UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 WASHINGTON,
        D.C. 20549
  
 FORM
        10-K
 
 **ANNUAL
        REPORT**
 **PURSUANT
        TO SECTIONS 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 (MARK
          ONE)
 x ANNUAL
          REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES   EXCHANGE
          ACT OF 1934
 FOR
            THE
            FISCAL YEAR ENDED: MAY 31, 2007
 OR
 o TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 300
              **K2K
                  3G1**OTTAWA,
                  ONTARIO
              (zip
                  code)(Address
                  of principal executive offices)(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 o Nox


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




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




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


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




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





The
      aggregate market value of the outstanding voting and non-voting common equity
      held by non-affiliates of the registrant, computed by reference to the price
      at
      which the common equity was last sold as of the last business day of the
      registrant’s most recently completed second fiscal quarter was $40,968,971.
      Common shares held by each executive officer and director and by each person
      who
      owned 10% or more of the outstanding common shares as of such date have been
      excluded in that such persons may be deemed to be affiliates. This determination
      of affiliate status is not necessarily a conclusive determination for other
      purposes.




The
      total
      number of common shares, no par value, outstanding on August 15, 2007 was
      51,531,152, excluding 108,304 **** escrow
      shares.




DOCUMENTS
      INCORPORATED BY REFERENCE




Information
      required by Part III of this annual report is incorporated by reference to
      the
      registrant’s definitive proxy statement relating to its 2007 annual meeting of
      shareholders, which will be filed within 120 days of the close of the
      registrant’s fiscal year end.










WORKSTREAM
        INC.


FORM
        10-K
 TABLE
        OF
        CONTENTS
  **ITEM**
              
              **PAGE****PART
                  I**1.
              Business
              41A.
              Risk
                  Factors
              161B.
              Unresolved
                  Staff Comments
              252.
              Properties
              253.
              Legal
                  Proceedings
              254.
              Submission
                  of Matters to a Vote of Security Holders
              264A.
              Executive
                  Officers of the Registrant
              26**PART
                  II**5.
              Market
                  for Registrant's Common Equity and Related Stockholder
                  Matters
              276.
              Selected
                  Financial Data
              347.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              357A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              488.
              Consolidated
                  Financial Statements and Supplementary Data
              499.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              779A.
              Controls
                  and Procedures
              789B.
              Other
                  Information
              79**PART
                  III**10.
              Directors,
                  Executive Officers and Corporate Governance
              8011.
              Executive
                  Compensation
              8012.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              8013.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              8014.
              Principal
                  Accountant Fees and Services
              80**PART
                  IV**15.
              Exhibits
                  and Financial Statement Schedules
              81






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
      has two distinct business units: Enterprise Workforce Services and Career
      Networks. The Enterprise Workforce Services segment offers a complete suite
      of
      HCM software solutions, which addresses performance, development, compensation,
      recruitment, benefits, and rewards. We offer each application on an individual
      basis, and we offer a comprehensive package through TalentCenter, which is
      a
      web-based portal that aggregates and integrates all of the applications. We
      also
      offer enterprise workforce management application tools for succession planning
      and organizational planning and charting. The Career Networks segment offers
      career transition, applicant sourcing and recruitment research
      services.




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




INDUSTRY
      BACKGROUND




Our
      target market includes any organization 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 knowledge 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 cost and ease
      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, customer relationship management systems
      and supply chain 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 the leading supplier of comprehensive, adaptive workforce
      solutions in North America. While our Career Network services can be used by
      any
      size organization, until recently, our Enterprise Workforce talent management
      solutions were primarily configured for larger organizations. In June of 2007,
      we introduced a middle market talent management product set that is configured
      for companies with anywhere from 100 to 2,500 employees allowing us to expand
      the addressable market for our software applications. We believe that our
      products can address the needs of the entire human capital market and manage
      the
      entire employee lifecycle and we are now able to provide enterprise workforce
      management solutions and services to companies of any size.




We
      believe that our solutions help companies cost-effectively maximize workforce
      productivity, 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.





6




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





·
            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 similar to our recent entry into mid-market 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 of every size to significantly
      improve their recruiting, hiring, evaluation, compensation, performance
      management, retention and outplacement cycles. Our systems automate those human
      capital management functions and most are accessible with any standard web
      browser and require no additional software or hardware deployment by clients.




PRINCIPAL
      SERVICES AND OPERATIONS




*ENTERPRISE
      WORKFORCE SERVICES*




Our
      Enterprise Workforce Services segment offers a complete suite of HCM software
      solutions and related professional services. Our products address recruitment,
      benefits, performance, compensation, development and rewards. During fiscal
      2005, we launched TalentCenter, which is an integrated, open portal solution
      that aggregates applications, content and services that companies use to manage
      all phases of the employee lifecycle - from recruitment to retirement. In fiscal
      2007, Enterprise Workforce Services generated approximately 69% 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.




7




*Performance*




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




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




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






8






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




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




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




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




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




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




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






9






·
            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:




·
            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 recognitioncertificatesand 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
      31%
      of total revenue for fiscal 2007.




*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
      $2,000 and $4,000 for our resume development, career consulting and market
      research services.




10




*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 filing
      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
      reviewed before his or her resume is allowed to reside in the site’s candidate
      database. On the recruiting side, all job openings must have a minimum aggregate
      compensation of $100,000. We generate revenue through 6FigureJobs on a
      subscription basis from employers and recruiters that access our database of
      job
      seekers and use our tools to post, track and manage job openings. We also
      generate revenue by charging companies that advertise on our 6FigureJobs
      website, which includes charging certain advertisers a fee based on the number
      of leads delivered or on a cost per lead basis.




*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.




ACQUISITIONS




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




FISCAL
      2006 ACQUISITION




*Exxceed,
      Inc.*




On
      January 13, 2006, we acquired certain assets of Exxceed, Inc. (“Exxceed”), a
      Delaware corporation, a developer and marketer of competency and performance
      management software. As consideration for the purchase, the Company issued
      to
      the shareholders of Exxceed 1,500,000 shares of common stock valued at
      $2,525,000, made cash payment of $500,000, and issued a promissory note payable
      for $500,000. An additional 496,971 common shares valued at $557,850 were
      subsequently issued as contingent consideration in fiscal 2007. We recorded
      approximately $1.15 million in intangible assets and an aggregate $3.0 million
      in goodwill as part of the acquisition. Exxceed’s performance management,
      development and competencies applications were a very strategic fit as it
      allowed us to upgrade our performance offering and add development capabilities
      to our suite of offerings.





11




FISCAL
      2005 ACQUISITIONS




*Peoplebonus.com
      LLC*




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




*Bravanta,
      Inc.*





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





*HRSoft,
      LLC*





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





*ProAct
      Technologies Corporation*





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




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. We recently moved our hosting
      capabilities, from both in-house in Ottawa and through subcontracted hosting
      partners, to the Fusepoint datacenter facility in Toronto, Canada where we
      now
      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.




12




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




REVENUE
      SOURCES




The
      Enterprise Workforce Services segment derives revenue from various sources
      including the following: subscription and hosting fees; licensing of software;
      software maintenance fees; professional services related to software
      implementation, customization and training; and sale of products and tickets
      through the Company’s employee discount and rewards software module. Clients
      enter into contracts which specifically address the products and services
      acquired, periods covered, and the billings terms. Contracts that include a
      software subscription component have a period of at least one year and
      typically, average three years. Clients are billed in advance according to
      the
      terms of the contract. In the case of annual or multiple year contracts, we
      bill
      our clients in advance monthly, quarterly or annually as deemed necessary when
      negotiating the contract. Any 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 segment derives revenue from career transition, applicant
      sourcing and recruitment research services. For career transition services,
      clients are billed 50% when the assignment starts and the remaining 50% when
      the
      assignment is completed, which is generally in approximately ten days. For
      recruitment research services and applicant sourcing and exchange, customers
      are
      billed and revenue is recognized as services are provided. Revenue is recognized
      when the services have been completed.




RESEARCH
      AND DEVELOPMENT




From
      fiscal 2002 through fiscal 2005, the Company embarked on a 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 and throughout 2006, 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 additional functionality and features, a more common
      look and feel to the various applications, improved user interface and
      reporting, integration between modules and putting the various applications
      on a
      common platform. The increase in costs was primarily due to the addition of
      internal resources as well as the use of offshore contractors. In 2007, much
      of
      the effort was focused on specific product releases and further integration
      of
      the applications, with particular emphasis on the compensation, performance
      management and development solutions. Research and development expense was
      approximately $4,013,000, $5,422,000 and $2,147,000 in fiscal 2007, fiscal
      2006,
      and fiscal 2005, respectively. All research and development expense was incurred
      in the Enterprise Workforce Services segment.




INTELLECTUAL
      PROPERTY




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




13




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





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





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





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





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





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




SALES
      AND
      MARKETING





We
      market
      our services in both the United States and Canada. Target
      clients for our on-demand software applications range from large global 2000
      companies to small and medium size organizations. We sell these solutions to
      both new and existing clients primarily through our direct sales force, which
      is
      comprised of inside sales, telesales and 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. We expect
      this cycle to be 1-4 months for mid-size businesses. Career Networks sales
      cycle
      is relatively short and of a higher volume nature. The Enterprise Workforce
      Services segment has a sales team of approximately 15 (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 ten marketing personnel located throughout
      the United States and Canada. Both Career Networks and Enterprise Workforce
      Services sales teams sell only within their segment.






14


Our
        marketing initiatives are generally targeted toward specific vertical industries
        or specific solutions. Our marketing programs primarily consist of:
  ·  participation
        in, and sponsorship of, conferences, trade shows and industry events;


·  direct
      mail and email campaigns;




·  extensive
      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 McKenzie Scott and WSA Corp. Companies such as LifeCare,
      Next Jump and SparkFly compete with our employee portal. Oracle, SAP, Workscape
      and Authoria are our main competitors for our benefit products and Siebel,
      Kronos, Callidus, Softscape, Success Factors and Authoria compete with our
      compensation and performance product lines.




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;




·
            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.






15


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 2000
                  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
                service reputation; and





·
            our
                experienced staff.




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




EMPLOYEES




As
      of May
      31, 2007, we had 179 full-time employees. Our employees are not represented
      by a
      collective bargaining organization, and we have never experienced any work
      stoppage. We consider our relations with our employees to be good.




AVAILABLE
      INFORMATION




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




ITEM
      1A.
      RISK FACTORS





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




**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, 2007, we had an accumulated deficit of
      $79,403,082. We reported net losses of $13,758,473, $12,986,291 and $15,158,975
      for the years ended May 31, 2007, 2006 and 2005, respectively. Revenues for
      fiscal 2007, 2006 and 2005 were $29,308,769, $28,120,662 and $26,818,587,
      respectively. Our ability to reduce our losses will be adversely affected if
      we
      continue to acquire companies reporting losses, if revenue grows slower than
      we
      anticipate or if operating expenses exceed our expectations. Even if we do
      achieve profitability, we may not sustain or increase profitability on a
      quarterly or annual basis. Failure to achieve or maintain profitability would
      materially adversely affect the market price of our common shares. We expect
      our
      operating expenses to moderate due to the scalability of our business model.




**We
        may encounter difficulties with acquisitions, which could
        harm**  **our
        business** .
  From
        fiscal 2003 through fiscal 2006, we made several acquisitions of other companies
        and businesses as part of our efforts to expand our operations, and we may
        continue to make acquisitions of complementary companies, products and
        businesses. The
        risks
        we may encounter in acquisitions include:
  ·
              difficulty
                  and expense of assimilating the operations and personnel of acquired
                  businesses;




16





·
            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.




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




As
      of May
      31, 2007, Michael Mullarkey, our Executive Chairman, beneficially owned
      approximately 8% 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 Mr. Mullarkey votes on certain matters
      that require shareholder approval. Mr. Mullarkey may influence the outcome
      of
      various actions that require shareholder approval including the election of
      our
      directors, delaying or preventing a transaction in which shareholders might
      receive a premium over the prevailing market price for their shares and
      preventing changes in control or management.




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




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






17




**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:




·  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 talent management solutions
      include Taleo, Webhire, Success Factors, Authoria and Kenexa. Companies such
      as
      Monster Worldwide, Execunet and Netshare have products or services that compete
      with our applicant sourcing and exchange services. We also compete with vendors
      of enterprise resource planning software, such as PeopleSoft, Oracle and SAP.
      In
      the area of career transition services, we compete with companies such as
      McKenzie Scott and WSA Corp. Finally, companies such as LifeCare, Next Jump
      and
      SparkFly compete with our employee portal services.





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




**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.




18




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




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




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




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




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




We
      expect
      to continue to expand our U.S. and Canadian operations through both organic
      growth and acquisitions and may spend significant financial and managerial
      resources to do so. 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.






19




**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 acquisitions,
      anticipated capital expenditures, the development of new services or
      technologies and our projected operational needs. We believe that, after our
      recent $20 million equity financing in August 2007 and the simultaneous payoff
      of all indebtedness, we have sufficient cash reserves, which, together with
      further cost reductions, will permit us to meet our working capital requirements
      and capital expenditure requirements through at least May 31, 2008. However,
      it
      is possible that we may need to raise additional funds sooner than expected
      in
      order to fund expansion, develop new, and enhance existing services, or acquire
      complementary businesses or technologies or if our revenues are less or our
      expenses are greater than we expect. Our ability to obtain financing depends
      on
      a number of factors, including our ability to generate positive cash flow from
      operations, the amount of our cash reserves, the amount and terms of our
      existing debt arrangements, the availability of sufficient collateral and the
      prospects of our business. If financing is not available when required or is
      not
      available on acceptable terms, it may impair our ability to:




·  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.




