UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549










FORM
      10-K/A


(Amendment
      No. 1)










**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, 2008


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 EXCHANGEON
                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 oNo 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 oNo x





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. o




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


Large
                  accelerated filer
              o
              Accelerated
                  filer
              oNon-accelerated
                  filer
              o
              Smaller
                  reporting company
              x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes oNo x





The
      aggregate market value of the outstanding voting and non-voting common equity
      held by non-affiliates of the registrant was $20,663,106 as of May 31, 2008,
      and
      based on the closing sales price of common stock as reported by the NASDAQ
      Capital Market on May 31, 2008, which is the last business day of the
      registrant’s most recently completed 4th fiscal quarter. This calculation does
      not reflect a determination that persons are affiliates for any other
      purposes.





The
      total
      number of common shares, no par value, outstanding on May 31, 2008 was
      52,442,818, excluding 108,304 **** escrow
      shares.


**EXPLANATORY
        NOTE**
  On
        November 14, 2008, Workstream Inc. filed its Annual Report on Form 10-K for
        its
        fiscal year ended May 31, 2008 (the “2008 Form 10-K”). However, Exhibits 31.1
        and 32.1 were inadvertently omitted from such filing. The Company hereby
        files
        this amendment to include with it as Exhibits 31.1 and 32.1 the certifications
        required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. As required,
        the Company has included in this filing the 2008 Form 10-K in its entirety,
        including all exhibits. None of the information previously disclosed in the
        2008
        Form 10-K has been modified or amended by this amendment.


WORKSTREAM
      INC.


FORM
      10-K


TABLE
      OF
      CONTENTS





**ITEM**
            
            
            
            **PAGE****PART
                I**1.
            
            Business
            
            41A.
            
            Risk
                Factors
            
            151B.
            
            Unresolved
                Staff Comments
            
            242.
            
            Properties
            
            243.
            
            Legal
                Proceedings
            
            254.
            
            Submission
                of Matters to a Vote of Security Holders
            
            26**PART
                II**5.
            
            Market
                for Registrant's Common Equity, Related Stockholder Matters
                andIssuer
                Purchases of Equity Securities
            
            266.
            
            Selected
                Financial Data
            
            347.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            347A.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            438.
            
            Consolidated
                Financial Statements and Supplementary Data
            
            449.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            759A(T).
            
            Controls
                and Procedures
            
            759B.
            
            Other
                Information
            
            76**PART
                III**10.
            
            Directors,
                Executive Officers and Corporate Governance
            
            7711.
            
            Executive
                Compensation
            
            7912.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            8313.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            8514.
            
            Principal
                Accountant Fees and Services
            
            86**PART
                IV**15.
            
            Exhibits
                and Financial Statement Schedules
            
            86




2




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 18 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.





3


**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 further and embarked
      on a strategy of product design and development, principally through acquired
      intellectual property, that would allow us 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, compensate, evaluate performance, motivate
      and retain their employees. Today, we offer software and service solutions
      that
      address the needs of companies to more effectively manage their human capital
      management function. We believe that our single provider approach for our
      clients’ HCM needs is more efficient and effective than traditional methods of
      human resource management.




COMPANY
      SEGMENTS




Workstream
      is a provider of software and services for HCM. 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 performance management, compensation management, development,
      recruitment, benefits administration and enrollment, succession planning, 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 of America and Canada.




Workstream
      has reduced expenses in an effort to align revenues with expenses. Workstream
      has actively engaged an investment bank to value and divest 6Figuresjobs.com.
      The move is designed to infuse the Company with cash as well as to reduce the
      warrant liability. Per the note agreement made with the Special Warrant Holders
      (SWH) (See Note 6 to the financial statements) Workstream is to receive 25%
      of
      any proceeds from the sale of any assets and the SWH are to receive 75% of
      any
      proceeds. 6Figuresjobs.com is considered an industry leader in the job board
      market and is a part of the Career Networks division. Workstream is continuing
      to consider other opportunities to raise capital and align the Company’s
      business operations with its strategic focus.




INDUSTRY
      BACKGROUND




Our
      target market includes any organization that needs to manage their human capital
      function in a more effective and cost efficient manner. This includes providing
      solutions for recruitment needs, evaluating performance, compensation planning,
      development, incenting and retaining employees and benefits administration.
      Our
      target market includes companies seeking to fulfill those functions through
      information technology skills and expertise. We believe that there are several
      factors that have contributed to companies now placing a higher premium on
      hiring the right personnel, appropriately compensating and rewarding
      performance, and making substantial investments in areas such as training and
      development, incentives and rewards and overall employee satisfaction. These
      factors include increased employee turnover, the shortage of knowledgeable
      workers, and compliance pressures on compensation practices, particularly in
      North America, all of which increase the demand for our services.




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 recurring
      cost
      and lower cost of implementation.




4




*The
      Value of Human Capital*




Over
      the
      past two decades, many organizations have implemented software systems that
      automate best practices and drive efficiency in most departments, including
      enterprise resource planning systems, and customer relationship management
      systems. These software applications provide a wide array of benefits that
      both
      increase revenue growth and eliminate expenses. Based on our experience,
      however, we believe that the human resource (HR) departments of many of these
      organizations have only implemented HR information systems which track basic
      employee information for payroll and benefits purposes, or the organizations
      are
      increasingly dependent on inefficient use of spreadsheets and other manual
      paper-based processes for management of critical areas such as compensation
      and
      performance management. Although these methods provide some level of automation,
      they often do little to increase the effectiveness of managing the human capital
      function because, in spite of the volumes of data and business information
      that
      are generated, the critical knowledge within an organization and therefore
      much
      of its value, resides with employees. As a result, many companies have begun
      to
      change their view of human capital, not as an expense to be minimized but as
      an
      asset whose value should be optimized. Unfortunately, many organizations have
      neither systematized best practices for talent management nor have they
      implemented software applications to support these processes and provide HR
      professionals with critical analytics and metrics.




We
      believe that our suite of workforce management solutions directly addresses
      the
      major challenges facing employers in effectively managing the human capital
      function. Our solutions enable companies to employ sophisticated systems in
      their talent management processes. The ability to leverage valuable data
      generated through these functions allows organizations to identify overall
      trends that could improve the efficiency and effectiveness of its processes,
      quickly identify problems that could lead to employee turnover and ensure that
      the employee workforce is aligned appropriately around the corporate
      objectives.




*Increased
      Use of On-Demand Applications*




Based
      on
      our experience, we believe that organizations have become increasingly
      dissatisfied with traditional enterprise software applications, resulting in
      the
      growing adoption of the on-demand model for enterprise software.
      Historically, organizations have purchased perpetual software licenses and
      deployed enterprise software applications on-site within their IT environment.
      This traditional method of purchasing and deploying enterprise software
      applications has left many organizations questioning whether the benefits of
      these technologies outweigh the following burdens:




·
            expensive
                and time consuming implementation;




·
            significant
                initial capital investment;




·
            expensive
                maintenance; and




·
            limited
                incentives to ensure client
                success.




Developments
      in technology have enabled software developers to offer enterprise software
      applications on an on-demand basis. Leveraging the Internet, multi-tiered
      architectures, advances in security and open standards for application
      integration, software vendors can offer software applications to their clients
      as a service, hosting the software on servers operated by the software vendor.
      Clients, using an Internet browser, access the applications, which are designed
      to be easily configured and integrated with a client’s existing applications.




The
      on-demand model fundamentally changes both the purchasing and deployment of
      enterprise software from a client perspective. Rather than making large,
      up-front investments in perpetual licenses, clients purchase limited term
      subscriptions for on-demand software applications. Further, because only an
      Internet browser is required to access on-demand software applications, which
      can be easily configured to meet the buyer’s specific needs, organizations
      eliminate the expense of ancillary technology and third-party services required
      to implement, configure and maintain the enterprise application on-site.
      Finally, the finite duration of subscriptions provides a strong incentive to
      software vendors to ensure that the software provides the expected benefits
      to
      the client and that they receive consistent customer service. The on-demand
      model also reduces research and development support costs for the software
      developer. Because only limited versions of the software exist at any one time,
      the on-demand model relieves the burden of maintaining and upgrading historical
      versions of the software.




We
      believe that talent management applications are particularly well-suited to
      the
      on-demand model. Talent management applications are generally purchased by
      an
      organization’s HR department. Because the HR departments of most organizations
      have little historical experience making capital expenditures for enterprise
      software applications, we believe that the on-demand applications are an
      operating expense model that provides these departments the opportunity to
      access these software applications on a subscription basis, thus eliminating
      a
      major impediment to the adoption of talent management software
      solutions.




5




STRATEGY




Our
      objective is to become a leading supplier of comprehensive, adaptive workforce
      solutions in North America. While our Career Network services can be used by
      any
      size organization, our Enterprise Workforce talent management solutions were
      primarily configured for larger organizations. We believe that our products
      can
      address the needs of most of the human capital market and manage the entire
      employee lifecycle and we are able to provide enterprise workforce management
      solutions and services to companies of 2,500 employees or more.




We
      believe that our solutions help companies cost-effectively maximize workforce
      productivity, performance and satisfaction by applying business discipline
      to
      key people processes. Our solutions are built around a suite of easily
      configurable software applications that automate talent management best
      practices. We believe that by providing our software applications on an
      on-demand basis, we can substantially reduce the costs and risks associated
      with
      traditional enterprise software application implementations. We also believe
      that implementing feature-rich and scalable, or easily configurable on a
      real-time basis, talent management solutions that meet organizations’ specific
      needs requires a combination of software, services and domain-specific content.
      Accordingly, we complement our software applications with consulting services,
      outsourcing services and proprietary content. Together, these components form
      solutions that enable our clients to improve the quality of their human capital
      management processes and increase employee productivity and retention and make
      their talent management programs more cost-effective. Our solutions
      include:




management
      of talent compensation;





evaluation
      of talent performance and competencies;





talent
      development and training need identification;





talent
      succession planning;





talent
      reward, non-cash incentives and retention services;





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





benefits
      enrollment and administration and tools for employee
      communications;





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; and





talent
      utilization services with job posting to internal company
      intranets.





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:




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 healthcare, financial services, retail, education
      and government, pharmaceuticals and biotech, food services and some
      manufacturing sectors;





6




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 such as Human Resource Outsourcing companies,
      Business Processing Outsourcing companies, and Systems Integrators; In addition,
      we will continue to pursue OEM channels for our products and
      services;





Expand
      market opportunities for our products and services. We will continue to identify
      and leverage additional growth engines for our products and services as well
      as
      Education and Government markets. These markets provide new revenue
      opportunities for our products and services;





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 and functionally rich human capital management service in a hosted
      environment;





Cross-selling
      additional solutions to further penetrate current clients.   We
      believe that having a “suite” of human capital solutions that address the entire
      employee life cycle combined with our strong client relationships provides
      us
      with a meaningful opportunity to cross-sell additional solutions to our existing
      clients and to achieve greater penetration within an organization. We expect
      to
      continue to create innovative programs designed to provide our sales and account
      management personnel with strong incentives to maximize the value for each
      of
      our clients; and





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 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 introduced 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
      2008, Enterprise Workforce Services generated approximately 67% 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 a state-of-the-art, world class data center
      facility. 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.





*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:




7




·
            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; and


·
            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;


·
            Off
                Cycle Planning,for
                evaluating individual employees throughout the year based on “effective”
                hiring dates or ad hoc needs;


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


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





*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. Development capabilities
      include:




·
            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;




8




·
            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;
                and


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





*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;
                and


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





*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
      capabilities and applications include:




·
            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 and


·
            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.





*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:




9




·
            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;
                and


·
            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.




*CAREER
      NETWORKS*





Our
      Career Networks segment consists of career transition services, recruitment
      research and applicant sourcing. Career Networks accounted for approximately
      33%
      of total revenue for fiscal 2008.





*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 thousands of 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
      $795 and $3,000 for our resume development, career consulting and market
      research services.





*Applicant
      Sourcing*




6FigureJobs.com,
      Inc., which we acquired in October 2001, is an online applicant-sourcing portal
      where job seeking candidates and companies that are actively hiring and filling
      positions 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
      hand reviewed, to ensure they have recent total compensation of $100,000 per
      annum, 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 the number
      of leads delivered or on a cost per lead basis.




Workstream
      has reduced expenses in an effort to align revenues with expenses. Workstream
      has actively engaged an investment bank to value and divest 6Figuresjobs.com.
      The move is designed to infuse the Company with cash as well as to reduce the
      warrant liability. Per the agreement made with the Special Warrant Holders
      (SWH)
      Workstream is to receive 25% of any proceeds from the sale of any assets and
      the
      SWH are to receive 75% of any proceeds. 6Figuresjobs.com is considered an
      industry leader in the job board market and is a part of the Career Networks
      division. Workstream is continuing to consider other opportunities to raise
      capital and align the Company’s business operations with its strategic
      focus.




10




*Recruitment
      Research and Contingent Placement*





We
      currently provide recruitment research services and contingent recruiting
      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. For clients interested in a guaranteed hire, we also
      provide search services where fees are based on a percentage of the candidate’s
      first year salary.




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 group is located in Ottawa, Canada. The Fusepoint datacenter in
      Toronto, Canada is where we maintain our servers that support all of our
      locations and the software that is accessed by our clients in an Application
      Service Provider (“ASP”) environment. We also have certain product development
      resources in Victoria, British Columbia.




Financial
      information about geographic areas and segments can be found in Note 13 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 billed but 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 and contingent permanent placement 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.




11




RESEARCH
      AND DEVELOPMENT




From
      fiscal 2002 through fiscal 2005, the Company embarked on a research and
      development strategy whereby, rather than relying solely on developing software
      internally, the Company began to obtain new technology applications and
      intellectual property through the acquisition of companies that had already
      developed the technology and proven its success in the marketplace. During
      late
      fiscal 2005 through 2008, the Company incurred significant research and
      development costs subsequent to the various acquisitions in order to further
      enhance the technologies developed by the individual entities prior to the
      acquisitions. This included a more common look and feel to the various
      applications user interfaces and reporting, integration between modules. The
      increase in costs was primarily due to the addition of internal resources as
      well as the use of offshore contractors. In 2008, much of the effort was focused
      on specific integration of Workstream TalentCenterV7.0, with particular emphasis
      on the compensation, performance management and development solutions. Research
      and development expense was approximately $5,725,000 and $4,013,000 in fiscal
      2008 and fiscal 2007, respectively. All research and development expense was
      incurred in the Enterprise Workforce Services segment. As of April 2008, the
      research and development expenses have been reduced.




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.




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
      expired and renewals have been applied for 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 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.




12




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. Target clients for our
      on-demand software applications range from large global 2000 companies to medium
      size organizations. We sell these solutions to both new and existing clients
      primarily through our direct sales force, which is comprised of mainly field
      sales personnel. Target clients for Career Networks range from headhunters
      and
      recruitment firms seeking applicant sourcing from the internet job board,
      advertisers for our job board website, 6FigureJobs.com, outplacement candidates
      looking to either change positions or find a job and companies that wish to
      avail themselves of our recruitment research capabilities.




Our
      marketing strategy focuses on generating qualified sales leads. The Enterprise
      Workforce Services segment’s sales cycle for global 2000 companies is
      approximately six to nine months depending on the size of the potential client
      and the number of solutions the prospective customer is evaluating. Career
      Networks sales cycle is relatively short and of a higher volume nature. The
      Enterprise Workforce Services segment has a sales team of approximately 7
      (internal and external) located throughout the United States. The Career
      Networks segment has a sales team of approximately 40 located in five locations
      throughout the United States. In addition, we have approximately three marketing
      personnel located throughout the United States and Canada. Both Career Networks
      and Enterprise Workforce Services sales teams sell typically within their
      segment.




Our
      marketing initiatives are generally targeted toward specific vertical industries
      or specific solutions. Our marketing programs primarily consist of:




·  participation
      in conferences, trade shows and industry events;




·  direct
      mail and email campaigns;




·  use
      of
      webinars;




·  distribution
      of white papers, case studies and thought leadership documents; and




·  using
      our
      website to provide product and company information.




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 ITS Personal Marketing 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.




We
      believe that the primary competitive factors affecting our market
      include:




·
            product
                functionality and performance;




·
            solution
                breadth and functionality;




·
            ease
                of deployment, integration and
                configuration;




13




·
            cost
                of delivery;




·
            integration
                between applications;




·
            domain
                expertise;




·
            industry-specific
                expertise;




·
            service
                support, including consulting services;




·
            solution
                price;




·
            scalability
                and reliability;




·
            security
                and data privacy; and




·
            breadth
                of customer support.




We
      believe that our principal competitive advantages include:




·
            our
                complete and integrated suite of HCM
                applications;




·
            our
                richness and completeness of product functionality to meet the demanding
                requirements of global customers;




·
            our
                career transition service products;




·
            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
                applicant sourcing job board
                website;




·
            our
                customer service; 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, 2008, we had 144 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. **





14




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.




**We
      have limited operating funds, and our ability to continue as a going concern
      is
      dependent upon our ability to obtain additional capital to operate the business.**




We
      have
      experienced net losses which have caused an accumulated deficit of approximately
      $132,000,000 as of May 31, 2008. In addition, we have consumed net cash
      used in operating activities of approximately $12,500,000 for the year ended
      May
      31, 2008. We will require additional funds to sustain and expand our current
      business, and to continue implementing our business plan. These factors raise
      substantial doubt about our ability to continue as a going concern.




**Our
      independent auditors have expressed substantial doubt about our ability to
      continue as a going concern, which may hinder our ability to obtain future
      financing.**




Our
      independent registered public accounting firm has issued its report, which
      includes an explanatory paragraph for a going concern uncertainty on our
      financial statements as of May 31, 2008. Our ability to continue as a going
      concern is heavily dependent upon our ability to obtain additional capital
      to
      sustain operations. Currently, we have no commitments to obtain additional
      capital, and there can be no assurance that financing will be available in
      amounts or on terms acceptable to us, if at all.




**The
      Company has a material weakness in its internal accounting
      controls.**




In
      the
      2008 Annual Report on Form 10-K, the Company noted that it had identified a
      material weakness in its internal accounting controls because of insufficient
      staffing in its accounting department. The Company took remedial action to
      correct this weakness, but, as of the date of the 2008 audit, the Company’s
      Chief Executive Officer and Chief Financial Officer determined that the material
      weakness had not been remediated and therefore has continued. The reason for
      this decision is that during the Company’s annual audit, a material weakness
      arose due to numerous adjustments to the Company’s financial statements that
      were not detected by the Company’s accounting staff. See Item 9A. By definition,
      a material weakness means that there is a significant deficiency that, by
      itself, or in combination with other significant deficiencies, results in more
      than a remote likelihood that a material misstatement of the annual or interim
      financial statements will not be prevented or detected. Additionally, the
      existence of a material weakness precludes management from concluding that
      internal control over financial reporting is effective.




**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, 2008, we had an accumulated deficit of
      approximately $132,000,000. We reported net losses of approximately $52,600,000
      and $13,800,000 for the years ended May 31, 2008 and 2007, respectively.
      Revenues for fiscal 2008 and 2007 were approximately $27,600,000 and
      $29,300,000, 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.




**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 for future anticipated capital
      expenditures, the development of new services or technologies and our projected
      operational needs. We recentlyundertook cost reductions in an effort to meet
      our
      working capital requirements and capital expenditure requirements through at
      least May 31, 2009. We are not sure whether these cost reductions, together
      with
      our anticipated generation of cash flow will be sufficient to meet these
      requirements.I It is possible that we may need to raise additional funds sooner
      than expected in order to fund working capital 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:




15




·
            fund
                current operations;





·
            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 shareholder interests** .




In
      the
      past we have issued, and in the future we may issue, equity to raise additional
      funds. 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.




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




The
      general level of current economic activity has significantly affected the demand
      for employment and recruitment services in our Career Networks segment, as
      well
      as, sales of Enterprise software. If the general level of economic activity
      continues to be slow, 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.




**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, as well
      as,
      sales of Enterprise software. 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 companies
      offering products or services that compete with one or more of the services
      that
      we offer. We compete for a portion of employers’ human resource budgets with
      many types of competitors, as employers typically utilize a variety of sources
      for managing their human capital needs, including:




16




client-server-based
      software services;





web-based
      and hosted service providers with a variety of human capital
      solutions;





traditional
      offline recruiting firms;





traditional
      offline advertising, such as print media;





resume
      processing companies;





web-based
      recruitment companies; and





Internet
      job posting companies.





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 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 ITS
      Personal Marketing 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.





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.





**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.




17




**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.




**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. While we have no current intention of making acquisitions, the
      risks
      we may encounter in completing any such 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.




18




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




As
      of May
      31, 2008, Michael Mullarkey, our Executive Chairman, beneficially owned
      approximately 8.52% of our outstanding common shares. As on November 1, 2008,
      Mr. Mullarkey beneficially owned approximately 19.91% of our outstanding common
      shares. Mr. Mullarkey’s interests as a major shareholder may conflict with his
      fiduciary duties as a director. Mr. Mullarkey’s interests may influence how he
      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.




