**





***2006
      Acquisition***





On
      January 13, 2006, the Company acquired certain assets of Exxceed, Inc.
      (“Exxceed”), a Delaware corporation, a developer and marketer of competency and
      performance management software. As partial consideration for the purchase,
      the
      Company issued 1,500,000 shares of common stock valued at $2,525,000. Up to
      an
      additional $1,000,000 in common shares, representing potential contingent
      consideration, may be issued upon the acquired company meeting certain billing
      targets within 12 months of the acquisition date. The primary reason for the
      Exxceed acquisition was to enable the Company to both enhance and expand its
      product and service offerings. The acquisition added a competency and employee
      development capability and upgraded the current performance management and
      succession planning application.





The
      consolidated financial statements presented herein include the results of
      operations of Exxceed from January 14, 2006.





Management
      prepared the valuation of the net tangible and intangible assets acquired and
      liabilities assumed.





The
      following summarizes the Exxceed purchase price allocation:





Share
                consideration
            
            $
            2,525,000Cash
                consideration
            
            
            500,000Note
                payable (Note 9)
            
            
            500,000Acquisition
                costs
            
            
            35,000Total
                purchase price
            
            $
            3,560,000Current
                assets
            
            $
            945,729Tangible
                long-term assets
            
            
            21,173Other
                assets
            
            
            5,562Current
                liabilities
            
            
            (1,003,577
            )Intangible
                assets:Customer
                base
            
            
            561,752Acquired
                technology
            
            
            587,989Goodwill
            
            
            2,441,372Total
                net assets
            
            $
            3,560,000








62





***2005
      Acquisitions***





The
      following summarizes the final purchase price allocations for asset and business
      acquisitions made during the year ended May 31, 2005:





Peoplebonus
            
            Bravanta
            
            HRSoft
            
            ProAct
            
            TotalShare
                consideration
            
            $
            200,000
            
            $
            7,107,693
            
            $
            -
            
            $
            2,822,873
            
            $
            10,130,566Cash
                consideration
            
            
            105,000
            
            
            2,051,120
            
            
            100,000
            
            
            5,500,000
            
            
            7,756,120Payoff
                of bank loans
            
            
            -
            
            
            -
            
            
            550,000
            
            
            -
            
            
            550,000Payoff
                of vendor payables
            
            
            -
            
            
            -
            
            
            216,913
            
            
            -
            
            
            216,913Note
                payable
            
            
            95,798
            
            
            -
            
            
            -
            
            
            1,530,000
            
            
            1,625,798Cash
                advance
            
            
            -
            
            
            -
            
            
            325,000
            
            
            -
            
            
            325,000Escrow
                funds
            
            
            25,000
            
            
            -
            
            
            -
            
            
            -
            
            
            25,000Acquisition
                costs
            
            
            18,499
            
            
            155,000
            
            
            150,000
            
            
            144,529
            
            
            468,028Total
                purchase price
            
            $
            444,297
            
            $
            9,313,813
            
            $
            1,341,913
            
            $
            9,997,402
            
            $
            21,097,425Current
                assets
            
            $
            8,450
            
            $
            643,709
            
            $
            326,561
            
            $
            1,443,098
            
            $
            2,421,818Tangible
                long-term assets
            
            
            9,080
            
            
            86,310
            
            
            49,548
            
            
            298,858
            
            
            443,796Other
                assets
            
            
            -
            
            
            35,005
            
            
            57,103
            
            
            56,686
            
            
            148,794Current
                liabilities
            
            
            (644
            )
            
            (875,800
            )
            
            (644,942
            )
            
            (1,832,091
            )
            
            (3,353,477
            )Other
                liabilities
            
            
            -
            
            
            (61,624
            )
            
            (267,823
            )
            
            -
            
            
            (329,447
            )Deferred
                income tax asset
            
            
            -
            
            
            861,000
            
            
            -
            
            
            -
            
            
            861,000Intangible
                assets:Customer
                base
            
            
            -
            
            
            837,000
            
            
            852,098
            
            
            1,717,000
            
            
            3,406,098Intellectual
                property
            
            
            -
            
            
            645,000
            
            
            -
            
            
            5,034,000
            
            
            5,679,000Acquired
                technology
            
            
            427,411
            
            
            670,000
            
            
            969,368
            
            
            -
            
            
            2,066,779Deferred
                income tax liability
            
            
            -
            
            
            (861,000
            )
            
            -
            
            
            -
            
            
            (861,000
            )Goodwill
            
            
            -
            
            
            7,334,213
            
            
            -
            
            
            3,279,851
            
            
            10,614,064Total
                net identifiable assets
            
            $
            444,297
            
            $
            9,313,813
            
            $
            1,341,913
            
            $
            9,997,402
            
            $
            21,097,425





***Peoplebonus.com
      LLC***





On
      June
      21, 2004, the Company acquired certain assets of Peoplebonus.com LLC
      (“Peoplebonus”), a Delaware limited liability company. As partial consideration
      for the purchase, the Company issued 72,202 shares of common stock valued at
      $200,000. An additional 108,304 shares are being held in escrow as potential
      contingent consideration dependent upon the acquired company meeting certain
      revenue targets subsequent to the acquisition. Peoplebonus' products and
      services were designed to streamline the way a company processes and handles
      resumes. Peoplebonus’ artificial intelligence data mining software can search
      for key words and phrases from within a resume and score the resume based on
      learned search criteria. The primary reason for the Peoplebonus acquisition
      was
      the expansion and enhancement of the HCM solutions offered by the Company.





The
      consolidated financial statements presented herein include the results of
      operations of Peoplebonus from June 22, 2004.





Management
      prepared a valuation of the net tangible and intangible assets acquired.




63





***Bravanta,
      Inc.***





On
      July
      27, 2004, the Company acquired 100% of the outstanding stock of Bravanta, Inc.
      (“Bravanta”), a Delaware corporation. As partial consideration for the purchase,
      the Company issued Bravanta 2,672,064 shares of common stock valued at
      $7,107,693. Bravanta was a provider of enterprise incentive and recognition
      programs. The primary reason for the Bravanta acquisition was to enable the
      Company to expand its customer base, expand rewards and incentives products
      and
      services, and increase recurring revenues.





The
      consolidated financial statements presented herein include the results of
      operations of Bravanta from July 28, 2004.





Management
      obtained an independent valuation of intangible assets acquired and prepared
      a
      valuation of net tangible assets acquired. The excess of the purchase price
      over
      the value of the net tangible and identifiable intangible assets acquired has
      been allocated to goodwill.




***HRSoft,
      LLC***





On
      October 6, 2004, the Company acquired certain assets of HRSoft, LLC (“HRSoft”),
      a Delaware limited liability company. HRSoft developed and marketed strategic
      talent management software solutions for succession planning and leadership
      development, performance management, competency management, career and
      development planning, organizational charting, modeling and hierarchy
      management. The primary reason for the HRSoft acquisition was to enable the
      Company to expand its customer base, expand its products and services, and
      increase recurring revenues.





The
      consolidated financial statements presented herein include the results of
      operations of HRSoft from October 7, 2004.





Management
      prepared a valuation of the net tangible and intangible assets acquired and
      liabilities assumed.




***ProAct
      Technologies Corporation***





On
      December 30, 2004, the Company acquired certain assets of ProAct Technologies
      Corporation (“ProAct”), a Delaware corporation. As partial consideration for the
      purchase, the Company issued 913,551 shares of common stock valued at
      $2,822,873, of which 253,764 shares are being held in escrow as source against
      which the Company can assert potential indemnification claims. ProAct was a
      provider of software and hosted web-based tools for employee benefits
      management. The primary reason for the ProAct acquisition was to enable the
      Company to expand its customer base, expand employee benefits management
      products and services, and increase recurring revenue.