**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.




20




**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 2005, 2006 and 2007. 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;
 
 ·  characteristics
        and quality of services;
 
 ·  sales
        and
        other taxes; and
 
 ·  other
        claims based on the nature and control of Internet materials.


21





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 recently contracted to
      centralize all of our application hosting in a secure, state-of-the-art
      datacenter facility and 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** .






22




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.




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




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




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




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




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




We
      must
      expand and upgrade our systems and network hardware in order to accommodate
      growth in our business. While we are 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.




**In
      the past, our common shares traded at prices below $1.00. If that happens again
      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. 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. In the
      past, the closing bid price for our common stock has been below $1.00 and on
      one
      occasion we received written notification from Nasdaq that the bid price of
      our
      common stock for 30 consecutive trading days had closed below the minimum $1.00
      per share required for continued listing under Nasdaq rules. We have since
      regained compliance with the Nasdaq’s minimum bid price requirements, but no
      assurance can be given that we will be able to successfully satisfy such
      requirements in the future 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.






23




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




SEC
      regulations generally define a penny stock as an equity security that has a
      market price of less than $5.00 per share, subject to certain exceptions. We
      are
      not currently subject to the penny stock rules because our common shares qualify
      for two separate exceptions to the SEC’s penny stock rules. The first exception
      from the penny stock rules for which we qualify is an exception for companies
      that have an equity security that is quoted on the NASDAQ Stock Market. Since
      our common shares are traded on the NASDAQ Small Cap Market, we are not subject
      to the penny stock rules. The second exception from the penny stock rules for
      which we qualify is an exception for companies that have average revenue of
      at
      least $6,000,000 for the last three years. Our revenue for fiscal 2007, fiscal
      2006, and fiscal 2005 was $29,308,769, $28,120,662,
      and $26,818,587 ,
      respectively, resulting in an average revenue of $28,082,673. If
      our
      common shares are delisted or removed from the NASDAQ Small Cap Market and
      if we
      fail to meet the average revenue exception to the penny stock rules, our common
      shares may become subject to the penny stock rules, which impose additional
      sales practice requirements on broker-dealers who sell our common shares. For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchaser of such securities and have received
      the purchaser’s written agreement to the transaction prior to purchase. In
      addition, unless an exception is available, the regulations require the
      delivery, prior to any transaction involving a penny stock, of a disclosure
      schedule explaining the penny stock market and the risks associated with it.
      If
      our common shares were considered penny stock, the ability of broker-dealers
      to
      sell our common shares and the ability of our shareholders to sell their
      securities in the secondary market would be limited. As a result, the market
      liquidity for our common shares would be severely and adversely affected. We
      cannot assure you that trading in our securities will not be subject to these
      or
      other regulations in the future which would negatively affect the market for
      our
      common shares.




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




The
      market price of our common shares has been highly volatile in the past, and
      may
      continue to be volatile in the future. For example, since June 1, 2004, the
      closing sale price of our common shares on the NASDAQ Small Cap Market has
      fluctuated between $0.72 and $5.35 per share. The following factors may
      significantly affect the market price of our common shares:




·  quarterly
        variations in our results of operations;
  ·  announcement
        of new products, product enhancements, joint ventures and other alliances
        by our
        competitors or us;
  ·  technological
        innovations by our competitors or us;
  ·  general
        market conditions or market conditions specific to particular industries;
        and
  ·  the
        operating and stock price performance of other companies that investors may
        deem
        comparable to us.




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




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






24




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




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




Our
      success depends on the efforts, abilities and expertise of certain of our Board
      members’ senior management and other key employees, including in particular,
      Michael Mullarkey, our Chairman and Deepak Gupta, 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 17,100 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 this facility expires in December
      2008.




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.




As
      part
      of the acquisitions over the past several years, we assumed several facility
      leases, some of which we extended beyond the assumed term. We lease
      approximately 7,100 square feet of office space in Burlingame, California that
      was assumed as part of the Kadiri acquisition and expires in April 2008. This
      facility has the principal research and development group along with marketing
      and sales resources. We lease approximately 15,700 square feet of office space
      in White Plains, New York that was assumed as part of the ProAct acquisition
      and
      expires in September 2007. We lease approximately 9,400 square feet of office
      space in Fairfield, Iowa that was assumed as part of the HRSoft acquisition
      and
      expires in February 2008. Finally, we lease 2,200 square feet of office space
      in
      Chicago, Illinois month to month and 1,500 square feet of office space in
      Victoria, British Columbia, Canada that expired in April 2007 and now is a
      month
      to month basis. Both of these leases were assumed as part of the Exxceed
      acquisitions.




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




ITEM
      3.
      LEGAL PROCEEDINGS





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




25




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, brought on behalf of a purported class of purchasers of the Company’s
      common shares during the period from January 14, 2005 to and including April
      14,
      2005 (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.




In
      December 2005, the plaintiffs filed an amended complaint which added additional
      plaintiffs and sought to elaborate on the allegations contained in the
      complaint. The defendant’s counsel filed a motion to dismiss the complaint,
      which was denied. Defendants have answered the amended complaint, denying its
      material allegations. The Court has certified the case as a class action and
      has
      approved notice to the class. Discovery is continuing.




The
      Company and the individual defendants have filed a motion for judgment on the
      pleadings, based upon a recent ruling of the United States Supreme Court.
      Plaintiffs are in the process of responding to that motion. Plaintiffs have
      also
      stated their desire to file a second amended complaint in lieu of responding
      to
      the pending motion, and have requested that defendants allow them to do so.
      Defendants have objected to this request. Plaintiffs may seek leave of Court
      to
      allow them to re-plead.




Should
      it
      become necessary, and based on discovery to date, the Company expects to file
      a
      motion for summary judgment at the close of discovery. In the event the case
      is
      not disposed of on motion, trial is expected to occur no earlier than Spring
      2008.




Plaintiffs
      have yet to submit an expert report quantifying their damages. The Company
      has
      directors and officers liability insurance, which covers the liability of the
      individual defendants. The Company believes that the damages which plaintiffs
      will claim will exceed the face amount of the insurance coverage available.





On
      September 27, 2006, an investor in one of the company’s private equity placement
      filed a complaint against the Company and its now 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 the investor’s purchase of common shares
      and warrants in a private placement.




On
      April
      11, 2007, two additional investors to the same private equity placement 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 their purchase of common shares and warrants in a private
      placement.




The
      defendants have answered the initial complaint and the parties are engaged
      in
      discovery. A discovery cutoff has been established by the court of September
      17,
      2007. Trial is expected to occur in late 2007.




The
      damages claimed by plaintiffs approximate, in the aggregate, $2.2 million.
      The
      Company has directors and officers liability insurance in a face amount in
      excess of the amount of the claimed damages. However, that insurance coverage
      is
      also subject to the claims for damages in connection with the litigation
      described in the preceding numbered paragraph of this item; those claims for
      damages are expected to exceed the face amount of the insurance coverage
      available.




In
        connection with both of the above matters, which are claimed under the same
        insurance policy year, the Company has accrued and/or paid the associated
        legal
        expenses and satisfied the related deductible limits under the policy. In
        addition, the Company has provided an additional reserve in the amount of
        approximately $600,000 which it believes to be the minimum estimated liability
        exposure after determining the appropriate allocations with its insurance
        carrier.




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.




ITEM
      4A.
      EXECUTIVE OFFICERS OF THE REGISTRANT





The
      following table sets forth information concerning our executive officers,
      including their ages, positions and tenure as of May 31, 2007:






26







Name
            Age
            Officer
                Since
            PositionMichael
                Mullarkey
            39
            
            Executive
                Chairman of the BoardDeepak
                Gupta
            44
            2007
            President
                and Chief Executive OfficerStephen
                Lerch
            52
            2005
            Executive
                Vice President, Chief Operating and Financial
                Officer




*Michael
      Mullarkey*  has
      been
      the Chairman of our Board of Directors since November 2001. From January 2001
      to
      April 2001, Mr. Mullarkey was the President, Secretary and a Director of Paul
      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.




*Deepak
      Gupta*  has
      been
      the Chief Executive Officer since February 2007 and our President since December
      2006. In December 2006, Mr. Gupta assumed the responsibilities of President.
      Before joining Workstream, Mr. Gupta was the President and CEO of iSpheres,
      a
      venture-backed software vendor in the real-time intelligence space. Mr. Gupta’s
      leadership at iSpheres led to its technology being acquired by a Fortune 500
      company. Prior to iSpheres, Mr. Gupta was the Senior Vice President, General
      Manager and founder of the PeopleSoft’s OnDemand business and reported directly
      to Craig Conway, President and CEO of PeopleSoft. Under Gupta’s leadership, this
      business grew from inception to the fourth largest hosting provider in North
      America within 24 months. Mr. Gupta was responsible for all aspects of this
      business including sales, marketing, business development, operations and
      customer support, and finance. Before PeopleSoft, Mr. Gupta was the Chief
      Architect of Oracle’s Hosting business as well as the Global Leader for Oracle
      Services’ Middleware line of business.




*Stephen
      Lerch* has
      been
      our Executive Vice President, Chief Operating and Financial Officer since April
      2005. He is in charge of our financial, human resources, legal and
      administrative affairs and has operational oversight responsibility. From April
      2003 to January 2004, Mr. Lerch was the Executive Vice President and Chief
      Operating Officer of Rewards Network Inc/iDine Rewards Network Inc.  Prior
      to this position, Mr. Lerch held the position of Executive Vice President and
      Chief Financial Officer from February 1997 to August 2003. Prior to that, Mr.
      Lerch was a business assurance partner at Coopers & Lybrand LLP, (now
      PricewaterhouseCoopers). In June of 2007, the Company announced that Mr. Lerch
      had resigned, and after a transition period, would be leaving on August 24,
      2007.




**PART
      II**




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





MARKET
      PRICE OF COMMON SHARES






27





Our
      common shares are listed on the NASDAQ Small Cap Market under the symbol “WSTM”
and on the Boston Stock Exchange under the symbol “ERM.” The principal United
      States market for our common shares is the NASDAQ Small Cap Market. The
      following table sets forth, for the periods indicated, the high and low sales
      prices of our common shares as reported on the NASDAQ Small Cap Market. As
      of
      August 14, 2007, there were approximately 220 holders of record of our common
      shares.





PRICE
                OF COMMON SHARESPeriod
            
            High
            
            LowJune
                1, 2004 - August 31, 2004
            
            $
            3.09
            
            $
            2.26September
                1, 2004 - November 30, 2004
            
            $
            3.44
            
            $
            2.56December
                1, 2004 - February 29, 2005
            
            $
            4.75
            
            $
            2.60March
                1, 2005 - May 31, 2005
            
            $
            5.35
            
            $
            1.68June
                1, 2005 - August 31, 2005
            
            $
            1.80
            
            $
            1.48September
                1, 2005 - November 30, 2005
            
            $
            1.72
            
            $
            1.20December
                1, 2005 - February 28, 2006
            
            $
            2.17
            
            $
            1.23March
                1, 2006 - May 31, 2006
            
            $
            2.47
            
            $
            1.30June
                1, 2006 - May 31, 2007
            
            $
            1.82
            
            $
            .72




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.





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.




28





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
      2007.




TAXATION




MATERIAL
      CANADIAN FEDERAL INCOME TAX CONSIDERATIONS




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




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




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




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




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




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




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






29




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




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




TAXATION
      OF DIVIDENDS




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




TAXATION
      OF CAPITAL GAINS




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




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




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.






30




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.




31




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.




PASSIVE
      FOREIGN INVESTMENT COMPANY CONSIDERATIONS




32




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 2007 and May
      2006, and we believe that we will not be a PFIC for the fiscal year ending
      May
      2008. 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.






33




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




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




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




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




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




U.S.
      INFORMATION REPORTING AND BACKUP WITHHOLDING




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




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




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




RECENT
      SALES OF UNREGISTERED SECURITIES




None.




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.






