10-K

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 SECURITIESEXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED: MAY 31, 2007

OR

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

FOR THE TRANSITION PERIOD FROM ________________ TO _____________

COMMISSION FILE NUMBER: 001-15503

WORKSTREAM INC.

(Exact name of Registrant as specified in its charter)

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

495 MARCH ROAD, SUITE 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 EXCHANGE ON WHICH REGISTERED
COMMON SHARES, NO PAR VALUE	BOSTON STOCK EXCHANGE

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

COMMON SHARES, NO PAR VALUE

(TITLE OF CLASS)

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 108,304escrow 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	4
1A.	Risk Factors	16
1B.	Unresolved Staff Comments	25
2.	Properties	25
3.	Legal Proceedings	25
4.	Submission of Matters to a Vote of Security Holders	26
4A.	Executive Officers of the Registrant	26
PART II
5.	Market for Registrant's Common Equity and Related Stockholder Matters	27
6.	Selected Financial Data	34
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
7A.	Quantitative and Qualitative Disclosures About Market Risk	48
8.	Consolidated Financial Statements and Supplementary Data	49
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	77
9A.	Controls and Procedures	78
9B.	Other Information	79
PART III
10.	Directors, Executive Officers and Corporate Governance	80
11.	Executive Compensation	80
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	80
13.	Certain Relationships and Related Transactions, and Director Independence	80
14.	Principal Accountant Fees and Services	80
PART IV
15.	Exhibits and Financial Statement Schedules	81

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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.

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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.

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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.

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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.

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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.

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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 the creation and management of the entire employee development process. IDP compliance reports ensure that managers and employees are creating and approving the correct IDP’s;

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·   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 Reports aggregate competency gaps and rank employees based against specific competency profiles;

·   Career Developmentallows 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 PlanReports 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 Administration is 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 Communicator helps 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

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·   Health Pages is 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 Statements gives 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 recognition certificates and awards when exceptional performance occurs or goals are achieved.

CAREER NETWORKS

Our Career Networks segment consists of career transition services, recruitment research and applicant sourcing. Career Networks accounted for approximately 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.

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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.

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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 streamlinethe 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.

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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.

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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.

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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.

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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 harmour 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;

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·   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.

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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 resultswill 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.

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We may not be able to strengthen and maintain awareness ofour 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 successfullydevelop 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.

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Our business could suffer if financing is not availablewhen 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.

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If we are characterized as a passive foreign investmentcompany, 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 unableto 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 theirproprietary 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 ouractivities 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.

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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 harmto 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.

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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 ourservices 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.

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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.

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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.

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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:

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Name	Age	Officer Since	Position
Michael Mullarkey	39		Executive Chairman of the Board
Deepak Gupta	44	2007	President and Chief Executive Officer
Stephen Lerch	52	2005	Executive Vice President, Chief Operating and Financial Officer

Michael Mullarkeyhas 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 Guptahas 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

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

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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.

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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.

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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.

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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

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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.

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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.

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FISCAL YEAR ENDED MAY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
		2007			2006			2005			2004			2003
Statement of Operations Data
Revenue, net	$	29,309		$	28,121		$	26,819		$	17,167		$	17,837
Cost of revenues		7,401			7,808			7,014			1,587			3,040
Selling and marketing		7,549			6,934			7,211			4,362			6,058
General and administrative		14,959			14,253			17,838			9,799			9,582
Research and development		4,013			5,423			2,147			453			1,086
Amortization and depreciation		6,503			6,685			8,535			5,602			6,097
Impairment write-down of goodwill		-			-			-			-			2,133
Operating 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			1,586
Current income tax (expense) recovery		(124	)		(64	)		(36	)		(55	)		42
Net 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 of
common stock outstanding		51,134			49,828			43,462			25,036			18,608

MAY 31,

(IN THOUSANDS)

		2007			2006			2005		2004			2003
Balance Sheet Data
Working capital (deficit)	$	(6,515	)	$	(1,087	)	$	6,797	$	(351	)	$	(3,412)
Total assets		58,661			66,270			75,657		48,882			30,618
Long term obligations		744			288			192		1,259			5,312
Total liabilities		15,474			13,248			12,718		11,143			11,594
Stockholders' 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.

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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.

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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.

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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.

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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		2005
Revenues:
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

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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.

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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.

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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.