The
      consolidated financial statements presented herein include the results of
      operations of ProAct from December 31, 2004.





Management
      obtained an independent valuation of the identifiable intangible assets
      acquired. Management estimated the fair value of all other assets. The excess
      of
      the purchase price over the value of the net tangible and identifiable
      intangible assets acquired has been allocated to goodwill.




64





**Note
      3.**  **Restricted
      Cash**





Certain
      short-term investments were pledged as collateral as follows at May 31:





2006
            
            2005Line
                of credit (note 8)
            
            $
            2,537,246
            
            $
            2,326,612Term
                loan (note 9)
            
            
            33,285
            
            
            61,073Letters
                of credit for facility leases (note 10)
            
            
            434,817
            
            
            467,929Legal
                bond
            
            
            90,000
            
            
            -Credit
                card reserves
            
            
            -
            
            
            207,754$
            3,095,348
            
            $
            3,063,368





**Note
      4.**  **Allowance
      for Doubtful Accounts**





The
      following presents the detail of the changes in the allowance for doubtful
      accounts for the years ended May 31:





2006
            
            2005Balance
                at beginning of the year
            
            $
            495,402
            
            $
            21,509Charged
                to bad debt expense
            
            
            159,704
            
            
            577,362Write-offs
                and effect of exchange rate changes
            
            
            (29,745
            )
            
            (103,469
            )Balance
                at end of the year
            
            $
            625,361
            
            $
            495,402





The
      Company uses historical experience and knowledge of and experience with specific
      customers in order to assess the adequacy of the allowance for doubtful
      accounts. Any adjustments to this account are reflected in the statement of
      operations as a general and administrative expense.





**Note
      5.**  **Property
      and Equipment**





Property
      and equipment consist of the following at May 31:





2006
            
            2005Furniture,
                equipmentand
                leasehold improvements
            
            $
            1,899,690
            
            $
            1,701,644Office
                equipment
            
            
            473,274
            
            
            313,237Computers
                and software
            
            
            6,196,568
            
            
            4,753,0308,569,532
            
            
            6,767,911Less
                accumulated depreciation
            
            
            (6,779,793
            )
            
            (5,543,579
            )Net
                capital assets
            
            $
            1,789,739
            
            $
            1,224,332





Property
      and equipment includes equipment under capital lease totaling $485,677 at May
      31, 2006. Accumulated amortization relating to equipment under capital leases
      totaled $71,411 at May 31, 2006. There were no capital leases as of May 31,
      2005. Depreciation expense for property and equipment was $767,946, $1,007,737
      and $677,933 for the years ended May 31, 2006, 2005 and 2004,
      respectively.




65





**Note
      6.**  **Acquired
      Intangible Assets**





Acquired
      intangible assets consist of the following at May 31:





2006
            
            2005Accumulated
            
            
            
            AccumulatedCost
            
            Amortization
            
            Cost
            
            AmortizationCustomer
                base
            
            $
            8,132,722
            
            $
            5,815,423
            
            $
            7,561,712
            
            $
            4,360,465Acquired
                technologies
            
            
            22,191,121
            
            
            17,001,665
            
            
            21,592,299
            
            
            12,804,243Intellectual
                property
            
            
            1,322,760
            
            
            762,092
            
            
            1,322,760
            
            
            497,53831,646,603
            
            $
            23,579,180
            
            
            30,476,771
            
            $
            17,662,246Less
                accumulated amortization
            
            
            (23,579,180
            )
            
            
            
            
            (17,662,246
            )Net
                acquired intangible assets
            
            $
            8,067,423
            
            
            
            
            $
            12,814,525





Amortization
      expense for intangible assets was $5,916,934, $7,526,978 and $4,923,977 for
      the
      years ended May 31, 2006, 2005 and 2004, respectively. The estimated
      amortization expense related to intangible assets in existence as of May 31,
      2006 is as follows:




Fiscal
                2007:
            
            $
            5,464,831Fiscal
                2008:
            
            
            2,152,615Fiscal
                2009:
            
            
            428,477Fiscal
                2010:
            
            
            21,500$
            8,067,423







**Note
      7.**  **Goodwill**




The
      following represents the detail of the changes in the goodwill account for
      the
      years ended May 31, 2006 and 2005:




EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalGoodwill
                at May 31, 2004
            
            $
            16,375,409
            
            $
            12,223,297
            
            $
            28,598,706Acquisitions
                during the year
            
            
            10,617,019
            
            
            -
            
            
            10,617,019Contingent
                consideration
            
            
            2,532,111
            
            
            234,305
            
            
            2,766,416Purchase
                price allocation adjustments madewithin
                one year of acquisition date
            
            
            301,301
            
            
            -
            
            
            301,301Goodwill
                at May 31, 2005
            
            
            29,825,840
            
            
            12,457,602
            
            
            42,283,442Acquisition
                during the year
            
            
            2,441,372
            
            
            -
            
            
            2,441,372Purchase
                price allocation adjustments madewithin
                one year of acquisition date
            
            
            (2,955
            )
            
            -
            
            
            (2,955
            )Goodwill
                at May 31, 2006
            
            $
            32,264,257
            
            $
            12,457,602
            
            $
            44,721,859








66





**Note
      8.**  **Line
      of Credit**





At
      May
      31, 2006 and 2005, the Company had an aggregate of $2,537,246 and $2,326,612,
      respectively, outstanding on a line of credit from a Canadian bank. The line
      of
      credit bears annual interest at the bank’s prime rate plus 1%. The Company is
      permitted to draw up to CDN (Canadian dollars) $3,000,000 against this facility
      based on compensating balances on deposit with the bank (note 3). At May 31,
      2006, the Company had drawn CDN $2,794,777, which allowed for an additional
      CDN
      $205,223 available to be drawn on this line.





**Note
      9.**  **Long-Term
      Obligations**





Long-term
      obligations consist of the following at May 31:





2006
            
            2005Note
                payable - Exxceed acquisition
            
            $
            500,000
            
            $
            -Note
                payable - other
            
            
            58,776
            
            
            1,530,000Leasehold
                inducements
            
            
            151,890
            
            
            193,359Settlement
                agreement payable
            
            
            30,000
            
            
            123,500Term
                loan
            
            
            33,285
            
            
            61,073Capital
                lease obligations
            
            
            410,611
            
            
            23,2921,184,562
            
            
            1,931,224Less:
                current portion
            
            
            896,293
            
            
            1,738,966$
            288,269
            
            $
            192,258




As
      part
      of the Exxceed acquisition, the Company delivered a $500,000 promissory note,
      which offset certain accounts receivable totaling $1,029,470 at the acquisition
      date. According to the terms of the acquisition agreement, the Company will
      retain the first $500,000 of cash collected on these accounts receivable. The
      next $500,000 in cash receipts will be used to pay down the note payable dollar
      for dollar. The Company will then maintain all cash receipts over $1,000,000.
      All accounts that remain uncollected at May 31, 2006 may be returned to Exxceed
      and the note payable would then be cancelled. Otherwise, the note payable
      matures on January 13, 2007. As of May 31, 2006, the Company collected $751,910.
      Management is in discussions with Exxceed management with regards to the
      disposition of the accounts receivable balances still outstanding at May 31,
      2006, the note payable balance and the potential payment due to Exxceed.




The
      other
      note payable represents a portion of the total consideration for the acquisition
      of ProAct. The note accrued interest at an annual rate of 6% with principal
      and
      interest due on June 1, 2005 and was collateralized by the assets acquired
      by
      the Company from ProAct. On June 8, 2005, the Company paid the principal balance
      of $1,471,224. At May 31, 2006, the balance of $58,776 represents a working
      capital adjustment as prescribed for in the original acquisition agreement.
      To
      date, the Company and ProAct have not agreed to the final working capital
      adjustment amount.