34





FISCAL
                YEAR ENDED MAY 31,(IN
                THOUSANDS, EXCEPT PER SHARE DATA)2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Statement
                of Operations DataRevenue,
                net
            
            $
            29,309
            
            $
            28,121
            
            $
            26,819
            
            $
            17,167
            
            $
            17,837Cost
                of revenues
            
            
            7,401
            
            
            7,808
            
            
            7,014
            
            
            1,587
            
            
            3,040Selling
                and marketing
            
            
            7,549
            
            
            6,934
            
            
            7,211
            
            
            4,362
            
            
            6,058General
                and administrative
            
            
            14,959
            
            
            14,253
            
            
            17,838
            
            
            9,799
            
            
            9,582Research
                and development
            
            
            4,013
            
            
            5,423
            
            
            2,147
            
            
            453
            
            
            1,086Amortization
                and depreciation
            
            
            6,503
            
            
            6,685
            
            
            8,535
            
            
            5,602
            
            
            6,097Impairment
                write-down of goodwill
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,133Operating
                loss
            
            
            (11,116
            )
            
            (12,982
            )
            
            (15,926
            )
            
            (4,636
            )
            
            (10,159
            )Other
                (expense) income, net
            
            
            (2,518
            )
            
            60
            
            
            (45
            )
            
            (2,635
            )
            
            (1,146
            )Loss
                before income taxes
            
            
            (13,634
            )
            
            (12,922
            )
            
            (15,971
            )
            
            (7,271
            )
            
            (11,305
            )Recovery
                of deferred income tax
            
            
            -
            
            
            -
            
            
            848
            
            
            1,789
            
            
            1,586Current
                income tax (expense) recovery
            
            
            (124
            )
            
            (64
            )
            
            (36
            )
            
            (55
            )
            
            42Net
                loss for the year
            
            
            (13,758
            )
            $
            (12,986
            )
            $
            (15,159
            )
            $
            (5,537
            )
            $
            (9,677
            )Basic
                and diluted net loss per share
            
            $
            (0.27
            )
            $
            (0.26
            )
            $
            (0.35
            )
            $
            (0.22
            )
            $
            (0.52
            )Weighted
                average number ofcommon
                stock outstanding
            
            
            51,134
            
            
            49,828
            
            
            43,462
            
            
            25,036
            
            
            18,608








MAY
                31,(IN
                THOUSANDS)




2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
                Sheet DataWorking
                capital (deficit)
            
            $
            (6,515
            )
            $
            (1,087
            )
            $
            6,797
            
            $
            (351
            )
            $
            (3,412)Total
                assets
            
            
            58,661
            
            
            66,270
            
            
            75,657
            
            
            48,882
            
            
            30,618Long
                term obligations
            
            
            744
            
            
            288
            
            
            192
            
            
            1,259
            
            
            5,312Total
                liabilities
            
            
            15,474
            
            
            13,248
            
            
            12,718
            
            
            11,143
            
            
            11,594Stockholders'
                equity
            
            
            43,187
            
            
            53,022
            
            
            62,939
            
            
            37,739
            
            
            19,024




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





CAUTIONARY
      STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS





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







35




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.





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 significantly beginning in fiscal 2002. During fiscal 2002,
      we
      completed the acquisitions of Paula Allen Holdings, OMNIpartners,
      6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. During fiscal 2003,
      we
      completed the acquisitions of Icarian, PureCarbon and Xylo. During fiscal 2004,
      we completed the acquisitions of Perform, Peopleview and Kadiri. During fiscal
      2005, we completed the acquisitions of Peoplebonus, Bravanta, HRSoft and ProAct.
      During fiscal 2006, we acquired Exxceed, Inc. These acquisitions have enabled
      us
      to expand and enhance our HCM software, increase our service offerings and
      increase our revenue streams. Subsequent to the acquisitions, we have
      concentrated on integrating the acquired entities 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 two years, we have expended significant resources on further development
      and 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
      latter part of fiscal 2007, we set in motion a series of initiatives to help
      meet our strategic objective of becoming one of the premier providers of talent
      management solutions in the HCM space. These initiatives entail further
      investment in product development, including the introduction of “middle market”
talent management applications that are more suitable and cost effective for
      small to medium sized companies as well as further development of a more
      seamless integration between our core applications of compensation, performance
      and development. We are also investing in making all our products very intuitive
      and easy to use leveraging Web2.0 functionality. We also have begun a rapid
      expansion and upgrade of our sales force and related sales support resources
      and
      plan to increase marketing expenditures in support of the sales effort. In
      August of 2007, we closed on a $20 million equity financing to provide
      sufficient capital to fund these investments and support the operational needs
      of the business in the near-term. We believe that sound execution of these
      initiatives will result in accelerated 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.




36





CRITICAL
      ACCOUNTING POLICIES





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





The
      Company derives revenue from various sources including the following:
      subscription and hosting fees; licensing of software 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, which approximates the expected lives of the
      customer relationships.





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 deliverable of the
      arrangement. When accounted for separately, revenues are recognized as the
      services are rendered.





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






37





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.





Goodwill
      is assessed for impairment on an annual basis or more frequently if
      circumstances warrant. We assess goodwill related to reporting units for
      impairment and write down the carrying amount of goodwill as required. We have
      two distinct reporting units: Enterprise Workforce Services and Career Networks.
      Each reporting unit represents a distinct business unit that offers different
      products and services. Management monitors each unit separately. Enterprise
      Workforce Services, which includes revenue from software and related services,
      is still considered a developing business unit, whereas Career Networks is
      a
      more established business unit. We estimate the fair value of each business
      unit
      by preparing a discounted cash flow model, using a 15% discount rate. The model
      is prepared by projecting results for five years making different assumptions
      for each reporting unit. For the calculation done at the end of fiscal 2007,
      we
      estimated that individual reporting unit annual revenue growth rates would
      range
      from 6% to 27%, that gross profit would increase slightly, and that operating
      expenses would increase but would decrease as a percentage of revenues. We
      estimated the terminal rate as a multiple of revenue after the fifth year to
      be
      between 1.5 and 3.0. An impairment charge is recorded if the implied fair value
      of goodwill of a reporting unit is less than the book value of goodwill for
      that
      unit. Changes in the discount rate used, or in other assumptions in the model,
      would result in wide fluctuations in the value of goodwill that is supported.
      Any such changes may result in additional impairment write-downs.





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






38





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





FISCAL
      2007 COMPARED TO FISCAL 2006





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.





Year
                ended May 31,2007
            
            
            2006
            
            
            2005Revenues:Software
            
            
            35
            %
            
            39
            %
            
            35
            %Professional
                services
            
            
            15
            %
            
            10
            %
            
            12
            %Rewards
                and discount products
            
            
            19
            %
            
            22
            %
            
            20
            %Career
                services
            
            
            31
            %
            
            29
            %
            
            33
            %Revenues,
                net
            
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of revenues:Rewards
                and discount products
            
            
            11
            %
            
            17
            %
            
            15
            %Other
            
            
            14
            %
            
            11
            %
            
            11
            %Cost
                of revenues (exclusive of the amortization and depreciation expense
                noted
                below)
            
            
            25
            %
            
            28
            %
            
            26
            %Gross
                profit
            
            
            75
            %
            
            72
            %
            
            74
            %Operating
                expenses:Selling
                and marketing
            
            
            26
            %
            
            25
            %
            
            27
            %Research
                and development
            
            
            14
            %
            
            18
            %
            
            8
            %General
                and administrative
            
            
            51
            %
            
            51
            %
            
            67
            %Amortization
                and depreciation
            
            
            22
            %
            
            24
            %
            
            32
            %Total
                operating expenses
            
            
            113
            %
            
            118
            %
            
            134
            %-38
            %
            
            -46
            %
            
            -60
            %Interest
                  and other income
            
            
            2
            %
            
            1
            %
            
            1
            %Interest
                and other expense
            
            
            -10
            %
            
            -1
            %
            
            -1
            %Other
                income (expense), net
            
            
            -8
            %
            
            0
            %
            
            0
            %Loss
                before income tax
            
            
            -46
            %
            
            -46
            %
            
            -60
            %Recovery
                of deferred income taxes
            
            
            0
            %
            
            0
            %
            
            3
            %Current
                income tax expense
            
            
            0
            %
            
            0
            %
            
            0
            %NET
                LOSS FOR THE PERIOD
            
            
            -46
            %
            
            -46
            %
            
            -57
            %





REVENUES








39




Consolidated
      revenues were $29,308,769 for fiscal 2007 compared to $28,120,662 for fiscal
      2006 an increase of $1,188,107 or 4%.





Enterprise
      Workforce Services revenues for fiscal 2007 were flat compared to the prior
      year, increasing only slightly to $20,219,044 compared to $20,157,009 for fiscal
      2006, an increase of $62,035 or less than 1%. Professional service revenues
      increased $1,411,018, reflecting a stronger level of utilization throughout
      fiscal 2007 driven, in large measure, by a number of enhancement and upgrade
      projects to existing customers resulting from the product releases that occurred
      in the second half fiscal 2006. Recurring revenues from subscription and
      maintenance agreements was lower by $826,212 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 bookings. Revenue from current
      license sales was higher by $112,358. Rewards and recognition revenue decreased
      $635,130 on lower redemption volumes in the existing customer base compared
      to
      the prior year.





In
      the
      fourth quarter of fiscal 2007, the Board of Directors approved a plan to take
      a
      number of immediate steps to accelerate revenue growth in the on-demand software
      business. As a result, the Company immediately commenced a number of strategic
      initiatives including increased R&D expenditures to launch a targeted middle
      market product in June of 2007 as well as a new product release scheduled for
      the fall of 2007 that further enhances and integrates the critical Compensation,
      Performance Management and Development applications. Additional steps include
      a
      significant increase in sales personnel and training, including an expanded
      sales management team, a broader and deeper field representative group, a
      telesales organization and additional sales engineering and support resources.
      Lastly, the Company has increased its planned marketing expenditures for the
      foreseeable future in support of the sales strategy. In August of 2007, as
      will
      be discussed further in this document, the Company announced the closing of
      a
      $20 million equity financing, a portion of which will be used for the funding
      of
      these investments.





Career
      Networks revenues for fiscal 2007 were $9,089,725 compared to $7,963,653 for
      fiscal 2006, a increase of $1,126,072 or 14%. The outplacement business showed
      a
      significant increase of $1,308,176 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 showed modest gains
      to prior year with slight increases in advertising and subscription revenue.
      Recruitment services was lower compared to prior year as a substantial portion
      of their 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 2007 was $7,400,632 compared to $7,808,115 for fiscal 2006
      a
      decrease of $407,483 or 5%. Gross profit for fiscal 2007 was $21,908,137 or
      75%
      of revenues compared to $20,312,547 or 72% of revenues for fiscal 2006.





Enterprise
      Workforce Services cost of revenues accounted for $6,845,644 of the total cost
      of revenue for fiscal 2007 and $7,078,405 for fiscal 2006, a decrease of
      $232,761 or 3%. Enterprise Workforce Services gross profit was $13,373,400
      or
      66% of revenues for fiscal 2007 compared to $13,078,604 or 65% of revenues
      for
      fiscal 2006. Software margins declined from 94% to 92% year over year primarily
      as a result of certain redundant costs associated with the migration of various
      customers from subcontracted hosting partners to a centralized hosting array
      at
      the Fusepoint datacenter facility in Toronto. This centralization is not only
      expected to provide cost efficiencies as we scale the on-demand business but
      it
      also enables 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 and the final migration
      process should be completed by October of 2007. Professional services margins
      increased from 40% to 65% primarily as a result of much higher utilization
      rates
      on the strength of higher billable hour volumes. Additionally, the average
      rate
      per hour was slightly ahead of last year. Rewards and recognition margins
      declined from 24% a year ago to 19% for fiscal 2007, continuing the trend in
      higher use of gift cards compared to redemption for other products such as
      electronic and photographic goods that have larger margins. This shift in
      product mix is not expected to change in the near term and we anticipate further
      pressure on rewards margins as a result.








40




Career
      Networks cost of revenues accounted for $554,988 of the total cost of revenues
      for fiscal 2007 and $729,710 for fiscal 2006, a decrease of $174,722 or 24%.
      Career Networks gross profit was $8,534,737 or 94% of revenues for fiscal 2007
      compared to $7,233,943 or 91% of revenues for fiscal 2006. The improved gross
      profit was directly attributable to the higher revenue per sale in the career
      transition business and the lower cost of lead generation. The product set
      used
      in career transition services was expanded to allow for additional revenue
      generating items and the target customer group was shifted to more highly
      compensated individuals. Both measures, when combined with a higher conversion
      ratio on leads provided, had a positive impact on gross profit. Additionally,
      the Company was able to augment its lead generation needs by sourcing
      opportunities from the internet job board business to reduce the overall blended
      cost of leads.





SELLING
      AND MARKETING





Selling
      and marketing expenses were $7,458,777 for fiscal 2007 compared to $6,934,056
      for fiscal 2006, an increase of $524,721 or 8%. The increase was primarily
      attributable to a higher level of variable compensation associated with the
      increase in the outplacement business revenue and a slight increase in
      advertising expense in the job board business. Overall marketing costs in both
      the software and career transition businesses were relatively stable compared
      to
      prior year.





As
      previously noted, the company is currently increasing its on-demand software
      sales force resources including increased sales and support personnel, a
      telesales group and a more software industry experienced management team and
      has
      simultaneously increased its planned marketing expenditures. As a result, sales
      and marketing expenses in this segment are expected to continue to increase
      for
      the foreseeable future.





GENERAL
      AND ADMINISTRATIVE





General
      and administrative expenses were $14,959,116 for fiscal 2007 compared to
      $14,253,037 for fiscal 2006, an increase of $706,079 or 5%.  The
      net
      increase is primarily due to increases in non-cash compensation associated
      with
      stock options and professional fees. In
      first
      quarter 2007, we adopted FAS 123R, which required us to include in compensation
      expense the estimated fair value of stock options granted. Prior to the adoption
      of FAS 123R, this expense was included as a footnote disclosure only. The
      non-cash compensation expense associated with the adoption of FAS 123R for
      the
      year was $785,541. An additional $183,321 in non-cash compensation expense
      relating to certain restricted stock units granted to management and the Board
      of Directors was also recognized in 2007, an increase of $126,515 over prior
      year. Professional fees were higher in the current year as legal expense,
      primarily associated with the class action litigation and an additional
      investor complaint, increased $530,563. Additionally, the Company incurred
      recruitment expenses associated with the hiring of new executives. These fees
      were offset by lower audit and Sarbanes- Oxley fees.