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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.

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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.

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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.

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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		Total
Debt	$	4,557,395	$	-	$	-	$	-	$	-	$	4,557,395
Capital leases		591,764		471,375		213,240		7,015		-		1,283,394
Operating leases		1,120,522		583,478		-		-		-		1,704,000
Total	$	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 streamlinethe 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.

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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.

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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.

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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

To 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

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

See accompanying notes to these consolidated financial statements.

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WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
	Years ended May 31,
	2007			2006			2005
Software	$	10,295,086		$	11,008,939		$	9,096,241
Professional services		4,290,960			2,879,942			3,320,556
Rewards and discount products		5,632,998			6,268,128			5,446,152
Career services		9,089,725			7,963,653			8,955,638
Revenues, net		29,308,769			28,120,662			26,818,587
Rewards and discount products		3,225,093			4,722,467			3,955,663
Other		4,175,539			3,085,648			3,058,317
Cost of revenues (exclusive of amortization and depreciation expense noted below)		7,400,632			7,808,115			7,013,980
Gross profit		21,908,137			20,312,547			19,804,607
Operating expenses:
Selling and marketing		7,548,777			6,934,056			7,210,996
Research and development		4,013,158			5,422,309			2,147,251
General and administrative		14,959,116			14,253,037			17,837,777
Amortization and depreciation		6,502,977			6,684,880			8,534,715
Total operating expenses		33,024,028			33,294,282			35,730,739
Operating loss		(11,115,891	)		(12,981,735	)		(15,926,132	)
Interest and other income		523,531			223,722			189,851
Interest 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					-			847,920
Current income tax expense		(124,382	)		(64,774	)		(36,163	)
NET LOSS	$	(13,758,473	)	$	(12,986,291	)	$	(15,158,975	)
Weighted average number of
common shares outstanding		51,134,281			49,827,925			43,461,514
Basic 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
								Accumulated
					Additional			Other						Total
	Common Stock				Paid-In			Accumulated			Accumulated			Stockholders'
	Shares		Amount		Capital			Loss			Deficit			Equity
Balance at May 31, 2004	$	33,574,883	$	72,705,603	$	3,605,224		$	(1,072,302	)	$	(37,499,343	)	$	37,739,182
Issuance of shares and warrants,
net of issue costs		9,684,439		19,519,485		4,820,653			-			-			24,340,138
Issuance of shares for acquisitions		4,700,708		13,491,066		-			-			-			13,491,066
Issuance of shares through
exercise of stock options		331,260		950,390		-			-			-			950,390
Issuance of shares through
exercise of warrants		891,482		2,352,814		(919,501	)		-			-			1,433,313
Net loss for the year		-		-		-			-			(15,158,975	)		(15,158,975	)
Cumulative translation adjustment		-		-		-			143,999			-			143,999
Balance at May 31, 2005		49,182,772		109,019,358		7,506,376			(928,303	)		(52,658,318	)		62,939,113
Issuance of shares for acquisition		1,500,000		2,525,000		-			-			-			2,525,000
Issuance of shares through
exercise of stock options		104,740		104,170		-			-			-			104,170
Issuance of shares through
exercise of warrants		133,333		290,000		(90,000	)		-			-			200,000
Issuance of shares through
vesting of restricted stock units		40,000		52,800		-			-			-			52,800
Expensing of restricted stock unit grants		-		-		131,017			-			-			131,017
Net loss for the year		-		-		-			-			(12,986,291	)		(12,986,291	)
Cumulative translation adjustment		-		-		-			56,522			-			56,522
Balance at May 31, 2006		50,960,845	$	111,991,328	$	7,547,393		$	(871,781	)	$	(65,644,609	)	$	53,022,331
Issuance of common shares as
contingent consideration		496,971		557,850											557,850
Hilco Warrant Discount						2,392,500									2,392,500
Stock option expense						785,541									785,541
Issuance of shares through
vesting of restricted stock units		73,336				26,250									26,250
Expensing of restricted stock unit
grants						156,071									156,071
Net loss for the year												(13,758,473	)		(13,758,473	)
Cumulative translation adjustment									4,493						4,493
Balance 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			2005
Cash 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 by
operating activities:
Amortization and depreciation		6,502,977			6,684,880			8,534,715
Leasehold inducement amortization		(54,236	)		(53,835	)		(40,100	)
Non-cash interest on convertible notes and notes payable		2,012,159			-			53,746
Provision for bad debts		85,502			159,704			577,362
Recovery of deferred income taxes		-			-			(847,920	)
Non-cash compensation		967,862			226,326			210,296
Change in long-term portion of deferred revenue		(34,434	)		191,571			77,156
Net 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	)		663,145
Accounts payable and accrued liabilities		202,320			661,216			(2,828,592	)
Deferred revenue		(653,535	)		(899,111	)		250,064
Net 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			98,659
Net 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		-			-			24,993,989
Proceeds from exercise of options and warrants		-			304,170			2,383,703
Costs related to the registration and issuance of common stock		-			-			(904,051	)
Line of credit, net activity		(1,487,351	)		(90,863	)		186,289
Net cash provided by (used in) financing activities		2,148,712			(1,498,979	)		25,609,638
Effect of exchange rate changes on cash and cash equivalents		309,760			(13,413	)		74,108
Net (decrease) increase in cash and cash equivalents		(1,824,439	)		(7,234,571	)		7,473,145
Cash and cash equivalents, beginning of year		4,577,040			11,811,611			4,338,466
Cash 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		2005
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid	$	1,010,565	$	162,609	$	141,690
Income taxes paid	$	77,128	$	70,593	$	50,736
Supplemantal 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		-	$	2,532,111
Discount on the Hilco warrants	$	2,392,500		-		-