The
      settlement agreement payable represents a settlement reached by HRSoft with
      one
      of its vendors relating to services provided prior to the asset acquisition
      of
      HRSoft by the Company. The Company assumed the liability as part of the
      acquisition agreement. The settlement agreement provides for monthly payments
      of
      $8,500 through August 2006 with a final payment of $4,500 in September
      2006.





The
      term
      loan represents a five year term loan with a Canadian bank maturing in May
      2007
      with monthly principal payments of CDN $3,333 that bears annual interest at
      the
      bank’s prime rate plus 2%. Cash balances have been provided as collateral
      against this loan (note 3).




67





As
      of May
      31, 2006, the maturities for long-term obligations are as follows:




Fiscal
                2007:
            
            $
            896,293Fiscal
                2008:
            
            
            201,633Fiscal
                2009:
            
            
            59,476Fiscal
                2010:
            
            
            18,464Fiscal
                2011:
            
            
            8,696$
            1,184,562








**Note
      10.**  **Commitments
      and Contingencies**





***Lease
      Commitments***





A
      summary
      of the future minimum lease payments under the Company’s non-cancelable leases
      as of May 31, 2006 is as follows:





Capital
                Leases
            
            Operating
                LeasesFacilities
            
            Equipment
            
            TotalYear
                ended May 31:2007
            
            $
            245,594
            
            $
            1,218,091
            
            $
            66,380
            
            $
            1,530,0652008
            
            
            152,487
            
            
            1,015,139
            
            
            45,690
            
            
            1,213,3162009
            
            
            22,138
            
            
            647,585
            
            
            -
            
            
            669,7232010
            
            
            22,138
            
            
            361,916
            
            
            -
            
            
            384,0542011
            
            
            11,069
            
            
            -
            
            
            -
            
            
            11,069Total
                minimum lease payments
            
            
            453,426
            
            $
            3,242,731
            
            $
            112,070
            
            $
            3,808,227Less
                amount representing interest
            
            
            42,814Total
                principal payments
            
            
            410,612Less
                current maturities
            
            
            218,420$
            192,192








Rent
      expense totaled $1,433,091, $1,666,386 and $1,369,801 for the years ended May
      31, 2006, 2005 and 2004, respectively.





***Letters
      of Credit***





At
      May
      31, 2006, the Company had provided two letters of credit totaling $434,817
      as
      security for office leases in Florida and Ontario, which were collateralized
      by
      short-term investments that are maintained at the granting financial institution
      (note 3).




68





***Contingencies***




In
      July
      2005, a direct competitor filed a complaint against the Company in U.S. District
      Court in the District of Massachusetts. The plaintiff asserted that Workstream
      interfered with the contractual relationship between it and a former member
      of
      its executive management team. This issue was resolved during the second quarter
      of fiscal 2006 with a payment of approximately $60,000.





On
      or
      about August 10, 2005, a class action lawsuit was filed against the Company,
      its
      Chief Executive Officer and its former Chief Financial Officer in the United
      States District Court for the Southern District of New York.  The action,
      brought on behalf of a purported class of purchasers of the Company’s common
      shares during the period from January 14, 2005 to and including April 14, 2005, alleges ,
      among
      other things, that management provided the market misleading guidance as to
      anticipated revenues for the quarter end ed February
      28, 2005, and failed to correct this guidance on a timely basis.  The
      action claims violations of Section 10(b) of the Securities Exchange Act of
      1934
      (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, as well as Section
      20(a) of the Exchange Act, and seeks compensatory damages in an unspecified
      amount as well as the award of reasonable costs an d
      expenses, including counsel and expert fees and costs . 
      In December 2005, the plaintiffs filed an amended complaint which added
      additional plaintiffs and sought to elaborate on the allegations contained
      in
      the complaint. The defendant’s counsel filed a motion to dismiss the complaint,
      which motion was denied. Plaintiffs have moved to confirm a class of purchases
      of the Company’s shares during the class period. Briefing on that motion is
      expected to conclude in the fall of 2006. Discovery remains in the early stages,
      and the Company intends to defend the action vigorously. We expect the trial
      to
      occur in or about late 2007.





The
      Company is subject to other legal proceedings and claims which arise in the
      ordinary course of business.
      The Company does not believe that the resolution of such actions will materially
      affect the Company’s business, results of operations or financial
      condition.





**Note
      11.**  **Income Taxes**





The
      Company operates in several tax jurisdictions. Its income is subject to varying
      rates of tax, and losses incurred in one jurisdiction cannot be used to offset
      income taxes payable in another.





The
      loss
      before income taxes consisted of the following (rounded):





Years
                ended May 31,2006
            
            2005
            
            2004Canadian
                domestic loss
            
            $
            2,930,000
            
            $
            568,000
            
            $
            230,000United
                States loss
            
            
            10,038,000
            
            
            15,403,000
            
            
            7,041,000Loss
                before income taxes
            
            $
            12,968,000
            
            $
            15,971,000
            
            $
            7,271,000











69





The
      provision (recovery) for income taxes consists of the following
      (rounded):





Years
                ended May 31,2006
            
            2005
            
            2004Canadian
                domestic:Current
                income taxes
            
            $
            -
            
            $
            -
            
            $
            (49,000
            )United
                States:Current
                income taxes
            
            
            65,000
            
            
            36,000
            
            
            104,000Deferred
                income taxes
            
            
            -
            
            
            (848,000
            )
            
            (1,789,000
            )Recovery
                of income taxes
            
            $
            65,000
            
            $
            (812,000
            )
            $
            (1,734,000
            )








A
      reconciliation of the combined Canadian federal and provincial income tax rate
      with the Company’s effective income tax rate is as follows (rounded):




Years
                ended May 31,2006
            
            2005
            
            2004Combined
                Canadian federal and provincial tax rate
            
            
            36.12
            %
            
            36.12
            %
            
            36.80
            %Income
                tax recovery based on combined Canadian andfederal
                and provincial rate
            
            $
            4,684,000
            
            $
            5,768,000
            
            $
            2,676,000Effect
                of foreign tax rate differences
            
            
            389,000
            
            
            579,000
            
            
            240,000Change
                in enacted tax rates
            
            
            -
            
            
            (147,000
            )
            
            (210,000
            )Non-deductible
                amounts
            
            
            197,000
            
            
            173,000
            
            
            (852,000
            )Change
                in valuation allowance
            
            
            (5,771,000
            )
            
            (5,638,000
            )
            
            175,000Effect
                of changes in carryforward amounts
            
            
            (728,000
            )
            
            (547,000
            )
            
            (298,000
            )Effect
                of foreign exchange rate differences
            
            
            1,104,000
            
            
            661,000
            
            
            123,000Other
            
            
            60,000
            
            
            (37,000
            )
            
            (120,000
            )Income
                tax (expense) recovery
            
            $
            (65,000
            )
            $
            812,000
            
            $
            1,734,000








70





The
      components of the Company’s net deferred income taxes are as follows
      (rounded):





Years
                ended May 31,2006
            
            2005
            
            2004Deferred
                income tax assets:Scientific
                Research and Experimental Development ("SR&ED")
                expenses
            
            $
            814,000
            
            $
            613,000
            
            $
            561,000Loss
                carryforwards
            
            
            26,340,000
            
            
            23,313,000
            
            
            18,002,000Asset
                basis differences
            
            
            2,116,000
            
            
            2,421,000
            
            
            2,541,000Share
                issue costs
            
            
            309,000
            
            
            467,000
            
            
            267,000Investment
                tax credits
            
            
            1,009,000
            
            
            849,000
            
            
            105,000Other
            
            
            2,222,000
            
            
            413,000
            
            
            386,00032,810,000
            
            
            28,076,000
            
            
            21,862,000Less:
                valuation allowance
            
            
            (32,810,000
            )
            
