UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended May 31, 2011

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

Commission File Number: 001-15503

WORKSTREAM INC.

(Exact name of registrant as specified in its charter)

Canada	N/A
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

2200 Lucien Way, Suite 201	32751
Maitland, Florida	(Zip Code)
(Address of principal executive offices)
Registrant’s telephone number, including area code:	1-866-953-8800

Securities registered pursuant to Section 12(b) of the Act:	None
Securities registered pursuant to Section 12(g) of the Act:	None
Common Stock, no par value
(Title of Class)	(Name of exchange on which registered)

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [X]

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ] 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 [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

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 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. [ ]

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

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

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

Yes ¨ No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of November 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was $16,332,225 based on the closing price of such common equity of $0.02 per share on that date. All executive officers and directors of the registrant and all persons filing a Schedule 13D or a Schedule 13G with the Securities and Exchange Commission in respect to the registrant’s common stock have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.

The total number of common shares, no par value, outstanding on August 19, 2011 was 2,656,583 excluding 270 common shares held in escrow.

DOCUMENTS INCORPORATED BY REFERENCE: None

WORKSTREAM INC.

TABLE OF CONTENTS

For the Fiscal Year Ended May 31, 2011

			Page No.
Part I.
	Item 1.	Business	1

	Item 1A.	Risk Factors	4

	Item 2.	Properties	8

	Item 3.	Legal Proceedings	8

Part II.
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	9

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

	Item 8.	Financial Statements and Supplementary Data
		Report of Registered Public Accounting Firms	26
		Consolidated Balance Sheets as of May 31, 2011 and 2010	27
		Consolidated Statements of Operations & Comprehensive Loss for the fiscal years ended May 31, 2011 and 2010	28
		Consolidated Statements of Stockholders’ Deficit for the fiscal years ended May 31, 2011 and 2010	29
		Consolidated Statements of Cash Flows for the fiscal years ended May 31, 2011 and 2010	30
		Notes to the Consolidated Financial Statements	31

	Item 9A(T).	Controls and Procedures	60

Part III.
	Item 10.	Directors, Executive Officers and Corporate Governance	61

	Item 11.	Executive Compensation	63

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	68

	Item 13.	Certain Relationships and Related Transactions, and Director Independence	69

	Item 14.	Principal Accountant Fees and Services	69

Part IV.
	Item 15.	Exhibits	71

		Signatures	76

iii

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 IN PART I, ITEM 1A, "RISK FACTORS," OF 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.

PART I

ITEM 1.

BUSINESS

Workstream Inc. is a provider of Human Resource Software and Services. Our business provides corporate human resource departments with solutions used for Talent Acquisition and Talent Management.

Our Talent Acquisition solutions includes the Workstream Recruiting Solution; Incentive Advisors, which assists businesses in obtaining hiring tax credits, training grants and other federal, state and local incentives; 6FigureJobs.com is a job board which matches executive level candidates with executive recruiters.

Workstream’s Talent Management solution (TalentCenter) allows businesses to use web based software to better manage human resources. Available solutions include systems to manage performance, development, employee communications and compensation. Increasingly, employers seek automated tools to tie their performance management and professional development strategies to compensation management so that they truly can pay for performance.

Workstream was 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 since November 2001, have operated as Workstream Inc. (the “Company”). We conduct our business and reflect our management reports on a fiscal year basis from June 1 through May 31 each year.

In August of 2010, John Long, former CEO of First Advantage Corporation, was appointed CEO of Workstream, replacing Michael Mullarkey, the founder and former Chairman and CEO. Later that same month, Mr. Mullarkey resigned his position and is no longer affiliated with the company.

Workstream conducts its business primarily in the United States of America and Canada and our target market is employers with more than 1,500 employees.

STRATEGY

Our objective is to provide our client’s human resource department with solutions used for acquiring and managing human capital. We believe that clients want to purchase both service and software from a single vendor and that bundling our solutions will help companies maximize workforce productivity and help companies achieve better results. Our solutions are easily configurable software applications that streamline talent acquisition and talent management workflows. 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.

We believe we have developed a strategy that will achieve revenue growth. 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, marketing and product development efforts in targeted vertical industries.

Building a wider indirect sales channel for distribution of our products and services. We have in place and will continue to pursue additional reseller or referral agreements for all of our services.

Maintaining technological leadership. We plan to remain at the forefront of web-based human capital by continuing development of our Talent Center and Recruitment software offerings and continuing the integration of our various service offerings into the software.

Pursuing strategic acquisitions. From time-to-time, we will evaluate acquisition for 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.

PRINCIPAL SERVICES AND OPERATIONS

TalentCenter

The Workstream TalentCenter provides a unified suite of Performance, Development and Compensation Management software. 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. TalentCenter is a hosted solution and Workstream manages virtually all of the integration and service complexities at our data center facility. Through a standard web browser, clients 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 with one module and grow over time or deploy the entire solution at once.

Performance

Workstream Performance enables organizations to translate business strategy into a fully aligned set of operational goals, provide real-time visibility and reporting on goal status, assess employee performance and gather employee feedback across the organization. The solution is also integrated with Workstream Compensation to support pay-for-performance programs.

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. 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.

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 10,000 technical, 60 behavioral competencies, and over 600 behavioral-based interview questions for over 1,500 job titles.

Recruitment

Workstream Recruitment helps companies automate and manage the entire recruitment process including job requisition, job profile creation, job posting, interview scheduling, offer letter generation. The SaaS application includes 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 including OFCCP compliance; and

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

Incentives

Incentives Advisors’ services help Workstream clients secure tax credits, training grants, and other government incentives including:

Hiring Credits: These credits are created by governments to encourage the hiring of individuals from targeted groups such as veterans, public assistance recipients and disadvantaged youth. Workstream’s ability to identify credits during the hiring process allows our clients to maximize the value of these programs and claim thousands of dollars per qualified hire.

Job Creation Credits: Many states have created incentives for companies to create new jobs. Workstream’s services allow clients to claim what are typically strong economic incentives for qualified businesses.

Training Grants: Corporate Human Resource departments have an interest in improving the skill sets of new and incumbent workers. Incentive Advisors helps identify and claim available state and local grants that can be used to offset the cost of training.

Enterprise Zone Programs: Both Federal and state tax credits exist for businesses who locate in areas that governments have targeted for revitalization.

Job Board

6FigureJobs.com, Inc., is an online applicant-sourcing portal where job seeking candidates and companies that are actively hiring and filling positions can interact. The site provides content appropriate for senior executives, directors and other managers, as well as containing job postings that meet their qualifications. 6FigureJobs 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 through advertising and through the sale of premium services to job candidates.

Other Services

Workstream offers several other services incidental to the core services and solutions. Our Career Transition service assists individuals in indentifying job opportunities.

We have exited the Rewards business, a low margin and working capital intensive business which we considered to be non-core. See the discussion of Discontinued Operations in Note 16.

OPERATIONS

In addition to our geographically dispersed sales force we have operations in Canada and the United States. Our principal operating centers for Hosting, R&D, Client Services and Fulfillment are in Phoenix Azizona, Maitland Florida, Mississauga Ontario (where our primary date center is located) and Stamford Connecticut.

REVENUE SOURCES

Workstream derives revenue from various sources including subscription and hosting fees; fees for the processing of tax credits and grants; licensing of software; software maintenance fees; professional services related to software implementation, customization and training; and sale of advertising and other products and services. Contracts that include a software subscription component have a period of at least one year and typically, average three years. Software clients are billed in advance according to the terms of the contract. Any billed but unearned revenue is disclosed in the balance sheet as deferred revenue and is recognized as revenue 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.

RESEARCH AND DEVELOPMENT

Research and development is focused on improving the ease of use and functionality of our various software and service offerings. Workstream also invests in research and development to make our internal processes more efficient and to shorten the amount of time required, and the expense involved, with implementation of our software solutions.

INTELLECTUAL PROPERTY

We consider certain of our processes, systems, methodologies, databases, tangible and intangible materials, software and trademarks to be proprietary. We rely upon a combination of patents, copyright, trade secret and trademarks as well as non-disclosure and other contractual arrangements to protect our intellectual property.

COMPETITION

The market for Human Resource software and 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.

EMPLOYEES

As of May 31, 2011, we had 74 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. . Our SEC reports can be accessed 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

We believe the following risk factors, as well as the other information contained in this Annual Report on Form 10-K are material to an understanding of our company. Any of the following risks as well as other risks and uncertainties discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the value of our stock to decline. Additional risks and uncertainties that we are unaware of, or that are currently deemed immaterial, also may become important factors.

We have limited operating funds.

The Company has incurred substantial losses in recent periods. Losses for the twelve months ended May 31, 2011 were $162,719 and losses for the years ended May 31, 2010 and 2009 were $26,583,731 and $4,856,356, respectively. Management believes that current operations will be sufficient to meet its anticipated working capital and capital expenditure requirements. However, 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.

Our stock is no longer traded on the NASDAQ Stock Market but instead is traded on the OTC Bulletin Board, which may make it more difficult for investors to sell shares, may potentially lead to future market declines and may increase our costs related to registration statements.

An investor may find it difficult to sell our common shares or to obtain accurate quotations as to the market value of our securities, potentially leading to declines in our share price. This may cause us to have difficulty obtaining future financing.