**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. In addition, we intend to expand our talent management
      solution offerings on a broader international scale and are presently enhancing
      our products with further multi-lingual and multi-currency capabilities. Our
      international operations are now and will be 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.




**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.




**Currently
      our common shares trade at prices below $1.00. If this continues in the future,
      our common shares could be subject to delisting by NASDAQ** .




Our
      common stock currently trades on the NASDAQ Capital Market and the Boston Stock
      Exchange. On November 20, 2007, the Company received a letter from The NASDAQ
      Stock Market (“NASDAQ”) notifying the Company that for 30 consecutive trading
      days prior to the date of the letter, the minimum bid price per share of the
      Company's listed securities had been below the minimum bid price per share
      of
      $1.00 as required for continued inclusion on the NASDAQ Capital Market.




19




On
      May
      20, 2008, we received a notice from the Nasdaq Stock Market informing the
      Company that pursuant to NASDAQ’s previous communication of November 20, 2007,
      the Company had not regained compliance with Marketplace Rule 4310(c)(4) related
      to the minimum closing bid price of the Company’s common shares by May 19,
      2008.





The
      notice stated that because the Company met all initial inclusion criteria for
      the Capital Market set forth in Marketplace Rule 4310(c) (except for the bid
      price) on May 19, 2008, in accordance with Marketplace Rule 4310(c)(8)(D),
      the
      Company will now be provided an additional 180 calendar day compliance period,
      or until November 17, 2008, to regain compliance. To regain compliance anytime
      before November 17, 2008, the bid price of the Company’s common shares must
      close at $1.00 per share or more for a minimum of ten consecutive business
      days.
      However, on October 16, 2008, the NASDAQ announced that, effective immediately,
      it was suspending the enforcement of the rules requiring a minimum $1.00 closing
      bid price. The suspension will remain in effect through January 16, 2009 and,
      as
      a result, we will now have until February 18, 2009 to regain compliance with
      the
      $1.00 minimum bud price requirements.





Under
      the
      NASDAQ’s requirements, a stock can be delisted and not allowed to trade on the
      NASDAQ Capital Market if the closing bid price of the stock over a 30
      consecutive trading-day period is less than $1.00. The Boston Stock Exchange
      does not maintain a similar minimum price requirement. We intend to seek
      shareholder approval to authorize a reverse split of our common shares in order
      to raise our stock price and gain compliance with the minimum bid price
      requirement, However, there is no assurance that our shareholders will approve
      the reverse stock split or that such split, if approved, will be sufficient
      to
      allow us to maintain a bid price of at least $1.00. No assurance can be given
      that the closing bid price of our common shares will satisfy the NASDAQ minimum
      bid price requirements and thus continue to trade on the NASDAQ Capital Market.
      Although our common shares may remain listed on the Boston Stock Exchange,
      if
      our common shares are delisted from the NASDAQ Capital 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 the NASDAQ Capital Market, potential
      investors may be prohibited from or be less likely to purchase our common
      shares, limiting the trading market for our stock even further.




**We
      are currently not in compliance with the NASDAQ’s reporting requirements and may
      face delisting if it does not regain compliance.**




Currently,
      we are not in compliance with the requirements for continued listing set forth
      in NASDAQ Marketplace Rule 4310(c)(14) because of our failure to file our annual
      report on Form 10-K for the fiscal year ended May 31, 2008 and our quarterly
      report on Form 10-Q for the fiscal quarter ended August 31, 2008. We filed
      an
      appeal of a delisting notice delivered to us by the NASDAQ with the NASDAQ
      Listing Qualifications Panel requesting continued listing of our common shares
      until the Panel’s review and determination. A hearing before the Panel to
      consider the appeal occurred on October 30, 2008. We are awaiting a
      determination by the Panel on our matter. The suspension of trading and
      delisting remains stayed pending such appeal. Subsequent to our hearing, the
      NASDAQ announced that effective as of October 30, 2008, the NASDAQ is providing
      a company that is delinquent in its periodic filing obligations with the
      opportunity to submit a plan of compliance pursuant to which the staff may
      grant
      an exception for up to 180 calendar days from the due date of the filing for
      the
      company to evidence compliance. A company that regains compliance within that
      time would not receive a delisting determination. We expect that the Panel’s
      determination will take into consideration such pronouncement. If we are unable
      to regain compliance with NASDAQ Marketplace Rule 4310(c)(14), our common shares
      will likely be delisted from trading on the NASDAQ Capital Market. As described
      above, if our common shares are delisted from the NASDAQ Capital 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 the NASDAQ Capital Market,
      potential investors may be prohibited from or be less likely to purchase our
      common shares, limiting the trading market for our stock even
      further.




20




**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 Capital 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 2008, fiscal 2007
      and fiscal 2006 was approximately $27,600,000, $29,300,000,
      and $28,100,000 ,
      respectively, resulting in average revenue of approximately $28,300,000. If
      our
      common shares are delisted or removed from the NASDAQ Capital 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 Capital Market has
      fluctuated between $0.15 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 currently trade at prices below $1.00 and could be subject
      to
      delisting by NASDAQ.”)





**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.**




Subject
      to NASDAQ limitations, 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.




21




**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 2007 and 2008. 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:




·
            user
                privacy;





·
            pricing
                controls;





·
            consumer
                protection;





·
            libel
                and defamation;





·
            copyright
                and trademark protection;




22




·
            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. We have centralized all of our
      application hosting in a secure, state-of-the-art datacenter facility and we
      have invested substantial funds in procuring the necessary equipment. While
      this
      initiative should enhance our ability to meet performance and security
      requirements under our customer service level agreements, there is no assurance
      that this will cover all eventualities. We have also established redundant
      systems and implemented disaster recovery procedures, they also may not be
      sufficient for all situations. 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.




**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 achieved independent auditor certification under a SAS 70 Type
      I
      and II 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.




23




**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 have recently updated and refreshed our data
      center capabilities and upgraded the necessary equipment there is no assurance
      that such changes and upgrades will accommodate growth in our business, our
      business, financial condition and operating results could be adversely
      affected.




**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 certain of our Board
      members’ senior management and other key employees, including in particular,
      Michael Mullarkey, our Chairman and Steve Purello, our President and Chief
      Executive 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 are located in approximately 25,020 square feet of leased
      office space in Ottawa, Ontario, Canada. This facility houses our network
      operation and information technology groups, certain research and development
      personnel and customer support. Our lease for 17,945 square feet of this
      facility expires in December 2008 with the remaining 7,075 square feet expiring
      in October 2010.




In
      addition, we lease approximately 20,700 square feet of office space in Maitland,
      Florida, which serves as the headquarters of our operating subsidiary,
      Workstream USA. Our finance and human resources department, our internal sales
      team and lead generation group, and the majority of the employees of the
      outplacement and recruitment companies reside in this space. Our lease for
      this
      premise expires in April 2009.




24




As
      part
      of the acquisitions over the past several years, we assumed several facility
      leases, some of which we extended beyond the assumed term or moved within the
      same geographic area. We lease approximately 11,349 square feet of office space
      in Pleasanton, California that expires in December 2013. This facility has
      the
      principal research and development group along with professional services
      resources. Finally, we lease 1,500 square feet of office space in Victoria,
      British Columbia, Canada that expires in April 2009. This lease was assumed
      as
      part of the Exxceed acquisition.




ITEM
      3.
      LEGAL PROCEEDINGS




On
      or
      about August 10, 2005, a class action lawsuit was filed against the Company,
      its
      former Chief Executive Officer and its former Chief Financial Officer in the
      United States District Court for the Southern District of New York. The action,
      instituted 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
      (the class period), alleges, among other things, that management provided the
      market misleading guidance as to anticipated revenues for the quarter ended
      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 and expenses, including counsel
      and expert fees and costs. The Court certified the case as a class action.




The
      Company and the individual defendants thereafter filed a motion for judgment
      on
      the pleadings, based upon a recent ruling of the United States Supreme Court,
      seeking to dismiss the amended complaint. Plaintiffs then sought leave to file
      a
      Second Amended Complaint, and asked the Court for additional time to pursue
      discovery. The Court granted the motion for leave to file a Second Amended
      Complaint, but deferred the request for additional discovery and ruled that
      the
      pending motion for judgment on the pleadings would be considered with respect
      to
      the allegations in the Second Amended Complaint. The motion for judgment on
      the
      pleadings has been briefed and argued, but has not been ruled upon. In the
      event
      the case is not disposed of on motion, the Company expects to file a motion
      for
      summary judgment.




The
      Company has directors and officers’ liability insurance, which covers the
      liability of the individual defendants in the amount of $10 million. The Company
      has reached an agreement with its primary insurance carrier limiting the
      Company’s exposure, in the event of a resolution within the Company’s insurance
      limits, to $600,000.




The
      parties have agreed to settle the claims in consideration of the payment of
      $3
      million by the Company’s insurance carrier and issuance by the Company of
      $600,000 in common shares. The Court held a hearing on June 24, 2008 to consider
      the fairness of the settlement after notice of the settlement and the hearing
      had been given to the
      class. No opposition to approval of the settlement was presented at the hearing.
      On August 13, 2008, the Court entered a Final Judgment in the case, which became
      final on September 12, 2008.




*
      *
      *




On
      September 27, 2006, Sunrise Equity Partners, L.P. (“Sunrise”) filed a complaint
      against the Company and its former Chief Executive Officer in the United States
      District Court for the Southern District of New York alleging a violation of
      Section 10b-5 of the Securities Exchange Act of 1934 and a claim under New
      York
      common law for fraudulent and negligent misrepresentations in connection with
      Sunrise’s purchase of common shares and warrants in a private placement.




On
      April
      11, 2007, Nathan A. Low (“Low”) and Sunrise Foundation Trust (“Trust”) filed a
      complaint against the Company and its former Chief Executive Officer in the
      United States District Court for the Southern District of New York alleging
      a
      violation of Section 10b-5 of the Securities Exchange Act of 1934 and a claim
      under New York common law for fraudulent and negligent misrepresentations in
      connection with Low’s and the Trust’s purchase of common shares and warrants in
      a private placement. The three plaintiffs invested an aggregate of $4 million
      in
      the Company in the private placement.




The
      case
      has been settled for $3.9 million dollars of which $3.3 million is cash and
      $600,000 in common shares, pursuant to written agreement, and the litigation
      has
      been dismissed. The settlement of the claims against defendants was funded
      by
      proceeds from the Company’s insurance policies.




*
      *
      *




25




On
      June
      24, 2008, the Company filed a lawsuit in the Superior Court of the State of
      Delaware in and for New Castle County (the “State Court Lawsuit”) against
      Empagio Acquisition, LLC (“Empagio”) and SMB Capital Corporation (“SMB”) to
      obtain the $5 million termination fee required to be paid by Empagio and SMB
      pursuant to Section 7.02 of the Agreement and Plan of Merger dated as of
      February 12, 2008 among the Company, Workstream Merger Sub Inc., Empagio and
      SMB, which agreement was terminated by the Company on June 13, 2008. On June
      25,
      2008, Empagio and SMB filed a lawsuit against the Company in the United States
      District Court for the District of Delaware (the “Federal Lawsuit”) alleging
      entitlement to a $3 million termination fee pursuant to the Agreement and Plan
      of Merger. On July 29, 2008, Empagio and SMB filed a notice of voluntary
      dismissal of their Federal Lawsuit based on an understanding that Empagio and
      SMB would make their claim as part of the Company’s State Court Lawsuit. In
      accordance with the voluntary notice of dismissal of the Federal lawsuit,
      Empagio and SMB have now asserted their claims in the State Court Lawsuit. 
The Company has denied these allegations.  The parties are now awaiting the
      issuance of a Case Management Order, which will establish deadlines in this
      action.  Also under new Delaware Rule 16, this matter is subject to
      mandatory alternative dispute resolution.





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.





**PART
      II**





ITEM
      5.
      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





MARKET
      PRICE OF COMMON SHARES





Our
      common shares are listed on the NASDAQ Capital 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 Capital Market. As of
      May
      31, 2008, there were approximately 165 holders of record of our common
      shares.


**Fiscal 2008**
              
              **Fiscal 2007****Low Sale**
              
              **High Sale**
              
              **Low Sale**
              
              **High Sale****Price**
              
              **Price**
              
              **Price**
              
              **Price**Fourth
                  Quarter
              
              $
              0.35
              
              $
              0.75
              
              $
              1.11
              
              $
              1.34Third
                  Quarter
              
              $
              0.55
              
              $
              1.04
              
              $
              0.82
              
              $
              1.40Second
                  Quarter
              
              $
              0.53
              
              $
              1.11
              
              $
              0.72
              
              $
              1.43First
                  Quarter
              
              $
              0.99
              
              $
              1.25
              
              $
              1.16
              
              $
              1.52




26









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.




27




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
      2008.




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.




28




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.




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.




29




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.




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.




30




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.




31




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.




We
      believe that we were not a PFIC for the fiscal years ending May 2008 and May
      2007, and we believe that we will not be a PFIC for the fiscal year ending
      May
      2009. 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.




32




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.




33




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)
 
 2008
              
              2007
              
              2006
              
              2005
              
              2004Statement
                  of Operations DataRevenue,
                  net
              
              $
              27,614
              
              $
              29,309
              
              $
              28,121
              
              $
              26,819
              
              $
              17,167Cost
                  of revenues
              
              
              6,823
              
              
              7,401
              
              
              7,808
              
              
              7,014
              
              
              1,587Selling
                  and marketing
              
              
              9,894
              
              
              7,549
              
              
              6,934
              
              
              7,211
              
              
              4,362General
                  and administrative
              
              
              18,358
              
              
              14,959
              
              
              14,253
              
              
              17,838
              
              
              9,799Research
                  and development
              
              
              5,725
              
              
              4,013
              
              
              5,423
              
              
              2,147
              
              
              453Amortization
                  and depreciation
              
              
              3,601
              
              
              6,503
              
              
              6,685
              
              
              8,535
              
              
              5,602Impairment
                  write-down of goodwill
              
              
              27,547
              
              
              -
              
              
              -
              
              
              -
              
              
              -Operating
                  loss
              
              
              (44,334
              )
              
              (11,116
              )
              
              (12,982
              )
              
              (15,926
              )
              
              (4,636
              )Other
                  (expense) income, net
              
              
              (8,169
              )
              
              (2,518
              )
              
              60
              
              
              (45
              )
              
              (2,635
              )Loss
                  before income taxes
              
              
              (52,503
              )
              
              (13,634
              )
              
              (12,922
              )
              
              (15,971
              )
              
              (7,271
              )Recovery
                  of deferred income tax
              
              
              706
              
              
              -
              
              
              -
              
              
              848
              
              
              1,789Current
                  income tax expense
              
              
              (820
              )
              
              (124
              )
              
              (64
              )
              
              (36
              )
              
              (55
              )Net
                  loss for the year
              
              $
              (52,617
              )
              $
              (13,758
              )
              $
              (12,986
              )
              $
              (15,159
              )
              $
              (5,537
              )Basic
                  and diluted net loss per share
              
              $
              (1.01
              )
              $
              (0.27
              )
              $
              (0.26
              )
              $
              (0.35
              )
              $
              (0.22
              )Weighted
                  average number ofcommon
                  stock outstanding
              
              
              51,900
              
              
              51,134
              
              
              49,828
              
              
              43,462
              
              
              25,036
 
 AS
        OF MAY
        31,
 (IN
        THOUSANDS)
 
 2008
              
              2007
              
              2006
              
              2005
              
              2004Balance
                  Sheet DataWorking
                  capital (deficit)
              
              $
              (2,799
              )
              $
              (6,515
              )
              $
              (1,087
              )
              $
              6,797
              
              $
              (351
              )Total
                  assets
              
              
              28,387
              
              
              58,661
              
              
              66,270
              
              
              75,657
              
              
              48,882Long
                  term obligations
              
              
              19,276
              
              
              742
              
              
              288
              
              
              192
              
              
              1,259Total
                  liabilities
              
              
              30,356
              
              
              15,474
              
              
              13,248
              
              
              12,718
              
              
              11,143Stockholders'
                  equity (capital deficiency)
              
              
              (1,969
              )
              
              43,187
              
              
              53,022
              
              
              62,939
              
              
              37,739


ITEM
      7.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS





OVERVIEW





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




34




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 management, compensation, development and
      rewards. The Career Networks segment consists of career transition, applicant
      sourcing and recruitment research services.




Our
      business changed 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 and technologies, 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 and 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.




Over
      the
      past three years, we have expended significant resources on further integration
      of the acquired software applications. We have enhanced product functionality,
      user interface and reporting capabilities. We have further integrated many
      of
      the talent management solutions and provide a portal based platform for our
      customers who may elect to contract for a single solution or multiple
      applications.





In
      the
      last half of fiscal 2008 we initiated objectives that were a part of a strategy
      to align expenses with revenues of the business. Our overall strategic objective
      is still to be the premier provider of talent management solutions in the HCM
      space. We completed our development of our seamless integration between our
      core
      applications of Compensation, Performance, and Development. We are capitalizing
      on the sales and marketing expenditures and continue to maintain momentum of
      selling to new customers and retaining existing customers. We believe that
      sound
      execution of these initiatives will result in revenue growth and the ability
      to
      take advantage of the scalable nature of our business model.





To
      monitor our results of operations and financial condition, we review key
      financial information including net revenues, gross profit, operating
      expenditure and cash flow from operations. We have deployed numerous analytical
      dashboards across our business to assist in evaluating current performance
      against established metrics, budgets and business objectives on an ongoing
      basis. 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 and determination of useful lives 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
      revenues. Changes in assumptions used would impact our financial position and
      results.





**Revenue**





The
      Company derives revenue from various sources including the following:
      subscription and hosting fees; licensing of software and related 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:




35




·
            evidence
                of an arrangement exists;


·
            services
                have been provided or goods have been
                delivered;


·
            the
                price is fixed or determinable; and


·
            collection
                is reasonably assured.





The
      Company primarily provides various HCM software applications as an on-demand
      application service and also enters into the sale of license agreements. 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 of the customer.





Subscription
      revenues and hosting fees consist of 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 undeliverable item 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 both perpetual and term
      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 are either multi-year
      or
      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.





Source
      code revenue is generated by sales in small markets that we do not typically
      target. The sales are for versions of specific applications or products that
      we
      no longer support or sell. As such, future earnings are not affected by these
      sales. Source code revenue is recognized when our contractual commitments have
      been satisfied.





Professional
      services revenue is generated from implementation of software applications
      and
      from customer training, customization 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 customers to offer
      rewards, employee recognition and benefits (discounted goods and tickets) in
      an
      effort to promote their employee retention. The Company generates subscription
      revenues from the customer. 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.




36




For
      career transition services, the Company bills the client when the assignment
      starts, due to the short turn around on these services revenue is recognized
      in
      the month that they are billed. 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**





We
      test
      goodwill for impairment on an annual basis, as of May 31, or as needed if
      circumstances arise that reduce the value of our reporting units below the
      carrying value. We compare the fair value of each reporting unit to its carrying
      amount (including goodwill) for our impairment evaluation. Our business segments
      are considered reporting units for goodwill impairment testing. Goodwill is
      considered to be impaired if the carrying value of a reporting unit exceeds
      its
      fair value. If goodwill is considered to be impaired, the loss that is
      recognized is equal to the amount that the carrying value exceeds the fair
      value
      of that goodwill.





There
      are
      judgments and estimates built into our fair value analysis, including future
      cash flow projections, the discount rate representing innate risk in future
      cash
      flows, market valuation, strategic operation plans and our interpretation of
      current economic indicators. Changes in any of the underlying assumptions will
      cause a change in the results, which could lead to the fair value of one or
      more
      of the reporting units to be worth less than the current carrying amounts.
      In
      addition to a change in market and economic conditions or our strategic plans,
      the possibility exists that our conclusions could change which would result
      in a
      material negative effect on both our financial position and results of
      operations.





In
      Fiscal
      2008, the Company recorded a $27.6 million goodwill impairment charge. Based
      on
      the Company’s fourth quarter fiscal 2008 SFAS No. 142 impairment review of its
      Enterprise Workforce and Career Networks operating segments net assets and
      their
      related book value, the Company recorded an impairment of $21.5 million and
      $6.1
      million, respectively. The analysis was conducted by independent valuation
      specialists. The decline in estimated fair values of the operating segments
      resulted from an analysis of the current economic conditions, the Company’s
      performance to budget and the estimated future cash flows.





**Intangible
      Assets**




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 determined by a third
      party valuation expert 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.