RESEARCH
      AND DEVELOPMENT





Research
      and development expenses were $4,013,158 for fiscal 2007 compared to $5,422,309
      for fiscal 2006, a decrease of $1,409,151 or 26%. This decrease reflects a
      reduction in the use of outside contractors subsequent to the two significant
      product releases in February and April of 2006. During fiscal 2006, the Company
      made a significant investment to update and enhance its acquired technology,
      standardize and integrate the software applications and build out the talent
      management suite platform. The Company used outside consultants and offshore
      development contractors to augment its existing development team and these
      resources were reduced after the product releases resulting in a significant
      saving through the first three quarters of fiscal 2007.




As
      noted
      previously, in the fourth quarter of fiscal 2007, the Company moved ahead with
      its plan to develop various “middle market” software applications that it
      expects to be more suitable and cost-effective for small and mid-size companies.
      Additionally, a number of other enhancements to its Compensation, Performance
      Management and Development applications are underway for release in the fall
      of
      2007, including further seamless integration between the products and the
      development of further multi-lingual and multicurrency capabilities to allow
      for
      international expansion within and outside of our current customer base. These
      product development initiatives have required a ramping back up of outside
      contractors over the next two to three quarters and we anticipate a
      corresponding higher expense in those periods.






41




AMORTIZATION
      AND DEPRECIATION EXPENSE





Amortization
      and depreciation expense was $6,502,977 for fiscal 2007 compared to $6,684,880
      for fiscal 2006, a decrease of $181,903 or 3%. Amortization and depreciation
      expense for the Enterprise Workforce Services segment was $6,413,871 in fiscal
      2007 compared to $6,532,749 for fiscal 2006, a decrease of $118,878 or 2%.
      The
      decrease was the net effect of a decrease in certain intangible assets with
      three and five-year lives (Acquired Technology & Intellectual Property)
      becoming fully amortized during fiscal 2007 and an increase in depreciation
      due
      to the addition of the capital lease obligations for the Fusepoint facility
      added during the year. Amortization and depreciation expense for the Career
      Networks segment was $89,105 in fiscal 2007 compared to $152,131 in fiscal
      2006,
      a decrease of $63,025 or 41%. The decrease was due to certain intangible assets
      with five-year lives (Intellectual Property) included in the Career Networks
      segment becoming fully amortized during fiscal 2007. Amortization
      expense is expected to decrease significantly from the $5,464,833 recorded
      in fiscal 2007 to $2,152,613 in fiscal 2008 as the intangible assets acquired
      in
      2003 and 2004 continue to become fully amortized.




INTEREST
      INCOME AND OTHER INCOME




Interest
      and other income was $523,531 in fiscal 2007 compared to $223,722 in fiscal
      2006
      an increase of $299,809 or 134%. The increase in interest and other income
      was
      primarily due to the Company investing the proceeds from its Secured Note
      facility in short term commercial paper.





INTEREST
      AND OTHER EXPENSE




Interest
      and other expense was $3,041,731 for fiscal 2007 compared to $163,504 for fiscal
      2006 an increase of $2,878,227 or 1,760%.  This
      is
      wholly attributable to the $15 million Secured Note Agreement entered into
      in
      September of 2006 as amended to a Senior Line of Credit in March 2007. The
      interest expense includes interest paid of prime plus 2.5% on the note, an
      accrual for the excess interest required over the amount paid to meet the
      guaranteed rate of return provisions through December 31, 2007, and the
      accretion the of warrant discount for warrants issued in conjunction with the
      debt obligation and amortization of prepaid financing costs.




GOODWILL
  Goodwill
        was $45,276,411 at May 31, 2007 compared to $44,721,859 at May 31, 2006,
        a net
        increase of $554,552 or 1%. The increase represents an increase of $554,850
        relating to contingent consideration paid in fiscal 2007 associated with
        the
        acquisition of Exxceed in January 2006 offset slightly by minor purchase
        price
        adjustments relating to the Bravanta and ProAct acquisitions.




FISCAL
      2006 COMPARED TO FISCAL 2005





REVENUES





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





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





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




42




COST
      OF
      REVENUES AND GROSS PROFIT





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





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





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




SELLING
      AND MARKETING





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




GENERAL
      AND ADMINISTRATIVE





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




RESEARCH
      AND DEVELOPMENT





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






43


AMORTIZATION
      AND DEPRECIATION EXPENSE





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




INTEREST
      INCOME AND OTHER INCOME




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




INTEREST
      AND OTHER EXPENSE




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




LIQUIDITY
      AND CAPITAL RESOURCES




At
      May
      31, 2007, we maintained $3,342,949, in cash and cash equivalents, restricted
      cash and short-term investments. Working capital, which represents current
      assets less current liabilities, was a negative $6,514,537.




At
      May
      31, 2007, $524,497 of short-term investments was restricted from use in order
      to
      collateralize two facility lease arrangements and a credit card reserve. In
      fiscal 2007, we repaid an outstanding term loan and line of credit and the
      associated restricted cash balances were eliminated. In addition, as we make
      facility lease payments, the restricted cash guaranteeing the leases will
      periodically decrease according to the terms of the lease agreements.






44





For
      fiscal 2007, cash used in operations totaled $6,377,638, consisting primarily
      of
      the net loss for the year of $13,758,473 and a net decrease in working capital
      of $2,098,995 offset by non-cash expenses, including amortization and
      depreciation of $6,502,977, non-cash interest expense associated with the
      Secured Note arrangement and related warrant discount of $2,012,159 and non-cash
      compensation of $967,862.




Net
      cash
      provided by investing activities during fiscal 2007 was $2,094,727. Investing
      inflows consisted of the aforementioned release of restricted cash net of
      capital expenditures of $638,549.





Net
      cash
      provided by financing activities was $2,148,712 for fiscal 2007. Net proceeds
      from the Secured Note arrangement were $4,650,000 after giving effect to a
      compensating balance arrangement which was later returned to the lender when
      the
      agreement was amended and a corresponding $10 million of the obligation was
      retired. Additional outflows consisted of repayments of older term loan and
      line
      of credit obligations as noted above and scheduled payments on the capital
      lease
      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 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 contains
      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. Financing costs associated with the loan totaled
      approximately $350,000. Financing costs are being amortized over the term of
      the
      loan to interest expense.





In
      connection with loan, 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 is being amortized over the term of the loan to interest expense.
      The
      shares issuable upon exercise of the warrants were registered for resale within
      120 days of the closing date of the loan.





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 a $5 million term note 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 set
      up as
      financing costs. At closing, $200,000 of the aggregate fee was paid and $550,000
      is due in December 2007. The term loan will be amortized ratably on a 60 month
      amortization. The Senior Line of Credit bears interest at prime plus 3% per
      annum, has a termination date of February 1, 2008 and requires annual renewal
      with the lender. As of May 31, 2007, the interest rate was 11.25%. Also at
      that
      date, $5,816,667 was drawn on the facility and the Company had borrowing
      capacity of approximately $14,000 still available based on eligible accounts
      receivable at that date.




In
      the
      spring of 2007, the Board of Directors approved a plan to take a number of
      immediate steps to accelerate revenue growth in the on-demand software core
      business. As a result, the Company immediately commenced a number of strategic
      initiatives including increased R&D expenditures to launch a targeted middle
      market product in June of 2007 as well as a new product release scheduled for
      the fall of 2007 that further enhances and integrates the critical Compensation,
      Performance Management and Development applications. Additional steps include
      a
      significant increase in sales force personnel and training including an expanded
      sales management team, a broader and deeper field representative group, a
      telesales group and more sales engineering and support resources. Lastly, the
      Company has increased its planned marketing expenditures for the foreseeable
      future in support of the sales strategy. In connection with the anticipated
      funding necessary for the execution of this plan to address current liquidity
      needs for operations and working capital, the Board also directed management
      to
      look at various equity or debt alternatives.




45





On
      July
      25, 2007, the Company announced that it had entered into a definitive agreement
      pursuant to which it would raise $20 million in new capital with several new
      and
      existing investors.  In connection with the financing, the Company would
      issue warrants convertible into 16,000,000 common shares at a conversion price
      of $1.25 per share.  The warrants also include 25% coverage in the form of
      additional warrants exercisable for 4,000,000 common shares at an exercise
      price
      of $1.40 per share.  The warrants must be exercised within five years from
      the closing date of the financing. On August 3, 2007, the agreement closed
      and
      was funded and on August 6, 2007, the Company paid all outstanding obligations
      due to its principal lender in the amount of $6,664,801. This included
      $6,038,672 outstanding under the line of credit, the $550,000 still due under
      the guaranteed return/restructuring fee, an early termination fee of $50,000
      and
      any remaining accrued interest and miscellaneous fees .




Management
      believes that the remaining liquidity from the equity financing after repayment
      of the indebtedness will be sufficient to meet its anticipated working capital
      and capital expenditure requirements Allowing the company to reach its
      profitability goal.





CONTRACTUAL
      OBLIGATIONS





At
      May
      31, 2007 maturities of debt outstanding, capital leases, operating leases and
      contractual obligations are as follows:





Year
                Ended May 31,2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            TotalDebt
            
            $
            4,557,395
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            4,557,395Capital
                leases
            
            
            591,764
            
            
            471,375
            
            
            213,240
            
            
            7,015
            
            
            -
            
            
            1,283,394Operating
                leases
            
            
            1,120,522
            
            
            583,478
            
            
            -
            
            
            -
            
            
            -
            
            
            1,704,000Total
            
            $
            6,269,681
            
            $
            1,095,359
            
            $
            213,240
            
            $
            7,015
            
            $
            -
            
            $
            7,544,789




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.




Acquisitions
      that occurred in the three years ended May 31, 2007 are described in further
      detail below.





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




46





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





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





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




On
      January 13, 2006, we acquired certain assets of Exxceed, Inc., a Delaware
      corporation, a developer and marketer of competency and employee development
      software solutions. As consideration for the sale, we made a cash payment of
      $500,000 and issued a promissory note for $500,000. In addition, after giving
      effect to shares issued in February 2007 as part of a contingent purchase price
      provision, the Company issued the shareholders of Exxceed 1,996,971 common
      shares valued at $3,082,850. We recorded approximately $1.1 million in
      intangible assets and an aggregate $3.0 million in goodwill as part of the
      acquisition.




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




RECENT
      ACCOUNTING PRONOUNCEMENTS




In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement
      No. 109.* Interpretation
      48 clarifies the accounting for uncertainty in income taxes recognized in an
      entity’s financial statements in accordance with Statement 109 and prescribes a
      recognition threshold and measurement attribute for financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. Additionally, Interpretation 48 provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. Interpretation 48 is effective for fiscal years
      beginning after December 15, 2006, with early adoption permitted. We will
      adopt Interpretation 48 for our fiscal year ending May 31, 2008 and are
      currently evaluating the impact of the adoption of Interpretation 48 on our
      consolidated financial statements.








47







In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (SAB 108).
      SAB 108 addresses the diversity in practice in quantifying financial
      statement misstatements and establishes an approach that requires quantification
      of financial statement misstatements based on the effects of the misstatements
      on a company’s financial statements and related disclosures. SAB 108 is
      effective for fiscal years ending after November 15, 2006. The application
      of SAB 108 did not have a material impact on our consolidated financial
      statements.








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.




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




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





INTEREST
      RATE RISKS





Our
      exposure to interest rate fluctuations relates primarily to our short-term
      investment portfolio and our bank loans. 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.




Prior
      to
      the repayment of the Senior Line of Credit in August of 2007, we held variable
      rate debt that fluctuated with the prime rate as part of our principal debt
      facility. In connection with the amount outstanding at May 31, 2007, a
      one-percent increase in interest rates would have had approximately a $60,000
      adverse impact on the annual results of operations. Additionally, we have two
      letters of credit issued in May 2002 as collateral on leased facilities in
      the
      amounts of $71,676 and CDN $400,000. We pay an annual fee of 1.2% on these
      letters of credit.  ****




FOREIGN
      CURRENCY RISK





We
      have
      monetary assets and liabilities denominated in Canadian dollars. As a result,
      fluctuations in the exchange rate of the Canadian dollar against the U.S. dollar
      will impact our reported net asset position and net income or loss. A 10% change
      in foreign exchange rates would result in a change in our reported net asset
      position of approximately $40,000, and a change in the reported net loss for
      the
      year ended May 31, 2007 of approximately $290,000.








48





ITEM
      8:
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




**REPORT
      OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM**




T o
      the
      Board of Directors and Stockholders of Workstream Inc.





We
      have
      audited the accompanying consolidated balance sheet of Workstream Inc. as of
      May
      31, 2007, and the related consolidated statements of operations, stockholders’
equity and cash flows for the year then ended and subsidiaries.  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 audit.