The company’s stock may not continue to be publicly traded, or the company may elect to “go dark” and stop filing reports with the Securities and Exchange Commission. Either of these may make it difficult for investors to sell shares.

Additionally, we are now not eligible to use short form registration statements with the respect to the sale of our securities. This could substantially increase our costs of registering securities in the future, if we are so required in connection with financing transactions.

Our common stock may become subject to certain “Penny Stock” rules which may make it a less attractive investment.

Since the trading price of our common stock is less than $5.00 per share, trading in our common stock would be subject to the requirements of Rule 15g-9 of the Exchange Act if our net tangible assets fall below $2 million or our average revenue falls below $6,000,000 for three years. Under Rule 15g-9, brokers who recommend penny stocks to persons who are not established customers and accredited investors, must satisfy special sales practice requirements. For these reasons, an investment in our equity securities may not be attractive to our potential investors.

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 as quoted on the NASDAQ Stock Market prior to May 22, 2009 and since such date on the OTCBB has fluctuated between $8.00 and $2,140.00 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;

the issuance of new common shares that dilute the ownership of our existing shareholders; 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.

We have and may continue to issue securities with rights superior to those of our common stock, which could materially limit the ownership rights of existing stockholders.

We have and may continue to offer debt or equity securities in private and/or public offerings in order to raise working capital and to refinance our debt. Our Articles of Incorporation authorizes the board of directors 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. The board of directors is also authorized to issue and unlimited number of common shares and has the right to determine the terms and rights of any debt securities without obtaining further approval of the stockholders. It is likely that any debt securities or preferred stock that we sell would have terms and rights superior to those of our common stock and may be convertible into common stock. Any sale of securities could adversely affect the interests or voting rights, impede a change of control and result in substantial dilution to the existing holders of our common stock. Additionally, a sale of securities could adversely affect the market price of our common stock.

We may not become profitable.

Our ability to reduce our losses or earn a profit will be adversely affected if revenue falls or grows more slowly 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.

Our large shareholders may influence certain decisions regarding the Company.

As of August 5, 2011, CCM Master Qualified Fund beneficially owns approximately 36.24% of our common shares and Magnetar Capital Master Fund beneficially owns approximately 17.98% of our common shares. To the extent that CCM Master Qualified Fund in particular, and other of our large shareholders in general, continue to own such a substantial portion of our outstanding common shares, even though less than a majority, they will have significant influence over all matters submitted to our shareholders and exercise significant control over our business policies and affairs. Any of our large shareholders may have interests that conflict with or are different from our own and those of our other shareholders. This concentration of voting power could have the effect of delaying, deterring or preventing a change in control or other business combination that some shareholders might consider beneficial.

Our business could be adversely affected if we are unable to protect our intellectual property.

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

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

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

Changes in law or regulation may have an adverse impact.

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. Changes in the law or regulation relating to the availability of tax incentives and grants may hurt our ability to sell services related to these incentives. . 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;

characteristics and quality of services;

sales and other taxes; and

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

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

Breaches of our network security could be costly.

If unauthorized persons penetrate our network security, they could misappropriate proprietary information or cause interruptions in our services. We may be required to spend capital and resources to protect against or to alleviate these problems. In addition, because we host data for our clients, we may be liable to any of those clients that experience losses due to our security failures. While we have implemented measures to strengthen and improve our intrusion protection system, 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.

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.

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

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

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

We cannot assure you that the Internet infrastructure will continue to effectively support the demands placed on it as the internet continues to experience increased numbers of users, greater frequency of use and increased bandwidth requirements of users. In the past, the internet has experienced a variety of outages and other delays. The internet is also subject to actions of terrorists or hackers who may attempt to disrupt specific web sites or Internet traffic generally. Any future outages or delays could affect the willingness of employers to use our on-line recruitment offerings and of job seekers to post their resumes on the internet. Although we have never experienced an internet interruption that has had a material adverse effect on our business, if any such event were to occur, our business, operating results and financial condition could be materially adversely affected.

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

We must expand and upgrade our systems and network hardware in order to accommodate growth in our business. While we have recently updated and refreshed our data center capabilities and upgraded the necessary equipment there is no assurance that such changes and upgrades will accommodate growth in our business, our business, financial condition and operating results could be adversely affected.

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

Our success depends on the efforts, abilities and expertise of our new Board members, our new senior management team and other key employees. 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 2.

PROPERTIES

Our corporate headquarters are located in approximately 5,500 square feet of office space in Maitland, Florida. In addition to our corporate staff, this location houses our finance department, our internal sales team and lead generation group, our research and development and operations team. Our lease for this premise expires in January 2017.

Our Incentive Advisors business is located in 2,095 square feet of space in Tempe, Arizona. The lease expires in August 2011. Workstream’s wholly-owned subsidiary 6FigureJobs.com leases approximately 2,560 square feet of office space in Stamford, Connecticut under a lease expiring on October 31, 2012. Workstream’s wholly-owned subsidiary Paula Allen Holdings, Inc. also leases space in Dallas, Texas and Minneapolis, Minnesota. In Dallas, we lease approximately 4,192 square feet of office space under a lease expiring on January 31, 2014 and in Minneapolis, we lease approximately 1,523 square feet of office space under a lease expiring on December 31, 2012.

ITEM 3.

LEGAL PROCEEDINGS

We are involved in various lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. If the potential loss from an item is considered probable and the amount can be estimated, we accrue a liability for the estimated loss, as provided in ASC 450, Contingencies. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. Periodically, we review the status of each significant matter and assess our potential financial exposure. These matters are inherently unpredictable and are subject to significant uncertainties, some of which are beyond our control. Should any of the estimates and assumptions utilized to estimate potential losses change or prove to have been incorrect, it could have a material impact on our results of operations, financial position or cash flows.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Until May 22, 2009, our common shares, no par value, were traded on the NASDAQ Stock Market (“NASDAQ”) under the symbol “WSTM.” Commencing May 22, 2009 and June 3, 2009, we began trading under the symbol “WSTM-OB” on the Pink Sheets electronic over-the-counter securities market and quoted on the Over-the-Counter Bulletin Board (OTCBB) in what is commonly referred to as the OTC Bulletin Board. On May 6, 2011, the Company completed a 1-for-400 reverse split of its common shares pursuant to which each shareholder received one common share for every four hundred shares held. OTC market quotations reflect interdealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.

The following table sets forth the high and low closing sales prices of our common shares during each quarter as reported by the OTC Bulletin Board, as applicable, for the fiscal years ended May 31, 2011 and 2010(giving effect to the 1-for-400 reverse stock split):

Period	High Closing Sales Price	Low Closing Sales Price
2011 Fiscal Year, quarter ended:
August 31, 2010	$44.00	$8.00
November 30, 2010	$12.00	$8.00
February 28, 2011	$ 8.00	$4.00
May 31, 2011	$ 8.00	$3.00

2010 Fiscal Year, quarter ended:
August 31, 2009	$148.00	$72.00
November 30, 2009	$128.00	$84.00
February 28, 2010	$120.00	$80.00
May 31, 2010	$ 88.00	$32.00

HOLDERS

On August 5, 2011, there were approximately 263 stockholders of record for our common stock. This does not reflect persons or entities that hold our common stock in nominee or “street” name through various brokerage firms.

DIVIDENDS

We have not paid any dividends on our common shares and do not expect to pay dividends in the foreseeable future. It is the present policy of our Board of Directors to retain any future earnings to finance the growth and development of our business. Any future dividends to common shareholders will be declared at the discretion of the Board of Directors and will depend upon several things including approval by our note holders and holders of any senior securities, the financial condition, capital requirements, earnings and liquidity of our Company. See Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of our current capital position.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Please see the section titled “Equity Compensation Plan Information” under Item 12 in Part III of this Form 10-K.

FOREIGN ISSUER LAWS

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.

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 $312 million, the threshold established for 2009, 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.

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.

Material Canadian Federal Income Tax Considerations

General

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:

·	is a U.S. individual;

·	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.

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, (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, or (c) a fiscally transparent entity with respect to the recently introduced Fifth Protocol to the Canada-United States Income Tax Convention, 1980 and may be treated differently than an individual.

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 Minister of Finance (Canada) before the date of this annual report and counsel’s understanding of the current published administrative practices of Canada 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, literary, educational, 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

Gains realized by a U.S. holder on a sale, disposition or deemed disposition of “taxable Canadian property” are taxable under the Income Tax Act (Canada). Shares of a Canadian corporation qualify as “taxable Canadian property” unless they are listed on a designated stock exchange pursuant to the Income Tax Act (Canada). The Over-the-Counter Bulletin Board (OTCBB) and the Pink Sheets electronic over-the-counter securities market are not designated stock exchanges, therefore our common shares are currently “taxable Canadian property”.

However, generally gains will be exempt from Canadian tax 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.

Section 116 of the Income Tax Act (Canada) requires that a U.S. holder apply to the Canada Revenue Agency for a clearance certificate either before or within 10 days after a disposition of “taxable Canadian property” even if a treaty exemption applies; failure to comply or the making of false representations exposes the U.S. holder to prosecution. While delisted, on the disposition of our common shares to another U.S. resident, the U.S. holder will be deemed to dispose of the common shares and will have to comply with Section 116 and all related filings and withholdings, including filing a Canadian tax return.