            (27,039,000
            )
            
            (19,656,000
            )-
            
            
            1,037,000
            
            
            2,206,000Deferred
                income tax liabilities:Intangible
                assets
            
            
            -
            
            
            (1,037,000
            )
            
            (3,045,000
            )Net
                deferred income tax liabilities
            
            $
            -
            
            $
            -
            
            $
            (839,000
            )





The
      Company has incurred net losses since inception. At May 31, 2006, the Company
      had approximately $48,150,000 in net operating loss carryforwards for U.S.
      federal income tax purposes that expire in various amounts through 2026, and
      approximately CDN $21,600,000 (US $19,500,000) in net operating loss
      carryforwards for Canadian federal and provincial income tax purposes that
      expire in various years through 2013. Limitations on the use of net operating
      losses exist so future changes of control may result in additional limitations
      on the use of these net operating losses. Management has determined that it
      is
      more likely than not that deferred tax assets will not be realized; therefore,
      a
      valuation allowance has been provided for the full value of deferred tax
      assets. The change in the valuation allowance for the year ended May 31, 2006
      and 2005 was an increase of $5,771,000 and $7,383,000, respectively, resulting
      primarily from net operating losses generated during the periods.





**Note
      12.**  **Stockholders’ Equity**





The
      authorized share capital consists of an unlimited number of no par value common
      shares, an unlimited number of no par value Class A Preferred Shares (the “Class
      A Preferred Shares”), and an unlimited number of no par value Series A
      Convertible Preferred Shares (the “Series A Shares”). There were 50,960,845 and
      49,182,772 common shares outstanding as of May 31, 2006 and 2005, respectively.
      There were no Class A Preferred Shares or Series A Shares outstanding as of
      May
      31, 2006 and 2005.





***Stock-Based
      Compensation Plan***





The
      Company has granted stock options to employees, directors and consultants under
      the 2002 Amended and Restated Stock Option Plan (the “Plan”), which was most
      recently amended in October 2004. Under the Plan, as amended, the Company
      authorizes the issuance of up to 4,000,000 shares of common stock upon the
      exercise of stock options. In addition, the Plan reserves 1,000,000 shares
      of
      common stock for issuance of restricted share grants. The Audit Committee of
      the
      Board of Directors administers the Plan. Under the terms of the Plan, the
      exercise price of the options shall not be lower than the fair market value
      of
      the common stock on the date of the grant. Options to purchase shares of common
      stock generally vest ratably over a period of three years and expire five years
      from the date of grant.




71





Stock
      option activity and related information is summarized as follows:





Weighted
            
            WeightedNumber
            
            Average
            
            Average
            
            Optionsof
                Options
            
            Exercise
                Price
            
            Fair
                Value
            
            ExercisableBalance
                outstanding - May 31, 2003
            
            
            1,789,052
            
            $
            2.33
            
            
            
            
            
            996,608Granted
            
            
            593,000
            
            
            1.82
            
            $
            1.14Exercised
            
            
            (136,665
            )
            
            1.02Forfeited
            
            
            (403,884
            )
            
            2.43Balance
                outstanding - May 31, 2004
            
            
            1,841,503
            
            
            2.24
            
            
            
            
            
            1,144,273Granted
            
            
            1,755,770
            
            
            2.81
            
            
            1.49Exercised
            
            
            (331,260
            )
            
            2.87Forfeited
            
            
            (1,011,928
            )
            
            2.93Balance
                outstanding - May 31, 2005
            
            
            2,254,085
            
            
            2.29
            
            
            
            
            
            552,073Granted
            
            
            818,450
            
            
            1.57
            
            $
            0.93Exercised
            
            
            (104,740
            )
            
            0.99Forfeited
            
            
            (768,892
            )
            
            2.22Balance
                outstanding - May 31, 2006
            
            
            2,198,903
            
            $
            2.11
            
            
            
            
            
            871,829





Information
      about options outstanding at May 31, 2006 is as follows:





Options
                Outstanding
            
            Options
                ExercisableWeightedAverageRemaining
            
            Weighted
            
            
            
            WeightedContractual
            
            Average
            
            
            
            AverageLife
            
            Exercise
            
            
            
            ExerciseExercise
                Price
            
            Shares
            
            (Years)
            
            Price
            
            Shares
            
            PriceLess
                than $.99
            
            
            149,667
            
            
            2.01
            
            $
            0.98
            
            
            95,334
            
            $
            0.98$1.00-$1.99
            
            
            759,870
            
            
            3.71
            
            
            1.38
            
            
            207,983
            
            
            1.03$2.00-$2.99
            
            
            978,430
            
            
            2.93
            
            
            2.30
            
            
            464,867
            
            
            2.30$3.00-$3.99
            
            
            126,936
            
            
            3.63
            
            
            3.29
            
            
            42,312
            
            
            3.29$4.00
                and over
            
            
            184,000
            
            
            3.81
            
            
            4.22
            
            
            61,333
            
            
            4.22Total
            
            
            2,198,903
            
            
            
            
            
            
            
            
            871,829







72





In
      November 2005, the Company finalized restricted stock unit agreements for
      certain executives and the members of the Board of Directors. Each restricted
      stock unit represents one share of common stock and vests over three years,
      after which time the Company will issue the common stock underlying the vested
      restricted stock units. During the vesting period, the restricted stock units
      cannot be transferred, and the grantee has no voting or dividend rights. The
      cost of the awards, determined to be the fair market value of the shares at
      the
      date of the grant, is expensed ratably over the vesting period. The compensation
      expense associated with the restricted stock units totaling $131,017 for fiscal
      2006 is included in general and administrative expenses on the statement of
      operations and in additional paid-in capital on the balance sheet. During fiscal
      2006, the Company granted a total of 310,000 restricted stock units to senior
      management and members of the Board of Directors. At May 31, 2006, 220,000
      restricted stock units were outstanding.





***Warrants***





Outstanding
      warrants to purchase shares of common stock as of May 31, 2006 are as
      follows:





Exercise
                Price
            
            Expiration
            
            Shares$1.60
            
            December
                2008
            
            162,500$2.00
            
            April
                2007
            
            400,000$3.50
            
            December
                2008
            
            2,825,0003,387,500





All
      warrants outstanding are exercisable at May 31, 2006.





***Earnings
      per Share***





For
      all
      the years presented, diluted net loss per share equals basic net loss per share
      due to the antidilutive effect of employee stock options, restricted stock
      units, warrants and escrowed shares. The following outstanding instruments
      could
      potentially dilute basic earnings per share in the future:





May
                31, 2006Stock
                options
            
            
            2,198,903Restricted
                stock units
            
            
            220,000Escrowed
                shares
            
            
            108,304Warrants
            
            
            3,387,500Potential
                increase in number of shares from dilutive instruments
            
            
            5,914,707





In
      addition to the above, up to an additional $1,000,000 in common shares could
      be
      issued to the owners of Exxceed if certain financial milestones are achieved
      within 12 months of the acquisition date.