We
      conducted our audit 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 audit provides 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, 2007, and the results of their operations
      and their cash flows for the year then ended, in conformity with U.S.
      generally accepted accounting principles.




As
      described in Note 12 to the consolidated financial
      statements, on June 1, 2006, the Company changed its method of accounting for
      share based payments to adopt Financial Accounting Standard No. 123(R)
      Share-Based Payment.





/s/
      McGladrey & Pullen, LLP





Orlando,
      Florida


August
      17, 2007




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Shareholders of Workstream Inc.




In
      our
      opinion, the accompanying consolidated balance sheet as of May 31, 2006 and
      the
      related consolidated statements of operations, stockholders equity and cash
      flows for each of the two years in the period ended may 31, 2006 appearing
      on
      pages 53 through 80 of this Annual Report to the Shareholders present
      fairly, in all material respects, the financial position of Workstream Inc.
      and
      its subsidiaries (the “Company”) at May 31, 2006 and the results of their
      operations and their cash flows for each of the two years in the period ended
      May 31, 2006 in conformity with accounting principles generally accepted in
      the
      United States of America. These
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits. We conducted our audits of these statements in accordance with
      the
      standards of the Public
      Company Accounting Oversight Board  (United
      States). Those standards require that we plan and perform the audit to obtain
      reasonable assurance about whether the financial statements are free of material
      misstatement. An audit of financial statements includes examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.




/s/
      PRICEWATERHOUSECOOPERS LLP




Ottawa,
      Ontario




July
      28,
      2006






49







**WORKSTREAM
                INC.****CONSOLIDATED
                BALANCE SHEETS**May
                31, 2007
            
            May
                31, 2006ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            2,752,601
            
            $
            4,577,040Restricted
                cash
            
            
            524,497
            
            
            3,095,348Short-term
                investments
            
            
            65,851
            
            
            302,197Accounts
                receivable, net
            
            
            3,789,838
            
            
            3,100,779Prepaid
                expenses and other assets
            
            
            848,359
            
            
            527,876Total
                current assets
            
            
            7,981,146
            
            
            11,603,240Property
                and equipment, net
            
            
            2,715,494
            
            
            1,789,739Other
                assets
            
            
            85,122
            
            
            87,468Acquired
                intangible assets, net
            
            
            2,602,590
            
            
            8,067,423Goodwill
            
            
            45,276,411
            
            
            44,721,859TOTAL
                ASSETS
            
            $
            58,660,763
            
            $
            66,269,729LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            2,259,010
            
            $
            2,690,388Accrued
                liabilities
            
            
            2,961,928
            
            
            2,132,470Line
                of credit
            
            
            -
            
            
            2,537,246Accrued
                compensation
            
            
            1,378,444
            
            
            1,073,239Notes
                payable
            
            
            4,557,395
            
            
            558,776Current
                portion of long-term obligations
            
            
            639,445
            
            
            337,517Deferred
                revenue
            
            
            2,699,461
            
            
            3,360,766Total
                current liabilities
            
            
            14,495,683
            
            
            12,690,402Long-term
                obligations
            
            
            742,025
            
            
            288,269Deferred
                revenue
            
            
            236,492
            
            
            268,727Total
                liabilities
            
            
            15,474,200
            
            
            13,247,398Commitments
                and contingenciesSTOCKHOLDERS’
                EQUITYPreferred
                stock, no par value
            
            
            -
            
            
            -Common
                stock, no par value
            
            
            112,549,178
            
            
            111,991,328Additional
                paid-in capital
            
            
            10,907,755
            
            
            7,547,393Accumulated
                other comprehensive loss
            
            
            (867,288
            )
            
            (871,781
            )Accumulated
                deficit
            
            
            (79,403,082
            )
            
            (65,644,609
            )Total
                stockholders’ equity
            
            
            43,186,563
            
            
            53,022,331TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            58,660,763
            
            $
            66,269,729





See
      accompanying notes to these consolidated financial statements.






50







**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF OPERATIONS**Years
                ended May 31,2007
            
            2006
            
            2005Software
            
            $
            10,295,086
            
            $
            11,008,939
            
            $
            9,096,241Professional
                services
            
            
            4,290,960
            
            
            2,879,942
            
            
            3,320,556Rewards
                and discount products
            
            
            5,632,998
            
            
            6,268,128
            
            
            5,446,152Career
                services
            
            
            9,089,725
            
            
            7,963,653
            
            
            8,955,638Revenues,
                net
            
            
            29,308,769
            
            
            28,120,662
            
            
            26,818,587Rewards
                and discount products
            
            
            3,225,093
            
            
            4,722,467
            
            
            3,955,663Other
            
            
            4,175,539
            
            
            3,085,648
            
            
            3,058,317Cost
                of revenues (exclusive of amortization and depreciation expense noted
                below)
            
            
            7,400,632
            
            
            7,808,115
            
            
            7,013,980Gross
                profit
            
            
            21,908,137
            
            
            20,312,547
            
            
            19,804,607Operating
                expenses:Selling
                and marketing
            
            
            7,548,777
            
            
            6,934,056
            
            
            7,210,996Research
                and development
            
            
            4,013,158
            
            
            5,422,309
            
            
            2,147,251General
                and administrative
            
            
            14,959,116
            
            
            14,253,037
            
            
            17,837,777Amortization
                and depreciation
            
            
            6,502,977
            
            
            6,684,880
            
            
            8,534,715Total
                operating expenses
            
            
            33,024,028
            
            
            33,294,282
            
            
            35,730,739Operating
                loss
            
            
            (11,115,891
            )
            
            (12,981,735
            )
            
            (15,926,132
            )Interest
                and other income
            
            
            523,531
            
            
            223,722
            
            
            189,851Interest
                and other expense
            
            
            (3,041,731
            )
            
            (163,504
            )
            
            (234,451
            )Other
                income (expense), net
            
            
            (2,518,200
            )
            
            60,218
            
            
            (44,600
            )Loss
                before income tax
            
            
            (13,634,091
            )
            
            (12,921,517
            )
            
            (15,970,732
            )Recovery
                of deferred income taxes
            
            
            
            
            
            -
            
            
            847,920Current
                income tax expense
            
            
            (124,382
            )
            
            (64,774
            )
            
            (36,163
            )NET
                LOSS
            
            $
            (13,758,473
            )
            $
            (12,986,291
            )
            $
            (15,158,975
            )Weighted
                average number ofcommon
                shares outstanding
            
            
            51,134,281
            
            
            49,827,925
            
            
            43,461,514Basic
                and diluted net loss per share
            
            $
            (0.27
            )
            $
            (0.26
            )
            $
            (0.35
            )








See
      accompanying notes to these consolidated financial statements.






51





**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS' EQUITY**AccumulatedAdditional
            
            Other
            
            
            
            TotalCommon
                Stock
            
            Paid-In
            
            Accumulated
            
            Accumulated
            
            Stockholders'Shares
            
            Amount
            
            Capital
            
            Loss
            
            Deficit
            
            EquityBalance
                at May 31, 2004
            
            $
            33,574,883
            
            $
            72,705,603
            
            $
            3,605,224
            
            $
            (1,072,302
            )
            $
            (37,499,343
            )
            $
            37,739,182Issuance
                of shares and warrants,net
                of issue costs
            
            
            9,684,439
            
            
            19,519,485
            
            
            4,820,653
            
            
            -
            
            
            -
            
            
            24,340,138Issuance
                of shares for acquisitions
            
            
            4,700,708
            
            
            13,491,066
            
            
            -
            
            
            -
            
            
            -
            
            
            13,491,066Issuance
                of shares throughexercise
                of stock options
            
            
            331,260
            
            
            950,390
            
            
            -
            
            
            -
            
            
            -
            
            
            950,390Issuance
                of shares throughexercise
                of warrants
            
            
            891,482
            
            
            2,352,814
            
            
            (919,501
            )
            
            -
            
            
            -
            
            
            1,433,313Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (15,158,975
            )
            
            (15,158,975
            )Cumulative
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            143,999
            
            
            -
            
            
            143,999Balance
                at May 31, 2005
            
            
            49,182,772
            
            
            109,019,358
            
            
            7,506,376
            
            
            (928,303
            )
            
            (52,658,318
            )
            
            62,939,113Issuance
                of shares for acquisition
            
            
            1,500,000
            
            
            2,525,000
            
            
            -
            
            
            -
            
            
            -
            
            
            2,525,000Issuance
                of shares throughexercise
                of stock options
            
            
            104,740
            
            
            104,170
            
            
            -
            
            
            -
            
            
            -
            
            
            104,170Issuance
                of shares throughexercise
                of warrants
            
            
            133,333
            
            
            290,000
            
            
            (90,000
            )
            
            -
            
            
            -
            
            
            200,000Issuance
                of shares throughvesting
                of restricted stock units
            
            
            40,000
            
            
            52,800
            
            
            -
            
            
            -
            
            
            -
            
            
            52,800Expensing
                of restricted stock unit grants
            
            
            -
            
            
            -
            
            
            131,017
            
            
            -
            
            
            -
            
            
            131,017Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (12,986,291
            )
            
            (12,986,291
            )Cumulative
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            56,522
            
            
            -
            
            
            56,522Balance
                at May 31, 2006
            
            
            50,960,845
            
            $
            111,991,328
            
            $
            7,547,393
            
            $
            (871,781
            )
            $
            (65,644,609
            )
            $
            53,022,331Issuance
                of common shares ascontingent
                consideration
            
            
            496,971
            
            
            557,850
            
            
            
            
            
            
            
            
            
            
            
            557,850Hilco
                Warrant Discount
            
            
            
            
            
            
            
            
            2,392,500
            
            
            
            
            
            
            
            
            2,392,500Stock
                option expense
            
            
            
            
            
            
            
            
            785,541
            
            
            
            
            
            
            
            
            785,541Issuance
                of shares throughvesting
                of restricted stock units
            
            
            73,336
            
            
            
            
            
            26,250
            
            
            
            
            
            
            
            
            26,250Expensing
                of restricted stock unitgrants
            
            
            
            
            
            
            
            
            156,071
            
            
            
            
            
            
            
            
            156,071Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (13,758,473
            )
            
            (13,758,473
            )Cumulative
                translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            4,493
            
            
            
            
            
            4,493Balance
                at May 31, 2007
            
            
            51,531,152
            
            $
            112,549,178
            
            $
            10,907,755
            
            $
            (867,288
            )
            $
            (79,403,082
            )
            $
            43,186,563








See
      accompanying notes to these consolidated financial statements.





52








**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS**Years
                ended May 31,2007
            
            2006
            
            2005Cash
                provided by (used in) operating activities:Net
                loss for the year
            
            $
            (13,758,473
            )
            $
            (12,986,291
            )
            $
            (15,158,975
            )Adjustments
                to reconcile net loss to net cash (used in) provided byoperating
                activities:Amortization
                and depreciation
            
            
            6,502,977
            
            
            6,684,880
            
            
            8,534,715Leasehold
                inducement amortization
            
            
            (54,236
            )
            
            (53,835
            )
            
            (40,100
            )Non-cash
                interest on convertible notes and notes payable
            
            
            2,012,159
            
            
            -
            
            
            53,746Provision
                for bad debts
            
            
            85,502
            
            
            159,704
            
            
            577,362Recovery
                of deferred income taxes
            
            
            -
            
            
            -
            
            
            (847,920
            )Non-cash
                compensation
            
            
            967,862
            
            
            226,326
            
            
            210,296Change
                in long-term portion of deferred revenue
            
            
            (34,434
            )
            
            191,571
            
            
            77,156Net
                change in operating components of working capital:Accounts
                receivable
            
            
            (1,465,023
            )
            
            1,119,129
            
            
            (430,955
            )Prepaid
                expenses and other assets
            
            
            (182,757
            )
            
            (13,215
            )
            
            663,145Accounts
                payable and accrued liabilities
            
            
            202,320
            
            
            661,216
            
            
            (2,828,592
            )Deferred
                revenue
            
            
            (653,535
            )
            
            (899,111
            )
            
            250,064Net
                cash used in operating activities
            
            
            (6,377,638
            )
            
            (4,909,626
            )
            
            (8,940,058
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (638,549
            )
            
            (682,702
            )
            
            (333,799
            )Cash
                paid for business combinations
            
            
            -
            
            
            (500,000
            )
            
            (8,838,592
            )(Increase)/decrease
                in restricted cash
            
            
            2,716,766
            
            
            319,856
            
            
            (196,811
            )Sale
                of short-term investments
            
            
            16,510
            
            
            50,293
            
            
            98,659Net
                cash provided by (used in) investing activities
            
            
            2,094,727
            
            
            (812,553
            )
            
            (9,270,543
            )Cash
                flows from financing activities:Proceeds
                from issuance of secured notes payable, net
            
            
            14,650,000
            
            
            -
            
            
            -Repayment
                of secured notes payable
            
            
            (10,000,000
            )
            
            -
            
            
            -Repayment
                of other long-term obligations
            
            
            (1,013,937
            )
            
            (1,712,286
            )
            
            (1,050,292
            )Proceeds
                from issuance of common stock and warrants
            
            
            -
            
            
            -
            
            
            24,993,989Proceeds
                from exercise of options and warrants
            
            
            -
            
            
            304,170
            
            
            2,383,703Costs
                related to the registration and issuance of common stock
            
            
            -
            
            
            -
            
            
            (904,051
            )Line
                of credit, net activity
            
            
            (1,487,351
            )
            
            (90,863
            )
            
            186,289Net
                cash provided by (used in) financing activities
            
            
            2,148,712
            
            
            (1,498,979
            )
            
            25,609,638Effect
                of exchange rate changes on cash and cash equivalents
            
            
            309,760
            
            
            (13,413
            )
            
            74,108Net
                (decrease) increase in cash and cash equivalents
            
            
            (1,824,439
            )
            
            (7,234,571
            )
            
            7,473,145Cash
                and cash equivalents, beginning of year
            
            
            4,577,040
            
            
            11,811,611
            
            
            4,338,466Cash
                and cash equivalents, end of year
            
            $
            2,752,601
            
            $
            4,577,040
            
            $
            11,811,611






53





**WORKSTREAM
                INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS (CONTINUED)**Years
                ended May 31,2007
            
            2006
            
            2005Supplemental
                disclosure of cash flow information:Cash
                paid during the year for:Interest
                paid
            
            $
            1,010,565
            
            $
            162,609
            
            $
            141,690Income
                taxes paid
            
            $
            77,128
            
            $
            70,593
            
            $
            50,736Supplemantal
              schedule of home cash investing and financing activities:Equipment
                acquired under capital leases
            
            $
            1,224,028
            
            $
            485,677
            
            
            -Issuance
                of common shares as contingent consideration
            
            $
            557,850
            
            
            -
            
            $
            2,532,111Discount
                on the Hilco warrants
            
            $
            2,392,500
            
            
            -
            
            
            -








See
      accompanying notes to these consolidated financial statements .