See accompanying notes to these consolidated financial statements.

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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.

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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 line
Customer base…………………	3 years straight line
Intellectual 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.

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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.

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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, Share-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			2005
Weighted-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			2005
Net 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 shares
outstanding during the year		49,827,925			43,461,514
Basic 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.

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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.

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

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

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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.

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Note 3.Restricted Cash

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

	2007		2006
Line of credit (note 8)	$	-	$	2,537,246
Term loan (note 9)		-		33,285
Letters of credit for facility leases (note 10)		396,367		434,817
Legal bond		-		90,000
Credit 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		2006
Balance at beginning of the year	$	625,361	$	495,402
Charged to bad debt expense		85,502		159,704
Write-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			2006
Furniture, equipment
and leasehold improvements	$	1,937,072		$	1,899,690
Office equipment		498,720			473,274
Computers and software		8,270,919			6,196,568
		10,706,711			8,569,532
Less 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.

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Note 6.Acquired Intangible Assets

Acquired intangible assets consist of the following at May 31:

	2007					2006
				Accumulated					Accumulated
	Cost			Amortization		Cost			Amortization
Customer base	$	8,132,722		$	7,348,604	$	8,132,722		$	5,815,423
Acquired technologies		22,191,121			20,740,286		22,191,121			17,001,665
Intellectual property		1,322,760			955,123		1,322,760			762,092
		31,646,603		$	29,044,013		31,646,603		$	23,579,180
Less 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:	2,152,613
Fiscal 2009:	428,477
Fiscal 2010:	21,500
	2,602,590

Note 7.Goodwill

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

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

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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			2006
Senior Line of Credit	$	5,816,667		$	-
Less: Unaccreted warrant discount		(1,318,049	)		-
		4,498,618			-
Notes payable - other		59,427		$	558,776
Leasehold inducements		97,426			151,890
Settlement agreement payable		-			30,000
Term loan		-			33,285
Capital lease obligations		1,283,394			410,611
		5,938,865			1,184,562
Less: current portion of:
Notes Payable		4,557,395			558,776
Other 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.

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

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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 Leases
				Facilities		Equipment		Total
Year ended May 31:
2008	$	643,835	$	942,456	$	178,065	$	1,764,356
2009		519,687		445,678		137,801		1,103,166
2010		215,754		-		-		215,754
2011		7,260		-		-		7,260
Total minimum lease payments		1,386,536		1,388,134		315,866		3,090,536
Less amount representing interest		103,142
Total principal payments	$	1,283,394
Less 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.