**Deferred
      Taxes**





We
      apply
      significant judgment in recording deferred tax assets, which primarily are
      the
      result of loss carryforwards of companies that we acquired and loss
      carryforwards internally generated. In addition, we make certain assumptions
      about if and when these deferred tax assets will be utilized. The utilization
      of
      the Company’s net operating loss carryforwards may be limited in any given year
      under circumstances. Events which may affect the Company’s ability to utilize
      these carryforwards include, but are not limited to, future profitability,
      cumalitive stock ownership changes of 50% or more over a three-year period,
      as
      defined by section 382 of the Internal Revenue Code, and the timing of the
      utilization of the tax benefit carryforwards. Actual results may differ from
      amounts estimated.




37




FISCAL
      2008 COMPARED TO FISCAL 2007





RESULTS
      OF OPERATIONS





The
      following table sets forth certain consolidated statements of operations data
      expressed as a percentage of total revenue for the periods indicated.
      Period-to-period comparisons of our financial results are not necessarily
      meaningful and you should not rely on them as an indication of future
      performance.


Years ended May 31,2008
              
              2007Revenues:Software
              
              
              35
              %
              
              35
              %Professional
                  services
              
              
              12
              %
              
              15
              %Rewards
                  and discount products
              
              
              20
              %
              
              19
              %Career
                  Networks
              
              
              33
              %
              
              31
              %Revenues,
                  net
              
              
              100
              %
              
              100
              %Cost
                  of revenues:Rewards
                  and discount products
              
              
              15
              %
              
              15
              %Other
              
              
              10
              %
              
              10
              %Cost
                  of revenues (exclusive of the amortization and depreciation expense
                  noted
                  below)
              
              
              25
              %
              
              25
              %Gross
                  profit
              
              
              75
              %
              
              75
              %Operating
                  expenses:Selling
                  and marketing
              
              
              36
              %
              
              26
              %Research
                  and development
              
              
              21
              %
              
              14
              %General
                  and administrative
              
              
              66
              %
              
              51
              %Amortization
                  and depreciation
              
              
              13
              %
              
              22
              %Goodwill
                  impairment
              
              
              100
              %
              
              0
              %Total
                  operating expenses
              
              
              236
              %
              
              113
              %Operating
                  Loss
              
              
              -161
              %
              
              -38
              %Interest
                  and other income
              
              
              1
              %
              
              2
              %Interest
                  and other expense
              
              
              -31
              %
              
              -10
              %Other
                  income (expense), net
              
              
              -30
              %
              
              -8
              %Loss
                  before income taxes
              
              
              -191
              %
              
              -46
              %Income
                  taxes
              
              
              0
              %
              
              0
              %NET
                  LOSS FOR THE PERIOD
              
              
              -191
              %
              
              -46
              %




38






REVENUES





Consolidated
      revenues were approximately $27,614,000 for fiscal 2008 compared to
      approximately $29,309,000 for fiscal 2007, a decrease of $1,695,000 or 6%.





Enterprise
      Workforce Services revenues for fiscal 2008 were approximately $18,477,000
      compared to approximately $20,219,000 for fiscal 2007, a decrease of $1,742,000
      or 9%. Professional service revenues decreased $1,017,000, reflecting a lower
      level of utilization throughout fiscal 2008 driven, primarily, by the timing
      of
      implementation projects and a reduction in reliance outside consulting services.
      Recurring revenues from subscription and maintenance agreements was lower by
      $1,732,000 reflecting the impact of the run out of a number of maintenance
      contracts on older license agreements and other cancellations in excess of
      revenue from new implementations. Revenue from current license sales was higher
      by $1,133,000 as a result of sales of more licenses. Rewards and discount
      products revenue decreased $101,000 on lower than expected redemption volumes
      in
      the existing customer base compared to the prior year due to the slowing
      economy.





Career
      Networks revenues for fiscal 2008 were $9,137,000 compared to $9,090,000 for
      fiscal 2007, an increase of $47,000 or .5%. The outplacement business remained
      strong, showing an increase of $189,000 through a combination of stronger lead
      flow, higher conversion ratios and an increase in revenue per transaction with
      the enhanced service offering. The internet job board business slowed as
      compared to prior year as a result of the slowing economy and availability
      of
      high level job opportunities. Recruitment services was lower compared to prior
      year, by $74,000, as a substantial portion of our recruiting efforts in the
      current year were used to support internal hiring initiatives as opposed to
      external revenue generating engagements.





COST
      OF
      REVENUES AND GROSS PROFIT





Cost
      of
      revenues for fiscal 2008 were $6,823,000, or 25%, compared to $7,401,000, or
      25%, for fiscal 2007 a decrease of $578,000 or 8%. Gross profit for fiscal
      2008
      was $20,791,000 or 75% of revenues compared to $21,908,000 or 75% of revenues
      for fiscal 2007. The decline in costs matched the decline in sales and was
      in
      line by percentage.





Enterprise
      Workforce Services cost of revenues accounted for $6,144,000 of the total cost
      of revenue for fiscal 2008 and $6,846,000 for fiscal 2007, a decrease of
      $702,000 or 10%. Enterprise Workforce Services gross profit was $12,324,000
      or
      67% of revenues for fiscal 2008 compared to $13,373,000 or 66% of revenues
      for
      fiscal 2007. Software margins increased from 87% to 89% year over year primarily
      as a result of redundant costs associated with the completion of the migration
      of all customers from subcontracted hosting partners to a centralized hosting
      array at the Fusepoint datacenter facility in Toronto. The centralization
      provided cost efficiencies in the on-demand business and enabled us to provide
      further assurance to our customers regarding performance under service level
      agreements and other security and privacy requirements. All new customers are
      hosted at Fusepoint. Professional services margins decreased from 77% to 71%
      primarily as a result of our commitment to maintain satisfied customers. Rewards
      and recognition margins increased from 20% a year ago to 25% for fiscal 2008,
      continuing the trend in use of gift cards compared to redemption for other
      products such as electronic and photographic goods that have larger margins.
      This shift in selling more gift cards in the product mix is not expected to
      change in the near term and we anticipate further pressure on rewards margins
      as
      a result. In addition, we are negotiating better discounts from
      vendors.





Career
      Networks cost of revenues accounted for $679,000 of the total cost of revenues
      for fiscal 2008 and $555,000 for fiscal 2007, an increase of $124,000 or 22%.
      Career Networks gross profit was $8,467,000 or 93% of revenues for fiscal 2008
      compared to $8,535,000 or 94% of revenues for fiscal 2007. The expansion in
      the
      product set used in career transition services continues to allow for additional
      revenue generating items and the target customer group was shifting to more
      highly compensated individuals. Both measures, when combined with a higher
      conversion ratio on leads provided, continue to have a positive impact on gross
      profit.




SELLING
      AND MARKETING





Selling
      and marketing expenses were $9,894,000 for fiscal 2008 compared to $7,549,000
      for fiscal 2007, an increase of $2,345,000 or 31%. The increase was primarily
      attributable to a higher level of compensation and related expenses associated
      with the increase in sales personnel and training, early in the year, including
      an expanded sales management team, a telesales organization and additional
      sales
      engineering and support resources. There was a 26% reduction in headcount,
      resulting in significantly reduced costs after the third quarter. Management
      believed that it needed to reduce current costs to align revenues with expenses
      and we believe these expenditures will increase in the future, as revenue
      increases, to sustain sales momentum.


39


RESEARCH
      AND DEVELOPMENT





Research
      and development expenses were $5,725,000 for fiscal 2008 compared to $4,013,000
      for fiscal 2007, an increase of $1,712,000 or 43%. This increase reflects an
      escalation in the use of outside contractors subsequent to new release of Talent
      Center 7.0, a significant product release in fiscal 2008. During fiscal 2008,
      the Company made a significant investment to update and modify its acquired
      technology, standardize and integrate the software applications and build out
      the talent center suite platform. The Company used outside consultants and
      offshore development contractors to augment its existing development team.
      These
      resources were reduced after the product releases which will result in savings
      in the future.




GENERAL
      AND ADMINISTRATIVE





General
      and administrative expenses were $18,358,000 for fiscal 2008 compared to
      $14,959,000 for fiscal 2007, an increase of $3,399,000 or 23%.  The
      net
      increase was primarily due to increases in professional fees, non-cash
      compensation associated with stock options, provision for doubtful accounts
      and
      merger costs. The increase in professional fees was in connection with the
      filing of certain SEC documents, professional fees associated with the potential
      merger with Empagio and other professional fees due to recruiting costs
      associated with new hires. Non-cash compensation associated with stock options
      increased as a result of the hiring of new executives. Provision for doubtful
      accounts increased as a result of management’s assessment of risk based on
      current economic conditions.





AMORTIZATION
      AND DEPRECIATION EXPENSE





Amortization
      and depreciation expense was $3,602,000 for fiscal 2008 compared to $6,503,000
      for fiscal 2007, a decrease of $2,901,000 or 45%. Amortization and depreciation
      expense for the Enterprise Workforce Services segment was $3,527,000 in fiscal
      2008 compared to $6,414,000 in fiscal 2007, a decrease of $2,887,000 or 45%.
      The
      decrease was the net effect of a decrease in certain intangible assets with
      three and five-year lives becoming fully amortized during fiscal 2007.
      Amortization and depreciation expense for the Career Networks segment was
      $75,000 in fiscal 2008 compared to $89,000 in fiscal 2007, a decrease of $14,000
      or 16%. The decrease was due to certain intangible assets with five-year lives
      included in the Career Networks segment becoming fully amortized during fiscal
      2008. Amortization expense is expected to decrease significantly from the
      $2,153,000 recorded in fiscal 2008 to $428,000 in fiscal 2009 as the intangible
      assets acquired in 2003 and 2004 continue to become fully amortized.





IMPAIRMENT
      CHARGES





Impairment
      of goodwill was $27,547,000 for fiscal 2008 compared to $0 for fiscal 2007,
      an
      increase of $27,547,000 or 100%. Based on the Company’s impairment tests and
      consideration of the current and expected future market conditions, we
      determined that goodwill for Enterprise Workforce and Career Networks operating
      segments was impaired in accordance with Statement of Financial Accounting
      Standards (“SFAS”) 142, *Goodwill
      and Other Intangible Assets* and the
      Company recorded non-cash, pre-tax goodwill impairment charges of $21.4 million
      and $6.1 million respectively. The analysis also determined that there was
      no
      impairment to intangible assets. The analysis was conducted by independent
      valuation specialists. The decline in estimated fair values of the operating
      segments resulted from an analysis of the current economic conditions, the
      Company’s performance to budget and the lower estimated future cash
      flows.




INTEREST
      AND OTHER EXPENSE





Interest
      and other expense was $8,470,000 for fiscal 2008 compared to $3,042,000 for
      fiscal 2007 an increase of $5,428,000 or 178%. As required by FASB Statement
      No.
      150, pursuant to our August 2007 equity financing, we account for changes in
      the
      fair value of the warrant liability as either interest income or expense based
      on the change in the value of the associated warrants for the related period.
      For fiscal 2008, the fair value of the warrant liability resulted in interest
      expense of $6,318,000.





LIQUIDITY
      AND CAPITAL RESOURCES





At
      May
      31, 2008, we maintained $3,895,000 in cash and cash equivalents, restricted
      cash
      and short-term investments. Working capital, which represents current assets
      less current liabilities, was a negative $2,799,000.


40





At
      May
      31, 2008, $391,000 of short-term investments was restricted from use in order
      to
      collateralize two facility lease arrangements. As we make facility lease
      payments, the restricted cash guaranteeing the leases will periodically decrease
      according to the terms of the lease agreements. The restriction on the cash
      ends
      in December of 2008.





For
      fiscal 2008, cash used in operations totaled $12,495,000, consisting primarily
      of the net loss for the year of $52,617,000 and a net increase in working
      capital of $829,000 offset by non-cash expenses, including amortization and
      depreciation of $3,602,000, non-cash interest expense associated with the
      Secured Note arrangement and related warrant interest of $6,318,000, goodwill
      impairment of $27,547,000 and non-cash compensation of $1,374,000.




Net
      cash
      used by investing activities during fiscal 2008 was $456,000. Investing outflows
      consisted of the purchase of property and equipment of $587,000.





Net
      cash
      provided by financing activities was $13,565,000 for fiscal 2008. Proceeds
      from
      the sale of two series of warrants were $18,658,000, offset by repayment of
      $4,721,000 of secured notes payable, done in conjunction with the sale of two
      series of, and other long term obligations.





We
      have
      had operating losses since our inception, and during fiscal 2008, we had an
      operating loss of $52,616,000 and cash used in operating activities of
      $12,495,000. Cash, cash equivalents and short-term investments on hand at May
      31, 2008 totaled $3,895,000. These trends raise concerns about the sufficiency
      of the Company’s liquidity levels to be able to support its operations in the
      near term. Due to significant reductions in operating expenses and a solid
      strategic direction, developed in the fourth quarter of fiscal 2008, management
      believes the current liquidity will be sufficient to meet its anticipated
      working capital and capital expenditure requirements allowing the Company to
      reach its goal for profitability. The loss incurred in fiscal 2008 was the
      result of goodwill impairment approximately $27,600,000, costs relating to
      the
      Empagio merger approximately $1,500,000, higher level of compensation and
      related expenses associated with the increase in sales personnel and training
      approximately $2,500,000 in the first three quarters of fiscal 2008. Based
      on an
      analysis of our current contracts, forecasted new business and our current
      backlog, management believes the Company will meet its cash flow needs for
      fiscal 2009. We recognize that there are no assurances that the Company will
      be
      successful in meeting its cash flow requirements, however, management is
      confident that, if necessary, there are other alternatives available to fund
      operations and meet cash requirements during fiscal 2009.





The
      significant research and development expenses, incurred in fiscal 2008, have
      resulted in a release of our version 7.0 Talent center offering that provides
      a
      streamlined user interface along with other modifications to its reporting
      services, security services and a federated single-sign-on. Research and
      development expenses in fiscal 2008 totaled $5,725,000. Subsequent to this
      significant investment, management anticipates reductions in research and
      development expenditures. In addition, management has identified certain other
      expenses, the most significant being employee and related costs, that decreased
      in the fourth quarter of fiscal 2008, continuing through fiscal 2009. Legal
      and
      accounting expenses, which were approximately $760,000 in fiscal 2008 as a
      result of the Empagio merger and various SEC filings which required our
      predecessor auditors consent are expected to decrease for fiscal 2009. Finally,
      management is committed to holding costs down 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, 2009,
      we
      are exploring other alternatives to assist in the funding of our business.
      Workstream has actively engaged an investment bank to value and divest
      6Figuresjobs.com. The move is designed to infuse the Company with cash as well
      as to reduce the warrant liability. In accordance with the note agreement (see
      Note 16 to the financial statements) made with the Special Warrant Holders
      (SWH), from the August 2007 private placement of securities, Workstream is
      to
      receive 25% of any proceeds from the sale of any assets and the SWH are to
      receive 75% of any proceeds. 6Figuresjobs.com, a job board market, part of
      the
      Career Networks division is available for sale. Workstream is continuing to
      consider other opportunities to raise capital and align the Company’s business
      operations with its strategic focus.


41





In
      August
      of 2007 the Company entered into a private placement of securities pursuant
      to
      which the Company raised $19,000,000 through the sale of Special Warrants
      convertible into 15,200,000 common shares at a conversion price of $1.25 per
      share and additional warrants to purchase an aggregate of 3,800,000 common
      shares at an exercise price of $1.40 per share. On August 29, 2008 the Company
      converted the Special Warrants liability into a 2 year note payable due August
      29, 2010 at 7% interest per annum. In the event that there is a default 5%
      will
      be added to the interest rate resulting in a 12% interest rate in the default
      period. The Company will also split the proceeds from any dispositions of
      Company assets with the warrant holders 25/75. In addition to these conditions,
      in the event of default, the Company will reissue the 3,800,000 of additional
      warrants at $1.40 at a new exercise price of $.25.





ACQUISITIONS





As
      part
      of our early strategy, we pursued growth through the acquisition of other
      companies offering services similar or complementary to ours. Through the
      acquisition of those companies we expanded our service offerings enabling us
      to
      grow our revenue and to position ourselves for future profitability by
      consolidating operations and improving efficiencies. While we are currently
      not
      actively pursuing an acquisition strategy, we will continue to evaluate
      opportunities that may increase revenues for the company and may involve
      enhanced or complementary products that assist in a “build or buy” decision or
      companies with an attractive customer base that would allow us to penetrate
      further with our current product set.




In
      the
      past we have generally acquired companies and businesses through the issuance
      of
      our common shares. We anticipate that, to the extent necessary, we would
      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.




On
      February 12, 2008, Workstream, Workstream Merger Sub Inc., Empagio Acquisition
      LLC (“Empagio”) and SMB Capital Corporation entered into an Agreement and Plan
      of Merger pursuant to which Empagio would merge with and into Workstream,
      subject to the terms and conditions of the Merger Agreement, which was approved
      by the Boards of Directors of both the companies. Upon the completion of the
      Merger, the equity interests in Empagio would be converted into up to
      177,397,332 shares of Workstream Inc. common stock, representing approximately
      75% of the Company’s outstanding common stock on a diluted basis following the
      Merger. The proposed combination of Workstream and Empagio would have been
      accounted for under the purchase method of accounting as a reverse acquisition
      with Empagio being treated as having acquired Workstream as of the date of
      the
      completion of the merger.





On
      June
      24, 2008, the Company filed a lawsuit against Empagio and SMB Capital
      Corporation (“SMB”) to obtain the $5 million termination fee required to be paid
      by Empagio and SMB pursuant to Section 7.02 of the Agreement and Plan of Merger
      dated as of February 12, 2008 among the Company, Workstream Merger Sub Inc.,
      Empagio and SMB, which agreement was terminated by the Company on June 13,
      2008.
      On June 25, 2008, Empagio and SMB filed a lawsuit against Workstream Inc.
      alleging entitlement to a $3 million termination fee pursuant to the Agreement
      and Plan of Merger dated as of February 12, 2008 among the Company, Workstream
      Merger Sub Inc., Empagio and SMB, which agreement was terminated by the Company
      on June 13, 2008. Prior to commencement of the Federal Lawsuit, the Company
      initiated a lawsuit against Empagio and SMB. On July 29, 2008, Empagio and
      SMB
      filed a notice of voluntary dismissal of their Federal Lawsuit based on an
      understanding that Empagio and SMB would make their claim as part of the
      Company’s State Court Lawsuit. Although Workstream intends to vigorously pursue
      the lawsuit, if a judgment is reached against the Company this would have a
      significant impact on the Company’s financial position.




RECENT
      ACCOUNTING PRONOUNCEMENTS







In
      September 2006, the FASB issued Statement No. 157, *Fair
      Value Measurements.* Statement
      157 defines fair value, establishes a framework for measuring fair value and
      expands fair value measurement disclosures. Statement 157 is effective for
      fiscal years beginning after November 15, 2007. We are currently evaluating
      the impact of the adoption of Statement 157 on our consolidated financial
      statements.








In
      February 2007, the FASB issued Statement No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities, including
      an
      amendment of FASB Statement No. 115,* which
      allows an entity the irrevocable option to elect fair value for the initial
      and
      subsequent measurement for certain financial assets and liabilities on an
      instrument-by-instrument basis. Subsequent measurements for the financial assets
      and liabilities an entity elects to record at fair value will be recognized
      in
      earnings. Statement 159 also establishes additional disclosure requirements.
      Statement 159 is effective for fiscal years beginning after November 15,
      2007, with early adoption permitted provided that the entity also adopts
      Statement 157. We are currently evaluating the impact of the adoption of
      Statement 159 on our consolidated financial statements.


42





In
      December 2007, the FASB issued Statement No. 141R, *Business
      Combinations* ,
      which
      is intended to improve the relevance, representational faithfulness and
      comparability of the information that a reporting entity provides in its
      financial reports about a business combination and its effects. Statement 141R
      applies prospectively to business combinations for which the acquisition date
      is
      on or after the beginning of the first annual reporting period beginning on
      or
      after December 15, 2008. Early adoption is not permitted. The statement provides
      guidance around how the acquirer recognizes identifiable assets acquired,
      liabilities assumed and any non controlling interest in the acquiree,, goodwill
      acquired and determines what information to disclose in order to enable users
      of
      financial statements to evaluate the nature and financial effects of the
      business combination. Statement 141R will have an effect on the Company’s future
      acquisitions.




In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities* (“SFAS
      161”). The new standard is intended to improve financial reporting about
      derivative instruments and hedging activities by requiring enhanced disclosures
      to enable investors to better understand their effects on an entity’s financial
      position, financial performance and cash flows. SFAS 161 is effective for
      financial statements issued for fiscal years and interim periods beginning
      after
      November 15, 2008, with early application encouraged. The Company is currently
      assessing the impact that SFAS 161 may have on its consolidated financial
      statements.




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. During the year, we invest our surplus cash in short
      term
      instruments such as overnight repurchase agreements and bank commercial paper
      in
      a bank in the United States. These short-term, low-risk instruments could 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.