54


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





***Description
      of the Company***





Workstream
      Inc. (“Workstream” or the “Company”), is a provider of services and software for
      Human Capital Management (“HCM”). HCM is the process by which companies recruit,
      train, evaluate, motivate and retain their employees. Workstream offers software
      and services that address the needs of companies to more effectively manage
      their human capital management function. Workstream has two distinct reporting
      units: Enterprise Workforce Services and Career Networks. The Enterprise
      Workforce Services segment offers a suite of HCM software solutions, which
      includes 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.





***Principles
      of Consolidation***




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





***Use
      of Estimates***





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





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





***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.





***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.








55








***Property
      and Equipment***





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





Furniture
      and fixtures............................... 5 years straight line


Office
      equipment.................................... 5 years straight line


Computers
      and software............................ 3 years straight line


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





***Goodwill
      and Acquired Intangible Assets***




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





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


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





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





***Income
      Taxes***





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





***Investment
      Tax Credits***





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







56




***Revenue
      Recognition***




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


·
            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, which approximates the expected lives of the
      customer relationships.





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 deliverable of the
      arrangement. When accounted for separately, revenues are recognized as the
      services are rendered.





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





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.






57





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
      revenue from the rewards software application. In addition, the Company
      generates revenue from the sale of products and tickets to the customers’
employees through a website. The Company recognizes revenue when all of the
      revenue recognition criteria are met, which is typically when the goods are
      shipped and title has transferred.





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





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





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




***Deferred
      Revenue***





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





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





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





Effective
      June 1, 2006, the Company adopted the provision Statements of Financial
      Accounting Standards (SFAS) No. 123R, *S**hare-Based
      Payment* and
      accounts for compensation expense for its stock based compensation plan using
      the fair-value method. Prior to fiscal 2007, the Company accounted for
      compensation expense using the intrinsic value method prescribed in Accounting
      Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      25”), compensation expense is measured at the grant date based on the intrinsic
      value of the award and is recognized on a straight-line basis over the service
      period, which is usually the option-vesting period.





Compensation
      expense for fiscal 2007 and the pro forma information calculation utilized
      prior
      to the adoption of FAS 123R 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 31,2007
            
            2006
            
            2005Weighted-average
                risk free interest rates
            
            
            4.72
            %
            
            4.30
            %
            
            3.68
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %Weighted-average
                expected volatility
            
            
            70
            %
            
            82
            %
            
            72
            %Expected
                life (in years)
            
            
            3.5
            
            
            3.5
            
            
            3.5







58






The
      following reflects the impact on 2006 and 2005 results of operations if the
      Company had recorded additional compensation expense relating to the employee
      stock options:




Years
                Ended May 31,2006
            
            2005Net
                loss, as reported
            
            $
            (12,986,291
            )
            $
            (15,158,975
            )Add:
                stock-based compensation expense included in reported net
                loss
            
            
            55,356
            
            
            -Deduct:
                total stock-based compensation expense determined under fair value
                based
                method for all awards
            
            
            (948,651
            )
            
            (896,621
            )Net
                loss, pro forma
            
            $
            (13,879,586
            )
            $
            (16,055,596
            )Weighted
                average common sharesoutstanding
                during the year
            
            
            49,827,925
            
            
            43,461,514Basic
                and diluted loss per share:As
                reported
            
            $
            (0.26
            )
            $
            (0.35
            )Pro
                forma
            
            $
            (0.28
            )
            $
            (0.37
            )








***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 year ended May 31, 2007.





***Concentration
      of Credit Risk***





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






59




***Interest
      Rate Risk***





The
      Company’s cash equivalents, restricted cash and short-term investments earn
      interest at fixed rates. The Company’s loan agreement accrues interest payable
      currently at a variable rate based on the bank’s prime rate. 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. The variable rate
      indebtedness was paid off in August of 2007.





***Fair
      Value of Financial Instruments***





The
      carrying amounts of the Company’s financial instruments, including cash and cash
      equivalents, short-term investments, restricted cash, accounts receivable,
      accounts payable, and accrued expenses, approximate their fair values due to
      their short maturities. Based on borrowing rates currently available to the
      Company for similar terms and the duration of the debt instruments being
      primarily short term in nature the carrying value of the 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.




The Company's chief operating decision maker is its Chief
      Executive Officer, who reviews financial information presented on a consolidated
      basis.  Accordingly, in accordance with SFAS No. 131, *Disclosures about
      Segments of Enterprise and Related Information*(SFAS 131), the Company has
      determined that it has two reporting segments:  Enterprise Workforce
      Services and Career Networks (see note 14).





***Recent
      Accounting Pronouncements***





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* ,
      an
      interpretation of FASB Statement No. 109. Interpretation 48 clarifies the
      accounting for uncertainty in income taxes recognized in an entity’s financial
      statements in accordance with Statement 109 and prescribes a recognition
      threshold and measurement attribute for financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      Additionally, Interpretation 48 provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. Interpretation 48 is effective for fiscal years
      beginning after December 15, 2006, with early adoption permitted. We will
      adopt Interpretation 48 for our fiscal year ending May 31, 2008 and are
      currently evaluating the impact of the adoption of Interpretation 48 on our
      consolidated financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements in Current Year Financial
      Statements* (SAB 108). SAB 108 addresses the diversity in practice in quantifying
      financial statement misstatements and establishes an approach that requires
      quantification of financial statement misstatements based on the effects of
      the
      misstatements on a company’s financial statements and related disclosures.
      SAB 108 is effective for fiscal years ending after November 15, 2006.
      The application of SAB 108 did not have a material impact on our
      consolidated financial statements.





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.





60





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.





**Note
      2.**  **Business
      Acquisitions**





***2006
      Acquisition***





On
      January 13, 2006, the Company acquired certain assets of Exxceed, Inc.
      (“Exxceed”), a Delaware corporation, a developer and marketer of development,
      competency and performance management software. As partial consideration for
      the
      purchase, the Company issued 1,500,000 shares of common stock valued at
      $2,525,000 and took a note payable of $500,000. Up to an additional 1,000,000
      in
      common shares, representing potential contingent consideration, were issuable
      upon the acquired company meeting certain billing targets within 12 months
      of
      the acquisition date. In fiscal 2007, the company issued the successor entity
      to
      Exxceed 496,971 common shares with a fair value at issuance of $557,850 for
      meeting certain targets in the 12 month period subsequent to acquisition. The
      primary reason for the Exxceed acquisition was to enable the Company to both
      enhance and expand its product and service offerings. The acquisition added
      a
      competency and employee development capability and upgraded the current
      performance management and succession planning application.





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





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





The
      following summarizes the Exxceed purchase price allocation, after giving effect
      to the contingent consideration issued in fiscal 2007.





Share
                consideration
            
            $
            3,082,850Cash
                consideration
            
            
            500,000Note
                payable (Note 9)
            
            
            500,000Acquisition
                costs
            
            
            35,000Total
                purchase price
            
            $
            4,117,850Current
                assets
            
            $
            945,729Tangible
                long-term assets
            
            
            21,173Other
                assets
            
            
            5,562Current
                liabilities
            
            
            (1,003,577
            )Intangible
                assets:Customer
                base
            
            
            561,752Acquired
                technology
            
            
            587,989Goodwill
            
            
            2,999,222Total
                net assets
            
            $
            4,117,850






61




***2005
      Acquisitions***





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





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





***Peoplebonus.com
      LLC***





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





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





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






62




***Bravanta,
      Inc.***





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





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





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




***HRSoft,
      LLC***





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





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





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




***ProAct
      Technologies Corporation***





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




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





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








63




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





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





2007
            
            2006Line
                of credit (note 8)
            
            $
            -
            
            $
            2,537,246Term
                loan (note 9)
            
            
            -
            
            
            33,285Letters
                of credit for facility leases (note 10)
            
            
            396,367
            
            
            434,817Legal
                bond
            
            
            -
            
            
            90,000Credit
                card reserves
            
            
            128,110
            
            
            -$
            524,497
            
            $
            3,095,348




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





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





2007
            
            2006Balance
                at beginning of the year
            
            $
            625,361
            
            $
            495,402Charged
                to bad debt expense
            
            
            85,502
            
            
            159,704Write-offs
                and effect of exchange rate changes
            
            
            224
            
            
            (29,745
            )Balance
                at end of the year
            
            $
            711,087
            
            $
            625,361





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




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





Property
      and equipment consist of the following at May 31:





2007
            
            2006Furniture,
                equipmentand
                leasehold improvements
            
            $
            1,937,072
            
            $
            1,899,690Office
                equipment
            
            
            498,720
            
            
            473,274Computers
                and software
            
            
            8,270,919
            
            
            6,196,56810,706,711
            
            
            8,569,532Less
                accumulated depreciation
            
            
            (7,991,217
            )
            
            (6,779,793
            )Property
                and equipment, net
            
            $
            2,715,494
            
            $
            1,789,739




Property
      and equipment includes equipment under capital lease totaling $1,330,618 at
      May
      31, 2007. Accumulated amortization relating to equipment under capital leases
      totaled $487,904 at May 31, 2007 and $71,411 at May 31, 2006. Depreciation
      expense for property and equipment was $1,038,144, $767,947 and $1,007,737
      for
      the years ended May 31, 2007, 2006 and 2005, respectively.






64





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





Acquired
      intangible assets consist of the following at May 31:





2007
            
            2006Accumulated
            
            
            
            AccumulatedCost
            
            Amortization
            
            Cost
            
            AmortizationCustomer
                base
            
            $
            8,132,722
            
            $
            7,348,604
            
            $
            8,132,722
            
            $
            5,815,423Acquired
                technologies
            
            
            22,191,121
            
            
            20,740,286
            
            
            22,191,121
            
            
            17,001,665Intellectual
                property
            
            
            1,322,760
            
            
            955,123
            
            
            1,322,760
            
            
            762,09231,646,603
            
            $
            29,044,013
            
            
            31,646,603
            
            $
            23,579,180Less
                accumulated amortization
            
            
            (29,044,013
            )
            
            
            
            
            (23,579,180
            )Net
                acquired intangible assets
            
            $
            2,602,590
            
            
            
            
            $
            8,067,423





Amortization
      expense for intangible assets was $5,464,833, $5,916,934 and $7,526,978 for
      the
      years ended May 31, 2007, 2006 and 2005, respectively. The estimated future
      amortization expense related to intangible assets in existence as of May 31,
      2007 is as follows:




Fiscal
                2008:
            2,152,613Fiscal
                2009:
            428,477Fiscal
                2010:
            21,5002,602,590




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




The
      following represents the detail of the changes in the goodwill account for
      the
      years ended May 31, 2007 and 2006:




EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalGoodwill
                at May 31, 2005
            
            
            29,825,840
            
            
            12,457,602
            
            
            42,283,442Acquisition
                during the year
            
            
            2,441,372
            
            
            -
            
            
            2,441,372Contingent
                considerationPurchase
                price allocation adjustments madewithin
                one year of acquisition date
            
            
            (2,955
            )
            
            -
            
            
            (2,955
            )Goodwill
                at May 31, 2006
            
            $
            32,264,257
            
            $
            12,457,602
            
            $
            44,721,859Contingent
                consideration
            
            
            557,850
            
            
            
            
            
            557,850Purchase
                price allocation adjustments madewithin
                one year of acquisition date
            
            
            (3,298
            )
            
            
            
            
            (3,298
            )Goodwill
                at May 31, 2007
            
            $
            32,818,809
            
            $
            12,457,602
            
            $
            45,276,411






65




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





The
      company previously had a line of credit from a Canadian bank. The line of credit
      had an interest rate of bank’s prime rate plus 1%. The Company was permitted to
      draw up to CDN (Canadian dollars) $3,000,000 against this facility based on
      compensating balances on deposit with the bank (note 3). In October 2006, the
      line of credit was paid off in its entirety and cancelled.