If relisted on the Nasdaq Stock Market or listed on any other designated stock exchange then our common shares will generally not be taxable Canadian property provided that 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.

If relisted, our common shares will cease to be “taxable Canadian property” and Section 116 will not apply to a disposition by a U.S. holder.

A deemed disposition of common shares will occur on the death of a U.S. holder.

Material United States Federal Income Tax Considerations

General

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

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

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

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

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

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

·	tax-exempt organizations;

·	financial institutions or “financial services entities”;

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

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

·	non-resident aliens of the United States;

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

·	taxpayers who acquire common shares as compensation.

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

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

Taxation of Dividends Paid on Common Shares

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

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

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

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

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

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

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

Taxation of the Disposition of Common Shares

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

Passive Foreign Investment Company Considerations

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

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

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

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

We believe that we were not a PFIC for the fiscal years ending May 31, 2010 and 2009, and we believe that we will not be a PFIC for the fiscal year ending May 31, 2011. The tests for determining PFIC status, however, are applied annually, and it is difficult to make accurate predictions of future income and assets, which are relevant to this determination. Accordingly, there can be no assurance that we will not become a PFIC. U.S. Holders who hold common shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who made a QEF election. U.S. Holders are strongly urged to consult their tax advisors about the PFIC rules, including the consequences to them of making a mark-to-market or QEF election with respect to common shares in the event that we qualify as a PFIC.

Tax Consequences for Non-U.S. Holders of Common Shares

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

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

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

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

U.S. Information Reporting and Backup Withholding

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

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

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

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

FORWARD LOOKING STATEMENTS

Certain statements discussed in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and elsewhere in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concerning management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements discussed or implied by such forward-looking statements. The words “estimate,” “project,” “intend,” “believe,” “plan” and similar expressions are intended to identify 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 in Part I, Item 1A, "Risk Factors," of 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. Forward-looking statements speak only as of the date of the document in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which the forward-looking statement is based.

The following discussion and analysis should be read in conjunction with consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. All figures are in United States dollars, except as otherwise noted.

OVERVIEW

Workstream Inc. is a provider of Human Resource Software and Sevices. Our business provides corporate human resource departments with solutions used for Talent Acquistion and Talent Management.

Our Talent Acquisition solutions include the Workstream Recruiting Solution, an applicant tracking system; Incentive Advisors, which assists businesses in obtaining hiring tax credits, cash training grants and other federal, state and local incentives available to businesses; 6FigureJobs.com a job board which matches executive level candidates with executive recruiters.

Workstream’s Talent Management solution (TalentCenter) allows businesses to tie their performance management and professional development strategies to compensation management so that they truly can pay for performance.

RESULTS OF OPERATIONS

To monitor our results of operations and financial condition, we review key financial information including net revenues, gross profit, operating income and cash flow from operations.

	Fiscal Years Ended May 31
	2011			2010			$ Change			% Change
Revenues:
Software	$	4,357,599		$	6,011,926		$	(1,654,327	)		-27.5	%
Professional services		342,163			752,251			(410,088	)		-54.5	%
Tax incentives		647,456			-			647,456			0.0	%
Job board		1,352,685			1,572,465			(219,780	)		-14.0	%
Career transition services		936,387			1,587,858			(651,471	)		-41.0	%
Total revenues	$	7,636,290		$	9,924,500		$	(2,288,210	)		-23.1	%

Percentage of total revenues:
Software		57.1	%		60.6	%
Professional services		4.5	%		7.6	%
Tax incentives		8.5	%		0.0	%
Job board		17.7	%		15.8	%
Career transition services		12.3	%		16.0	%

Fiscal Year 2011 Compared to Fiscal Year 2010: Software revenue decreased primarily due to lower subscriptions as a result of our discontinuing support of old software versions reduced renewals from existing clients. Revenue from new clients in fiscal 2011 was insufficient to offset the decline. Professional services revenues decreased due to less consulting for existing customer upgrades or specialization work. Career transition services revenues decreased as hiring activity, especially the hiring of highly compensated executives found on 6FigureJobs.com, remains weak. The tax incentives business was acquired in January 2011. It assists businesses in obtaining hiring tax credits, training grants and other federal, state and local incentives.

Cost of Revenues & Gross Profit

	Fiscal Years Ended May 31
	2011			2010			$ Change			% Change
Cost of revenues:
Software	$	510,942		$	505,700		$	5,242			1.0	%
Professional services		180,607			135,749			44,858			33.0	%
Tax incentives		3,200			-			3,200			0.0	%
Job board		8,376			11,533			(3,157	)		-27.4	%
Career transition services		33,878			114,896			(81,018	)		-70.5	%
	$	737,003		$	767,878		$	(30,875	)		-4.0	%


Gross profit	$	6,899,287		$	9,156,622		$	(2,257,335	)		-24.7	%

Gross profit as a percentage of total revenues:
Software		88.3	%		91.6	%
Professional services		47.2	%		82.0	%
Tax incentives		99.5	%		0.0	%
Job board		99.4	%		99.3	%
Career transition services		96.4	%		92.8	%
Total		90.3	%		92.3	%

Fiscal Year 2011 Compared to Fiscal Year 2010: Software costs of revenues increased due to increases in service provider fees. Further, Software margins decreased as the fixed service provider costs were spread over a lower revenue base. Professional services costs increased due to expenses associated with the implementation of new clients. Career transition services cost of revenues directly decreased due to the reduction in revenue levels. The tax incentives business was acquired in January 2011.

Selling & Marketing Expense

	Fiscal Years Ended May 31
	2011			2010			$ Change		% Change

Selling and marketing	$	2,288,928		$	1,880,091		$	408,837		21.7	%

Percentage of total revenues		30.0	%		18.9	%

Fiscal Year 2011 Compared to Fiscal Year 2010: Selling and Marketing expenses increased by approximately $253,400 primarily as a result of the acquisition of Incentives Advisors during fiscal 2011 and the accruing of employee bonuses. We have an increase of other expenses of approximately $17,800 directly related to the addition of the Incentives Advisors office in Arizona. Bad debt expense was $296,901 for fiscal 2011.

General & Administrative Expense

	Fiscal Years Ended May 31
	2011			2010			$ Change			% Change

General and administrative	$	6,706,402		$	7,307,371		$	(600,969	)		-8.2	%

Percentage of total revenues		87.8	%		73.6	%

Fiscal Year 2011 Compared to Fiscal Year 2010: Consulting, professional fees and employment related expenses decreased by approximately $902,700 as a result of fewer employees. Non-cash stock compensation and RSU expense increased by approximately $692,400 due to changes in management resulting in additional options and restricted stock awards being issued to the new management team and the board of directors. A non-cash compensation adjustment for the difference in the purchase price and the fair value of the private placement from the new management team of $258,725 was recorded in the first quarter of 2011. Space Occupancy Expenses decreased by approximately $40,700 due to an accrual in 2010 for rent at a closed office. We had a non-cash gain of $123,000 as a result of a favorable settlement of a lawsuit involving a vendor. Telephone expense decreased approximately $107,200 due to a settlement of old outstanding bills. There is an increase on rental & leases expense of $120,600 resulting from the settlement of a vendor liability in fiscal 2010.

Research & Development Expense

	Fiscal Years Ended May 31
	2011			2010			$ Change			% Change

Research and development	$	434,781		$	1,519,396		$	(1,084,615	)		-71.4	%

Percentage of total revenues		5.7	%		15.3	%

Fiscal Year 2011 Compared to Fiscal Year 2010: Research and development employment related expenses increased by approximately $89,400 as a result of the restructuring and addition in headcount. Costs associated with consultants and outsourcing of R&D activities decreased by approximately $1,125,000 due to a favorable settlement with a vendor regarding outstanding invoices. We had a non-cash gain of $993,218 as a result of the settlement. Telephone expenses decreased by approximately $21,400 as a result of the cancellation of unnecessary systems. Space occupancy decreased by $15,000 due to office closures. R&D costs associated with the development of software used for internal purposes and for the implementation of our software is capitalized. In fiscal 2011, approximately $348,200 has been recorded in Intangible Assets.

Impairment of Goodwill

	Fiscal Years Ended May 31
	2011			2010		$ Change			% Change

Impairment of goodwill	$	(685,426	)	$	11,683,548	$	(12,368,974	)		N/A

During fiscal year 2010, the Company determined that there were indicators of impairment for the goodwill associated with its Career Networks and Enterprise operating segments. Based on this determination, the Company performed an interim impairment test. In considering the current and expected future market conditions, the Company determined that the Career Network goodwill was impaired in accordance with ASC 350, Intangibles – Goodwill and Other, and the Company recorded non-cash, pre-tax goodwill impairment charges of $6,347,788 during the year ended May 31, 2010. The decline in estimated fair value of the Career Networks operating segment resulted from an analysis of the current economic conditions, the Company’s performance to budget and the lower estimated future cash flows. In considering the current and expected future market conditions, the Company determined that the Enterprise goodwill was impaired in accordance with ASC 350, Intangibles – Goodwill and Other, and the Company recorded non-cash, pre-tax goodwill impairment estimate charges of $5,335,760 during the year ended May 31, 2010. The decline in estimated fair value of the Enterprise operating segment resulted from an analysis of the current economic conditions, the Company’s performance to budget and the lower estimated future cash flows. During the first quarter of fiscal year 2011, we had a change in management as well as a conversion of our 2009 Notes to Equity (see Note 3 for further discussion). The Company believes that these transactions could have impacted the impairment test. This delayed the impairment test and the Company was unable to fully complete Step 2 of its goodwill impairment testing prior to the issuance of the financials for fiscal year 2010. A significant adjustment to the impairment estimate was made in the 1st quarter of fiscal year 2011 totaling $685,426 resulting in a partial reversal of the impairment charge made in the fourth quarter of fiscal 2010. The Company’s impairment test is based on a discounted cash flow method. The discounted cash flows analysis is an income method of valuation wherein the total fair value of the business entity is calculated by discounting projected future cash flows back to the date of valuation.