73





**Note
      13.**  **Comprehensive Loss**





Components
      of comprehensive loss were as follows:





Year
                ended May 31,2006
            
            2005
            
            2004Net
                loss for the year
            
            $
            (12,986,291
            )
            $
            (15,158,975
            )
            $
            (5,536,899
            )Other
                comprehensive loss:Foreign
                currency translation adjustments (net of tax of $0)
            
            
            56,522
            
            
            143,999
            
            
            (178,986
            )Comprehensive
                loss for the year
            
            $
            (12,929,769
            )
            $
            (15,014,976
            )
            $
            (5,715,885
            )








**Note
      14.**  **Segmented and Geographic Information**





The
      Company has two reportable segments: Enterprise Workforce Services and Career
      Networks. Enterprise Workforce Services consists of revenue generated from
      HCM
      software and related professional services. In addition, Enterprise Workforce
      Services generates revenue from the sale of various products through the rewards
      and discount modules of the HCM software. Career Networks primarily consists
      of
      revenue from career transition, applicant sourcing and recruitment research
      services.





The
      Company evaluates performance in each segment based on profit or loss from
      operations. There are no inter-segment sales. Corporate operating expenses
      are
      allocated to the segments primarily based on revenue.





The
      Company’s segments are distinct business units that offer different products and
      services. Each is managed separately and each has a different client base that
      requires a different approach to the sales and marketing process. In addition,
      Career Networks is an established business unit whereas Enterprise Workforce
      Services is a developing business unit.




74





The
      following is a summary of the Company’s operations by business segment and by
      geographic region for the years ended May 31, 2006 and 2005:





***Business
                Segment***EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalYear
                ended May 31, 2006Software
            
            $
            11,008,939
            
            $
            -
            
            $
            11,008,939Rewards
                and discount products
            
            
            6,268,128
            
            
            -
            
            
            6,268,128Professional
                services
            
            
            2,879,942
            
            
            -
            
            
            2,879,942Career
                services
            
            
            -
            
            
            7,963,653
            
            
            7,963,653Revenue
            
            
            20,157,009
            
            
            7,963,653
            
            
            28,120,662Cost
                of revenues, rewards and discount products
            
            
            4,722,467
            
            
            -
            
            
            4,722,467Cost
                of revenues, other
            
            
            2,355,938
            
            
            729,710
            
            
            3,085,648Gross
                profit
            
            
            13,078,604
            
            
            7,233,943
            
            
            20,312,547Expenses
            
            
            19,093,514
            
            
            7,515,888
            
            
            26,609,402Amortization
                and depreciation
            
            
            6,532,749
            
            
            152,131
            
            
            6,684,880Business
                segment loss
            
            $
            (12,547,659
            )
            $
            (434,076
            )
            
            (12,981,735
            )Other
                income/(expenses) andimpact
                of income taxes
            
            
            
            
            
            
            
            
            (4,556
            )Net
                loss
            
            
            
            
            
            
            
            $
            (12,986,291
            )





EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalAs
                at May 31, 2006Business
                segment assets
            
            $
            4,829,600
            
            $
            676,262
            
            $
            5,505,862Intangible
                assets
            
            
            8,052,062
            
            
            15,361
            
            
            8,067,423Goodwill
            
            
            32,264,257
            
            
            12,457,602
            
            
            44,721,859$
            45,145,919
            
            $
            13,149,225
            
            
            58,295,144Assets
                not allocated to business segments
            
            
            
            
            
            
            
            
            7,974,585Total
                assets
            
            
            
            
            
            
            
            $
            66,269,729








75







EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalYear
                ended May 31, 2005Software
            
            $
            9,096,241
            
            $
            -
            
            $
            9,096,241Rewards
                and discount products
            
            
            5,446,152
            
            
            -
            
            
            5,446,152Professional
                services
            
            
            3,320,556
            
            
            -
            
            
            3,320,556Career
                services
            
            
            -
            
            
            8,955,638
            
            
            8,955,638Revenue
            
            
            17,862,949
            
            
            8,955,638
            
            
            26,818,587Cost
                of revenues, rewards and discount products
            
            
            3,955,663
            
            
            -
            
            
            3,955,663Cost
                of revenues, other
            
            
            2,118,989
            
            
            939,328
            
            
            3,058,317Gross
                profit
            
            
            11,788,297
            
            
            8,016,310
            
            
            19,804,607Expenses
            
            
            18,557,279
            
            
            8,638,745
            
            
            27,196,024Amortization
                and depreciation
            
            
            8,126,809
            
            
            407,906
            
            
            8,534,715Business
                segment loss
            
            $
            (14,895,791
            )
            $
            (1,030,341
            )
            
            (15,926,132
            )Other
                income/(expenses) andimpact
                of income taxes
            
            
            
            
            
            
            
            
            767,157Net
                loss
            
            
            
            
            
            
            
            $
            (15,158,975
            )





EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalAs
                at May 31, 2005Business
                segment assets
            
            $
            4,714,196
            
            $
            737,873
            
            $
            5,452,069Intangible
                assets
            
            
            12,721,282
            
            
            93,243
            
            
            12,814,525Goodwill
            
            
            29,825,840
            
            
            12,457,602
            
            
            42,283,442$
            47,261,318
            
            $
            13,288,718
            
            
            60,550,036Assets
                not allocated to business segments
            
            
            
            
            
            
            
            
            15,107,327Total
                assets
            
            
            
            
            
            
            
            $
            75,657,363







***Geographic***Canada
            
            United
                States
            
            TotalYear
                ended May 31, 2006Revenue
            
            $
            1,906,194
            
            $
            26,214,468
            
            $
            28,120,662Expenses
            
            
            4,702,706
            
            
            36,399,691
            
            
            41,102,397Geographical
                loss
            
            $
            (2,796,512
            )
            $
            (10,185,223
            )
            
            (12,981,735
            )Other
                income/(expenses) andimpact
                of income taxes
            
            
            
            
            
            
            
            
            (4,556
            )Net
                loss
            
            
            
            
            
            
            
            $
            (12,986,291
            )





76





Canada
            
            United
                States
            
            TotalAs
                at May 31, 2006Long-lived
                assets
            
            $
            1,233,363
            
            $
            53,433,126
            
            $
            54,666,489Current
                assets
            
            
            
            
            
            
            
            
            11,603,240Total
                assets
            
            
            
            
            
            
            
            $
            66,269,729





Canada
            
            United
                States
            
            TotalYear
                ended May 31, 2005Revenue
            
            $
            2,188,925
            
            $
            24,629,662
            
            $
            26,818,587Expenses
            
            
            2,733,338
            
            
            40,011,381
            
            
            42,744,719Geographical
                loss
            
            $
            (544,413
            )
            $
            (15,381,719
            )
            
            (15,926,132
            )Other
                income/(expenses) andimpact
                of income taxes
            
            
            
            
            
            
            
            
            767,157Net
                loss
            
            
            
            
            
            
            
            $
            (15,158,975
            )





Canada
            
            United
                States
            
            TotalAs
                at May 31, 2005Long-lived
                assets
            
            $
            641,040
            
            $
            55,770,829
            
            $
            56,411,869Current
                assets
            
            
            
            
            
            
            
            
            19,245,494Total
                assets
            
            
            
            
            
            
            
            $
            75,657,363








**Note
      15.**  **Retirement Plans**





The
      Company has three 401(k) plans that cover all eligible employees. The Company
      is
      not required to contribute to the plan and has made no contributions to
      date.