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 $98,000, and a change in the reported net loss for
      the
      year ended May 31, 2008 of approximately $381,000.


43




ITEM
      8:
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of Workstream Inc.





We
      have
      audited the consolidated balance sheets of Workstream Inc. and subsidiaries
      as
      of May 31, 2008 and 2007, and the related consolidated statements of operations,
      stockholders’ equity (capital deficiency) and cash flows for the years then
      ended.  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 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 includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements.  An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation.  We believe that
      our audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Workstream Inc. and
      subsidiaries as of May 31, 2008 and 2007, and the results of their operations
      and their cash flows for the years then ended, in conformity with U.S. generally
      accepted accounting principles.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has suffered recurring losses from operations and
      negative cash flows from operations. This raises substantial doubt about the
      Company's ability to continue as a going concern. Management's plans in regard
      to these matters are also described in Note 1. The financial statements do
      not
      include any adjustments that might result from the outcome of this
      uncertainty.





We
      were
      not engaged to examine management’s assertion about the effectiveness of
      Workstream Inc. and subsidiaries’ internal control over financial reporting as
      of May 31, 2008 included in the accompanying Management’s Annual Report on
      Internal Control over Financial Reporting and, accordingly, we do not express
      an
      opinion thereon.





/s/
      McGladrey & Pullen, LLP





Orlando,
      Florida


November
      14, 2008




44





**WORKSTREAM
      INC.**


**CONSOLIDATED
      BALANCE SHEETS**





May 31, 2008
            
            May 31, 2007ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            3,435,337
            
            $
            2,752,601Restricted
                cash
            
            
            391,415
            
            
            524,497Short-term
                investments
            
            
            67,983
            
            
            65,851Accounts
                receivable, net
            
            
            3,771,598
            
            
            3,789,838Prepaid
                expenses and other assets
            
            
            502,303
            
            
            848,359Total
                current assets
            
            
            8,168,636
            
            
            7,981,146Equipment,
                net
            
            
            1,960,836
            
            
            2,715,494Other
                assets
            
            
            78,287
            
            
            85,122Acquired
                intangible assets, net
            
            
            449,975
            
            
            2,602,590Goodwill
            
            
            17,729,448
            
            
            45,276,411TOTAL
                ASSETS
            
            $
            28,387,182
            
            $
            58,660,763LIABILITIES
                AND STOCKHOLDERS’ EQUITY (CAPITAL DEFICIENCY)Current
                liabilities:Accounts
                payable
            
            $
            3,175,850
            
            $
            2,259,010Accrued
                liabilities
            
            
            3,079,718
            
            
            3,020,704Accrued
                compensation
            
            
            1,176,774
            
            
            1,378,444Notes
                payable
            
            
            -
            
            
            4,498,619Current
                portion of long-term obligations
            
            
            543,170
            
            
            639,445Deferred
                revenue
            
            
            2,991,909
            
            
            2,699,461Total
                current liabilities
            
            
            10,967,421
            
            
            14,495,683Common
                stock warrant liability
            
            
            19,000,000
            
            
            -Long-term
                obligations, less current portion
            
            
            275,987
            
            
            742,025Deferred
                revenue
            
            
            113,000
            
            
            236,492Total
                liabilities
            
            
            30,356,408
            
            
            15,474,200Commitments
                and contingencies (Note 14)STOCKHOLDERS’
                EQUITY (CAPITAL DEFICIENCY)Preferred
                stock, no par value
            
            
            -
            
            
            -Common
                stock, no par value issued and outstanding: 52,442,818 shares and
                51,531,152 shares as of May 31, 2008 and 2007
            
            
            112,588,378
            
            
            112,549,178Additional
                paid-in capital
            
            
            18,261,543
            
            
            10,907,755Accumulated
                other comprehensive loss
            
            
            (799,190
            )
            
            (867,288
            )Accumulated
                deficit
            
            
            (132,019,957
            )
            
            (79,403,082
            )Total
                stockholders’ equity (capital deficiency)
            
            
            (1,969,226
            )
            
            43,186,563TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY (CAPITAL DEFICIENCY)
            
            $
            28,387,182
            
            $
            58,660,763




See
      accompanying notes to these consolidated financial statements.


45





**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF OPERATIONS**




Years ended May 31,2008
            
            2007Software
            
            $
            9,671,463
            
            $
            10,295,086Professional
                services
            
            
            3,273,829
            
            
            4,290,960Rewards
                and discount products
            
            
            5,531,613
            
            
            5,632,998Career
                Networks
            
            
            9,137,398
            
            
            9,089,725Revenues,
                net
            
            
            27,614,303
            
            
            29,308,769Rewards
                and discount products
            
            
            4,132,236
            
            
            4,509,620Other
            
            
            2,690,572
            
            
            2,891,012Cost
                of revenues (exclusive of amortization/depreciation expense noted
                below)
            
            
            6,822,808
            
            
            7,400,632Gross
                profit
            
            
            20,791,495
            
            
            21,908,137Operating
                expenses:Selling
                and marketing
            
            
            9,893,858
            
            
            7,548,777Research
                and development
            
            
            5,724,932
            
            
            4,013,158General
                and administrative
            
            
            18,357,648
            
            
            14,959,116Amortization
                and depreciation
            
            
            3,601,546
            
            
            6,502,977Goodwill
                impairment
            
            
            27,546,963
            
            
            -Total
                operating expenses
            
            
            65,124,947
            
            
            33,024,028Operating
                loss
            
            
            (44,333,452
            )
            
            (11,115,891
            )Interest
                and other income
            
            
            300,255
            
            
            523,531Interest
                and other expense
            
            
            (8,469,746
            )
            
            (3,041,731
            )Other
                income (expense), net
            
            
            (8,169,491
            )
            
            (2,518,200
            )Loss
                before income taxes
            
            
            (52,502,943
            )
            
            (13,634,091
            )Income
                taxes
            
            
            (113,932
            )
            
            (124,382
            )Net
                loss
            
            $
            (52,616,875
            )
            $
            (13,758,473
            )Weighted
                  average number ofcommon shares outstanding-basic
                  and diluted
            
            
            51,899,782
            
            
            51,134,281Net
                loss per share-basic and diluted
            
            $
            (1.01
            )
            $
            (0.27
            )





See
      accompanying notes to these consolidated financial statements.


46





**WORKSTREAM
      INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)**


**For
      the Years ended May 31, 2008 and 2007**





**Accumulated**
            
            
            
            **Total****Additional**
            
            **Other**
            
            
            
            **Stockholders'****Common
                Stock**
            
            **Paid-In**
            
            **Comprehensive**
            
            **Accumulated**
            
            **Equity (Capital****Shares**
            
            **Amount**
            
            **Capital**
            
            **Loss**
            
            **Deficit**
            
            **Deficiency)**Balance
                at May 31, 2006
            
            
            50,960,845
            
            $
            111,991,328
            
            $
            7,547,393
            
            $
            (871,781
            )
            $
            (65,644,609
            )
            $
            53,022,331Issuance
                of common shares as contingent consideration
            
            
            496,971
            
            
            557,850
            
            
            -
            
            
            -
            
            
            -
            
            
            557,850Hilco
                warrant discount
            
            
            -
            
            
            -
            
            
            2,392,500
            
            
            -
            
            
            -
            
            
            2,392,500Stock
                option expense
            
            
            -
            
            
            -
            
            
            785,541
            
            
            -
            
            
            -
            
            
            785,541Issuance
                of shares through vesting of restriced stock units
            
            
            73,336
            
            
            -
            
            
            26,250
            
            
            -
            
            
            -
            
            
            26,250Expensing
                of restricted stock unit grants
            
            
            -
            
            
            -
            
            
            156,071
            
            
            
            
            
            
            
            
            156,071Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (13,758,473
            )
            
            (13,758,473
            )Cumulative
                translationadjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            4,493
            
            
            -
            
            
            4,493Balance
                at May 31, 2007
            
            
            51,531,152
            
            
            112,549,178
            
            
            10,907,755
            
            
            (867,288
            )
            
            (79,403,082
            )
            
            43,186,563Issuance
                of commonshares
                through exercise of warrants
            
            
            400,000
            
            
            -
            
            
            4,000
            
            
            -
            
            
            -
            
            
            4,000Issuance
                of shares through exercise of stock options
            
            
            40,000
            
            
            39,200
            
            
            -
            
            
            -
            
            
            -
            
            
            39,200Stock
                option expense
            
            
            -
            
            
            -
            
            
            558,681
            
            
            -
            
            
            -
            
            
            558,681Expensing
                of restrictedstock
                unit grants
            
            
            471,666
            
            
            -
            
            
            814,834
            
            
            -
            
            
            -
            
            
            814,834Issuance
                of warrants
            
            
            -
            
            
            -
            
            
            5,976,273
            
            
            -
            
            
            -
            
            
            5,976,273Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (52,616,875
            )
            
            (52,616,875
            )Cumulative
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            68,098
            
            
            -
            
            
            68,098Balance
                at May 31, 2008
            
            
            52,442,818
            
            $
            112,588,378
            
            $
            18,261,543
            
            $
            (799,190
            )
            $
            (132,019,957
            )
            $
            (1,969,226
            )





See
      accompanying notes to these consolidated financial
      statements.


47





**WORKSTREAM
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Years
                ended May 31,2008
            
            2007Cash
                from operating activities:Net
                loss for the year
            
            $
            (52,616,875
            )
            $
            (13,758,473
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Amortization
                and depreciation
            
            
            3,601,546
            
            
            6,502,977Leasehold
                inducement amortization
            
            
            (55,509
            )
            
            (54,236
            )Loss
                on disposition of equipment
            
            
            23,154
            
            
            -Non-cash
                interest on warrants
            
            
            6,318,101
            
            
            2,012,159Provision
                for bad debts
            
            
            485,087
            
            
            85,502Non-cash
                compensation
            
            
            1,373,515
            
            
            967,862Goodwill
                impairment
            
            
            27,546,963
            
            
            -Net
                change in operating components of working capital:Accounts
                receivable
            
            
            (466,847
            )
            
            (1,465,023
            )Prepaid
                expenses and other assets
            
            
            352,891
            
            
            (182,757
            )Accounts
                payable
            
            
            1,206,332
            
            
            (572,574
            )Accrued
                liabilities
            
            
            (230,432
            )
            
            774,894Accrued
                compensation
            
            
            (201,670
            )Deferred
                revenue
            
            
            168,956
            
            
            (687,969
            )Net
                cash used in operating activities
            
            
            (12,494,788
            )
            
            (6,377,638
            )Cash
                flows from investing activities:Purchase
                of equipment
            
            
            (586,936
            )
            
            (638,549
            )Decrease
                in restricted cash
            
            
            133,082
            
            
            2,716,766(Increase)
                Decrease of short-term investments
            
            
            (2,132
            )
            
            16,510Net
                cash provided by (used in) investing activities
            
            
            (455,986
            )
            
            2,094,727Cash
                flows from financing activities:Proceeds
                from issuance of secured notes payable
            
            
            222,005
            
            
            14,650,000Repayment
                of secured notes payable
            
            
            (4,720,624
            )
            
            (10,000,000
            )Repayment
                of other long-term obligations
            
            
            (637,341
            )
            
            (1,013,937
            )Proceeds
                from issuance of common stock and warrants
            
            
            18,658,172
            
            
            -Proceeds
                from exercise of options and warrants
            
            
            43,200
            
            
            -Repayments
                on line of credit
            
            
            -
            
            
            (1,487,351
            )Net
                cash provided by financing activities
            
            
            13,565,412
            
            
            2,148,712Effect
                of exchange rate changes on cash and cash equivalents
            
            
            68,098
            
            
            309,760Net
                increase (decrease) in cash and cash equivalents
            
            
            682,736
            
            
            (1,824,439
            )Cash
                and cash equivalents, beginning of year
            
            
            2,752,601
            
            
            4,577,040Cash
                and cash equivalents, end of year
            
            $
            3,435,337
            
            $
            2,752,601




48





**WORKSTREAM
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(CONTINUED)**





Years ended May 31,2008
            
            2007Supplemental
                disclosure of cash flow information:Cash
                paid during the year for:Interest
                paid
            
            $
            89,811
            
            $
            1,010,565Income
                taxes paid
            
            $
            126,608
            
            $
            77,128Supplemental
                schedule of non-cash investing and financing activities:Equipment
                acquired under capital leases
            
            $
            130,492
            
            $
            1,224,028Issuance
                of common shares as contingent consideration
            
            $
            -
            
            $
            557,850Discount
                on the Hilco warrants
            
            $
            -
            
            $
            2,392,500





See
      accompanying notes to these consolidated financial statements .


49


**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 reportable
      segments: Enterprise Workforce Services and Career Networks. The Enterprise
      Workforce Services segment offers a suite of HCM software solutions, which
      includes performance management, compensation management, development,
      recruitment, benefits administration and enrollment, succession planning, 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.





***Financial
      Condition and Management’s Plans***




For
      the
      year ended May 31, 2008, the Company incurred a loss of approximately
      $52,600,000 due to the goodwill impairment approximately $27,600,000, costs
      relating to the Empagio merger approximately $1,500,000, higher level of
      compensation and related expenses associated with the increase in sales
      personnel and training approximately $2,500,000, in the first three quarters
      of
      fiscal 2008. Based on an analysis of our current contracts, forecasted new
      business and our current backlog, management believes the Company will meet
      its
      cash flow needs for fiscal 2009. We recognize that there are no assurances
      that
      the Company will be successful in meeting its cash flow requirements, however,
      management is confident that, if necessary, there are other alternatives
      available to fund operations and meet any cash requirements during fiscal
      2009.





***Principles
      of Consolidation***





The
      consolidated financial statements include the accounts of Workstream Inc. and
      its wholly-owned subsidiaries.


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,
      the
      appropriate discount rate reflecting the risk inherent in future cash flows,
      the
      interpretation of current economic indicators and market valuations and our
      strategic plans with regard to our operations. It is reasonably possible that
      those estimates may change in the near-term and may materially affect future
      assessments of goodwill impairment. Other significant estimates include the
      determination of the provision for doubtful accounts, valuing and estimating
      useful lives of intangible assets, valuing assets and liabilities acquired
      through business acquisitions, and estimating future taxable income and the
      probability that net operating loss carryforwards will be utilized.





***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 short-term investments are classified as available for
      sale.


50


***Accounts
      Receivable***





Accounts
      receivable are uncollateralized customer obligations due under normal trade
      terms requiring payment within 30 days from the invoice date and are recorded
      at
      net realizable value. Unpaid accounts receivable with invoices dates over 30
      days old do not accrue interest.





***Restricted
      Cash***





Restricted
      cash consists of short-term investment balances used to collateralize certain
      lease and credit agreements and were also previously used for collateralizing
      outstanding line of credit and term loan balances that have been subsequently
      paid off. The facility leases and credit agreements form part of current
      operations, and, accordingly, the restricted cash is classified as a current
      asset. Restrictions on these amounts will expire on December 31,
      2008.





***Equipment***





Equipment
      is 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 lineCapital
                leases
            Shorter
                of lease term or useful lifeLeasehold
                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.





***Leasehold
      Inducements***





Leasehold
      inducements are included in long-term obligations on the consolidated balance
      sheets and 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 annually as of
      May
      31 or more frequently if an event occurs or circumstances indicate that the
      asset might be impaired and evaluates whether a write down of the carrying
      amount of goodwill is required. 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 (See Note 5).





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.


51





***Income
      Taxes***





The
      Company uses the asset and 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. Income tax expense is the tax
      payable for the period and the change in deferred tax assets and liabilities
      during the period. In determining the amount of any valuation allowance required
      to offset deferred tax assets, an assessment is made that includes anticipating
      future income and determining the likelihood of realizing deferred tax
      assets.





Effective
      June 1, 2007, the Company began accounting for uncertainty in income taxes
      recognized in the consolidated financial statements in accordance with Financial
      Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes” (“FIN 48”). FIN 48 requires that a
      more-likely-than-not threshold be met before the benefit of a tax position
      may
      be recognized in the consolidated financial statements and prescribes how such
      benefit should be measured. It also provides guidance on derecognition,
      classification, accrual of interest and penalties, accounting in interim
      periods, disclosure and transition. It requires that the new standard be applied
      to the balances of assets and liabilities as of the beginning of the period
      of
      adoption and that a corresponding adjustment be made to the opening balance
      of
      accumulated deficit. See Note 9.





Management
      must evaluate tax positions taken on the Company’s tax returns for all periods
      that are open to examination by taxing authorities and make a judgment as to
      whether and to what extent such positions are more likely than not to be
      sustained based on merit. Management judgment is required in determining the
      provision for income taxes, the deferred tax assets and liabilities and any
      valuation allowance recorded against deferred tax assets. Management judgment
      is
      also required in evaluation whether tax benefits meet the more-likely-than-not
      threshold for recognition under FIN 48.





It
      is the
      Company’s policy to classify interest and penalties on income tax liabilities as
      interest expense and administrative expense, respectively. The Company did
      not
      change its policy on classification of such amounts upon adoption of FIN
      48.





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.





***Revenue
      Recognition***





The
      Company derives revenue from various sources including the following:
      subscription and hosting fees; licensing of software and related 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; and


·
            collection
                is reasonably assured.





The
      Company primarily provides various HCM software applications as an on-demand
      application service and also enters into the sale of license agreements. 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 of the customer.


52


Subscription
      revenues and hosting fees consist of 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 undeliverable item 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 both perpetual and term
      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 are either multi-year
      or
      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.





Source
      code revenue is generated by sales in small markets that we do not typically
      target. The sales are for old versions of specific applications or products
      that
      we no longer support or sell. As such, future earnings are not affected by
      these
      sales. The Company recognizes revenue when all of the revenue recognition
      criteria are met, which is typically when the services have been
      completed.





Professional
      services revenue is generated from implementation of software applications
      and
      from customer training, customization 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 customers to offer
      rewards, employee recognition and benefits (discounted goods and tickets) in
      an
      effort to promote their employee retention. The Company generates subscription
      revenues from the customer. 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.


53





As
      described above, the Company defers certain revenues received and recognizes
      them ratably over the applicable term of service. If the revenue is expected
      to
      be recognized within the following twelve months, it is classified as a current
      liability on the accompanying consolidated balance sheets. If the revenue is
      expected to be recognized over a period longer than 12 months then the portion
      of revenue expected to be recognized greater than 12 months is classified as
      a
      long-term liability.




***Cost
        of Goods Sold***
 
 The
        components of cost of goods sold in the accompanying consolidated statements
        of
        operations include all direct materials and direct labor associated with
        the
        generation of revenue of the Company’s software, rewards, products and career
        services.


***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 11,000,000 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.





Effective
      June 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standards (SFAS) No. 123R, *Share-Based
      Payment* and
      accounts for compensation expense for its stock based compensation plan using
      the fair-value method and recognized share-based employee compensation cost
      as a
      charge to net income Under this transition method, compensation expense
      associated with stock options recognized in fiscal 2006 includes expense related
      to the remaining unvested portion of all stock options awards granted prior
      to
      June 1, 2006 based on the grant date fair value estimated in accordance with
      the
      original provisions of SFAS 123R. SFAS 123R also requires an estimation of
      future forfeitures of share-based awards to be incorporated into the
      determination of compensation expense when recognizing expense over the
      requisite service period.




Compensation
      expense is determined 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:





Years Ended May 31,2008
            
            2007Weighted-average
                risk free interest rates
            
            
            3.68
            %
            
            4.72
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Weighted-average
                expected volatility
            
            
            78
            %
            
            70
            %Expected
                life (in years)
            
            
            3.4
            
            
            3.5





***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
      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 contractors and miscellaneous software support
      and
      administrative expenses.





***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 years ended May 31, 2008 and 2007.




54


***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. The majority of the Company’s sales are credit sales which are made
      primarily to customers whose ability to pay is dependent upon the industry
      economics prevailing in the areas where they operate; however, concentrations
      of
      credit risk with respect to trade accounts receivables is limited due to
      generally short payment terms. The Company also performs ongoing credit
      evaluation of its customers to help further reduce credit risk. Collateral
      is
      not required for accounts receivables.





***Interest
      Rate Risk***





The
      Company’s cash equivalents, restricted cash and short-term investments earn
      interest at fixed rates. While fluctuations in the prime rate could impact
      the
      Company’s financial results, management believes that the exposure to interest
      rate fluctuations, while impacting current cash outlays for interest payable,
      is
      limited.





***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, warrant liability and accrued expenses, approximate their
      fair
      values due to their short maturities. Based on borrowing rates currently
      available to the Company for similar terms and the duration of the debt
      instruments being primarily short term in nature, the carrying value of the
      warrant liability, 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.





***Segments***





The
      Company’s chief operating decision maker is its Chief Executive Officer, who
      reviews financial information for two reportable segments. Accordingly, in
      accordance with SFAS No. 131, *Disclosures
      about Segments of an Enterprise and Related Information* (SFAS
      131), the Company has determined that it has two reporting segments: Enterprise
      Workforce Services and Career Networks (see Note 12).