Amortization & Depreciation Expense

	Fiscal Years Ended May 31
	2011			2010			$ Change			% Change

Amortization and depreciation	$	239,137		$	822,903		$	(583,766	)		-70.9	%

Percentage of total revenues		3.1	%		8.3	%

Fiscal Year 2011 Compared to Fiscal Year 2010: Amortization expense increased by nearly $33,800 due to the acquisition of Incentives Advisors and the amortization of related acquired customer relationships. Depreciation expense decreased by approximately $611,100 due to many of our fixed assets becoming fully depreciated during fiscal year 2011.

Interest Income & Expense, Net

	Fiscal Years Ended May 31
	2011			2010			$ Change		% Change

Interest income and expense, net	$	(689,411	)	$	(2,605,578	)	$	1,916,167		-73.5	%

Fiscal Year 2011 Compared to Fiscal Year 2010: Interest expense decreased by approximately $1,907,000 due to the exchange of the 2009 Senior Secured Notes for Common Stock in August 2010. This decrease is offset by the interest recorded in Fiscal Year 2011for the new $750,000 note from the infusion of capital during the exchange transaction.

Change in Fair Value of Warrants & Derivative

	Fiscal Years Ended May 31
	2011		2010		$ Change			% Change
Change in fair value of warrants
and derivative	$	265,753	$	2,074,393	$	(1,808,640	)		N/A

On June 1, 2009, the Company adopted ASC 815, which required it to begin accounting for the New Warrants as a liability due primarily to the reset provisions of the warrant in the event of lower priced financing transactions. Therefore, the fair value of the New Warrants was reclassified from equity to a liability classification as of June 1, 2009 via a cumulative effect adjustment. We recognized amounts of $265,753 and $2,074,396 associated with the change in the fair value of the New Warrants in the condensed consolidated statement of operations for fiscal 2011 and 2010, respectively.

Gain(Loss) on Extinguishment of Debt

	Fiscal Years Ended May 31
	2011		2010			$ Change		% Change

Gain(loss) on extinguishment of debt	$	1,192,635	$	(13,071,440	)	$	14,264,075		N/A

In a senior secured note exchange on December 11, 2009, the fair value of the 2009 Secured Notes and embedded put derivatives were estimated to be $33,587,376 on the date of the exchange, which resulted in a loss on extinguishment of debt of $12,076,040. Furthermore, as a result of the Company’s issuance of the $0.10 Convertible Notes, the exercise price of $2,800,000 of its 2008 Warrants that remained outstanding was adjusted to $0.10 per share from $0.25 per share and the number of common shares issuable upon exercise was proportionately increased by 4,200,000 to 7,000,000 in which $995,400 representing the fair value of this increase was included in the loss on extinguishment of debt. On August 13, 2010, the Company exchanged its 2009 senior secured notes for common stock. Furthermore, this transaction was combined with a private placement for equity and the issuance of a 2010 Note which resulted in a gain on exchange of debt of $1,192,635. The private placement was additional capital invested in the Company by several of the 2009 Note holders. The 2010 Note was provided by one of the 2009 Note holders as additional working capital for the Company and matures on October 13, 2012.

Income Taxes

	Fiscal Years Ended May 31
	2011			2010			$ Change		% Change

Income tax expense	$	(6,900	)	$	(46,819	)	$	39,919		-85.3	%

Income taxes continue to be minimal for all periods presented, primarily due to current operating losses and significant net operating loss carry forwards in various jurisdictions. Future effective tax rates could be adversely affected by unfavorable changes in tax laws and regulations, limitations on net operating loss deductions, or by adverse rulings in any tax related litigation that may arise.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital: As of May 31, 2011, working capital, which represents current assets less current liabilities, was negative $2,045,000 million compared to a negative $4,500,000 as of May 31, 2010. Further improvement of working capital is planned.The Company completed two private placements for common stock during the fiscal third quarter of 2011 to infuse capital into the Company. The Company also completed a merger with Incentives Advisors which should increase our working capital in future quarters. The Company has been successful in negotiating and settling large liabilities which have helped increase our working capital over prior quarters.

Cash & Cash Equivalents: As of May 31, 2011, we have approximately $813,000 in cash and cash equivalents, which primarily consists of deposits held with banks. Cash increased from May 31, 2010 primarily due to funding from a $3,000,000 credit line received from Bridge Bank as well as several private placements of the Company’s common stock during fiscal 2011.

Accounts Receivable: Days sales outstanding (“DSO”) is based upon a rolling 12 month calculation performed quarterlyThe DSO ratio increased to 54.2 days at May 31, 2011 from 24.7 days at May 31, 2010. The change was primarily caused by the addition of Incentives Advisors accounts receivable, which tends to have a longer collection period due to the utilization of the tax credits by its clients.

Accounts Payable & Accrued Liabilities: Management has substantially reduced the accounts payable and accrued liabilities during fiscal 2011.

Cash Flows: The following is a summary of cash flow activities for the twelve months ended May 31, 2011 and 2010:

	Fiscal Years Ended May 31
	2011			2010			$ Change			% Change

Cash used in operating activities	$	(2,079,921	)	$	(624,514	)	$	(1,455,407	)		233.0	%
Cash used in investing activities		(536,540	)		(106,762	)		(429,778	)		402.6	%
Cash provided by / (used in) financing activities		3,161,729			(441,934	)		3,603,663			-815.4	%

Cash Flows From Operating Activities: The cash generated by current year’s operations exceeded 2010 by $487,000 and net cash was used to reduce the working capital deficit by $ 1,942,000 yielding a net change in cash used in operations by $1,455,000.

Cash Flows From Investing Activities: The changes in these cash flows relate to the capitalization of software of $348,172. The acquisition of Incentives Advisors resulted in a cash payment of $250,000 less cash received during the acquisition of $15,632 totaling an investment of $188,368.

Cash Flows From Financing Activities: The increase in these cash flows primarily relates to a private placement for equity for $2,256,000 and a new secured note from Coghill for net proceeds of $660,000, respectively. The Company also secured a $3,000,000 line of credit with Bridge Bank providing an additional $900,000.

EBITDA: To supplement our consolidated statements of operations and cash flows, we use non-GAAP measures of EBITDA. Management believes that EBITDA, as a complement to US GAAP amounts, allows one to meaningfully trend and analyze the performance of the Company’s core cash operations. The presentation of this non-GAAP measure is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity. EBITDA is calculated as follows:

	Fiscal Years Ended
	May 31
	2011			2010

Net income / (loss), as reported under US GAAP	$	(162,719	)	$	(26,583,731	)

Effects of certain transactions:
Interest income and expense, net		689,411			2,605,578
Income tax expense		6,900			46,819
Amortization and depreciation		239,137			822,903
Stock-based compensation		747,450			161,680
Gain(loss) on extinguishment of debt		(1,192,635	)		13,071,440
Impairment of goodwill		(685,426	)		11,683,548
Change in fair value of warrants and derivative		(265,753	)		(2,074,393	)
Other income and expense, net		(14,359	)		(54,908	)

EBITDA, as adjusted	$	(637,994	)	$	(321,064	)

EBITDA is a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. EBITDA is commonly defined as earnings before interest, taxes, depreciation and amortization. We believe that EBITDA provides useful information to investors as it excludes transactions not related to the core cash operating business activities including non-cash transactions. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations. All companies do not calculate EBITDA in the same manner, and EBITDA as presented by Workstream may not be comparable to EBITDA presented by other companies. Workstream defines EBITDA as earnings or loss from continuing operations before interest, taxes, depreciation and amortization, other income and expense, including effects of foreign currency gains or losses, non-cash stock related compensation, and non-recurring goodwill impairment, if applicable.

Off-Balance Sheet Arrangements: We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Debt Facility

On May 10, 2011, Workstream Inc. (the “Company”) entered into a Business Financing Agreement (the “Financing Agreement”) with Bridge Bank, National Association. The Financing Agreement is secured by a lien on all of the assets of the Company and its subsidiaries pursuant to the terms of a Stock Pledge Agreement among the Company, its subsidiaries and the Lending Investor (the “Pledge Agreement”). The credit limit on the Financing Agreement is $3,000,000. Interest on the Financing Agreement accrues at an annual rate of the Prime Rate plus 2% with the Prime Rate having a minimum of 3.25%. From and after the occurrence and during the continuance of any event of default under the Financing Agreement, the interest rate then in effect will be automatically increased by 5% per year. The Financing Agreement has an annual facility fee of $15,000 or .5% of the advance balance. The Financing Agreement has a monthly maintenance fee of .125% of the average monthly balance. The Financing Agreement contains customary covenants of providing monthly financial statements within 30 days, annual audited financials within 180 days, annual board approved budget within 60 days of fiscal year end and a semi-annual accounts receivable audit. The Company must also maintain a minimum asset coverage ratio of 1.5 to 1. The Pledge Agreement sets forth that the Company has granted a security interest in all shares of capital stock, corporations, limited partnership interest and limited liability company interests that the Company now owns or hereafter acquires. The Company drew down $500,000 of the line of credit upon closing of which $100,000 was used for working capital and $400,000 was used to reduce the amount outstanding on the 2010 note referenced below. In conjunction with the arrangement of the debt facility the 2010 Note was subordinated to Bridge Bank.