77





**Note
      16.**  **Quarterly Results (Unaudited)**





The
      following table summarizes selected quarterly data of the Company for the years
      ended May 31, 2006 and 2005:





Quarter
                EndedAugust
                31,
            
            November
                30,
            
            February
                28,
            
            May
                31,2005
            
            2005
            
            2006
            
            2006Revenues,
                net
            
            $
            6,342,125
            
            $
            7,199,809
            
            $
            6,735,045
            
            $
            7,843,683Gross
                profit
            
            
            4,284,843
            
            
            4,956,286
            
            
            4,965,249
            
            
            6,106,169Net
                loss for the period
            
            $
            (3,838,144
            )
            $
            (3,302,937
            )
            $
            (3,419,325
            )
            $
            (2,425,885
            )Weighted
                average number ofcommon
                shares outstandingduring
                the period
            
            
            49,193,310
            
            
            49,194,178
            
            
            49,994,178
            
            
            50,938,164Basic
                and diluted net lossper
                common share
            
            $
            (0.08
            )
            $
            (0.07
            )
            $
            (0.07
            )
            $
            (0.05
            )




Quarter
                EndedAugust
                31,
            
            November
                30,
            
            February
                28,
            
            May
                31,2004
            
            2004
            
            2005
            
            2005Revenues,
                net
            
            $
            5,719,129
            
            $
            7,147,824
            
            $
            6,874,735
            
            $
            7,076,899Gross
                profit
            
            
            4,647,302
            
            
            4,953,326
            
            
            4,962,384
            
            
            5,241,595Net
                loss for the period
            
            $
            (2,508,326
            )
            $
            (2,849,376
            )
            $
            (3,554,351
            )
            $
            (6,246,922
            )Weighted
                average number ofcommon
                shares outstandingduring
                the period
            
            
            37,140,857
            
            
            41,385,822
            
            
            46,498,415
            
            
            48,824,747Basic
                and diluted net lossper
                common share
            
            $
            (0.07
            )
            $
            (0.07
            )
            $
            (0.08
            )
            $
            (0.13
            )








78





ITEM
      9.
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.





ITEM
      9A.
      CONTROLS AND PROCEDURES





As
      of the
      end of fiscal 2006, our management, with the participation of our Chief
      Executive Officer and Chief Financial Officer, carried out an evaluation of
      the
      effectiveness of our disclosure controls and procedures. Based on this
      evaluation, the Chief Executive Officer and Chief Financial Officer have
      concluded that our disclosure controls and procedures are effective to ensure
      that information required to be disclosed by us in reports that we file or
      submit under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission rules and forms. There were no changes during the fourth
      quarter of fiscal 2006 that materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.





***Report
      of Management on Financial Statements***





The
      Company's management is responsible for preparing the accompanying consolidated
      financial statements
      in conformity with accounting principles generally accepted in the United States
      of America ("GAAP") **.** In
      preparing these consolidated financial statements, management selects
      appropriate accounting policies and uses its judgment and best estimates to
      report events and transactions as **** they
      occur. Management has determined such amounts on a reasonable basis in order
      to
      ensure that the financial statements are presented fairly, in all material
      respects. Financial data included throughout this annual report is prepared
      on a
      basis consistent with that of the consolidated financial
      statements.





PricewaterhouseCoopers
      LLP, the independent registered public accounting firm appointed by the Board
      of
      Directors and ratified by the stockholders, have been engaged to conduct an
      integrated audit of the consolidated financial statements and internal control
      over financial reporting in accordance with the standards of the Public Company
      Accounting Oversight Board (United States), and have expressed their opinions
      thereon. The Board of Directors is responsible for ensuring that management
      fulfills its responsibility for financial reporting and internal control over
      financial reporting, and is ultimately responsible for reviewing and approving
      the consolidated financial statements. The Board carries out this responsibility
      principally through its Audit Committee (“Committee”), which is comprised of
      outside directors. The Committee meets at least four times annually to review
      audited and unaudited financial information prior to its public release. The
      Committee also considers, for review by the Board of Directors and approval
      by
      the stockholders, the engagement or reappointment of the external auditors.
      PricewaterhouseCoopers LLP has full and free access to the Audit
      Committee.





Management
      acknowledges its responsibility to provide financial information that is
      representative of the Company's
      operations, is consistent and reliable, and is relevant for the informed
      evaluation of the Company's
      activities.





***Report
      of Management on Internal Control over Financial
      Reporting***





The
      Company's management is responsible for establishing and maintaining adequate
      internal control over
      financial reporting for the Company. Internal control over financial reporting
      is a set of processes designed
      by, or under the supervision of, the Company's CEO and CFO, to provide
      reasonable assurance
      regarding the reliability of financial reporting and the preparation of
      financial statements for external
      purposes in accordance with generally accepted accounting principles in the
      United States of America and includes those policies and procedures
      that:





§
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect our transactions and dispositions of our
                assets:





§
            Provide
                reasonable assurance our transactions are recorded as necessary to
                permit
                preparation of our financial statements in accordance with generally
                accepted accounting principles, and that receipts and expenditures
                are
                being made only in accordance with authorizations of our management
                and
                directors; and





§
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of our assets that could
                have
                a material effect on the financial
                statement.





79




Under
      the
      supervision and with the participation of the Company's management, including
      the Company's
      CEO and CFO, the Company conducted an assessment of the effectiveness of its
      internal control
      over financial reporting based on criteria established in "Internal
      Control-Integrated Framework" issued by the Committee of Sponsoring
      Organizations of the Treadway Commission, also known as COSO. Based on this
      assessment, management concluded that the Company's internal control over
      financial reporting was effective as of May 31, 2006 based on those
      criteria.





Management’s
      assessment of the effectiveness of the Company’s internal control over financial
      reporting as of May 31, 2006 has been audited by PricewaterhouseCoopers LLP,
      the
      Company’s independent registered public accounting firm as stated in their
      report which is included on page 48 of this annual report on Form 10-K for
      the
      year ended May 31, 2006.








/s/
                Michael Mullarkey
            /s/
                Stephen LerchMichael
                Mullarkey
            Stephen
                LerchChairman
                and Chief Executive Officer
            Executive
                Vice President, ChiefOperating
                Officer and ChiefFinancial
                Officer








July
      28,
      2006









***Attestation
      Report of the Registered Public Accounting Firm***





Refer
      to
      the *Report
      of Independent Registered Public Accounting Firm* on page
      48.








ITEM
      9B.
      OTHER INFORMATION





None.




80








**PART
      III**





ITEM
      10.
      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2006 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.





ITEM
      11.
      EXECUTIVE COMPENSATION





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2006 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.





ITEM
      12.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2006 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.





ITEM
      13.
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2006 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.





ITEM
      14.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2006 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.




81







**PART
      IV**





ITEM
      15.
      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)  Documents
      filed as part of this report:





1.  Financial
      Statements for the Year Ended May 31, 2006. (See Page 47)





2.  Financial
      Statement Schedule. (None)





3.  Exhibits.





The
      following is a list of exhibits filed as part of this annual report on Form
      10-K.