***Recent
      Accounting Pronouncements***





In
      September 2006, the FASB issued Statement No. 157 *,
      Fair Value Measurements.* Statement
      157 defines fair value, establishes a framework for measuring fair value and
      expands fair value measurement disclosures. Statement 157 is effective for
      fiscal years beginning after November 15, 2007. We are currently evaluating
      the impact of the adoption of Statement 157 on our consolidated financial
      statements.


55





In
      February 2007, the FASB issued Statement No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ,
      including an amendment of FASB Statement No. 115, which allows an entity
      the irrevocable option to elect fair value for the initial and subsequent
      measurement for certain financial assets and liabilities on an
      instrument-by-instrument basis. Subsequent measurements for the financial assets
      and liabilities an entity elects to record at fair value will be recognized
      in
      earnings. Statement 159 also establishes additional disclosure requirements.
      Statement 159 is effective for fiscal years beginning after November 15,
      2007, with early adoption permitted provided that the entity also adopts
      Statement 157. We are currently evaluating the impact of the adoption of
      Statement 159 on our consolidated financial statements.





In
      December 2007, the FASB issued Statement No. 141, “ *Business
      Combinations-Revised* ”
(“SFAS
      No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for how an
      acquirer in a business combination: recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, and any
      non-controlling interests in the acquiree; recognizes and measures goodwill
      acquired in the business combination or a gain from a bargain purchase price;
      and, determines what information to disclose to enable users of the consolidated
      financial statements to evaluate the nature and financial effects of the
      business combination. Statement 141 (R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. The
      application of Statement 141 (R) will cause management to evaluate future
      transaction returns under different conditions, particularly the near term
      and
      long term economic impact to f expensing transaction costs up front.




In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities* (“SFAS
      161”). The new standard is intended to improve financial reporting about
      derivative instruments and hedging activities by requiring enhanced disclosures
      to enable investors to better understand their effects on an entity’s financial
      position, financial performance and cash flows. SFAS 161 is effective for
      financial statements issued for fiscal years and interim periods beginning
      after
      November 15, 2008, with early application encouraged. The Company is currently
      assessing the impact that SFAS 161 may have on its consolidated financial
      statements.





***Reclassifications***





Certain
      reclassifications have been made in the accompanying financial statements to
      conform to the current year presentation. These reclassifications have no impact
      on previously reported results of operations.





**Note
      2.**  **Restricted
      Cash**





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





2008
            
            2007Letters
                of credit for facility leases
            
            $
            391,415
            
            $
            396,387Credit
                card reserves
            
            
            -
            
            
            128,110$
            391,415
            
            $
            524,497




**Note
      3.**  **Allowance
      for Doubtful Accounts**





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





2008
            
            2007Balance
                at beginning of the year
            
            $
            711,087
            
            $
            625,361Charged
                to bad debt expense
            
            
            485,087
            
            
            85,502Write-offs
                and effect of exchange rate changes
            
            
            (686,372
            )
            
            224Balance
                at end of the year
            
            $
            509,802
            
            $
            711,087




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 accompanying
      statements of operations as a general and administrative expense.





**Note
      4.**  **Equipment**





Equipment
      consists of the following at May 31:


56





2008
            
            2007Furniture,
                  equipment and leasehold improvements
            
            $
            1,830,175
            
            $
            1,937,072Office
                equipment
            
            
            515,125
            
            
            498,720Computers
                and software
            
            
            9,187,728
            
            
            8,270,91911,533,028
            
            
            10,706,711Less
                accumulated depreciation
            
            
            (9,572,192
            )
            
            (7,991,217
            )Equipment,
                net
            
            $
            1,960,836
            
            $
            2,715,494





Equipment
      includes equipment under capital lease totaling $1,958,566 at May 31, 2008.
      Accumulated amortization relating to equipment under capital leases totaled
      $1,132,385 at May 31, 2008 and $487,904 at May 31, 2007. Depreciation expense
      for equipment was $1,448,931 and $1,038,144 for the years ended May 31, 2008
      and
      2007, respectively.





**Note
      5.**  **Acquired
      Intangible Assets and Goodwill**





Acquired
      intangible assets consist of the following at May 31:





2008
            
            2007Accumulated
            
            
            
            AccumulatedCost
            
            Amortization
            
            Cost
            
            AmortizationCustomer
                base
            
            $
            8,132,722
            
            $
            8,007,889
            
            $
            8,132,722
            
            $
            7,348,604Acquired
                technologies
            
            
            22,191,121
            
            
            22,060,477
            
            
            22,191,121
            
            
            20,740,286Intellectual
                property
            
            
            1,322,760
            
            
            1,128,262
            
            
            1,322,760
            
            
            955,12331,646,603
            
            $
            31,196,628
            
            
            31,646,603
            
            $
            29,044,013Less
                accumulated amortization
            
            
            (31,196,628
            )
            
            
            
            
            (29,044,013
            )Net
                acquired intangible assets
            
            $
            449,975
            
            
            
            
            $
            2,602,590





Amortization
      expense for intangible assets was $2,152,615 and $5,464,833 for the years ended
      May 31, 2008 and 2007, respectively. The estimated future amortization expense
      related to intangible assets in existence as of May 31, 2008 is as
      follows:




Fiscal
                2009
            
            $
            428,475Fiscal
                2010
            
            
            21,500$
            449,975


57




Goodwill




The
      following represents the detail of the changes in the goodwill account for
      the
      years ended May 31, 2008 and 2007:





EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalGoodwill
                at May 31, 2006
            
            $
            32,264,257
            
            $
            12,457,602
            
            $
            44,721,859Contingent
                consideration
            
            
            557,850
            
            
            -
            
            
            557,850Purchase
                  price allocation adjustment madewithin
                  one year of acquisition date
            
            
            (3,298
            )
            
            -
            
            
            (3,298
            )Goodwill
                at May 31, 2007
            
            $
            32,818,809
            
            $
            12,457,602
            
            $
            45,276,411Impairment
            
            
            (21,437,149
            )
            
            (6,109,814
            )
            
            (27,546,963
            )Goodwill
                at May 31, 2008
            
            $
            11,381,660
            
            $
            6,347,788
            
            $
            17,729,448





Based
      on
      the Company’s impairment tests and consideration of the current and expected
      future market conditions, we determined that goodwill for Enterprise Workforce
      and Career Networks operating segments was impaired in accordance with Statement
      of Financial Accounting Standards (“SFAS”) 142, *Goodwill
      and Other Intangible Assets* and the
      Company recorded non-cash, pre-tax goodwill impairment charges of approximately
      $21.4 million and approximately $6.1 million respectively. The analysis was
      conducted by independent valuation specialists. The decline in estimated fair
      values of the operating segments resulted from an analysis of the current
      economic conditions, the Company’s performance to budget and the lower estimated
      future cash flows.





Inherent
      in our fair value determinations are certain judgements and estimates, including
      projections of future cash flows, the discount rate reflecting the risk inherent
      in future cash flows, the interpretation of current economic indicators and
      market valuations and our strategic plans with regard to our operations. A
      change in these underlying assumptions would cause a change in the results
      of
      the tests, which could cause the fair value of one or more reporting units
      to be
      more or less than their respective carrying amounts. In addition, to the extent
      that there are significant changes in market conditions or overall economic
      conditions or our strategic plans change, it is possible that our conclusion
      regarding goodwill impairment could change, which could have a material adverse
      effect on our financial position and results of operations. Impairment charges
      related to reporting units which are not currently impaired may occur in the
      future if further market deterioration occurs resulting in a revised analysis
      of
      fair value.





**Note
      6.**  **Investor
      Warrants**




On
      August
      3, 2007, the Company consummated a private placement of securities pursuant
      to
      which the Company raised $20,000,000 through the sale of two series of warrants.
      The first series of warrants (the “Special Warrants”) were convertible into
      16,000,000 common shares at a conversion price of $1.25 per share. The Special
      Warrants had a five year life; however, after the fourth year the holder had
      the
      right to require the Company to purchase the unconverted portion at a price
      equal to fair value, which would be determined by an independent party selected
      by the Company and approved by the holder. The second series of warrants (the
      “Additional Warrants”) were convertible into 4,000,000 common shares at an
      exercise price of $1.40 per share over a five year life. On  November
      28, 2007, the Company was informed that it would not be receiving $1,000,000
      of
      the $20,000,000 proceeds, from one of the investors, therefore reducing the
      amount raised to $19,000,000. This also reduced the number of Special Warrants
      sold to from 16,000,000 to 15,200,000 and reduced the number of Additional
      Warrants from 4,000,000 to 3,800,000.





Originally,
      we valued these warrants using the Black-Scholes valuation model which was
      updated each quarterly reporting period. On April 14, 2008, Workstream and
      the
      holders of its Special Warrants entered into a Forbearance Agreement pursuant
      to
      which the holders of the Special Warrants agreed to forbear, for a period of
      one
      year and one day, any rights they have to require the redemption of the Special
      Warrants as a result of the occurrence of triggering events under the Special
      Warrants and to any fees owing to the Special Warrant holders under the
      Registration Rights Agreement Workstream entered into with them.  Due to
      the triggering events described above, as of February 29, 2008, we no longer
      believe the Black-Scholes valuation model is indicative of the fair value of
      the
      Special Warrants.  As a result, we evaluated the possible outcomes and
      determined the weighted-average value of the warrant liability to be $19 million
      as of February 29, 2008.  This adjustment resulted in $13,051,901 of
      interest expense in the third quarter of fiscal 2008.


58





Pursuant
      to FASB Statement No. 150 “Accounting for Certain Financial Instruments with
      Characteristics of both Liabilities and Equity” (“SFAS 150”), the Special
      Warrants were originally accounted for as a liability due to their redeemable
      feature, while the Additional Warrants have been accounted for as additional
      paid- in capital. Using the Black-Scholes valuation model, the Company
      determined the fair value of the Special Warrants to be $12,681,900 as of the
      closing of the private placement. Pursuant to Emerging Issue Task Force Issue
      00-19 “Accounting for Derivative Financial Instruments Indexed to and
      Potentially Settled in a Company’s Own Stock” the value of the Additional
      Warrants originally amounted to $5,976,272 which was calculated as the net
      proceeds received less the value of the Special Warrants.




On
      August
      29, 2008, we entered into a separate Exchange Agreement with each of the holders
      of our Special Warrants pursuant to which, among other things, each Investor
      exchanged its Special Warrant for a senior secured Note, in the original
      principal amount equal to the original purchase price of its Special Warrant
      (totaling, in the aggregate, approximately $19,000,000). Each Note is secured
      by
      a lien on all of our assets and our subsidiaries pursuant to the terms of a
      Security Agreement with each Investor. Interest on each Note accrues at an
      annual rate of 7%. The interest rate will increase to 12% per year if we have
      not repaid at least 50% of the sum of the original principal amount of the
      Note
      plus all accrued but unpaid interest and late charges, if any, upon the one-year
      anniversary of the issuance of the Note. Interest is payable at maturity of
      each
      Note, which is August 29, 2010. Upon the occurrence of an event of default,
      as
      defined in the Notes, an Investor may require us to redeem all or a portion
      of
      such Investor’s Note at a price equal to 110% of the sum of the principal amount
      of the Note, accrued and unpaid interest and late fees, if any, to be redeemed.
      Upon a Disposition (as defined in the Notes) of assets, we have agreed to use
      75% of the gross proceeds from such Disposition to redeem the Notes (on a pro
      rata basis among the Investors) and 25% (such amount not to exceed $2,500,000)
      of the gross proceeds may be retained by us. In addition, in the event that
      we
      receive cash, cash equivalents or publicly-traded securities in an amount
      exceeding $2,000,000 in connection with the settlement of certain litigation
      involving us, we agree to use 75% of the amount received in excess of $2,000,000
      to redeem the Notes (on a pro rata basis among the Investors). Each Note
      contains customary covenants with which we must comply. Each of our subsidiaries
      delivered a Guaranty pursuant to which it agreed to guarantee our obligations
      under each Note.





Pursuant
      to the terms of the Exchange Agreement, each Investor also exchanged the
      additional warrant held by it for a new warrant exercisable for the same number
      of common shares at an exercise price of $.25 per share. All other material
      terms of the new warrants are substantially the same as those contained in
      the
      warrants being exchanged, including the existence of anti-dilution provisions
      that provide for a full adjustment of the exercise price and the number of
      common shares to be issued in the event we, in certain circumstances, issue
      securities at a price below the exercise price of the New Warrants. Each New
      Warrant must be exercised on or prior to August 3, 2012 or it will expire by
      its
      terms.




The
      note
      payable contains covenants that, among other things, limit our ability and
      the
      ability of our subsidiaries to:


·
            Incur
                additional indebtedness;


·
            create
                liens;


·
            pay
                dividends or repurchase capital
                stock;


·
            restricts
                payments;


·
            restriction
                on transfer of assets.





Upon
      the
      occurrence of an event of default, as defined in the Notes, an Investor may
      require the Company to redeem all or a portion of such Investor’s Note at a
      price equal to 110% of the sum of the principal amount of the Note, accrued
      and
      unpaid interest and late fees, if any, to be redeemed. While management does
      not
      believe that the Company is in an event of default as of November 14, 2008,
      there can be no guarantee that the Company will not be in default during fiscal
      year 2009 and beyond. In the event of default, without a waiver from the note
      holders, the Company may not be able to comply with the requirements of an
      event
      of default.




59





**Note
      7. Accrued Liabilities**





Accrued
      liabilities consist of the following at May 31:





**2008**
            
            **2007**Taxes
            
            $
            403,939
            
            $
            430,206Legal
                & professional fees
            
            
            695,000
            
            
            1,135,661Audit
                & tax fees
            
            
            132,886
            
            
            260,796Merger
                costs
            
            
            570,881
            
            
            -Consulting
                fees
            
            
            504,000
            
            
            98,000Sales
                tax payable
            
            
            633,723
            
            
            605,380Other
            
            
            139,289
            
            
            490,661$
            3,079,718
            
            $
            3,020,704





**Note
      8.**  **Long-Term
      Obligations**




On
      October 12, 2006, the Company consummated a loan transaction pursuant to which
      it borrowed $15,000,000 under a Senior Secured Note Agreement. In conjunction
      with this transaction the Company liquidated certain short-term investments
      and
      used the funds, along with the related restricted cash balances to pay off
      the
      then outstanding balance of its line of credit and term loan as required by
      the
      terms of the secured note agreement. Under the terms of the agreement, interest
      on the loan was due monthly at a rate of prime plus 2.5% per annum for the
      initial 180 days and at a rate of prime plus 3.5% per annum for the remainder
      of
      the loan. The term of the loan was for 545 days and could be prepaid at the
      option of the Company. Upon repayment of the loan for any reason, the agreement
      provided that the Company was going to pay to the lender an additional payment
      such that the lender receives an internal rate of return of 30% per annum during
      the initial 180 days of the loan and 40% per annum during the remainder of
      the
      term of the loan. The loan agreement contained various financial covenants
      that
      required the Company to maintain at all times at least $15,000,000 of qualified
      accounts receivable and cash and to maintain cash of at least $10,000,000.
      Estimated financing costs associated with the loan totaled $350,000. Financing
      costs were being amortized over the term of the loan to interest expense.





In
      connection with the loan described above, the Company issued the lender a
      warrant to purchase 2,750,000 shares of its common shares at an exercise price
      of $.01 per share. The fair value of the warrants was determined using the
      Black-Scholes pricing model and gave rise to an original issue discount on
      the
      loan of $2,392,500. The discount was being amortized over the term of the loan
      to interest expense.





On
      January 4, 2007, the Company announced that the Board of Directors had approved
      an agreement in principle with its lender to amend the senior credit facility
      from a $15 million Senior Secured Note with an 18 month term, to a Senior Line
      of Credit, comprising of a $5 million designated sublimit drawn against the
      line
      and an additional $10 million available through an accounts receivable backed
      credit facility. The amendment, which had an effective date of March 30, 2007
      provided, among other things, that the guaranteed internal rate of return
      payments would be eliminated effective January 1, 2007 and $10 million of the
      initial principal was to be repaid to the lender, essentially converting it
      to a
      commitment under an asset backed line of credit. The only significant economic
      covenant that the lenders imposed was a $1 million block on the availability
      based on eligible receivables. The cost of the amendment was a restructuring
      fee
      of $750,000, which included $637,000 of interest previously accrued under the
      guaranteed interest provisions through January 1, 2007 and an additional
      $113,000 of financing costs, $200,000 of the aggregate fee was paid at closing
      and $550,000 was due in December 2007. The designated sublimit was to be
      amortized ratably on a 60 month amortization. The Senior Line of Credit bore
      interest at prime plus 3% per annum, had a termination date of February 1,
      2008
      and required an annual renewal with the lender.





The
      Company consummated financing of $19 million in August of 2007. Immediately
      after funding of the transaction, the outstanding obligation under the senior
      line of credit, which totaled approximately $6.1 million, the remaining
      restructuring fee of $550,000 and other miscellaneous fees were paid off in
      their entirety approximately $1,300,000 of the early extinguishment of debt
      expense was included in interest and other expense in the consolidated statement
      of operations.


60





The
      other
      notes payable represent the remaining portion of the total consideration for
      acquisitions made in December 2004 and January 2006. The balance of $58,776
      on
      one of the notes represents a working capital adjustment as prescribed for
      in
      the original acquisition agreement that was withheld from the repayment of
      the
      note obligation. To date, the Company and the acquired party have not agreed
      to
      the final working capital adjustment amount. The other note, which has a current
      balance of $248,091, was only to be repaid upon collection of certain accounts
      receivable which to date have not been fully collected.





The
      Company entered into various capital lease obligations for equipment to be
      housed in an outside data center facility. Leases relating to this equipment,
      amounting to $653,442 are included in the following schedule. All capital leases
      are being paid on a monthly and quarterly basis.





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





2008
            
            2007Senior
                Line of Credit
            
            $
            -
            
            $
            5,816,668Less:Unaccreted
                warrant discount
            
            
            -
            
            
            (1,318,049
            )-
            
            
            4,498,619Leasehold
                inducements
            
            
            41,917
            
            
            98,076Term
                loan
            
            
            123,798
            
            
            -Capital
                lease obligations
            
            
            653,442
            
            
            1,283,394Warrant
                liability
            
            
            19,000,000
            
            
            -19,819,157
            
            
            5,880,089Less:
                current portion of:Notes
                payable
            
            
            -
            
            
            4,498,619Long-term
                obligations
            
            
            543,170
            
            
            639,445$
            19,275,987
            
            $
            742,025Fiscal
                2009
            
            $
            543,170Fiscal
                2010
            
            
            174,900Fiscal
                2011
            
            
            19,040,725Fiscal
                2012
            
            
            35,614Fiscal
                2013
            
            
            24,748$
            19,819,157




61





**Note
      9.**  **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 31,2008
            
            2007Canadian
                domestic loss
            
            $
            3,783,000
            
            $
            3,082,000United
                States loss
            
            
            48,720,000
            
            
            10,552,000Loss
                before income taxes
            
            $
            52,503,000
            
            $
            13,634,000




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





Years ended May 31,2008
            
            2007Canadian
                domestic:Current
                income taxes
            
            $
            -
            
            $
            -United
                States:Current
                income taxes
            
            
            114,000
            
            
            124,000Deferred
                income taxes
            
            
            -
            
            
            -Income
                tax expense (recovery)
            
            $
            114,000
            
            $
            124,000




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




62





Years ended May 31,2008
            
            2007Combined
                Canadian, federal and provincial tax rate
            
            
            36.12%
            
            
            36.12%Income
                  tax recovery based on combined Canadian,federal
                  and provincial rate
            
            $
            18,964,000
            
            $
            4,925,000Effect
                of foreign tax rate differences
            
            
            578,000
            
            
            412,000Change
                in enacted tax rates
            
            
            (80,000
            )
            
            (600,000
            )Non-deductible
                amounts
            
            
            10,000
            
            
            26,000Non-deductible
                goodwill impairment
            
            
            (9,950,000
            )
            
            -Non-deductible
                warrant liability valuation
            
            
            (2,282,000
            )
            
            -Change
                in valuation allowance
            
            
            3,090,000
            
            
            (3,585,000
            )Effect
                of changes in carryforward amounts
            
            
            (11,005,000
            )
            
            (1,624,000
            )Effect
                of foreign exchange rate differences
            
            
            430,000
            
            
            298,000Other
            
            
            131,000
            
            
            24,000Income
                tax expense
            
            $
            (114,000
            )
            $
            (124,000
            )





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


63





Years ended May 31,2008
            
            2007Deferred
                income tax assets:Scientific
                  Research and Experimental Development ("SR&ED")
                  expenses
            
            $
            -
            
            $
            667,000Loss
                carryforwards
            
            
            24,309,000
            
            
            28,730,000Asset
                basis differences
            
            
            5,425,000
            
            
            3,812,000Deferred
                Revenue
            
            
            999,000
            
            
            776,000Share
                issue costs
            
            
            14,000
            
            
            169,000Investment
                tax credits
            
            
            611,000
            
            
            580,000Share
                Based Compensation
            
            
            988,000
            
            
            440,000Share
                Based OID
            
            
            -
            
            
            430,000Accrued
                expenses
            
            
            625,000
            
            
            360,000Accrued
                vacation
            
            
            131,000
            
            
            148,000Allowance
                for bad debts
            
            
            203,000
            
            
            283,00033,305,000
            
            
            36,395,000Less:
                valuation allowance
            
            
            (33,305,000
            )
            
            (36,395,000
            )Net
                deferred income tax assets
            
            
            -
            
            
            -Deferred
                income tax liabilities:Intangible
                assets
            
            
            -
            
            
            -Net
                deferred income tax liabilities
            
            $
            -
            
            $
            -




The
      Company has incurred net losses since inception. At May 31, 2008, the Company
      had approximately $49,800,000 in net operating loss carryforwards for U.S.
      federal and state income tax purposes that expire in various years through
      2028,
      and approximately CDN $12,900,000 in net operating loss carryforwards for
      Canadian federal and provincial income tax purposes that expire in various
      years
      through 2028. A substantial portion of these losses are subject to a complex
      set
      of rules in the Internal Revenue Code which limits a company’s ability to
      utilize net operating losses and tax credit carry forwards following an
      ownership change. Management has determined that there is sufficient uncertainty
      regarding the ultimate realization of deferred tax assets relating to the United
      States operations and therefore, has provided a valuation allowance for the
      entire balance of the deferred tax assets. The change in valuation allowance
      for
      the years ended May 31, 2008 and May 31, 2007 was an increase (decrease) of
      $3,090,000 and ($3,585,000) respectively, resulting primarily from net operating
      losses generated and expired during the periods.