Exchange Agreements

On August 13, 2010, the Company eliminated $22,356,665 in debt through separate Exchange and Share Purchase Agreements and an Exchange Agreement (collectively, the “2010 Exchange Agreements”) with each of the Holders pursuant to which, among other things, the Holders exchanged their existing 2009 Secured Notes (the aggregate principal amount of all the Notes, together with accrued but unpaid interest and penalties, was $22,356,665) for a total of 1,707,130 of the Company’s common shares. The 2008 Warrants were not affected by the transactions effected by the 2010 Exchange Agreements.

Pursuant to the terms of the 2010 Exchange Agreements with certain of the Holders, the Company also consummated a private placement pursuant to which it raised $750,000 through the sale of an aggregate 94,840 common shares in the Company to certain of the Holders. Simultaneous with the consummation of the transactions contemplated by the 2010 Exchange Agreements, pursuant to the terms of a Stock Purchase Agreement (the “Stock Purchase Agreement”) between the Company, and affiliates, John Long, David Kennedy and Ezra Schneier (together, the “New Management Team”), the Company completed a private placement pursuant to which it raised an additional $500,000 through the sale of an aggregate63,227 common shares in the Company to the New Management Team (such common shares, together with the common shares purchased under the Exchange Agreements by the Holders, the “Purchased Shares”). The Company is using the proceeds from the private placements for working capital and general corporate purposes.

The Company and each of the Holders also entered into a Third Amended and Restated Registration Rights Agreement pursuant to which the Company agreed to register for resale under the Securities Act of 1933, upon the request of a majority of the holders of Registrable Securities thereunder, the common shares received in the exchange, the Purchased Shares and the common shares issuable upon exercise of certain warrants. If the Company fails to comply with the filing and effectiveness deadlines set forth in the Registration Rights Agreement, the Company must pay to the Holder an amount in cash equal to 0.5% of the sum of the aggregate principal amount of the 2009 Secured Notes and the purchase price paid for the Purchased Shares purchased by such Holder under the relevant Exchange Agreement on the date of such failure and each 30 day anniversary thereafter, in an amount not to exceed $1,000,000 in the aggregate.

Simultaneous with the consummation of the transactions contemplated by the 2010 Exchange Agreements, the Company received an additional $750,000 from one Holder (the “Lending Investor”) in exchange for a senior secured note (the “2010 Note”). The 2010 Note was secured by a lien on all of the assets of the Company and its subsidiaries pursuant to the terms of a Security Agreement among the Company, its subsidiaries and the Lending Investor (the “Security Agreement”). Interest on the 2010 Note accrued at an annual rate of 12%. On August 12, 2011, the outstanding balance on the note was exchanged for equity in the Company.

The Company also received $1,006,000 in connection with private placements of its common shares. Separately, the Company intends to continue to raise capital from time to time as it pursues its business plan.

CRITICAL ACCOUNTING POLICIES

We believe that the following critical accounting policies affect our more significant estimates and judgments used in preparation of our consolidated financial statements. 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. Our significant estimates include the allowance for trade receivables, valuation of goodwill and intangible assets, valuation of derivative financial instruments, valuation of deferred taxes, valuation of stock-based compensation and loss contingencies. Although we believe that these estimates are reasonable, actual results could differ from those estimates given a change in conditions or assumptions that have been consistently applied.

Management has discussed the selection of critical accounting policies and estimates with our Board of Directors, and the Board of Directors has reviewed our disclosure relating to critical accounting policies and estimates in this annual report on Form 10-K. The critical accounting policies used by management and the methodology for its estimates and assumptions are as follows:

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; career transition services; training grants; hiring and job creation credits; 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.

A more detailed description of the Company’s revenue recognition policies can be found in the Revenue Recognition section of Note 1 of the Notes to Consolidated Financial Statements later in this document.

Allowance for Doubtful Accounts

We perform ongoing credit evaluations of our accounts receivable balances. Based on historical experience, we evaluate the accounts for potential uncollectible amounts based on a specific identification methodology and record a general reserve for all remaining balances. Based on the age of the receivable, cash collection history and past dilution in the receivables, we make an estimate of our anticipated bad debt. Based on this analysis, we reserved $571,078 and $442,195 for doubtful accounts at May 31, 2011 and 2010, respectively. We believe that this estimate is reasonable, but there can be no assurance that our estimate will not change given a change in economic conditions or business conditions within our industry, our individual customer base or our Company. Any adjustments to this account are reflected in the accompanying statements of operations and comprehensive loss as a selling and marketing expense.

Goodwill

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

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

The Company performed and intangible asset impairment test and determined there was no impairment in fiscal year 2011.

Goodwill impairment charges in previous years are described in the appropriate Forms 10-K. The Company had a first quarter fiscal 2011 adjustment to Goodwill. This reversal of impairment charged in fiscal year 2010 was done upon completion of the Step 2 analysis. The Step 2 was not able to be completed during fiscal year 2010 due to conversion of our 2009 Notes to Equity that took place in the first quarter of fiscal 2011. There is no goodwill impairment in fiscal year 2011.

There is no assurance that the market price of the common stock will increase the foreseeable future and the Company may have to recognize an impairment of all, or some portion of, its goodwill and other intangible assets. There is no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase or (3) the earnings, book values or projected earnings and cash flows of the Company’s individual units will not decline. Accordingly, an impairment charge to goodwill and other intangible assets may be required in the foreseeable future if the book equity value exceeds the estimated fair value of the enterprise or of an individual segment.

Derivative Financial Instruments

The Company accounts for derivative instruments in accordance with FASB ASC 815, Derivatives and Hedging (“ASC 815”), which requires additional disclosures about the Company’s objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for , and how the derivative instruments and related hedging items affect the financial statements. The Company does not use derivative instruments to hedge exposure to cash flow, market and foreign currency risk. Terms of convertible debt and equity instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivatives liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded current period operating results.

Deferred Taxes

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. The utilization of the Company’s net operating loss carry forwards may be limited in any given year under certain circumstances. Events which may affect the Company’s ability to utilize these carry forwards include, but are not limited to, future profitability, cumulative stock ownership changes of 50% or more over a three-year period, as defined by Section 382 of the Internal Revenue Code, and the timing of the utilization of the tax benefit carry forwards. Actual results may differ from amounts estimated.

Stock-Based Compensation

Stock-based compensation expense for all stock-based compensation awards granted on or subsequent to June 1, 2006 is based on the grant date fair value estimated in accordance with ASC 718, Compensation – Stock Compensation. Compensation expense for stock option awards is recognized on a straight-line basis over the requisite service period of the award. We utilize the Black-Scholes option-pricing model to value our stock option grants. As required, we also estimate forfeitures in calculating the expense related to stock-based compensation, and it requires us to reflect cash flows resulting from excess tax benefits related to those options as a cash inflow from financing activities rather than as a reduction of taxes paid.

The assumptions in the following table were used to calculate the fair-value of share-based payment awards using the Black-Scholes option pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments, and the risk-free interest rate over the expected life of the option.

	Fiscal Years Ended
	May 31, 2011	May 31, 2010

Expected volatility	198%	168% - 176%
Expected dividend yield	0%	0%
Expected term (in years)	3.5	3.5
Risk-free interest rate	1.5%	2.2% -2.7%
Forfeiture rate	30%	30%

The dividend yield was calculated by dividing the current annualized dividend by the option exercise price of each grant. The expected volatility was determined considering the Company’s historical stock prices for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free rate represents the US Treasury bond rate with maturity equal to the expected life of the option. The expected life of the option was estimated based on the exercise history of previous grants.

Loss Contingencies

From time to time we are involved in various lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. If the potential loss from an item is considered probable and the amount can be estimated, we accrue a liability for the estimated loss, as provided in ASC 450, Contingencies. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. Periodically, we review the status of each significant matter and assess our potential financial exposure. These matters are inherently unpredictable and are subject to significant uncertainties, some of which are beyond our control. Should any of the estimates and assumptions utilized to estimate potential losses change or prove to have been incorrect, it could have a material impact on our results of operations, financial position or cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 in the Consolidated Financial Statements for information concerning recent accounting pronouncements.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Workstream Inc.