Exhibit*Number*
            **Description**3.1
            Articles
                of Incorporation, as amended (incorporated by reference to Exhibit
                3.1 to
                the Registration Statement on Form F-1 (File No.
                333-87537)).3.2
            Articles
                of Amendment, dated July 26, 2001 (incorporated by reference to Exhibit
                1.2 of Form 20-F of Workstream Inc. for the fiscal year ended May
                31,
                2001).3.3
            Articles
                of Amendment, dated November 6, 2001 (incorporated by reference to
                Exhibit
                1.3 of Form 20-F of Workstream Inc. for the fiscal year ended May
                31,
                2001).3.4
            Articles
                of Amendment, dated November 7, 2002 (incorporated by reference to
                Exhibit
                4.4 to the Registration Statement on Form F-3 (File No.
                333-101502).3.5
            By-law
                No. 1 and No. 2 (incorporated by reference to Exhibit 3.2 to the
                Registration Statement on Form F-1 (File No.
                333-87537)).3.6
            By-law
                No. 3 (incorporated by reference to Exhibit 1.5 of Form 20-F of Workstream
                Inc. for the fiscal year ended May 31, 2001).4.1
            Form
                of common share certificate (incorporated by reference to Exhibit
                4.1 to
                the Registration Statement on Form F-1 (File No.
                333-87537)).4.2
            Warrant
                Agreement dated as of March 22, 2001 between Workstream Inc. (formerly
                E-Cruiter.com Inc.) and BlueStone Capital Corp. (incorporated by
                reference
                to Exhibit 4.11 of Form 20-F of Workstream Inc. for the fiscal year
                ended
                May 31, 2001).4.3
            Form
                of Underwriter's Warrant Agreement (incorporated by reference to
                Exhibit
                1.1 to the Registration Statement on Form F-1 (File No.
                333-87537)).4.4
            Form
                of 8% Senior Subordinated Convertible Note (incorporated by reference
                to
                Exhibit 4.5 to the annual report on Form 10-K for the year ended
                May 31,
                2002).4.5
            Form
                of Common Stock Purchase Warrant (incorporated by reference to Exhibit
                4.7
                to the annual report on Form 10-K for the year ended May 31,
                2002).4.6
            Amended
                and Restated Registration Rights Agreement dated May 14, 2002 by
                and among
                Workstream Inc., Sands Brothers Venture Capital III LLC, Sands Brothers
                Venture Capital IV LLC and Sands Brothers & Co., Ltd. (incorporated by
                reference to Exhibit 4.7 to the annual report on Form 10-K for the
                year
                ended May 31, 2002).4.7
            Common
                Stock Purchase Warrant dated May 30, 2003 between Michael Weiss and
                Workstream Inc. (incorporated by reference to Exhibit 4.7 to the
                annual
                report on Form 10-K for the year ended May 31,
                2003).




82




4.8
            Form
                of Common Stock Purchase Warrant (incorporated by reference to Exhibit
                4.8
                to the annual report on Form 10-K for the year ended May 31,
                2003).4.9
            Note
                and Warrant Amendment Agreement dated January 12, 2004, by
              and
                among Workstream Inc., Sands Brothers Venture Capital III LLC, Sands
                Brothers Venture Capital IV LLC and Sands Brothers & Co., LTD.
                (incorporated by reference to Exhibit 4.1 to the quarterly report
                on Form
                10-Q for the quarter ended February 29, 2004).4.10
            Note
                and Warrant Amendment Agreement dated January 12, 2004, by
              and
                among Workstream Inc., Crestview Capital Fund, L.P., Crestview Capital
                Fund II, L.P. and Crestview Capital Offshore Fund, Inc. (incorporated
                by
                reference to Exhibit 4.2 to the quarterly report on Form 10-Q for
                the
                quarter ended February 29, 2004).4.11
            Warrant
                to Acquire Common Shares from Workstream Inc. to
              Standard
                Securities Capital Corporation dated December 9, 2003 (incorporated
                by
                reference to Exhibit 4.3 to the quarterly report on Form 10-Q for
                the
                quarter ended February 29, 2004).4.12
            Warrant
                to Acquire Common Shares from Workstream Inc. to Nathan
              Low
                dated December 11, 2003 (incorporated by reference to Exhibit 4.4
                to the
                quarterly report on Form 10-Q for the quarter ended February 29,
                2004).4.13
            Warrant
                to Acquire Common Shares from Workstream Inc. to Nathan
              Low
                dated December 31, 2003 (incorporated by reference to Exhibit 4.5
                to the
                quarterly report on Form 10-Q for the quarter ended February 29,
                2004).4.14
            Form
                of Common Stock Purchase Warrant (incorporated by reference
              to
                Exhibit 4.6 to the quarterly report on Form 10-Q for the quarter
                ended
                February 29, 2004).4.15
            Registration
                Rights Agreement dated as of December 9, 2003, by
              and
                among Workstream Inc., Standard Securities Capital Corporation and
                certain
                purchasers (incorporated by reference to Exhibit 4.7 to the quarterly
                report on Form 10-Q for the quarter ended February 29,
                2004).4.16
            Registration
                Rights Agreement dated as of December 11, 2003, by
              and
                among Workstream Inc., Nathan Low and Smithfield Fiduciary LLC
                (incorporated by reference to Exhibit 4.8 to the quarterly report
                on Form
                10-Q for the quarter ended February 29, 2004).4.17
            Registration
                Rights Agreement dated as of December 31, 2003 by
              and
                among Workstream Inc. and certain purchase (incorporated by reference
                to
                Exhibit 4.9 to the quarterly report on Form 10-Q for the quarter
                ended
                February 29, 2004).4.18
            Registration
                Rights Agreement dated December 15, 2004 among Workstream, Rubicon
                Master
                Fund, Union Spring Fund Ltd., Sunrise Equity Partners, LP, Sunrise
                Foundation Trust and Nathan A. Low (incorporated by reference to
                Exhibit
                4.1 to the current report on Form 8-K filed December 21,
                2004).4.19
            Form
                of Warrant issued on December 15, 2004 (incorporated by reference
                to
                Exhibit 4.2 to the current report on Form 8-K filed December 21,
                2004).10.1**
            Workstream
                Inc. 2002 Amended and Restated Stock Option Plan, as amended as of
                November 7, 2002 (incorporated by reference to Exhibit 10.1 to the
                quarterly report on Form 10-Q for the quarter ended November 30,
                2002).




83




10.2
            Lease
                Agreement between Workstream Inc. (formerly E-Cruiter.com Inc.) and
                RT
                Twenty-Second Pension Properties Limited, dated March 21, 2000
                (incorporated by reference to Exhibit 2.1 to the annual report on
                Form
                20-F for the period ended May 31, 2000).10.3
            Service
                Agreement between Positionwatch Limited and Workstream Inc. (formerly
                E-Cruiter.com Inc.), dated February 23, 1999 (incorporated by reference
                to
                Exhibit 10.6 to the Registration Statement on Form F-1 (File No.
                333-87537)).10.4
            Security
                Agreement dated April 18, 2002 between Workstream Inc. and Sands
                Brothers
                Venture Capital III LLC, as Security Agent for the holders of the
                Senior
                Secured Convertible Notes (incorporated by reference to Exhibit 10.19
                to
                the annual report on Form 10-K for the year ended May 31,
                2002).10.5
            Guarantee
                Agreement dated as of April 18, 2002 by Workstream USA, Inc. in favor
                of
                the holders of 8% Senior Subordinated Secured Convertible Notes
                (incorporated by reference to Exhibit 10.20 to the annual report
                on Form
                10-K for the year ended May 31, 2002).10.6
            Joinder
                Agreement dated May 14, 2002 by and among Workstream Inc., Workstream
                USA,
                Inc., Sands Brothers Venture Capital IV LLC, Sands Brothers Venture
                Capital III LLC, Crestview Capital Fund, L.P., Crestview Capital
                Fund II,
                L.P. and Crestview Capital Offshore Fund, Inc. (incorporated by reference
                to Exhibit 10.21 to the annual report on Form 10-K for the year ended
                May
                31, 2002).10.7**
            Employment
                Agreement dated as of January 27, 2003 between Michael Mullarkey
                and
                Workstream Inc. (incorporated by reference to Exhibit 10.11 to the
                annual
                report on Form 10-K for the year ended May 31, 2003).10.8**
            Employment
                Agreement dated as of April 4, 2005 between Workstream, Inc. and
                Stephen
                Lerch (incorporated by reference to Exhibit 10.1 to the current report
                on
                Form 8-K filed April 7, 2005).10.9**
            Settlement
                Agreement dated as of May 9, 2003 between Paul Haggard and Workstream
                Inc.
                (incorporated by reference to Exhibit 10.13 to the annual report
                on Form
                10-K for the year ended May 31, 2003).10.10
            Merger
                Agreement dated August 30, 2002, among Workstream Inc., Workstream
                Acquisition II, Inc. and Xylo, Inc. (incorporated by reference to
                Exhibit
                2.1 to the report on Form 8-K filed September 4, 2002).10.11
            Term
                Note dated January 31, 2003 by Workstream Inc., Workstream USA, Inc.,
                6FigureJobs.com, Inc., Icarian, Inc., RezLogic, Inc., OMNIpartners,
                Inc.
                and Xylo, Inc. in favor of Michael Mullarkey (incorporated by reference
                to
                Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter
                ended
                February 28, 2003).10.12
            Security
                Agreement dated January 31, 2003 by and among Michael Mullarkey,
                Workstream Inc., Workstream USA, Inc., 6FigureJobs.com, Inc., Icarian,
                Inc., RezLogic, Inc., OMNIpartners, Inc., and Xylo, Inc. (incorporated
                by
                reference to Exhibit 10.2 to the quarterly report on Form 10-Q for
                the
                quarter ended February 28, 2003).10.13
            General
                Security Agreement dated January 31, 2003 between Workstream Inc.
                and
                Michael Mullarkey (incorporated by reference to Exhibit 10.3 to the
                quarterly report on Form 10-Q for the quarter ended February 28,
                2003).10.14
            Securities
                Purchase Agreement dated as of May 30, 2003 by and among Workstream
                Inc.
                and William J. Ritger (incorporated by reference to Exhibit 10.18
                to the
                annual report on Form 10-K for the year ended May 31,
                2003).10.15
            Securities
                Purchase Agreement dated as of May 30, 2003 by and among Workstream
                Inc.
                and Michael Weiss (incorporated by reference to Exhibit 10.19 to
                the
                annual report on Form 10-K for the year ended May 31,
                2003).10.16
            Form
                of Securities Purchase Agreement (incorporated by reference to Exhibit
                10.20 to the annual report on Form 10-K for the year ended May 31,
                2003).