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





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





2007
            
            2006Senior
                Line of Credit
            
            $
            5,816,667
            
            $
            -Less:
                Unaccreted warrant discount
            
            
            (1,318,049
            )
            
            -4,498,618
            
            
            -Notes
                payable - other
            
            
            59,427
            
            $
            558,776Leasehold
                inducements
            
            
            97,426
            
            
            151,890Settlement
                agreement payable
            
            
            -
            
            
            30,000Term
                loan
            
            
            -
            
            
            33,285Capital
                lease obligations
            
            
            1,283,394
            
            
            410,6115,938,865
            
            
            1,184,562Less:
                current portion of:Notes
                Payable
            
            
            4,557,395
            
            
            558,776Other
                long-term obligations
            
            
            639,445
            
            
            337,517$
            742,025
            
            $
            288,269




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 contains 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 are being amortized over the term of the loan to interest expense.





In
      connection with loan, 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 is being amortized over the term of the loan to interest expense.
      The
      shares issuable upon exercise of the warrants were registered for resale within
      120 days of the closing date of the loan.




66





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 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 set up as financing costs. $200,000 of the aggregate fee was paid
      at
      closing and $550,000 is due in December 2007. The designated sublimit will
      be
      amortized ratably on a 60 month amortization. The Senior Line of Credit bears
      interest at prime plus 3% per annum, has a termination date of February 1,
      2008
      and requires annual renewal with the lender. As of May 31, 2007, the interest
      rate was 11.25%. Also at that date, $5,816,667 was drawn on the facility and
      the
      Company had borrowing capacity of $14,051 still available based on eligible
      accounts receivable at that date.




As
      discussed in note 12, the Company consummated a $20 million equity financing
      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
      fess were paid off in their entirety.





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
      settlement agreement payable represented a settlement assumed by the Company
      as
      part of a past acquisition agreement. The final payment on this obligation
      was
      made in August 2006.





The
      term
      loan represented a five year term loan with a Canadian bank that was scheduled
      to mature in May 2007 with monthly principal payments of CDN $3,333 and bearing
      annual interest at the bank’s prime rate plus 2%. The term loan was paid off in
      October 2006.





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 $1,283,394 are included in the following schedule. All capital
      leases are being paid on a monthly basis.





As
      of May
      31, 2007, the maturities for long-term obligations are as follows:




Fiscal
                2008:
            $
            5,194,621Fiscal
                2009:
            
            521,230Fiscal
                2010:
            
            215,754Fiscal
                2011:
            
            7,260Fiscal
                2012:
            
            -$
            5,938,865







67




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





***Lease
      Commitments***





A
      summary
      of the future minimum lease payments under the Company’s non-cancelable leases
      as of May 31, 2007 is as follows:




Capital
                  Leases
              
              
              Operating
                  LeasesFacilities
              
              
              Equipment
              
              
              TotalYear
                  ended May 31:2008
              
              $
              643,835
              
              $
              942,456
              
              $
              178,065
              
              $
              1,764,3562009
              
              
              519,687
              
              
              445,678
              
              
              137,801
              
              
              1,103,1662010
              
              
              215,754
              
              
              -
              
              
              -
              
              
              215,7542011
              
              
              7,260
              
              
              -
              
              
              -
              
              
              7,260Total
                  minimum lease payments
              
              
              1,386,536
              
              
              1,388,134
              
              
              315,866
              
              
              3,090,536Less
                  amount representing interest
              
              
              103,142Total
                  principal payments
              
              $
              1,283,394Less
                  current maturities
              
              
              582,006$
              701,388







Rent
      expense totaled $1,551,571, $1,433,091 and $1,666,386 for the years ended May
      31, 2007, 2006 and 2005, respectively.





***Letters
      of Credit***





At
      May
      31, 2007, the Company had provided two letters of credit totaling $396,367
      as
      security for office leases in Florida and Ontario, which were collateralized
      by
      short-term investments that are maintained at the granting financial institution
      (note 3).





***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, brought on behalf of a purported class of purchasers of the Company’s
      common shares during the period from January 14, 2005 to and including April
      14,
      2005 (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.


In
      December 2005, the plaintiffs filed an amended complaint which added additional
      plaintiffs and sought to elaborate on the allegations contained in the
      complaint. The defendant’s counsel filed a motion to dismiss the complaint,
      which was denied. Defendants have answered the amended complaint, denying its
      material allegations. The Court has certified the case as a class action and
      has
      approved notice to the class. Discovery is continuing.


The
      Company and the individual defendants have filed a motion for judgment on the
      pleadings, based upon a recent ruling of the United States Supreme Court.
      Plaintiffs are in the process of responding to that motion. Plaintiffs have
      also
      stated their desire to file a second amended complaint in lieu of responding
      to
      the pending motion, and have requested that defendants allow them to do so.
      Defendants have objected to this request. Plaintiffs may seek leave of Court
      to
      allow them to re-plead.


Should
      it
      become necessary, and based on discovery to date, the Company expects to file
      a
      motion for summary judgment at the close of discovery. In the event the case
      is
      not disposed of on motion, trial is expected to occur no earlier than Spring
      2008.




68




Plaintiffs
      have yet to submit an expert report quantifying their damages. The Company
      has
      directors and officers liability insurance, which covers the liability of the
      individual defendants. The Company believes that the damages which plaintiffs
      will claim will exceed the face amount of the insurance coverage available.





On
      September 27, 2006, an investor in one of the Company’s private equity
      placements filed a complaint against the Company and its now 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 the investor’s purchase of common shares
      and warrants in a private placement.




On
      April
      11, 2007, two additional investors to the same private equity placement 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 their purchase of common shares and warrants in a private
      placement.




The
      defendants have answered the initial complaint and the parties are engaged
      in
      discovery. A discovery cutoff has been established by the court of September
      17,
      2007. Trial is expected to occur in late 2007.




The
      damages claimed by plaintiffs approximate, in the aggregate, $2.2 million.
      The
      company has directors and officers liability insurance in a face amount in
      excess of the amount of the claimed damages. However, that insurance coverage
      is
      also subject to the claims for damages in connection with the litigation
      described in the preceding paragraphs of this item; those claims for damages
      are
      expected to exceed the face amount of the insurance coverage
      available.




In
        connection with both of the above matters, which are claimed under the same
        insurance policy year, the Company has accrued and/or paid the associated
        legal
        expenses and satisfied the related deductible limits under the policy. In
        addition, the Company has provided an additional reserve in the amount of
        approximately $600,000 which it believes to be the minimum estimated liability
        exposure after determining the appropriate allocations with its insurance
        carrier.




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





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





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





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





Years
                ended May 31,2007
            
            2006
            
            2005Canadian
                domestic loss
            
            $
            3,082,000
            
            $
            2,930,000
            
            $
            568,000United
                States loss
            
            
            10,552,000
            
            
            10,038,000
            
            
            15,403,000Loss
                before income taxes
            
            $
            13,634,000
            
            $
            12,968,000
            
            $
            15,971,000




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






69






Years
                ended May 31,2007
            
            2006
            
            2005Canadian
                domestic:Current
                income taxes
            
            $
            -
            
            $
            -
            
            $
            -United
                States:Current
                income taxes
            
            
            124,000
            
            
            65,000
            
            
            36,000Deferred
                income taxes
            
            
            -
            
            
            -
            
            
            (848,000
            )Income
                tax expense (recovery)
            
            $
            124,000
            
            $
            65,000
            
            $
            (812,000
            )





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




Years
                ended May 31,2007
            
            2006
            
            2005Combined
                Canadian federal and provincial tax rate
            
            
            36.12
            %
            
            36.12
            %
            
            36.12
            %Income
                tax recovery based on combined Canadian andfederal
                and provincial rate
            
            $
            4,925,000
            
            $
            4,684,000
            
            $
            5,768,000Effect
                of foreign tax rate differences
            
            
            412,000
            
            
            389,000
            
            
            579,000Change
                in enacted tax rates
            
            
            (600,000
            )
            
            -
            
            
            (147,000
            )Non-deductible
                amounts
            
            
            26,000
            
            
            197,000
            
            
            173,000Change
                in valuation allowance
            
            
            (3,585,000
            )
            
            (5,771,000
            )
            
            (5,638,000
            )Effect
                of changes in carryforward amounts
            
            
            (1,624,000
            )
            
            (728,000
            )
            
            (547,000
            )Effect
                of foreign exchange rate differences
            
            
            298,000
            
            
            1,104,000
            
            
            661,000Other
            
            
            24,000
            
            
            60,000
            
            
            (37,000
            )Income
                tax (expense) recovery
            
            $
            (124,000
            )
            $
            (65,000
            )
            $
            812,000




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





Years
                ended May 31,2007
            
            2006
            
            2005Deferred
                income tax assets:Scientific
                Research and Experimental Development ("SR&ED")
                expenses
            
            $
            667,000
            
            $
            814,000
            
            $
            613,000Loss
                carryforwards
            
            
            28,730,000
            
            
            26,340,000
            
            
            23,313,000Asset
                basis differences
            
            
            3,812,000
            
            
            2,116,000
            
            
            2,421,000Deferred
                Revenue
            
            
            776,000
            
            
            1,325,000
            
            
            -Share
                issue costs
            
            
            169,000
            
            
            309,000
            
            
            467,000Investment
                tax credits
            
            
            580,000
            
            
            1,009,000
            
            
            849,000Share
                Based Compensation
            
            
            440,000
            
            
            -
            
            
            -Share
                Based OID
            
            
            430,000
            
            
            -
            
            
            -Other
            
            
            791,000
            
            
            897,000
            
            
            413,00036,395,000
            
            
            32,810,000
            
            
            28,076,000Less:
                valuation allowance
            
            
            (36,395,000
            )
            
            (32,810,000
            )
            
            (27,039,000
            )Net
                deferred income tax assets
            
            
            -
            
            
            -
            
            
            1,037,000Deferred
                income tax liabilities:Intangible
                assets
            
            
            -
            
            
            -
            
            
            (1,037,000
            )Net
                deferred income tax liabilities
            
            $
            -
            
            $
            -
            
            $
            -






70





The
      Company has incurred net losses since inception. At May 31, 2007, the Company
      had approximately $57,000,000 in net operating loss carryforwards for U.S.
      federal income tax purposes that expire in various amounts through 2027, and
      approximately CDN $17,400,000 (US $18,600,000) in net operating loss
      carryforwards for Canadian federal and provincial income tax purposes that
      expire in various years through 2027. 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 net deferred tax assets. The change
      in
      valuation allowance for the years ended May 31, 2007 and 2006 was an increase
      of
      $3,585,000 and $5,771,000 respectively, resulting primarily from net operating
      losses generated and acquired during the periods.




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





The
      authorized share capital consists of an unlimited number of no par value common
      shares, an unlimited number of no par value Class A Preferred Shares (the “Class
      A Preferred Shares”), and an unlimited number of no par value Series A
      Convertible Preferred Shares (the “Series A Shares”). There were 51,531,152 and
      50,960,845 common shares issued and outstanding as of May 31, 2007 and 2006,
      respectively. There was no Class A Preferred Shares or Series A Shares
      outstanding as of May 31, 2007 and 2006.





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 Special Warrants
      convertible into 16,000,000 common shares at a conversion price of $1.25 per
      share and additional warrants to purchase an aggregate of 4,000,000 common
      shares at an exercise price of $1.40 per share.





***Stock-Based
      Compensation Plan***





The
      Company has granted stock options to employees, directors and consultants under
      the 2002 Amended and Restated Stock Option Plan (the “Plan”), which was most
      recently amended in October 2004. Under the Plan, as amended, the 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 $785,541 of stock-based compensation expense resulting from
      stock options in the consolidated statement of operations for the year ended
      May
      31, 2007.






71




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, 2004
            
            
            1,841,503
            
            
            2.24
            
            
            
            
            
            1,144,273Granted
            
            
            1,755,770
            
            
            2.81
            
            
            1.49Exercised
            
            
            (331,260
            )
            
            2.87Forfeited
            
            
            (1,011,928
            )
            
            2.93Balance
                outstanding - May 31, 2005
            
            
            2,254,085
            
            
            2.29
            
            
            
            
            
            552,073Granted
            
            
            818,450
            
            
            1.57
            
            
            0.93Exercised
            
            
            (104,740
            )
            
            0.99Forfeited
            
            
            (768,892
            )
            
            2.22Balance
                outstanding - May 31, 2006
            
            
            2,198,903
            
            
            2.11
            
            
            
            
            
            871,829Granted
            
            
            2,957,970
            
            
            1.12
            
            
            0.60Exercised
            
            
            -Forfeited
            
            
            (1,044,010
            )
            
            1.92Balance
                outstanding - May 31, 2007
            
            
            4,112,863
            
            
            
            
            
            
            
            
            1,066,988
            
            $
            461,356


Information
      about options outstanding at May 31, 2007 is as follows:





Options
                Outstanding
            
            Options
                ExercisableWeightedAverageRemaining
            
            Weighted
            
            
            
            WeightedContractual
            
            Average
            
            
            
            AverageLife
            
            Exercise
            
            
            
            ExerciseExercise
                Price
            
            Shares
            
            (Years)
            
            Price
            
            Shares
            
            PriceLess
                than $.99
            
            
            1,144,800
            
            
            3.79
            
            $
            0.85
            
            
            103,001
            
            $
            0.98$1.00-$1.99
            
            
            2,343,990
            
            
            4.01
            
            
            1.32
            
            
            546,107
            
            
            1.15$2.00-$2.99
            
            
            392,200
            
            
            2.49
            
            
            2.39
            
            
            263,297
            
            
            2.38$3.00-$3.99
            
            
            81,873
            
            
            2.60
            
            
            3.24
            
            
            54,583
            
            
            3.24$4.00
                and over
            
            
            150,000
            
            
            2.79
            
            
            4.11
            
            
            100,000
            
            
            4.11Total
            
            
            4,112,863
            
            
            
            
            
            
            
            
            1,066,988







72




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 2007 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, 2007.