We have audited the accompanying consolidated balance sheets of Workstream Inc. and Subsidiaries as of May 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Workstream Inc. and Subsidiaries as of May 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Cross, Fernandez & Riley, LLP

Orlando, Florida

August 24, 2011

WORKSTREAM INC.
CONSOLIDATED BALANCE SHEETS

	Notes		May 31, 2011			May 31, 2010
ASSETS:
Current assets:
Cash and cash equivalents			$	813,333		$	358,529
Accounts receivable, net of allowances of $571,078 and $442,195 at		2
May 31, 2011 and May 31, 2010, respectively				1,393,679			1,606,623
Prepaid expenses and other assets				124,370			161,692
Total current assets				2,331,382			2,126,844

Equipment, net		5		208,725			295,798
Other assets				43,490			163,817
Intangible assets, net		6		962,338			-
Goodwill		6		8,606,441			6,045,900

TOTAL ASSETS			$	12,152,376		$	8,632,359

LIABILITIES AND SHAREHOLDERS’ EQUITY(DEFICIT):
Current liabilities:
Accounts payable			$	598,277		$	1,149,846
Accrued liabilities		7		1,346,537			3,211,124
Accrued compensation				1,016,923			516,209
Current portion of long-term debt, related party				94,000			-
Current portion of long-term obligations		8		135,110			200,469
Deferred revenue				1,083,386			1,456,005
Liabilities of discontinued operations		16		102,258			82,173
Total current liabilities				4,376,491			6,615,826

Senior secured notes payable and accrued interest		3		-			21,718,093
Secured note payable and accrued interest, net-related party		4		464,301			-
Long-term debt, related party		4		118,476			-
Long-term obligations, less current portion		8		1,059,318			138,858
Deferred revenue – long-term				26,667			7,667
Common stock warrant liability		3		2,847			268,600
Total liabilities				6,048,100			28,749,044

Commitments and Contingencies		9

SHAREHOLDERS’ EQUITY(DEFICIT):		10
Preferred shares, no par value				-			-
Common shares, no par value issued and outstanding 2,517,373 and 164,166 shares as of May 31, 2011 and 2010				140,209,385			114,498,157
Additional paid-in capital				31,061,264			30,313,814
Accumulated deficit		1		(164,160,363	)		(163,997,644	)
Accumulated other comprehensive loss				(1,006,010	)		(931,012	)
Total shareholders’ equity(deficit)				6,104,276			(20,116,685	)

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY(DEFICIT)			$	12,152,376		$	8,632,359

See accompanying notes to these consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

			Fiscal Years Ended
	Notes		May 31, 2011			May 31, 2010
Revenues:
Revenues, net				7,636,290			9,924,500

Cost of revenues:
Cost of revenues (exclusive of amortization				737,003			754,463
and depreciation expense noted below)

Gross profit				6,899,287			9,170,037

Operating expenses:
Selling and marketing				2,288,928			1,880,091
General and administrative				6,706,402			7,307,371
Research and development				434,781			1,519,396
Amortization and depreciation				239,137			822,903
Impairment of goodwill		6		(685,426	)		11,683,548
Total operating expenses				8,983,822			23,213,309

Operating loss				(2,084,535	)		(14,043,272	)

Other income / (expense):
Interest income and expense, net				(689,411	)		(2,605,578	)
Gain(loss) on extinguishment of debt		3		1,192,635			(13,071,440	)
Change in fair value of warrants and derivative		3		265,753			2,074,393
Other income and expense, net				14,359			54,908
Other income/(expense), net				783,336			(13,547,717	)

Loss before income tax expense				(1,301,199	)		(27,590,989	)

Income tax expense				(6,900	)		(46,819	)

Net Loss from Continuing Operations			$	(1,308,099	)	$	(27,637,808	)

Net Income from Discontinued Operations			$	1,145,380		$	1,054,077

Net Loss			$	(162,719	)	$	(26,583,731	)

Loss per share from continuing operations- basic and diluted			$	(0.73	)	$	(188.16	)

Earnings per share from discontinued operations- basic			$	0.64		$	7.19

Earnings per share from discontinued operations- diluted			$	0.60		$	6.97

Loss per share - basic and diluted		13	$	(0.09	)	$	(180.97	)

Weighted average number of common shares
outstanding:
Basic				1,795,160			146,897
Diluted				1,909,427			151,437

Net loss			$	(162,719	)	$	(26,583,731	)
Comprehensive loss:
Foreign curency translation adjustment				(74,998	)		(69,938	)

COMPREHENSIVE LOSS			$	(237,717	)	$	(26,653,669	)

See accompanying notes to these consolidated financial statements.

WORKSTREAM INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

										Accumulated
							Additional			Other						Total
	Common Stock						Paid-In			Comprehensive			Accumulated			Stockholders'			Comprehensive
	Shares			Amount			Capital			Loss			Deficit			Equity(Deficit)			Loss
Balance at May 31, 2009		142,483		$	113,668,376		$	18,269,589		$	(861,074	)	$	(136,876,313	)	$	(5,799,422	)

Exercise of warrants		2,394			-			22,500			-			-			22,500
Issuance of common shares		19,036			814,781						-			-			814,781
Restricted stock unit grants and expense		253			15,000			64,504			-			-			79,504
Beneficial conversion feature associated with PIK interest		-			-			137,804			-			-			137,804
Premium on senior secured notes		-			-			12,076,040			-			-			12,076,040
Stock option expense		-			-			82,176			-			-			82,176
Cummulative effect of change in accounting principle for warrant classification		-			-			(338,800	)		-			(537,600	)		(876,400	)
Net loss		-			-			-			-			(26,583,731	)		(26,583,731	)		(26,583,731	)
Cumulative translation adjustment		-			-			-			(69,938	)		-			(69,938	)		(69,938	)
Comprehensive loss																			$	(26,653,669	)
Balance at May 31, 2010		164,166		$	114,498,157		$	30,313,814		$	(931,012	)	$	(163,997,644	)	$	(20,116,685	)

Restricted stock unit grants and expense		25,437			-			531,281			-			-			531,281
Issuance of common shares in connections with 2010 exchange transaction		1,865,199			22,382,383						-			-			22,382,383
Stock option expense								216,169			-			-			216,169
Issuance of common shares for services		17,650			96,858			-			-			-			96,858
Issuance of common shares for wages		22,915			107,114			-			-			-			107,114
Private placements of common shares		157,188			1,006,000			-			-			-			1,006,000
Purchase of incentives advisors		264,916			2,119,382			-			-			-			2,119,382
Buyout of fractional shares from reverse stock split		(98	)		(509	)		-			-			-			(509	)
Net loss		-			-			-			-			(162,719	)		(162,719	)		(162,719	)
Cumulative translation adjustment		-			-			-			(74,998	)		-			(74,998	)		(74,998	)
Comprehensive loss																			$	(237,717	)
Balance at May 31, 2011		2,517,373		$	140,209,385		$	31,061,264		$	(1,006,010	)	$	(164,160,363	)	$	6,104,276

See accompanying notes to these consolidated financial statements.

WORKSTREAM INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal Years Ended
	May 31, 2011			May 31, 2010
Cash flows used in operating activities:
Net loss	$	(162,719	)	$	(26,583,731	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation		239,137			822,903
Amortization of deferred financing costs		12,195			-
Leasehold inducement amortization		8,666			5,935
Allowance for doubtful accounts, net		296,901			553,443
Impairment of goodwill		(685,426	)		11,683,548
Stock-based compensation		747,450			161,680
Non-cash compensation of stock purchased by management		258,725			-
Non-cash compensation of stock for board member fees		81,000			-
Non-cash compensation of stock for other services		14,453			-
Non-cash compensation of stock for wages		108,520			-
Loss on extingishment of debt		-			13,071,440
Beneficial conversion fearture associated with PIK interest		-			137,804
Gain on exchange of senior secured notes payable		(1,192,635	)		-
Non-cash gain on settlements of accrued liabilities		(1,124,846	)		-
Change in fair value of warrants and derivative		(265,753	)		(2,074,393	)
Net change in components of working capital:
Accounts receivable		5,764			586,294
Prepaid expenses and other assets		75,950			(15,083	)
Accounts payable		(618,214	)		(536,924	)
Accrued liabilities		(18,987	)		2,700,952
Accrued compensation		494,518			(10,726	)
Deferred revenue		(354,620	)		(1,127,656	)
Net cash used in operating activities		(2,079,921	)		(624,514	)

Cash flows used in investing activities:
Cash paid for business acquistion net of cash acquired		(188,368	)		-
Purchase of equipment		-			(106,762	)
Capitalization of Software Development Costs		(348,172	)		-
Net cash used in investing activities		(536,540	)		(106,762	)

Cash flows provided by / (used in) financing activities:
Proceeds from issuance of stock		2,256,000			-
Proceeds from issuance of senior secured note payable, net of issuance costs $90,000		1,560,000			(132,827	)
Repayment of non-convertible senior note		-			(43,750	)
Costs related to reverse stock split		(510	)		-
Repayment of long-term obligations		(653,761	)		(265,357	)
Net cash provided by / (used in) financing activities		3,161,729			(441,934	)

Effect of exchange rate changes on cash and cash equivalents		(90,464	)		(112,029	)

Net decrease in cash and cash equivalents		454,804			(1,285,239	)
Cash and cash equivalents - beginning of period		358,529			1,643,768

Cash and cash equivalents - end of period	$	813,333		$	358,529


Supplemental schedule of non-cash investing and financing activities:
Equipment acquired under capital leases	$	78,049		$	191,298
Cumulative effect of change in accounting principle for warrant classification	$	-		$	876,400
Exercise of Warrants	$	-		$	22,500
Non-cash issuance of common stock in connection with conversion of senior secured notes and accrued interest	$	-		$	814,781
Exchange of senior secured notes for common stock	$	22,382,383		$	33,587,377

Cash paid for interest	$	46,514		$	35,505
Cash paid for taxes	$	5,623		$	42,718

See accompanying notes to these consolidated financial statements.