84




10.17
            Agreement
                and Plan of Merger dated May 24, 2004, as amended, by and between
                Kadiri,
                Inc., Workstream Inc. and Workstream Acquisition III, Inc. (incorporated
                by reference to Exhibits 2.1 and 2.2 to the report on Form 8-K filed
                June
                14, 2004).10.18
            Asset
                Purchase Agreement dated as of July 14, 2003 by
              and
                between Perform, Inc. and Workstream
              Inc.
                (incorporated by reference to Exhibit 10.1 to the quarterly report
                on Form
                10-Q for the quarter ended November 30, 2003).10.19
            Asset
                Purchase Agreement dated as of March 27, 2004, as amended, by and
                between
                Workstream USA, Inc., Workstream Inc. and Peopleview, Inc.10.20
            Form
                of Subscription Agreement (incorporated by reference to
              Exhibit
                10.1 to the quarterly report on Form 10-Q for the quarter ended February
                29, 2004).10.21
            Form
                of Securities Purchase Agreement (incorporated by reference
              to
                Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter
                ended
                February 29, 2004).10.22
            Agency
                Agreement dated December 9, 2003 between Standard
              Securities
                Capital Corporation and Workstream Inc.(incorporated by reference
                to
                Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter
                ended
                February 29, 2004).10.23
            Securities
                Purchase Agreement dated as of December 11, 2003 by
              and
                between Workstream Inc. and Sunrise Securities Corporation (incorporated
                by reference to Exhibit 10.4 to the quarterly report on Form 10-Q
                for the
                quarter ended February 29, 2004).10.24
            Securities
                Purchase Agreement dated as of December 31, 2003 by
              and
                between Workstream Inc. and Sunrise Securities Corporation (incorporated
                by reference to Exhibit 10.5 to the quarterly report on Form 10-Q
                for the
                quarter ended February 29, 2004).10.25
            Institutional
                Public Relations Retainer Agreement dated December
              1,
                2003 between Sunrise Financial Group, Inc. and Workstream Inc.
                (incorporated by reference to Exhibit 10.6 to the quarterly report
                on Form
                10-Q for the quarter ended February 29, 2004).10.26
            Business
                Advisory Agreement dated as of December 3, 2003, by and
              between
                Workstream Inc. and Legend Merchant Group, Inc. (incorporated by
                reference
                to Exhibit 10.7 to the quarterly report on Form 10-Q for the quarter
                ended
                February 29, 2004).10.27
            Securities
                Purchase Agreement dated December 15, 2004 among Workstream, Rubicon
                Master Fund, Union Spring Fund Ltd., Sunrise Equity Partners, LP,
                Sunrise
                Foundation Trust and Nathan A. Low (incorporated by reference to
                Exhibit
                10.1 to the current report on Form 8-K filed December 21,
                2004).10.28
            Agreement
                and Plan of Merger dated June 29, 2004 among Workstream, Workstream
                Acquisition IV, Inc. and Bravanta, Inc. (incorporated by reference
                to
                Exhibit 2.1 to the current report on Form 8-K filed August 11,
                2004).10.29
            Asset
                Purchase Agreement dated December 20, 2004 among Workstream, Workstream
                USA, Inc. and ProAct Technologies Corporation (incorporated by reference
                to Exhibit 10.1 to the current report on Form 8-K filed January 6,
                2005).10.30
            Amendment
                to Asset Purchase Agreement dated December 30, 2004 among Workstream,
                Workstream USA, Inc. and ProAct Technologies Corporation (incorporated
                by
                reference to Exhibit 10.2 to the current report on Form 8-K filed
                January
                6, 2005).




85




10.31
            Registration
                Rights Agreement dated December 30, 2004 between Workstream and ProAct
                Technologies Corporation (incorporated by reference to Exhibit 10.3
                to the
                current report on Form 8-K filed January 6, 2005).10.32
            Promissory
                Note dated December 30, 2004 issued to ProAct Technologies Corporation
                (incorporated by reference to Exhibit 10.4 to the current report
                on Form
                8-K filed January 6, 2005).10.33
            Asset
                Purchase Agreement dated August 31, 2004 among Workstream, Workstream
                USA,
                Inc. and Peoplebonus.com, Inc. (incorporated by reference to Exhibit
                10.1
                to the quarterly report on Form 10-Q for the quarter ended August
                31,
                2004).21.1
            List
                of Subsidiaries.*23.1
            Consent
                of PricewaterhouseCoopers LLP.*31.1
            Certifications
                pursuant to Rule 13a-14(a)/15d-14(a).*32.1
            Certifications
                pursuant to 18 U.S.C. Section
                1350.*


_


*
      Filed
      herewith.





**
      Constitutes a management contract for compensatory plan or
      arrangement.




86




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




WORKSTREAM
              INC.By:
            /s/ Michael
              MullarkeyMichael
              Mullarkey,Chairman
                of the Board and ChiefExecutive
                OfficerDated:July
              28, 2006







Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/
                Michael
                Mullarkey
            
            Chairman
                of the Board of
            
            July
                28, 2006Michael
                Mullarkey
            
            Directors
                and Chief ExecutiveOfficer
                (Principal Executive Officer)/s/
                Stephen
                Lerch
            
            Executive
                Vice President
            
            July
                28, 2006Stephen
                Lerch
            
            Chief
                Financial Officer/Chief Operating Officer(Principal
                Financial and Accounting Officer)/s/
                Arthur Halloran
            
            Director
            
            July
                28, 2006Arthur
                Halloran/s/
                John Oltman
            
            Director
            
            July
                28, 2006John
                Oltman/s/
                Michael A. Gerrior
            
            Director
            
            July
                28, 2006Michael
                A. Gerrior/s/
                Thomas Danis
            
            Director
            
            July
                28, 2006Thomas
                Danis/s/
                Mitch Tuchman
            
            Director
            
            July
                28, 2006Mitch
                Tuchman/s/
                Steve Singh
            
            Director
            
            July
                28, 2006Steve
                Singh





87