The
      Company adopted the provisions of FIN 48 on June 1, 2007. As a result of the
      implementation of FIN 48, the Company did not recognize a change in the
      liability for unrecognized tax benefits related to tax positions taken in prior
      periods and thus, did not record a change in its opening accumulated deficit.
      During the year ended May 31, 2008, there was no activity related to prior
      or
      current years’ tax positions, settlements or reductions resulting from
      expirations of unrecognized tax benefits or obligations.





Accordingly,
      there are no unrecognized tax benefits that, if recognized, would affect the
      effective tax rate. No interest or penalties have been accrued in the
      consolidated financial statements related to unrecognized tax benefits. The
      Company does not expect a significant increase or decrease in unrecognized
      tax
      benefits during the next 12 months. As of May 31, 2008, the Company’s 2004
      through 2007 U.S. tax years and 2001 through 2007 Canadian tax years were open
      to examination by the federal and major state taxing authorities.





**Note
      10.**  **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 52,442,818 and
      51,531,152 common shares issued and outstanding as of May 31, 2008 and 2007,
      respectively. There was no Class A Preferred Shares or Series A Shares
      outstanding as of May 31, 2008 and 2007.


64




***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 November 2007. Under the Plan, as amended, the Shareholders
      have approved the Company to issue up to 4,000,000 shares of common stock upon
      the exercise of stock options. In addition, the Plan reserves, an additional
      1,000,000 shares of common stock for issuance of restricted share grants. The
      Compensation 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.





On
      June
      1, 2006, the Company adopted the provisions of SFAS 123R, which requires it
      to
      recognize expense related to the fair value of stock-based compensation awards.
      Management elected to use the modified prospective transition method as
      permitted by SFAS 123R and, therefore, the financial results for prior periods
      have not been restated. Under this transition method, stock-based compensation
      expense now includes compensation expense for all stock-based compensation
      awards granted prior to, but not vested as of June 1, 2006, based upon the
      grant
      date fair value estimated in accordance with the original provisions of SFAS
      123. Stock-based compensation expense for all stock-based compensation awards
      granted on or subsequent to June 1, 2006 was based on the grant date fair value
      estimated in accordance with the provisions of SFAS 123R. Compensation expense
      for stock option awards is recognized on a straight-line basis over the
      requisite service period of the award.





The
      Company recognized $558,681 and $785,541of stock-based compensation expense
      resulting from stock options as a component of general and administrative
      expenses in the consolidated statement of operations for the years ended May
      31,
      2008 and 2007, respectively.





Stock
      option activity and related information is summarized as follows:





Weighted
            
            Weighted
            
            
            
            AggregateNumber
            
            Average
            
            Average
            
            Options
            
            Intrinsicof Options
            
            Exercise Price
            
            Fair Value
            
            Exercisable
            
            ValueBalance
                outstanding - May 31, 2006
            
            
            2,198,903
            
            
            2.11
            
            
            
            
            
            871,829Granted
            
            
            2,957,970
            
            
            1.12
            
            
            0.60Exercised
            
            
            -Forfeited
            
            
            (1,044,010
            )
            
            1.92Balance
                outstanding - May 31, 2007
            
            
            4,112,863
            
            
            1.41
            
            
            
            
            
            1,066,988Granted
            
            
            2,441,150
            
            
            0.81
            
            
            0.45Exercised
            
            
            (40,000
            )
            
            0.98Forfeited
            
            
            (4,157,465
            )
            
            1.23Balance
                outstanding - May 31, 2008
            
            
            2,356,548
            
            
            1.23
            
            
            
            
            
            1,228,341
            
            
            -





Information
      about options outstanding at May 31, 2008 is as follows:




65







Options
                Outstanding
            
            Options
                ExercisableWeightedAverageRemaining
            
            Weighted
            
            
            
            WeightedContractual
            
            Average
            
            
            
            AverageLife
            
            Exercise
            
            
            
            ExerciseExercise
                Price
            
            Shares
            
            (Years)
            
            Price
            
            Shares
            
            PriceLess
                than $.99
            
            
            1,004,600
            
            
            4.36
            
            $
            0.76
            
            
            546,066
            
            $
            0.77$1.00-$1.99
            
            
            1,110,565
            
            
            3.04
            
            $
            1.35
            
            
            444,726
            
            $
            1.41$2.00-$2.99
            
            
            187,400
            
            
            1.27
            
            $
            2.47
            
            
            183,566
            
            $
            2.47$3.00-over
            
            
            53,983
            
            
            1.58
            
            $
            3.24
            
            
            53,983
            
            $
            3.24Total
            
            
            2,356,548
            
            
            
            
            
            
            
            
            1,228,341





The
      aggregate intrinsic value in the table above represents total intrinsic value
      (of options in the money), which is the difference between the Company’s closing
      stock price on the last trading day of fiscal 2008 and the exercise price times
      the number of shares, that would have been received by the option holders had
      the option holders exercised their options on May
      31,
      2008.





As
      of May
      31, 2008, $324,806 of total unrecognized compensation costs related to
      non-vested stock options is expected to be recognized over the weighted average
      period of 2.8 years. The
      realized tax benefit from stock options and other share based payment was zero
      for the years ended May 31, 2008 and 2007 due to the uncertainty of
      realizability.




The
      Company grants restricted stock units to certain management and members of
      the
      Board of Directors. Each restricted stock unit represents one share of common
      stock and vests ratably over three years. The Company will then issue common
      stock for 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 $814,834 for fiscal 2008 is included in general and administrative
      expenses on the statement of operations and in additional paid-in capital on
      the
      balance sheet. As
      of May
      31, 2008 there was $160,697 of total unrecognized compensation costs related
      to
      non-vested restricted stock units. During
      fiscal 2008, the Company granted a total of 705,000 restricted stock units
      to
      senior management and members of the Board of Directors. At May 31, 2008,
      486,670 restricted stock units were outstanding including 264,444 that were
      fully vested.


Number
                Restricted
                Shares
              
              Weighted
                Average
                Grant
                  Date
                Fair
                  Value
 Balance
                  non-vested - May 31, 2006
              
              
              220,000Granted
              
              
              510,000
              
              
              0.98Vested
              
              
              (83,335
              )
              
              2.06Forfeited
              
              
              (53,334
              )
              
              1.14Balance non-vested
                  - May 31, 2007
              
              
              593,331Granted
              
              
              705,000
              
              
              0.94Vested
              
              
              (370,000
              )
              
              1.09Forfeited
              
              
              (441,661
              )
              
              1.15Balance non-vested
                  - May 31, 2008
              
              
              486,670




66




***Warrants***





Outstanding
      warrants to purchase shares of common stock as of May 31, 2008 are as
      follows:





Exercise Price
            
            Expiration
            
            Shares$
            1.25
            
            
            August
                2012
            
            
            15,200,000$
            0.25
            
            
            August
                2012
            
            
            3,800,000$
            1.60
            
            
            December
                2008
            
            
            162,500$
            3.50
            
            
            December
                2008
            
            
            2,825,001$
            0.01
            
            
            October
                2011
            
            
            2,350,00024,337,501





All
      warrants outstanding are exercisable at May 31, 2008.





***Earnings
      per Share***





For
      all
      the years presented, diluted net loss per share equals basic net loss per share
      due to the anti-dilutive 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, 2008Stock
                options
            
            
            2,356,548Restricted
                stock units
            
            
            486,670Escrowed
                shares
            
            
            108,304Warrants
            
            
            24,337,501Potential
                increase in number of shares from dilutive instruments
            
            
            27,289,023





**Note
      11.**  **Comprehensive Loss**





Components
      of comprehensive loss were as follows:




Years
                ended May 31,2008
            
            2007Net
                loss for the year
            
            $
            (52,616,875
            )
            $
            (13,758,473
            )Other
                comprehensive loss:Foreign
                currency translation adjustments (net of tax of $0)
            
            
            68,098
            
            
            4,493Comprehensive
                loss for the year
            
            $
            (52,548,777
            )
            $
            (13,753,980
            )





**Note
      12. Major Customer Information**





Direct
      sales to Liberty Mutual represented 10% or more of net sales and amounted to
      approximately $3,623,000 and $3,591,000 for the years ended May 31, 2008 and
      2007 respectively. Sales were for rewards products and merchandise for the
      Enterprise Workforce segment.





Sales
      to
      Liberty Mutual represented approximately 13% and 12%, respectively, of revenue
      for the year ended May 31, 2008 and 2007. No other customer sales totaled
      greater than 10 percent of revenue for years ended May 31, 2008 and
      2007.





67





**Note
      13.**  **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.





The
      following is a summary of the Company’s operations by business segment and by
      geographic region for the years ended May 31, 2008 and 2007:





***Business
                Segment***EnterpriseWorkforce
            
            CareerServices
            
            Services
            
            TotalYear
                ended May 31, 2008Software
            
            $
            9,662,463
            
            $
            9,000
            
            $
            9,671,463Professional
                services
            
            
            3,273,829
            
            
            -
            
            
            3,273,829Rewards
                and discount products
            
            
            5,531,613
            
            
            -
            
            
            5,531,613Career
                Networks
            
            
            -
            
            
            9,137,398
            
            
            9,137,398Revenue
            
            
            18,467,905
            
            
            9,146,398
            
            
            27,614,303Cost
                of revenues, rewards and discount products
            
            
            4,132,236
            
            
            -
            
            
            4,132,236Cost
                of revenues, other
            
            
            2,011,264
            
            
            679,308
            
            
            2,690,572Gross
                profit
            
            
            12,324,405
            
            
            8,467,090
            
            
            20,791,495Expenses
            
            
            24,624,528
            
            
            9,351,909
            
            
            33,976,437Impairment
                charges - goodwill
            
            
            21,437,149
            
            
            6,109,814
            
            
            27,546,963Amortization
                and depreciation
            
            
            3,526,935
            
            
            74,611
            
            
            3,601,546Business
                segment loss
            
            $
            (37,264,207
            )
            $
            (7,069,244
            )
            
            (44,333,451
            )Other
                  income/(expenses) andimpact
                  of income taxes
            
            
            
            
            
            
            
            
            (8,283,424
            )Net
                loss
            
            
            
            
            
            
            
            $
            (52,616,875
            )








EnterpriseWorkforce
            
            CareerServices
            
            Services
            
            TotalAs
                of May 31, 2008Business
                segment assets
            
            $
            5,564,763
            
            $
            748,261
            
            $
            6,313,024Intangible
                assets
            
            
            449,975
            
            
            
            
            
            449,975Goodwill
            
            
            11,381,660
            
            
            6,347,788
            
            
            17,729,448$
            17,396,398
            
            $
            7,096,049
            
            
            24,492,447Assets
                not allocated to business segments
            
            
            
            
            
            
            
            
            3,894,735Total
                assets
            
            
            
            
            
            
            
            $
            28,387,182





68





The
      Company does not allocate to the segments for profit and loss presentation
      other
      income/(expenses) that includes interest expense, interest income, income taxes
      and warrant interest expense. The Company also does not allocate certain assets
      to the segments for asset presentation which are cash, restricted cash and
      short
      term investments. The Company deems these costs to be corporate costs that
      would
      not necessarily be a part of the individual segment ordinary course of business
      or does not records these assets by segment. ****




69





***Business
      Segment (Continued)***





EnterpriseWorkforce
            
            CareerServices
            
            Services
            
            TotalYear
                ended May 31, 2007Software
            
            $
            10,295,086
            
            $
            -
            
            $
            10,295,086Professional
                services
            
            
            4,290,960
            
            
            -
            
            
            4,290,960Rewards
                and discount products
            
            
            5,632,998
            
            
            -
            
            
            5,632,998Career
                Networks
            
            
            
            
            
            9,089,725
            
            
            9,089,725Revenue
            
            
            20,219,044
            
            
            9,089,725
            
            
            29,308,769Cost
                of revenues, rewards and discount products
            
            
            4,175,539
            
            
            -
            
            
            4,175,539Cost
                of revenues, other
            
            
            2,670,105
            
            
            554,988
            
            
            3,225,093Gross
                profit
            
            
            13,373,400
            
            
            8,534,737
            
            
            21,908,137Expenses
            
            
            17,775,946
            
            
            8,745,106
            
            
            26,521,052Amortization
                and depreciation
            
            
            6,413,871
            
            
            89,105
            
            
            6,502,976Business
                segment loss
            
            $
            (10,816,417
            )
            $
            (299,474
            )
            
            (11,115,891
            )Other
                  income/(expenses) andimpact
                  of income taxes
            
            
            
            
            
            
            
            
            (2,642,582
            )Net
                loss
            
            
            
            
            
            
            
            $
            (13,758,473
            )





EnterpriseWorkforce
            
            CareerServices
            
            Services
            
            TotalAs
                of May 31, 2007Business
                segment assets
            
            $
            6,760,179
            
            $
            678,635
            
            $
            7,438,814Intangible
                assets
            
            
            2,602,590
            
            
            -
            
            
            2,602,590Goodwill
            
            
            32,818,809
            
            
            12,457,602
            
            
            45,276,411$
            42,181,578
            
            $
            13,136,237
            
            
            55,317,815Assets
                not allocated to business segments
            
            
            
            
            
            
            
            
            3,342,948Total
                assets
            
            
            
            
            
            
            
            $
            58,660,763





The
      Company does not allocate to the segments for profit and loss presentation
      other
      income/(expenses) that includes interest expense, interest income, income taxes
      and warrant interest expense. The Company also does not allocate certain assets
      to the segments for asset presentation which are cash, restricted cash and
      short
      term investments. The Company deems these costs to be corporate costs that
      would
      not necessarily be a part of the individual segment's ordinary course of
      business or does not record these assets by segment.




70




***Geographic***





Canada
            
            United States
            
            TotalYear
                ended May 31, 2008Revenue
            
            $
            1,407,875
            
            $
            26,206,428
            
            $
            27,614,303Expenses
            
            
            5,090,242
            
            
            66,857,513
            
            
            71,947,755Geographical
                loss
            
            $
            (3,682,367
            )
            $
            (40,651,085
            )
            
            (44,333,452
            )Other
                  income/(expenses) andimpact
                  of income taxes
            
            
            
            
            
            
            
            
            (8,283,423
            )Net
                loss
            
            
            
            
            
            
            
            $
            (52,616,875
            )





Canada
            
            United States
            
            TotalAs
                of May 31, 2008Long-lived
                assets
            
            $
            1,463,762
            
            $
            18,754,784
            
            $
            20,218,546Current
                assets
            
            
            
            
            
            
            
            
            8,168,636Total
                assets
            
            
            
            
            
            
            
            $
            28,387,182





Canada
            
            United States
            
            TotalYear
                ended May 31, 2007Revenue
            
            $
            1,523,451
            
            $
            27,785,318
            
            $
            29,308,769Expenses
            
            
            4,587,696
            
            
            35,836,965
            
            
            40,424,660Geographical
                loss
            
            $
            (3,064,245
            )
            $
            (8,051,647
            )
            
            (11,115,891
            )Other
                  income/(expenses) andimpact
                  of income taxes
            
            
            
            
            
            
            
            
            (2,642,582
            )Net
                loss
            
            
            
            
            
            
            
            $
            (13,758,473
            )





Canada
            
            United States
            
            TotalAs
                of May 31, 2007Long-lived
                assets
            
            $
            2,303,676
            
            $
            48,375,941
            
            $
            50,679,617Current
                assets
            
            
            
            
            
            
            
            
            7,981,146Total
                assets
            
            
            
            
            
            
            
            $
            58,660,763





**Note
      14.**  **Commitments
      and Contingencies**





***Lease
      Commitments***





A
      summary
      of the future minimum lease payments under the Company’s non-cancelable leases
      as of May 31, 2008 is as follows:




71




Capital Leases
            
            Operating
                LeasesFacilities
            
            Equipment
            
            TotalYear
                ended May 31:2009
            
            $
            532,615
            
            $
            955,064
            
            $
            197,305
            
            $
            1,684,9842010
            
            
            147,982
            
            
            455,071
            
            
            59,241
            
            
            662,2942011
            
            
            8,941
            
            
            361,247
            
            
            
            
            
            370,1882012
            
            
            -
            
            
            311,338
            
            
            -
            
            
            311,3382013
            
            
            -
            
            
            216,031
            
            
            -
            
            
            216,031Total
                minimum lease payments
            
            
            689,538
            
            $
            2,298,751
            
            $
            256,546
            
            $
            3,244,835Less
                amount representing interest
            
            
            (36,096
            )Total
                principal lease payments
            
            
            653,442Less
                current maturities
            
            
            (501,204
            )$
            152,238





Rent
      expense, recorded on the consolidated statements of operations in general and
      administrative expense, totaled $1,265,974 and $1,551,571 for the years ended
      May 31, 2008 and 2007, respectively.





**Letters
      of Credit**





At
      May
      31, 2008, the Company had provided two letters of credit totaling $391,415
      as
      security for office leases in Florida and Ontario, which were collateralized
      by
      short-term investments that are maintained at the granting financial institution
      (see Note 2).





**Retirement
      Plans**





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





**Contingencies**




On
      or
      about August 10, 2005, a class action lawsuit was filed against the Company,
      its
      former Chief Executive Officer and its former Chief Financial Officer in the
      United States District Court for the Southern District of New York. The action,
      instituted 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
      (the class period), alleges, among other things, that management provided the
      market misleading guidance as to anticipated revenues for the quarter ended
      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 and expenses, including counsel
      and expert fees and costs. The Court certified the case as a class action.




The
      Company and the individual defendants thereafter filed a motion for judgment
      on
      the pleadings, based upon a recent ruling of the United States Supreme Court,
      seeking to dismiss the amended complaint. Plaintiffs then sought leave to file
      a
      Second Amended Complaint, and asked the Court for additional time to pursue
      discovery. The Court granted the motion for leave to file a Second Amended
      Complaint, but deferred the request for additional discovery and ruled that
      the
      pending motion for judgment on the pleadings would be considered with respect
      to
      the allegations in the Second Amended Complaint. The motion for judgment on
      the
      pleadings has been briefed and argued, but has not been ruled upon. In the
      event
      the case is not disposed of on motion, the Company expects to file a motion
      for
      summary judgment.




The
      Company has directors and officers’ liability insurance, which covers the
      liability of the individual defendants in the amount of $10 million. The Company
      has reached an agreement with its primary insurance carrier limiting the
      Company’s exposure, in the event of a resolution within the Company’s insurance
      limits, to $600,000. The $600,000 was accrued for in fiscal year 2007 and is
      included in accrued liabilities.




72




The
      parties have agreed to settle the claims in consideration of the payment of
      $3
      million by the Company’s insurance carrier and issuance by the Company of
      $600,000 in common shares. The Court held a hearing on June 24, 2008 to consider
      the fairness of the settlement after notice of the settlement and the hearing
      had been given to the class. No opposition to approval of the settlement was
      presented at the hearing. On August 13, 2008, the court entered a final
      judgement in the case which became final on September 12, 2008.