WORKSTREAM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company

Workstream Inc. is a provider of Human Resource Software and Services. Our business primarily provides corporate human resource departments with solutions used for Talent Acquisition and Talent Management.

Workstream conducts its business primarily in the United States of America and Canada and our target market is employers with more than 1,500 employees.

On May 6, 2011, the Company effected a one (1) for four hundred (400) reverse stock split. All share and price per share amounts presented in the consolidated financial statements and in the notes thereto have been adjusted to reflect the reverse stock split.

Management’s Assessment of Liquidity

The Company has incurred substantial losses in recent periods. On August 13, 2010, we exchanged our 2009 Senior Secured Notes for common stock. At the same time we completed a private placement of our common shares for $1,250,000. Furthermore in the third quarter of fiscal 2011, we raised $1,006,000 in additional private placements of our common stock. As a result, we have shareholders’ equity of $6,104,276 as of May 31, 2011. Losses for the twelve months ended May 31, 2011 was $162,719 and losses for the years ended May 31, 2010 and 2009 were $26,583,731 and $4,856,356, respectively. In addition, Liberty Mutual Insurance Company gave notice during the second quarter of fiscal 2011 that it will not renew its contract with Workstream. In the fourth quarter of fiscal 2011, the Company decided to discontinue its rewards business.

The Company has made significant reductions in operating expenses beginning in the fourth quarter of fiscal 2008 and continuing through fiscal 2011. These, together with the funding received by the Company in connection with private placements of its common shares, as well as $750,000 received by the Company in connection with the issuance of its 2010 Note and an analysis of our current contracts, forecasted new business, our current backlog and current expense level leads management believes that current operations will be sufficient to meet its anticipated working capital and capital expenditure requirements. If this proves insufficient, management will consider additional cost savings measures or additional financing, if deemed necessary.

In May 2011, The Company signed an agreement with Bridge Bank for a $3,000,000 line of credit. As of May 31, 2011, $900,000 has been drawn down for working capital and a partial payment on the $750,000 note.

On July 14, 2011, the Company entered into a Securities Purchase Agreement with First Advantage Offshore Services, Private Limited pursuant to which the Company consummated on July 15, 2011 a private placement of 333,333 shares of its newly formed Class A, Series B Convertible Preferred Shares (the “Series B Shares”) to the Investor for $1,000,000. The issuance of the Series B Shares in the private placement was deemed to be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Marc Bala, a Director of First Advantage Corporation and a Principal of Symphony Technology Group joined the Company’s Board of Directors upon consummation of the transaction. The Company will use the proceeds from the private placement for working capital and general corporate purposes.

On August 12, 2011, the Company entered into a Securities Purchase Agreement with CCM Master Qualified Fund, Ltd.”) pursuant to which the Company consummated on August 12, 2011 a private placement of 147,841 shares of its Series B Shares to the Investor for $443,522, the principal and accrued and unpaid interest on the 2010 Note. The issuance of the Series B Shares in the private placement was deemed to be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

We recognize that there are no assurances that the Company will be successful in meeting its cash flow requirements, however, management is confident that, if necessary, there are other alternatives available to fund operations and meet cash requirements during fiscal 2012.

The Company continues to actively pursue financing from multiple sources including but not limited to, additional sales of preferred or common stock for cash, bank financing, and business acquisitions. Potential uses of such capital include but are not limited to continued investments in its core technology, enhancing its sales infrastructure and acquiring companies that provide complimentary products and services to the company’s core suite of products.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and the accompanying notes. Changes in these estimates and assumptions may have a material impact on the financial statements and accompanying notes.

Significant estimates and assumptions made by management include the assessment of goodwill impairment. When assessing goodwill for possible impairment, significant estimates include future cash flow projections, future revenue growth rates, the appropriate discount rate reflecting the risk inherent in future cash flows, the interpretation of current economic indicators and market valuations and our strategic plans with regard to our operations. It is reasonably possible that those estimates may change in the near-term and may materially affect future assessments of goodwill impairment. Other significant estimates include the provision for doubtful accounts, valuing intangible assets, valuing derivative instruments, valuing compensation related to stock-based transactions, and estimating future taxable income and the probability that net operating loss carryforwards will be utilized.

Principles of Consolidation

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

Cash Equivalents

Cash equivalents are stated at fair value. Cash equivalents are defined as highly liquid investments with terms to maturity at acquisition of three months or less.

Accounts Receivable

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

Allowance for Doubtful Accounts

We perform ongoing credit evaluations of our accounts receivable balances. Based on historical experience, we evaluate the accounts for potential uncollectible amounts based on a specific identification methodology and record a general reserve for all remaining balances. Based on the age of the receivable, cash collection history and past dilution in the receivables, we make an estimate of our anticipated bad debt. We believe our estimates are reasonable, but there can be no assurance that our estimates will not change given a change in economic conditions or business conditions within our industry, our individual customer base or our Company. Any adjustments to this account are reflected in the accompanying statements of operations and comprehensive loss as a selling and marketing expense.

Equipment

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

	Furniture and fixtures	5 years straight line
	Office equipment	5 to 7 years straight line
	Computers and software	3 years straight line
	Capital leases	Shorter of lease term or useful life
	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.

Goodwill and Other Identified Intangible Asset Impairment

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.

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

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

While management has a plan to return the Company’s business fundamentals to levels that support the book value per common share, there is no assurance that the plan will be successful, or that the market price of the common stock will increase to such levels in the foreseeable future. There is no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase or (3) the earnings, book values or projected earnings and cash flows of the Company’s individual product lines will not decline. Accordingly, an impairment charge to goodwill and other intangible assets may be required in the foreseeable future if the book equity value exceeds the estimated fair value of the enterprise or of an individual segment.

Warrant Liability

On June 1, 2009, the Company adopted the guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock (primarily codified in ASC 815, Derivatives and Hedging). This guidance requires a new 2-step test for determination of whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock. Step 1 is to evaluate the instrument's contingent exercise provisions, if any, and step 2 is to evaluate the instrument's settlement provisions. The Company evaluated its existing current instruments previously classified as equity immediately prior to such adoption and determined that the warrants issued in conjunction with its Senior Secured Notes Payable are not indexed to the Company’s own stock under the accounting requirements due primarily to the reset provisions of the warrant in the event of lower priced financing transactions. Therefore, they were reclassified out of equity to a liability classification as of June 1, 2009 via a cumulative effect adjustment, as required. Subsequent changes to the fair value of the liability after June 1, 2009 are included in the consolidated statements of operations. The table below details the effect of the adoption on the Company’s financial statements as of June 1, 2009:

	May 31, 2009			Effect of Adoption				June 1, 2009

Common stock warrant liability		-			876,400		(1)		876,400
Additional paid-in capital		18,269,589			(338,800	)	(2)		17,930,789
Accumulated deficit		(136,876,313	)		(537,600	)	(3)		(137,413,913	)

(1)

Fair value of warrants on May 31, 2009.

(2)

Fair value of warrants upon issuance on August 29, 2008.

(3)

Cumulative change in fair value of warrants from August 29, 2008 through May 31, 2009.

The fair value of the warrants was valued using a lattice-based valuation model with the following key inputs:

	May 31, 2011			May 31, 2010			August 29, 2008

Stock price	$	3.70		$	32.00		$	80.00
Exercise price	$	40.00		$	40.00		$	100.00
Expected volatility		54% - 154	%		77% - 152	%		74%-117	%
Expected dividend yield		0	%		0	%		0	%
Expected term (in years)		1.2			2.2			3.9
Risk-free interest rate		0.04% - 0.18	%		0.16% - 0.76	%		1.97%-2.60	%

Fair Value of Financial Instruments

The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be paid by an external party for an asset or liability (exit price) and emphasizes that fair value is a market-based measurement, not an entity-specific measurement. ASC 820 also establishes a fair value hierarchy which requires an entity to classify the inputs used in measuring fair value for assets and liabilities as follows:

·	Level 1 – Inputs are unadjusted quoted market prices in active markets for identical assets or liabilities available at the measurement date;

Level 2 – Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable and inputs that are corroborated by observable market data; and

·	Level 3 – Inputs are unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing the asset or liability based on the best available information.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of May 31, 2011. The Company uses the market approach to measure fair value for its Level 1 financial assets which includes cash equivalents. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. There were no cash equivalents as of May 31, 2011. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These instruments include cash, accounts receivable, accounts payable, and accrued liabilities.

The Company’s 2009 Senior Secured Notes and 2010 Note were valued using multiple, probability-weighted cash flow outcomes at credit-risk adjusted market rates (“Forward Value”). The Senior Secured Notes with options to convert principal balances into common equity derive their value from a combination of the Forward Value and the fair value of the embedded conversion feature (“ECF”). For purposes of the ECF, management concluded that the Monte Carlo Simulations Method (“MCS”) was the appropriate technique to embody all assumptions market participants would likely consider in estimating the ECF value. The carrying value of the Company’s other long-term debt approximates its fair value because interest rates associated with these instruments approximates current interest rates charged on similar current borrowings.