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

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

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	Years ended May 31,
	2007		2006		2005
Canadian domestic:
Current income taxes	$	-	$	-	$	-
United States:
Current income taxes		124,000		65,000		36,000
Deferred 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			2005
Combined Canadian federal and provincial tax rate		36.12	%		36.12	%		36.12	%
Income tax recovery based on combined Canadian and
federal and provincial rate	$	4,925,000		$	4,684,000		$	5,768,000
Effect of foreign tax rate differences		412,000			389,000			579,000
Change in enacted tax rates		(600,000	)		-			(147,000	)
Non-deductible amounts		26,000			197,000			173,000
Change 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			661,000
Other		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			2005
Deferred income tax assets:
Scientific Research and Experimental Development ("SR&ED") expenses	$	667,000		$	814,000		$	613,000
Loss carryforwards		28,730,000			26,340,000			23,313,000
Asset basis differences		3,812,000			2,116,000			2,421,000
Deferred Revenue		776,000			1,325,000			-
Share issue costs		169,000			309,000			467,000
Investment tax credits		580,000			1,009,000			849,000
Share Based Compensation		440,000			-			-
Share Based OID		430,000			-			-
Other		791,000			897,000			413,000
		36,395,000			32,810,000			28,076,000
Less: valuation allowance		(36,395,000	)		(32,810,000	)		(27,039,000	)
Net deferred income tax assets		-			-			1,037,000
Deferred income tax liabilities:
Intangible assets		-			-			(1,037,000	)
Net deferred income tax liabilities	$	-		$	-		$	-

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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.

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Stock option activity and related information is summarized as follows:

				Weighted		Weighted				Aggregate
	Number			Average		Average		Options		Intrinsic
	of Options			Exercise Price		Fair Value		Exercisable		Value
Balance outstanding - May 31, 2004		1,841,503			2.24				1,144,273
Granted		1,755,770			2.81		1.49
Exercised		(331,260	)		2.87
Forfeited		(1,011,928	)		2.93
Balance outstanding - May 31, 2005		2,254,085			2.29				552,073
Granted		818,450			1.57		0.93
Exercised		(104,740	)		0.99
Forfeited		(768,892	)		2.22
Balance outstanding - May 31, 2006		2,198,903			2.11				871,829
Granted		2,957,970			1.12		0.60
Exercised		-
Forfeited		(1,044,010	)		1.92
Balance 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 Exercisable
			Weighted
			Average
			Remaining		Weighted				Weighted
			Contractual		Average				Average
			Life		Exercise				Exercise
Exercise Price	Shares		(Years)		Price		Shares		Price
Less 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		4.11
Total		4,112,863						1,066,988

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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		2,750,000
				5,737,500

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

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Note 13. Comprehensive Loss

Components of comprehensive loss were as follows:

	Year ended May 31,
	2007			2006			2005
Net 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			143,999
Comprehensive 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
	Enterprise
	Workforce			Career
	Services			Networks			Total
Year ended May 31, 2007
Software	$	10,295,086		$	-		$	10,295,086
Rewards and discount products		5,632,998			-			5,632,998
Professional services		4,290,960			-			4,290,960
Career services					9,089,725			9,089,725
Revenue		20,219,044			9,089,725			29,308,769
Cost of revenues, rewards and discount products		4,175,539						4,175,539
Cost of revenues, other		2,670,105			554,988			3,225,093
Gross profit		13,373,400			8,534,737			21,908,137
Expenses		17,775,946			8,745,106			26,521,052
Amortization and depreciation		6,413,871			89,105			6,502,976
Business segment loss	$	(10,816,417	)	$	(299,474	)		(11,115,891	)
Other income/(expenses) and
impact of income taxes								(2,642,582	)
Net loss							$	(13,758,473	)

74

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

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

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

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

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

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

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

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

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

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

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

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

Revenues, net	6,342,125		7,199,809		6,735,045		7,843,683
Gross profit	4,284,843		4,956,286		4,965,249		6,106,169
Net loss for the period	(3,838,144	)	(3,302,937	)	(3,419,325	)	(2,425,885	)
Weighted average number of
common shares outstanding
during the period	49,193,310		49,194,178		49,994,178		50,938,164
Basic and diluted net loss
per 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 asthey 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 Lerch
Deepak 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.

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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.

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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, 3007 by and 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).

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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).

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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.

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

EX-23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 333-139403, 333-109187, 333-112145 and 333-122420), S-8 (No. 333-51468), and F-3 (No. 333-101502), of Workstream Inc. of our report dated July 28, 2006 relating to the financial statements which appear in this Form 10-K.

PricewaterhouseCoopers LLP

Ottawa, Canada

August 15, 2007

EX-23.2