*
      *
      *




On
      September 27, 2006, Sunrise Equity Partners, L.P. (“Sunrise”) filed a complaint
      against the Company and its former Chief Executive Officer in the United States
      District Court for the Southern District of New York alleging a violation of
      Section 10b-5 of the Securities Exchange Act of 1934 and a claim under New
      York
      common law for fraudulent and negligent misrepresentations in connection with
      Sunrise’s purchase of common shares and warrants in a private placement.




On
      April
      11, 2007, Nathan A. Low (“Low”) and Sunrise Foundation Trust (“Trust”) filed a
      complaint against the Company and its former Chief Executive Officer in the
      United States District Court for the Southern District of New York alleging
      a
      violation of Section 10b-5 of the Securities Exchange Act of 1934 and a claim
      under New York common law for fraudulent and negligent misrepresentations in
      connection with Low’s and the Trust’s purchase of common shares and warrants in
      a private placement. The three plaintiffs invested an aggregate of $4 million
      in
      the Company in the private placement.




The
      case
      has been settled for $3.9 million dollars of which $3.3 million is cash and
      $600,000 in common shares, pursuant to written agreement, and the litigation
      has
      been dismissed. The settlement of the claims against defendants was funded
      by
      proceeds from the Company’s insurance policies.





On
      June
      24, 2008, the Company filed a lawsuit in the Superior Court of the State of
      Delaware in and for New Castle County (the “State Court Lawsuit”) against
      Empagio Acquisition, LLC (“Empagio”) and SMB Capital Corporation (“SMB”) to
      obtain the $5 million termination fee required to be paid by Empagio and SMB
      pursuant to Section 7.02 of the Agreement and Plan of Merger dated as of
      February 12, 2008 among the Company, Workstream Merger Sub Inc., Empagio and
      SMB, which agreement was terminated by the Company on June 13, 2008. On June
      25,
      2008, Empagio and SMB filed a lawsuit against the Company in the United States
      District Court for the District of Delaware (the “Federal Lawsuit”) alleging
      entitlement to a $3 million termination fee pursuant to the Agreement and Plan
      of Merger. On July 29, 2008, Empagio and SMB filed a notice of voluntary
      dismissal of their Federal Lawsuit based on an understanding that Empagio and
      SMB would make their claim as part of the Company’s State Court Lawsuit.
      Workstream intends to vigorously pursue the lawsuit.





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, financial condition or cash flows.




*
      *
      *




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





The
      following table summarizes selected quarterly data of the Company for the years
      ended May 31, 2008 and 2007:




73




Quarter
                EndedAugust 31,
            
            November 30,
            
            February 28,
            
            May 31,2007
            
            2007
            
            2008
            
            2008Revenues,
                net
            
            
            7,368,160
            
            
            7,052,195
            
            
            6,184,526
            
            
            7,009,422Gross
                profit
            
            
            5,633,003
            
            
            5,169,986
            
            
            4,504,109
            
            
            5,484,397Net
                income/(loss) for the period
            
            
            (5,501,035
            )
            
            782,411
            
            
            (19,725,714
            )
            
            (28,172,537
            )Weighted
                average number of common shares outstanding during the
                period
            
            
            51,532,456
            
            
            55,629,959
            
            
            51,926,151
            
            
            51,899,782Basic
                  and diluted net lossper
                  common share
            
            $
            (0.11
            )
            $
            0.01
            
            $
            (0.38
            )
            $
            (0.54
            )





**Note
      16. Subsequent Events**





**Potential
      sale of 6FigureJobs.com**





Workstream
      has reduced expenses in an effort to align revenues with expenses with the
      goal
      of becoming profitable quarter after quarter. On August 4 th ,
      2008
      the Board of Directors of Workstream actively engaged an investment bank to
      sell
      6Figuresjobs.com which is reported under the Career Networks segment of
      business. The carrying value of the assets of 6FJ at May 31, 2008 are $3,891,000
      consisting of $3,405,000 of goodwill and $478,000 of accounts receivable. The
      carrying value of the liabilities are $790,000 consisting of $596,000 of
      deferred revenue and $127,000 of accrued liabilities. The move is designed
      to
      infuse the Company with cash to enhance the Company’s working capital position
      as well as to reduce the warrant liability. The timing of such sale has not
      been
      determined as the Company is still researching other options to infuse the
      Company with money. Per the note made with the Special Warrant Holders (SWH)
      Workstream is to receive 25% of any proceeds from the sale of any assets and
      the
      SWH are to receive 75% of any proceeds. 6Figuresjobs.com is considered an
      industry leader in the job board market and is a part of the Career Networks
      division. Workstream is continuing to consider all opportunities to raise
      capital and align the Company’s business operations with its strategic
      focus.





**Termination
      of Empagio merger agreement**





On
      June
      24, 2008, Workstream Inc. (“The Company”) filed a lawsuit against Empagio
      Acquisition, LLC (“Empagio”) and SMB Capital Corporation (“SMB”) to obtain the
      $5 million termination fee required to be paid by Empagio and SMB pursuant
      to
      Section 7.02 of the Agreement and Plan of Merger dated as of February 12, 2008
      among the Company, Workstream Merger Sub Inc., Empagio and SMB, which agreement
      was terminated by the Company on June 13, 2008. On June 25, 2008, Empagio and
      SMB filed a lawsuit against Workstream Inc. alleging entitlement to a $3 million
      termination fee pursuant to the Agreement and Plan of Merger dated as of
      February 12, 2008 among the Company, Workstream Merger Sub Inc., Empagio and
      SMB, which agreement was terminated by the Company on June 13, 2008. Prior
      to
      commencement of the Federal Lawsuit, the Company initiated a lawsuit against
      Empagio and SMB. On July 29, 2008, Empagio and SMB filed a notice of voluntary
      dismissal of their Federal Lawsuit based on an understanding that Empagio and
      SMB would make their claim as part of the Company’s State Court Lawsuit.
      Workstream is vigorously defending itself against the $3 million
      claim.





**Notification
      from NASDAQ**





On
      September 23, 2008, the Company issued a press release announcing that on
      September 17, 2008 it received notification from the NASDAQ Stock Market that
      it
      is not in compliance with the requirements for continued listing set forth
      in
      NASDAQ Marketplace Rule 4310(c)(14) because of its failure to file its annual
      report on Form 10-K for the fiscal year ended May 31, 2008. 
Consequently, Workstream’s common shares are subject to delisting on September
      26, 2008 unless Workstream files an appeal.  The Company filed an appeal of
      a delisting notice delivered to us by the NASDAQ with the NASDAQ Listing
      Qualifications Panel requesting continued listing of our common shares until
      the
      Panel’s review and determination. A hearing before the Panel to consider the
      appeal occurred on October 30, 2008. We are awaiting a determination by the
      Panel on our matter.




74




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





None.





ITEM
      9A(T). CONTROLS AND PROCEDURES




***Evaluation
      of Disclosure Controls and Procedures***





The
      Company maintains disclosure controls and procedures, as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
      referenced herein as the Exchange Act. These disclosure controls and procedures
      are designed to ensure that information required to be disclosed by the Company
      in the reports that it files or submits under the Exchange Act is recorded,
      processed, summarized, and reported within the time periods specified in the
      SEC’s rules and forms, and that such information is accumulated and communicated
      to Company’s management, including its Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosure. The Company carried out, under the supervision and with the
      participation of the Company’s management, including the Company’s Chief
      Executive Officer and the Company’s Chief Financial Officer, an evaluation of
      the effectiveness of the design and operation of the Company’s disclosure
      controls and procedures performed pursuant to Rule 13a-15 under the Securities
      Exchange Act of 1934 as amended. For the fiscal year ended January 31, 2008,
      the
      Company’s Chief Executive Officer and its Chief Financial Officer determined
      that a material weakness existed by reason of inadequate staffing in the
      Company’s accounting department. As a result, controls over the Company’s
      financial reporting process and oversight thereof were not adequate to prevent
      or detect misstatements in the accuracy of management’s estimates and
      disclosures on a timely basis, resulting numerous adjustments to the Company’s
      financial statements that were not detected by the Company’s accounting staff.
      We attributed the weaknesses to a lack of sufficient and appropriate internal
      expertise to resolve technical accounting issues. During fiscal year 2008,
      we
      added additional members to our in-house accounting staff. While the impact
      of
      these additions has been positive, there has not been adequate time for us
      to
      conclude that the material weaknesses have been fully remediated. We will
      continue to monitor the effectiveness of these control enhancements during
      fiscal year 2009 prior to reaching a conclusion on full remediation.


Given
      the
      identification of the above material weakness, we have decided on a course
      of
      action that we anticipate will remediate this material weakness. This includes
      plans to hire additional experienced accounting staff to provide sufficient
      time
      and resources to review the consolidation and supporting financial statement
      disclosure schedules independent of the preparer and research all applicable
      accounting pronouncements as they relate to our financial statements and
      underlying disclosures.




Notwithstanding
      the existence of this material weakness in internal control over financial
      reporting relating to insufficient staffing in its accounting department, the
      Company believes that the consolidated financial statements in this Annual
      Report on Form 10-K fairly present, in all material respects, the Company’s
      consolidated financial condition as of January 31, 2008 and 2007, and
      consolidated results of its operations and cash flows for the years ended
      January 31, 2008, 2007 and 2006, in conformity with U.S. generally accepted
      accounting principles (GAAP).





***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.




75




McGladrey
      & Pullen, LLP, the independent registered public accounting firm appointed
      by the Board of Directors and ratified by the stockholders, have not 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), because the
      Company is no longer considered an accelerated filer. 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. McGladrey & Pullen,
      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***





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting. Internal control over financial reporting is defined in
      Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process
      designed by, or under the supervision of, the Company’s principal executive and
      principal financial officers and implemented by the Company’s board of
      directors, management and other personnel, 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 and includes those polices and procedures that:




•
            
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                company;




•
            
            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




•
            
            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.





A
      significant deficiency is a control deficiency, or combination of control
      deficiencies, that adversely affects a company’s ability to initiate, authorize,
      record, process, or report external financial data reliably in accordance with
      generally accepted accounting principles such that there is a more than remote
      likelihood that a misstatement of a company’s annual or interim financial
      statements that is more than inconsequential will not be prevented or detected.
      An internal control material weakness is a significant deficiency, or
      combination of significant deficiencies, that results in more that a remote
      likelihood that a material misstatement of the annual or interim financial
      statements will not be prevented or detected.




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.




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 not effective as of May 31, 2008, based
      on
      those criteria.





/s/
                Steve Purello
            
            /s/
                Jay MarkellSteve
                Purello
            
            Jay
                MarkellPresident
                and Chief Executive Officer
            
            Chief
                Financial Officer





November
      14, 2008





ITEM
      9B.
      OTHER INFORMATION





None.





76





**PART
      111**





**Item
      10. Directors and Executive Officers of the Registrant**




Set
      forth
      below is certain information regarding our directors and executive
      officers:





Name
            
            Age
            
            PositionMichael
                Mullarkey
            
            40
            
            Chairman
                of the Board of DirectorsThomas
                Danis
            
            61
            
            DirectorMichael
                Gerrior
            
            58
            
            DirectorMitchell
                Tuchman
            
            52
            
            DirectorSteve
                Purello
            
            40
            
            President
                and Chief Executive OfficerJay
                Markell
            
            40
            
            Chief
                Financial Officer





*Michael
      Mullarkey* has been
      the Chairman of our Board of Directors since November 2001 and served as our
      Chief Executive Officer from April 2001 through January 2007. From April 2003
      until December 2006, 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.




*Thomas
      Danis* has been
      a member of our Board of Directors since 2001.  Mr. Danis is currently a
      consultant with Aon Corporation, a provider of risk management services,
      insurance and reinsurance brokerage, human capital and management consulting,
      and specialty insurance underwriting.  Prior to becoming a consultant in
      2007, Mr. Danis served as an executive with Aon. During 2001, Mr. Danis was
      the
      Market Area Leader for Southern California with Aon Risk Services and was
      responsible for the offices in this area.  From 1993 to 2000, Mr. Danis was
      a Managing Director of the Mergers & Acquisitions Practice for Aon, as well
      as their St. Louis office.  Mr. Danis serves on the Board of Directors of
      International Wire Group, Inc. and International Wire Holding Company.  Mr.
      Danis also serves on the Board of RCP Advisors, a fund to funds private equity
      firm.




*Michael
      Gerrior* has been
      a member of our Board of Directors since April 2001. From 1988 to present,
      Mr.
      Gerrior has been a partner at Perley-Robertson, Hill & McDougall LLP, our
      Canadian legal counsel. Mr. Gerrior assists his clients with mergers and
      acquisitions, securities matters and corporate governance. He has concluded
      private placements, venture capital transactions, and public offerings on
      various exchanges, including NASDAQ, the TSX Venture Exchange, the Toronto
      Stock
      Exchange and the Montreal Exchange.




77




*Mitchell
      Tuchman* has been
      a member of our Board of Directors since November 2005. Mr. Tuchman is currently
      an investment consultant and has served as a consultant and sub-advisor to
      Apex
      Capital, LLC, a hedge fund based in Orinda, California, where he has advised
      on
      the firm's technology micro-cap and special situations portfolio that ranges
      from $30 million to $200 million. In 2000, Mr. Tuchman co-founded and remains
      General Partner of Net Market Partners, LP, a venture fund specializing in
      business-to-business e-commerce investments. From 1998 to 2000, Mr. Tuchman
      ran
      an incubator that assisted venture-backed Internet companies to optimize their
      business models, develop strategies, consummate key strategic partnerships
      and
      raise capital. Mr. Tuchman serves on the Board of Directors of Kowabunga!,
      a
      provider of interactive performance-based advertising networks and technology
      platforms.




*Steve
      Purello* has
      been
      our President and Chief Executive Officer since February 2008. Prior to this
      appointment, Mr. Purello served as General Manager of the Company’s Career
      Networks business from January 2005 until February 2008. In November 2006,
      Mr.
      Purello became responsible for managing our Rewards and Recognition business.
      From 2003 until January 2005, Mr. Purello served as General Manager of our
      6FigureJobs subsidiary.





*Jay
      Markell* joined
      us
      in April 2007 as our Controller. In February 2008, Mr. Markell was appointed
      to
      serve as our Chief Financial Officer. From January 2006 until joining us, Mr.
      Markell served as Controller of Data2Logistics, a privately-held freight payment
      company. Prior to joining Data2Logistics, from September 2002 until January
      2006
      Mr. Markell was Controller of psiloQuest, a CMP pad manufacturing
      company.





**Audit
      Committee Financial Expert**





The
      Board
      of Directors has a separately designated Audit Committee to oversee its
      accounting and financial reporting processes and the audits of our financial
      statements. The Audit Committee is comprised of three non-employees: Thomas
      Danis (Chairman); Michael Gerrior; and Mitchell Tuchman. The Board has
      determined that all members of the Audit Committee are “independent” as that
      term is currently defined in Rule 4200(a)(15) of the listing standards of the
      NASD and Rule 10A-3(b)(1) of the Securities Exchange Act of 1934. Mr. Danis
      has
      been determined to be an “audit committee financial expert” as defined by the
      Securities and Exchange Commission.





**Company
      Employee Code of Conduct**





The
      Board
      has adopted a Code of Conduct that applies to our directors, officers and
      employees, including our principal executive, financial and accounting officers
      and persons performing similar functions. The Code of Conduct will be made
      available, without charge, upon written request made to Jay Markell, Chief
      Financial Officer of the Company, at its executive offices located at 495 March
      Road, Suite 300, Ottawa, Ontario K2K 3G1, Canada. In addition, it is also
      available on our website at www.workstreaminc.com.





**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Exchange Act requires that our officers, directors and persons
      who
      beneficially own more than 10% of a registered class of our equity securities
      file with the SEC initial reports of ownership and reports of changes in
      ownership of our common shares and other equity securities. Officers, directors
      and greater than 10% beneficial owners are required by SEC regulation to furnish
      us with copies of all Section 16(a) forms they file.





To
      our
      knowledge, based solely on a review of the copies of such reports furnished
      to
      us and written representations that no other reports were required during the
      year ended May 31, 2008, all Section 16(a) filing requirements applicable to
      our
      officers, directors and greater than 10% beneficial owners were complied with
      except that Mr. Oltman, a former Director of the Company, inadvertently failed
      to file a Form 4 in a timely manner in September 2007, each of Mr. Tuchman,
      Gerrior and Danis inadvertently failed to file a Form 4 in a timely manner
      in
      November 2007, and Mr. Purello inadvertently failed to file a Form 4 in a timely
      manner in December 2007.




**Procedures
      to Recommend Nominees to the Board**




There
      have been no changes to the procedures for security holders to recommend
      nominees to our Board from those set forth in our Proxy Statement dated October
      8, 2007 delivered in connection with our 2007 Annual and Special Meeting of
      Shareholders.




78




**Item
      11. Executive Compensation**





**Summary
      Compensation Table**


The
      following table sets forth the cash compensation as well as certain other
      compensation earned during the fiscal years indicated by each person who served
      as our principal executive officer and principal financial officer in fiscal
      year 2008 and each of our other three most highly compensated executive officers
      (collectively, the “Named Executive Officers”).




**Name and Principal**
              **Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Restricted**
              **Stock**
              **Awards**
              **($)(1)**
            
            **Option**
              **Awards**
              **($)(1)**
            
            **Non-Equity**
              **Incentive Plan**
              **Compensation**
              **($)**
            
            **All Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**Steve
                Purello,
              President &
                Chief Executive Officer (2)
            
            
            2008
            
            
            230,769
            
            
            62,403
            
            
            71,000
            
            
            300,000
            
            
            —
            
            
            —
            
            
            664,172Jay
                Markell,
              Chief
                Financial Officer(3)
            
            
            2008
            
            
            124,308
            
            
            —
            
            
            21,900
            
            
            10,650
            
            
            —
            
            
            —
            
            
            156,858Deepak
                Gupta,
              Former
                President & Chief Executive Officer (4)
            
            
            2008
              
              2007
            
            
            245,878
              
              140,000
            
            
            105,000
              
              —
            
            
            177,083
              
              35,417
            
            
            —
              
              76,668
            
            
            —
              
              —
            
            
            121,194
              
              5,398
            (7)
            
            649,155
              
              257,483Phil
                Oreste,
              Former
                Chief Financial Officer (5)
            
            
            2008
            
            
            136,373
            
            
            33,750
            
            
            35,100
            
            
            —
            
            
            —
            
            
            73,460
            (8)
            
            278,683Steve
                Lerch,
              Former
                Chief Financial Officer (6)
            
            
            2008
              
              2007
            
            
            72,494
              
              250,000
            
            
            —
              
              12,500
            
            
            106,833
              
              67,000
            
            
            —
              
              135,168
            
            
            —
              
              —
            
            
            132,319
              
              11,894
            (9)
            
            311,646
              
              476,562





(1)
            Represents
                the compensation expense incurred by us in the respective fiscal
                year in
                connection with the grants of restricted common stock or stock options,
                as
                applicable, calculated in accordance with SFAS 123(R). See Note 10
                of
                Notes to Consolidated Financial Statements for additional information,
                including valuation assumptions used in calculating the fair value
                of the
                award.


(2)
            Mr.
                Purello became our President and Chief Executive Officer in February
                2008.
                Mr. Purello receives an annual salary of
                $250,000.


(3)
            Mr.
                Markell became our Chief Financial Officer in February 2008. Mr.
                Markell
                receives an annual salary of
                $140,000.


(4)
            Mr.
                Gupta was our President and Chief Executive Officer until his resignation
                in February 2008.


(5)
            Mr.
                Oreste was our Chief Financial Officer from August 2007 until his
                resignation in February 2008.


(6)
            Mr.
                Lerch was our Chief Financial Officer until his resignation in August
                2007.


(7)
            Consists
                of a severance payment of $100,000, a car allowance of $10,500, which
                car
                allowance continues for one year following Mr. Gupta’s resignation and the
                payment of health insurance premiums of
                $10,694.


(8)
            Consists
                of a severance payment of $62,500, a car allowance of $3,250 and
                the
                payment of health insurance premiums of
                $7,710.


(9)
            Consists
                of a severance payment of $125,000, a car allowance of $1,154 and
                the
                payment of health insurance premiums of
                $6,165.




**Equity
      Awards**




The
      following table sets forth certain information concerning equity awards for
      our
      Named Executive Officers at May 31, 2008.