As
      of May
      31, 2007, approximately $2,132,000 of total unrecognized compensation costs
      related to non-vested stock options is expected to be recognized over the
      weighted average period of 1.8 years. Stock based compensation expense of
      $785,541 has been recorded for the year ended 2007.





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 $182,321 for fiscal 2007 is included in general and administrative
      expenses on the statement of operations and in additional paid-in capital on
      the
      balance sheet. During fiscal 2007, the Company granted a total of 510,000
      restricted stock units to senior management and members of the Board of
      Directors. At May 31, 2007, 593,331 restricted stock units were
      outstanding including 93,333 thate were fully vested.





On
      December 3, 2006, the Company hired a President for the Enterprise Workforce
      segment of the business, now the President and CEO of the Company. In connection
      thereto, the new president received, as part of his compensation package, a
      grant of 1,000,000 stock options at an exercise price of $0.85, the closing
      market price of the Company stock on that date, and 250,000 restricted stock
      units. The options are valued using the Black Scholes method and vest over
      a 3
      year period.





***Warrants***





Outstanding
      warrants to purchase shares of common stock as of May 31, 2007 are as
      follows:





Exercise
                Price
            
            Expiration
            
            Shares$1.60
            
            
            December
                2008
            
            
            
            162,500$3.50
            
            
            December
                2008
            
            
            
            2,825,000$0.01
            
            
            January
                2008
            
            
            
            2,750,0005,737,500









All
      warrants outstanding are exercisable at May 31, 2007.





***Earnings
      per Share***





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







May
                31, 2007Stock
                options
            
            
            4,112,863Restricted
                stock units
            
            
            593,331Escrowed
                shares
            
            
            108,304Warrants
            
            
            5,737,500Potential
                increase in number of shares from dilutive instruments
            
            
            10,551,998






73





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





Components
      of comprehensive loss were as follows:





Year
                ended May 31,2007
            
            2006
            
            2005Net
                loss for the year
            
            $
            (13,758,473
            )
            $
            (12,986,291
            )
            $
            (15,158,975
            )Other
                comprehensive loss:Foreign
                currency translation adjustments (net of tax of $0)
            
            
            4,493
            
            
            56,522
            
            
            143,999Comprehensive
                loss for the year
            
            $
            (13,753,980
            )
            $
            (12,929,769
            )
            $
            (15,014,976
            )





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





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





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





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





The
      following is a summary of the Company’s operations by business segment and by
      geographic region for the years ended May 31, 2007 and 2006:





***Business
                Segment***EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalYear
                ended May 31, 2007Software
            
            $
            10,295,086
            
            $
            -
            
            $
            10,295,086Rewards
                and discount products
            
            
            5,632,998
            
            
            -
            
            
            5,632,998Professional
                services
            
            
            4,290,960
            
            
            -
            
            
            4,290,960Career
                services
            
            
            
            
            
            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
            )






74





EnterpriseWorkforce
            
            CareerServices
            
            Networks
            
            TotalAs
                at 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






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






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


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


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




75






***Geographic***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) and
            
            
            
            
            
            
            
            
            (2,642,582
            )impact
                of income taxesNet
                loss
            
            
            
            
            
            
            
            $
            (13,758,473
            )








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






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





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




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


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




76


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





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





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





The
      following table summarizes selected quarterly data of the Company for the years
      ended May 31, 2007 and 2006:





Quarter
                EndedAugust
                31,
            
            November
                30,
            
            February
                28,
            
            May
                31,2006
            
            2006
            
            2007
            
            2007Revenues,
                net
            
            
            6,927,096
            
            
            7,993,464
            
            
            7,012,422
            
            
            7,375,788Gross
                profit
            
            
            5,134,475
            
            
            5,994,817
            
            
            5,113,151
            
            
            5,665,694Net
                loss for the period
            
            
            (2,889,769
            )
            
            (2,452,047
            )
            
            (4,380,645
            )
            
            (4,036,012
            )Weighted
                average number ofcommon
                shares outstandingduring
                the period
            
            
            50,960,845
            
            
            50,960,845
            
            
            51,258,672
            
            
            51,351,152Basic
                and diluted net lossper
                common share
            
            
            (0.06
            )
            
            (0.05
            )
            
            (0.09
            )
            
            (0.08
            )




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






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


On
        November 2, 2006, PricewaterhouseCoopers LLP (“PwC”) delivered written notice to
        Workstream Inc. (the “Company”) stating that PwC had declined to stand for
        re-election as the Company’s independent registered public accounting firm for
        the fiscal year ending May 31, 2007. The Company had utilized PwC as its
        auditors since its inception and was primarily serviced from PwC’s office in
        Ottawa, Canada, the location of the Company’s headquarters. However, with a
        significant portion of the books and records of the Company being maintained
        in
        Maitland, Florida, and with the requirement for the engagement partner at
        PwC to
        rotate in accordance with the relevant auditor independence rules, PwC found
        it
        increasingly challenging to efficiently service the Company. As a result
        of
        PwC’s difficulty and required partner rotation, the Board of Directors of the
        Company, at the recommendation of its Audit Committee, determined it necessary
        to engage a new independent public accounting firm.
 
 The
        reports of the PwC on the Company’s financial statements for the previous two
        fiscal years did not contain any adverse option or a disclaimer of opinion
        and
        were not qualified or modified as to uncertainty, audit scope or accounting
        principle. During the previous two fiscal years and this fiscal year, there
        have
        been no disagreements with PwC on any matters of accounting principles or
        practices, financial statement disclosure or auditing scope or procedure,
        which
        disagreements, if not resolved to the satisfaction of PwC would have caused
        PwC
        to make reference thereto in their reports on the financial statements for
        such
        years. During the previous two fiscal years and this fiscal year, there have
        been no “reportable events as such term is defined in Item 304(a)(1)(v) of
        Regulation S-K.
 
 The
        Board
        of Directors, on the advice of the Audit Committee, proposed the engagement
        of
        Tedder, James, Worden & Associates, P.A. (“Tedder James”) to audit the
        Company’s financial statements for the fiscal year ending May 31, 2007, which
        was ratified by the shareholders of the Company at the annual and special
        meeting of shareholders held on November 30, 2006.  Tedder James was
        appointed as the Company’s independent registered public accounting firm
        effective as of such date. Tedder James handled a substantial portion of
        the
        Company’s tax services in fiscal years 2004 and 2005. During fiscal years 2005
        and 2006 and the subsequent interim period, the Company has not consulted
        with
        Tedder James with respect to any of the matters or reportable events set
        for in
        Item 304(a)(2) of Regulation S-K.
 
 On
        June
        11, 2007, Workstream Inc. was notified that certain partners of Tedder, James,
        Worden & Associates, P.A. had joined McGladrey & Pulley, LLP, effective
        June 5, 2007, and, as a result Tedder, James, Worden & Associates, P.A.
        resigned as the independent registered auditor for the Company.
 
 The
        decision to engage McGladrey & Pullen, LLP was approved by the board of
        directors of the Company on June 22, 2007
 
 Since
        they were hired , there were (1) no disagreements between the Company and
        Tedder, James, Worden & Associates, P.A. on any matters of accounting
        principle or practices, financial statement disclosure, or auditing scope
        or
        procedures and (2) no reportable events within the meaning set forth in Item
        304(a)(1)(v) of Regulation S-K. Retained in November 2006 and June 2007,
        Tedder,
        James, Worden & Associates and McGladrey & Pullen, LLP,
        respectively have not issued any reports on the Company’s financial
        statements during the previous two fiscal years. Accordingly, there were
        no
        reports that contained any adverse opinion or disclaimer of opinion or were
        qualified or modified as to uncertainty, audit scope or accounting
        principle.




77








ITEM
      9A.
      CONTROLS AND PROCEDURES





As
      of the
      end of fiscal 2007, our management, with the participation of our Chief
      Executive Officer and Chief Financial Officer, carried out an evaluation of
      the
      effectiveness of our disclosure controls and procedures. Based on this
      evaluation, the Chief Executive Officer and Chief Financial Officer have
      concluded that our disclosure controls and procedures are effective to ensure
      that information required to be disclosed by us in reports that we file or
      submit under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission rules and forms. There were no changes during the fourth
      quarter of fiscal 2007 that materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.





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





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





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***





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





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





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





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





Under
      the
      supervision and with the participation of the Company's management, including
      the Company's
      CEO and CFO, the Company conducted an assessment of the effectiveness of its
      internal control over financial reporting based on criteria established in
      "Internal Control-Integrated Framework" issued by the Committee of Sponsoring
      Organizations of the Treadway Commission, also known as COSO. Based on this
      assessment, management concluded that the Company's internal control over
      financial reporting was effective as of May 31, 2007 based on those
      criteria.








78




/s/ Deepak
              Gupta
            
            
            /s/ Stephen
              LerchDeepak Gupta
              President and Chief Executive Officer
            
            
            Stephen Lerch
              Executive Vice President, Chief
              Operating Officer and Chief Fnancial
                Officer






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





Refer
      to
      the *Report
      of Independent Registered Public Accounting Firms* on page
      51.





ITEM
      9B.
      OTHER INFORMATION





None.






79






**PART
      III**








ITEM
      10.
      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2007 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.





ITEM
      11.
      EXECUTIVE COMPENSATION





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2007 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.




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





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2007 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.




ITEM
      13.
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2007 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.




ITEM
      14.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
      information required by this item will be incorporated by reference from our
      definitive proxy statement for our 2007 annual meeting of shareholders, which
      will be filed within 120 days after the end of the fiscal year covered by this
      report.








80





**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, 2007. (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).4.3
            Form
                of Underwriter's Warrant Agreement (incorporated by reference to
                Exhibit
                1.1 to the Registration Statement on Form F-1 (File No.
                333-87537)).4.4
            Form
                of 8% Senior Subordinated Convertible Note (incorporated by reference
                to
                Exhibit 4.5 to the annual report on Form 10-K for the year ended
                May 31,
                2002).4.5
            Form
                of Common Stock Purchase Warrant (incorporated by reference to Exhibit
                4.7
                to the annual report on Form 10-K for the year ended May 31,
                2002).4.6
            Amended
                and Restated Registration Rights Agreement dated May 14, 2002 by
                and among
                Workstream Inc., Sands Brothers Venture Capital III LLC, Sands Brothers
                Venture Capital IV LLC and Sands Brothers & Co., Ltd. (incorporated by
                reference to Exhibit 4.7 to the annual report on Form 10-K for the
                year
                ended May 31, 2002).






81




4.7
            Common
                Stock Purchase Warrant dated May 30, 2003 between Michael Weiss and
                Workstream Inc. (incorporated by reference to Exhibit 4.7 to the
                annual
                report on Form 10-K for the year ended May 31, 2003).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).






82




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
            Registration
                Rights Agreement dated as of August 3, 3007byand
                among Workstream Inc. and certain purchase (incorporated by reference
                to
                Exhibit 4.3 to the current report on Form 8-K filed July 31,
                2007).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).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).






83




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






84




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).21.1
            List
                of Subsidiaries.*23.1
            Consent
                of PricewaterhouseCoopers LLP.*23.2
            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.


85




**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/ Deepak
              GuptaDeepak
                Gupta,
              President
                and Chief
              Executive
                Officer




Dated:  August
      15, 2007










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/
                  Deepak
                  Gupta
              President
                  and Chief Executive Officer
              August
                  15, 2007Deepak
                  Gupta
              (Principal
                  Executive Officer)Director/s/
                  Stephen
                  Lerch
              Executive
                  Vice President
              August
                  15, 2007Stephen
                  Lerch
              Chief
                  Financial Officer/Chief Operating Officer(Principal
                  Financial and Accounting Officer)/s/
                  Michael
                  Mullarkey
              Chairman
                  of the Board of Directors
              August
                  15, 2007Michael
                  Mullarkey/s/
                  John Oltman
              Director
              August
                  15, 2007John
                  Oltman/s/
                  Michael A. Gerrior
              Director
              August
                  15, 2007Michael
                  A. Gerrior/s/
                  Thomas Danis
              Director
              August
                  15, 2007Thomas
                  Danis/s/
                  Mitch Tuchman
              Director
              August
                  15, 2007Mitch
                  Tuchman