79






**Outstanding
      Equity Awards At Fiscal Year-End—200** **8**





**Option Awards****Number****of Shares**
              **Underlying**
              **Unexercised Options**
              **(#)**
              **Exercisable**
            
            **Number of Shares**
              **Underlying**
              **Unexercised Options**
              **(#)**
              **Unexercisable**
            
            **Option Exercise**
              **Price**
              **($)**
            
            **Option Expiration**
              **Date**Steve
                Purello
            
            
            26,667
            
            
            13,333
            
            $
            1.03
            
            
            1/21/11400,0000
            
            
            —
            
            
            0.35
            
            
            12/6/12—
            
            
            100,000
            
            
            0.66
            
            
            5/31/13Jay
                Markell
            
            
            11,000
            
            
            7,334
            
            
            0.64
            
            
            4/23/1215,000
            
            
            15,000
            
            
            0.36
            
            
            12/6/12Deepak
                Gupta
            
            
            —
            
            
            —
            
            
            —
            
            
            —Phil
                Oreste
            
            
            —
            
            
            —
            
            
            —
            
            
            —Steve
                Lerch
            
            
            —
            
            
            —
            
            
            —
            
            
            —


80





**Stock Awards****Number****of Shares or**
              **Units of Stock that**
              **have not Vested**
              **(#)**
            
            **Market Value of Share**
              **or Units of Stock that**
              **have not Vested($)**
            
            **Equity Incentive**
              **Plan Awards:**
              **Number of**
              **Unearned Shares,**
              **Units or other**
              **Rights that**
              **have not**
              **Vested (#)**
            
            **Equity Incentive**
              **Plan Awards:**
              **Market or**
              **Payout Value of**
              **Unearned Shares,**
              **Units or other**
              **Rights that**
              **have not**
              **Vested (4)**Steve
                Purello
            
            
            —
            
            
            —
            
            
            —
            
            
            —Jay
                Markell
            
            
            3,333
            
            
            15,767
            
            
            —
            
            
            —Deepak
                Gupta
            
            
            —
            
            
            —
            
            
            —
            
            
            —Phil
                Oreste
            
            
            —
            
            
            —
            
            
            —
            
            
            —Steve
                Lerch
            
            
            —
            
            
            —
            
            
            —
            
            
            —





**Stock
      Option Exercises and Holdings**





The
      following table sets forth certain information concerning the exercise of
      options and the vesting of restricted stock for our Named Executive Officers
      during fiscal year 2008.




***Option
      Exercises and Stock Vested—200*** ***8***





**Option Awards**
            
            **Stock Awards****Name**
            
            **Number of**
              **Shares Acquired**
              **on Exercise**
              **(#)**
            
            **Value Realized**
              **on Exercise**
              **($)**
            
            **Number of Shares**
              **Acquired on Vesting**
              **(#)**
            
            **Value Realized**
              **on Vesting**
              **($)(1)**Steve
                Purello
            
            
            —
            
            
            —
            
            
            100,000
            
            
            71,000Jay
                Markell
            
            
            —
            
            
            —
            
            
            3,333
            
            
            1,900Deepak
                Gupta
            
            
            —
            
            
            —
            
            
            250,000
            
            
            187,500Phil
                Oreste
            
            
            —
            
            
            —
            
            
            30,000
            
            
            35,100Steve
                Lerch
            
            
            —
            
            
            —
            
            
            83,334
            
            
            51,000







(1)
      The
      dollar value is calculated by multiplying the number of shares of restricted
      stock that has vested by the market value of our common shares on the vesting
      date.




**Employment
      Contracts, Termination of Employment and Change-in-Control
      Arrangements**


81





*Steve
      Purello Employment Agreement.* On
      March
      19, 2008, we and Steve Purello agreed to the terms of his employment agreement
      as President and Chief Executive Officer and entered into an amendment to his
      employment agreement dated December 6, 2007. The employment agreement, as
      amended, has a one-year term that expires on December 6, 2008 and which
      automatically renews at the end of each renewal term for an additional one-year
      term unless either party provides prior notice of non-renewal. Mr. Purello
      will
      earn an annual base salary of $250,000. As part of his entering into the
      employment agreement in December 2007, Mr. Purello received 400,000 stock
      options, all of which have vested, and 100,000 Restricted Stock Units, all
      of
      which have vested. If Mr. Purello’s employment is terminated by the Company
      without “cause” or by Mr. Purello for “good reason” (as such terms are defined
      in the agreement), he will be entitled to a payment from the Company equal
      to
      six months’ salary at the rate then in effect and the value of six months of
      benefits being received by Mr. Purello at the time of his termination. In the
      event of a “change in control” (as defined in the employment agreement) during
      the term of the agreement, any unvested stock options, Restricted Stock Units
      or
      restricted stock held by Mr. Purello will become immediately vested and
      exercisable in full. If following a change in control Mr. Purello is terminated
      for any reason other than cause, he will receive a payment from the Company
      equal to six months’ salary at the rate then in effect and the value of six
      months of benefits being received by Mr. Purello at the time of termination.
      If
      there is a change in control with respect to the 6FigureJobs or Allen and
      Associates subsidiaries of the Company, Mr. Purello would receive 5% of the
      proceeds from any such sale and would be required to forfeit to the Company
      all
      of his stock options in the Company (unless he declines the 5% proceeds payment,
      in which case he would maintain such options).




*Jay
      Markell Employment Agreement.* Effective
      as of February 15, 2008, the date on which Phil Oreste resigned as Chief
      Financial Officer, we entered into an employment agreement with Jay Markell
      pursuant to which Mr. Markell became the Chief Financial Officer. The employment
      agreement has a one-year term that expires on February 15, 2009 and which
      automatically renews at the end of the initial or any renewal term for an
      additional one-year term unless either party provides prior notice of
      non-renewal. Mr. Markell will earn an annual base salary of not less than
      $140,000. In addition, the Company granted Mr. Markell 30,000 Restricted Stock
      Units that vest upon the consummation of the Company’s proposed merger with
      Empagio Acquisition LLC. If Mr. Markell’s employment is terminated by the
      Company without “cause” or by Mr. Markell for “good reason” (as such terms are
      defined in the agreement), he will be entitled to a payment from the Company
      equal to three months’ salary at the rate then in effect. In the event of a
“change of control” (as defined in the employment agreement) during the term of
      the agreement, any unvested stock options and Restricted Stock Units held by
      Mr.
      Markell will become immediately vested and exercisable in full. If following
      a
      change of control Mr. Markell is not offered a position of increased
      responsibility with an increased salary, and Mr. Markell is terminated for
      any
      reason other than “cause,” Mr. Markell will receive a payment equal to the
      greater of (a) the amounts to which he is entitled as described in the preceding
      paragraph or (b) the remaining salary for the term of the
      agreement.




**Compensation
      of Directors for Fiscal Year 2008**




All
      directors are entitled to reimbursement of their reasonable out-of-pocket
      expenses incurred in attending Board and committee meetings. Directors who
      are
      not also Workstream employees or professionals on retainer with Workstream
      were
      paid an annual fee of $20,000 for fiscal year 2008. The Chairman of the Board
      received an additional fee of $15,000 for fiscal year 2008. Directors who are
      members of our Audit Committee (other than the Chairman of the Audit Committee)
      were paid an additional $15,000 for fiscal year 2008. Directors who were members
      of our Special Committee formed in January 2008 in connection with the proposed
      merger transaction with Empagio Acquisition LLC were granted and have accrued
      an
      additional $50,000. Messrs. Gerrior, Danis, Tuchman and Mullarkey were appointed
      to serve as members of the Special Committee. The Chairman of the Audit
      Committee was paid $25,000 for fiscal year 2008. The Chairman of the Nominating
      Committee was paid a $10,000 annual retainer for fiscal year 2008 and $5,000
      a
      month from October 1, 2007 through March 31, 2008. The Chairman of the
      Compensation Committee was paid $25,000 for fiscal year 2008. Each director
      is
      eligible to participate in our 2002 Amended and Restated Stock Option Plan
      and
      is to receive 20,000 restricted stock units and option grants.




***Director
      Compensation Table—200*** ***8***





**Fees Earned or**
            
            **Option**
            
            **RSU**
            
            **All Other****Paid in Cash**
            
            **Awards**
            
            **Awards**
            
            **Compensation**
            
            **Total****Name**
            
            **($)**
            
            **($)(1)**
            
            **($)(1)**
            
            **($)**
            
            **($)**Thomas
                Danis
            
            
            135,000
            
            
            13,800
            
            
            13,800
            
            
            —
            
            
            162,600Michael
                Gerrior
            
            
            77,500
            
            
            13,800
            
            
            13,800
            
            
            —
            
            
            105,100Mitchell
                Tuchman
            
            
            140,416
            
            
            13,800
            
            
            13,800
            
            
            —
            
            
            168,016Michael
                Mullarkey
            
            
            85,000
            
            
            —
            
            
            —
            
            
            435,000
            (2)
            
            520,000


82





(1)
            Represents
                the compensation expense incurred by us in the fiscal year in connection
                with grants of stock options calculated in accordance with SFAS 123(R).
                See Footnote 10 of our financial statements for additional information,
                including valuation assumptions used in calculating the fair value
                of the
                award.




(2)
            Consists
                of consulting fees paid to Mr. Mullarkey pursuant to a Consulting
                Agreement between us and Mr. Mullarkey, which terminated on September
                1,
                2008 and was not renewed





**Item
      12. Security Ownership of Certain Beneficial Owners and Management Related
      Stockholder Matters**




**Security
      Ownership of Principal Shareholders**





The
      following table sets forth as of November 13, 2008 certain information with
      respect to the beneficial ownership of each person whom we knew or, based on
      the
      filing of a Schedule 13G, believe to be the beneficial owner of more than 5%
      of
      our Common Shares.




**Common Shares****Name and Address of**
              **Beneficial Owner**
            
            **Number of Shares (1)**
            
            **Percent**CCM
                Master Qualified Fund, Ltd.
              One
                North Wacker Drive
              Suite
                4350
              Chicago,
                IL 60606
            
            
            5,249,856
            
            
            9.99
            %Janus
                Capital Management LLC
              151
                Detroit Street
              Denver,
                CO 80206
            
            
            5,126,653
            
            
            9.76
            %Morgan
                Stanley
              1585
                Broadway
              New
                York, NY 10036
            
            
            3,302,558
            
            
            6.28
            %Magnetar
                Capital Partners LP
              1603
                Orrington Avenue, 13thfloor
              Evanston,
                IL 60201
            
            
            2,617,026
            
            
            4.99
            %Michael
                Mullarkey
              c/o
                Workstream Inc.
              495
                March Road, Suite 250
              Ottawa,
                Ontario, K2K 3G1
            
            
            11,192,668
            
            
            19.91
            %


83





(1)
      With
      respect to each shareholder, includes any shares issuable upon exercise of
      options or warrants held by such shareholder that are or will become exercisable
      within 60 days of November 1, 2008.





**Security
      Ownership of Management**





The
      following table sets forth as of November 1, 2008 certain information with
      respect to the beneficial ownership of (i) each director, (ii) each nominee
      for
      election to the Board of Directors, (iii) Named Executive Officers and (iv)
      all
      the directors and executive officers as a group.




**Name of Beneficial Owner**
            
            **Number of Shares(1)**
            
            **Percent of Class**Michael
                Mullarkey
            
            
            11,192,668
            (2)
            
            19.91
            %Mitchell
                Tuchman
            
            
            180,015
            (3)
            
            *Michael
                A. Gerrior
            
            
            177,000
            (4)
            
            *Thomas
                Danis
            
            
            160,000
            (5)
            
            *Steve
                Purello
            
            
            528,267
            (6)
            
            1.0Jay
                Markell
            
            
            67,700
            (7)
            
            *Deepak
                Gupta(8)
            
            
            250,000
            
            
            *Phil
                Oreste(9)
            
            
            30,000
            
            
            *Steve
                Lerch(10)
            
            
            100,000
            
            
            *All
                executive officers and directors as a group (6 persons)
            
            
            12,305,650
            (11)
            
            21.65





*
            Less
                than 1%.




(1)
            With
                respect to each Shareholder, the number of shares includes any shares
                issuable upon exercise of options held by such Shareholder that are
                or
                will become exercisable within 60 days of November 1,
                2008.


(2)
            Includes
                options exercisable for 33,334 common
                shares.


(3)
            Includes
                options exercisable for 53,334 common
                shares.


(4)
            Includes
                options exercisable for 76,334 common
                shares.


(5)
            Includes
                options exercisable for 60,000 common
                shares.


(6)
            Includes
                options exercisable for 426,667 common
                shares.


(7)
            Includes
                options exercisable for 3,366 common
                shares.


(8)
            Mr.
                Gupta served as our President and Chief Executive Officer until his
                resignation in February 2008.


(9)
            Mr.
                Oreste served as our Chief Financial Officer from August 2007 until
                his
                resignation in February 2008.


84





(10)
            Mr.
                Lerch served as our Chief Financial Officer until his resignation
                in
                August 2007.


(11)
            Includes
                options exercisable for 653,035 common
                shares.





**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence**





Michael
      Gerrior, a member of our Board of Directors, is a partner in the law firm of
      Perley-Robertson, Hill & McDougall, LLP, which provides ongoing legal
      services to us.





Michael
      Mullarkey and Workstream were parties to a Consulting Agreement pursuant to
      which Mr. Mullarkey provided consulting to us. Pursuant to the terms of the
      Consulting Agreement, which terminated on September 1, 2008 and was not renewed,
      we paid Mr. Mullarkey $435,000 during fiscal year 2008.





Each
      of
      our directors other than Mr. Mullarkey qualifies as “independent” in accordance
      with the published listing requirements of NASDAQ. As required by the NASDAQ
      rules, the Board has made a subjective determination as to each independent
      director that no relationships exists which, in the opinion of the Board, would
      interfere with the exercise of independent judgment in carrying out the
      responsibilities of a director. In making these determinations, the directors
      reviewed and discussed information provided by the directors with regard to
      each
      director’s business and personal activities as they may relate to us and our
      management.





We
      review
      all transactions involving us in which any of our directors, director nominees,
      significant shareholders and executive officers and their immediate family
      members are participants to determine whether such person has a direct or
      indirect material interest in the transaction. All directors, director nominees
      and executive officers must notify us of any proposed transaction involving
      us
      in which such person has a direct or indirect material interest. Such proposed
      transaction is then reviewed by either the Board as a whole or the Audit
      Committee, which determines whether or not to approve the transaction. After
      such review, the reviewing body approves the transaction only if it determines
      that the transaction is in, or not inconsistent with, the best interests of
      the
      company and its Shareholders.





**Item
      14. Principal Accountant Fees and Services**





The
      fees
      for all services provided by our independent auditors to us during fiscal years
      2008 and 2007 are as follows:




Fiscal Year 2008
            
            Fiscal Year 2007Audit
                Fees
            
            CDN  $
            —
            
            CDN $
            203,405U.S. $
            333,726
            
            U.S. $
            93,480Tax
                Fees
            
            U.S. $
            155,847
            
            U.S. $
            85,840All
                Other Fees
            
            U.S. $
            102,515
            
            
            —CDN  $
            29,175
            
            
            —





*Audit
      Fees*




Audit
      fees include fees billed by McGladrey & Pullen, LLP for services rendered in
      connection with the audit of our annual financial statements and for the reviews
      of our quarterly financial statements.






85




*Tax
      Fees*




Tax
      fees
      relate to tax consultation and compliance services, and work performed with
      respect to registration statements and other filings with the Securities and
      Exchange Commission. All of these fees were pre-approved by the Audit Committee.




*All
      Other Fees*




Other
      fees include fees paid to McGladrey & Pullen, LLP for the Empagio Merger,
      S-3 in connection with the $19,000,000 private placement of securities and
      proxy
      fees.




**Audit
      Committee Pre-Approval Policies and Procedures**




Section
      10A(i)(1) of the Exchange Act and related Securities and Exchange Commission
      rules require that all auditing and permissible non-audit services to be
      performed by the Company’s principal accountants be approved in advance by the
      Audit Committee of the Board of Directors. Pursuant to Section 10A(i)(3) of
      the
      Exchange Act and related Securities and Exchange Commission rules, the Audit
      Committee has established procedures by which the Chairman of the Audit
      Committee may pre-approve such services provided that the pre-approval is
      detailed as to the particular service or category of services to be rendered
      and
      the Chairman reports the details of the services to the full Audit Committee
      at
      its next regularly scheduled meeting.




**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, 2008. (See Page 47)





2.  Financial
      Statement Schedule. (None)





3.  Exhibits.




(b)
      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).




86




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)).4.6
            
            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).4.8
            
            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).




87




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).4.20
            
            Form
                of Special Warrant issued on August 3, 2007 (incorporated by reference
                to
                Exhibit 4.1 of the current report on Form 8-K filed July 31,
                2007).4.21
            
            Form
                of Warrant issued on August 3, 2007 (incorporated by reference to
                Exhibit
                4.2 to the current report on Form 8-K filed July 31,
                2007).4.22
            
            Form
                of Warrant issued on August 31, 2008 (incorporated by reference to
                Exhibit
                4.1 of the current report on Form 8-K filed September 5,
                2008.4.23
            
            Form
                of Senior Secured Note issued on August 31, 2008 (incorporated by
                reference to Exhibit 410.2 to the current report on Form 8-K filed
                September 5, 2008)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).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**
            
            Consulting
                Agreement dated march 1, 2007 between Michael Mullarkey and Workstream
                Inc. (incorporated by reference to Exhibit 10.1 to the current report
                on
                Form 8-K filed March 7, 2007).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).




88




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).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 byand
                between Perform, Inc. and WorkstreamInc.
                (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 toExhibit
                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 referenceto
                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 StandardSecurities
                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 byand
                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 byand
                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 December1,
                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 andbetween
                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).




89




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).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).10.34**
            
            Employment
                Agreement dated as of December 3, 2006 between Workstream, Inc. and
                Deepak
                Gupta (incorporated by reference to Exhibit 10.1 to the current report
                on
                Form 8-K filed December 7, 2006).10.35**
            
            Employment
                Agreement dated as of June 11, 2007 between Workstream, Inc. and
                Phil
                Oreste (incorporated by reference to Exhibit 10.1 to the current
                report on
                Form 8-K filed June 15, 2007).10.36
            
            Transaction
                Agreement dated July 25, 2007 among the company and the investors
                listed
                therein (incorporated by reference to Exhibit 4.2 to the current
                report on
                Form - 8-K filed July 31, 2007).10.37**
            
            Severance
                Agreement dated August 25, 2007 between Workstream, Inc. and Stephen
                Lerch
                (incorporated by reference to Exhibit 10.1 to the current report
                on
                Form-8-K filed September 14, 2007).10.38**
            
            Severance
                Agreement dated February 15, 2008 between Workstream, Inc. and Phil
                Oreste
                (incorporated by reference to Exhibit 10.1 to the current report
                on Form-8
                filed February 15, 2008).10.39**
            
            Severance
                Agreement dated February 29, 2008 between Workstream, Inc. and Deepak
                Gupta (incorporated by reference to Exhibit 10.1 to the current report
                on
                Form-8-K filed February 29, 2008).10.40**
            
            Employment
                Agreement dated February 15, 2008 between Workstream, Inc. and Jay
                Markell
                (incorporated by reference to Exhibit 10.2 to the current report
                on
                Form-8-K filed February 29, 2008).10.41**
            
            Employment
                Agreement dated March 19, 2008 between Workstream, Inc. and Steve
                Purello
                (incorporated by reference to Exhibit 10.1 to the current report
                on
                Form-8-K filed March 19, 2008).10.42
            
            Form
                of Exchange Agreement dated as of August 29, 2008 among the Company
                and
                each Investor set forth therein (incorporated by reference to Exhibit
                10.3
                to the current report on Form 8-K filed September 5,
                2008).10.43
            
            Security
                Agreement dated as of August 29, 2008 among the Company, each subsidiary
                of the Company and the investors set forth therein (incorporated
                by
                reference to Exhibit 10.3 to the current report on Form 8-K filed
                September 5, 2008).10.44
            
            Form
                of Guaranty dated August 29, 2008 from each subsidiary of the Company
                in
                favor of each Investor (incorporated by reference to Exhibit 10.4
                to the
                current report on Form 8-K filed September 5,
                2008).




90




21.1
            
            List
                of Subsidiaries.*23.1
            
            Consent
                of McGladrey & Pullen, 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.


91




**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/
                Steve PurelloSteve
                Purello,President
                and ChiefExecutive
                OfficerDated:
                November 14, 2008





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/
                Steve
                Purello
            
            President
                and Chief Executive Officer
            November
                14, 2008Steve
                Purello
            
            (Principal
                Executive Officer)/s/
                Jay
                Markell
            
            Chief
                Financial Officer
            November
                14, 2008Jay
                Markell
            
            (Principal
                Accounting Officer)/s/
                Michael
                Mullarkey
            
            Chairman
                of the Board of
            November
                14, 2008Michael
                Mullarkey
            
            Directors/s/
                Michael A. Gerrior
            
            Director
            November
                14, 2008Michael
                A. Gerrior/s/
                Thomas Danis
            
            Director
            November
                14, 2008Thomas
                Danis/s/
                Mitch Tuchman
            
            Director
            November
                14, 2008Mitch
                Tuchman




92