The following table details the change in the fair value of our financial instruments using significant unobservable inputs (Level 3) during the twelve months ended May 31, 2011:

	Warrant
	Liability

Fair value as of May 31, 2010	$	268,600
Change in fair value of warrants and derivative		(265,753	)
Fair value as of May 31, 2011	$	2,847

Impairment of goodwill was measured on a nonrecurring basis using the income approach, which utilizes Level 3 inputs in the fair value hierarchy.

Derivative Financial Instruments

Revenue Recognition

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 deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Quarterly and annual payments are deferred and recognized monthly over the service period on a straight-line basis. Set up fees are deferred and recognized monthly on a straight-line basis over the contractual lives of the customer.

Subscription revenues and hosting fees consist of fees from customers accessing our on-demand application service. The Company follows the provisions of ASC 605, Revenue Recognition and ASC605-25, Revenue Recognition with Multiple Deliverables Arrangements. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative fair values, as determined by the price of the undelivered items when sold separately. Professional services included in an application services arrangement with multiple deliverables are accounted for separately when these services have value to the customer on a standalone basis, and there is objective and reliable evidence of fair value of each undeliverable item of the arrangement. When accounted for separately, revenues are recognized as the services are rendered.

License revenues consist of fees earned from the granting of both perpetual and term licenses to use the software products. The Company recognizes revenue from the sale of software licenses in accordance with ASC985-605, Software Revenue Recognition. 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.

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 ASC605-35, Revenue Recognition 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.

Tax advisory service revenues are generated from transaction fees based on a percentage of the value of the tax credit identified and are recognized in the period that the approval of the underlying eligible employee or program is received from the taxing authority and such credit is reported to the client. Revenue from hourly and fixed fee consulting services is recognized as the services are performed.

One of the software applications offered by the Company allows customers to offer rewards, employee recognition and benefits 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. See discussion on discontinued operations in Note 16.

For career transition services, the Company recognizes revenue when all of the revenue recognition criteria are met, which is typically when services have been completed.

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

Cost of Goods Sold

The components of cost of goods sold in the accompanying consolidated statements of operations and comprehensive loss include all direct materials and direct labor associated with the generation of revenue of the Company's talent center software suite, rewards, incentives, job boards and other services.

Marketing and Advertising

The Company expenses any production costs of advertising the first time the advertising takes place and expenses direct response advertising costs in the period incurred. Advertising expense was approximately $367,000 and $409,000 during the fiscal years ended May 31, 2011 and 2010, respectively.

Accounting for Stock-Based Compensation

	Fiscal Years Ended
	May 31, 2011	May 31, 2010

Expected volatility	198%	168% - 176%
Expected dividend yield	0%	0%
Expected term (in years)	3.5	3.5
Risk-free interest rate	1.5%	2.2% -2.7%
Forfeiture rate	30%	30%

Intangible Asset- Customer Relationships

Customer relationships represent relationships that we have with customers of acquired companies which are based upon contractual rights. These customer relationships are initially recorded at their fair value based on the present value of expected future cash flows using the multi-period excess earnings method.

In accordance with FASB ASC 350, “Intangibles-Goodwill and Other”, acquired customer relationships is amortized over the estimated life of the revenue generated by the customers. Management has determined the useful life to be five years. The Company amortizes the value of its customer list on a straight-line basis over its estimated useful life. Management evaluates the useful lives of this asset on an annual basis and tests for impairments whenever events or changes in circumstances occur that could impact the recoverability of this asset.

Software Developed for Internal Use

In accordance with FASB ASC 350, “Intangibles-Goodwill and Other, Internal-Use Software”, the costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal costs are capitalized until the software is substantially complete and ready for its intended use. Internal use software is amortized on a straight-line basis over its estimated useful life, generally five years. Management evaluates the useful lives of these assets on an annual basis and tests for impairments whenever events or changes in circumstances occur that could impact the recoverability of these assets.

The company capitalized internal-use software costs for the twelve months ending May 31, 2011 of $348,172. The company will begin amortizing those costs when the product is placed into service.

Accrued Compensation

Included in accrued compensation is $150,000 payable due to a related party.

Prepaids and Other Assets

	2011		2010
Advances	$	19,124	$	-
Advances, related parties		30,000		-
Prepaid Insurance		10,760		18,964
Inventory		-		76,027
Software and Maintenance		22,555		43,525
Other		41,931		23,176
	$	124,370	$	161,692

Research and Development Costs

The Company accounts for research and development costs associated with computer software development under the provisions of ASC 985, Software. 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.

Income Taxes

The Company follows the provisions of ASC 740, Income Taxes,” (“ASC 740”). ASC 740 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has not recognized a liability as a result of the implementation of ASC 740. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit as of the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company files income tax returns in the U.S. federal jurisdiction and in various states and Canada.

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 in accordance with ASC 740. 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. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the amount of any valuation allowance required to offset deferred tax assets, an assessment is made that includes anticipating future income and determining the likelihood of realizing deferred tax assets. Management has determined that there is sufficient uncertainty regarding the ultimate realization of deferred tax assets relating to the United States operations and therefore, has provided a valuation allowance for the entire balance of the deferred tax assets.

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(deficit). 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 other income and expenses in the consolidated statements of operations and comprehensive loss and have not been material during the periods presented.

Earnings (Loss) per Common Share

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average shares outstanding. Diluted net earnings (loss) per common share is computed by dividing net income (loss) by the weighted average shares outstanding including potential common shares which would arise from the exercise of restricted stock units, stock options, warrants and escrowed shares using the treasury stock method.

Concentration of Credit Risk

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. At times, the Company’s deposits may exceed federally insured limits. Management believes that the use of credit quality financial institutions minimizes the risk of loss associated with these deposits. The majority of the Company’s sales are credit sales which are made primarily to customers whose ability to pay is dependent upon the industry economics prevailing in the areas where they operate; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluation of its customers to help further reduce credit risk. Collateral is not required for accounts receivable.

Segments

The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information primarily based on two reportable segments. Accordingly, in accordance with ASC 280 Segment Reporting, the Company has determined that it has two reporting segments: Human Resource Software and Services and Career Transition Services (see Note 11).

Subsequent Events

No material events have occurred subsequent to May 31, 2011 that requires recognition in these financial statements. No material events have occurred subsequent to May 31, 2011 that requires disclosure in these financial statements except for those discussed below.

On August 15, 2011, the Company entered into a Securities Purchase Agreement with CCM Master Qualified Fund, Ltd. pursuant to which the Company consummated a private placement of 147,841 shares of its Series B Shares to the Investor for $443,522 the principal and accrued and unpaid interest on its 2010 Note. The issuance of the Series B Shares in the private placement was deemed to be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

On August 15, 2011, the Company relocated its corporate headquarters to 2200 Lucien Way, Suite 201, Maitland, FL 32751.

Recent Accounting Pronouncements

In December 2010, the FASB issued ASU No. 2010-28, which updates the guidance in ASC Topic 350, Intangibles – Goodwill &Other. The amendments in ASU 2010-28 affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in ASU 2010-28 modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

In December 2010, the FASB issued ASU No. 2010-29, which updates the guidance in ASC Topic 805, Business Combinations. The objective of ASU 2010-29 is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by ASC 805 that enters into business combinations that are material on an individual or aggregate basis. This guidance will become effective for us for acquisitions occurring on or after the beginning of our 2012 fiscal year. We do not expect the adoption of this guidance will have a material impact upon our financial position or results of operations.

In April 2010, the FASB issued Accounting Standards Update No. 2010-17, Revenue Recognition—Milestone Method (Topic 605) – Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for us in fiscal 2012 and should be applied prospectively. We are currently evaluating the impact of the pending adoption of ASU 2010-17 on our consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820) — Fair Value Measurements and Disclosures (ASU 2010-06), to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. Certain provisions of this update will be effective for us in fiscal 2012 and we are currently evaluating the impact of the pending adoption of this standards update on our consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition: Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force” , which eliminates the use of the residual method for allocating consideration, as well as the criteria that requires objective and reliable evidence of fair value of undelivered elements in order to separate the elements in a multiple-element arrangement. By removing the criterion requiring the use of objective and reliable evidence of fair value in separately accounting for deliverables, the recognition of revenue will more closely align with certain revenue arrangements. The standard also will replace the term "fair value" in the revenue allocation guidance with "selling price" to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. ASU No. 2009-13 is effective for revenue arrangements entered or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently assessing the potential impact of this standard to determine if its adoption will have a material impact on the financial condition or results of operations of the Company.

Employment Agreements

In connection with the exchange transactions and private placement of common shares that was consummated on August 13, 2010, the Company entered into employment agreements with a new management team consisting of John Long, David Kennedy and Ezra Schneier. The Company also entered into an employment agreement with Michael Mullarkey, our former Chairman of the Board, Chief Executive Officer and President. Mr. Mullarkey subsequently resigned effective as of August 25, 2010. Below is a summary of the employment agreements with our new management team.

John Long, Chief Executive Officer. Pursuant to the terms of Mr. Long’s employment agreement, Mr. Long earns an initial base salary of $250,000. Upon entering into the employment agreement, Mr. Long received 50,871 Restricted Stock Units (“RSUs”) and options to purchase 25,435 common shares exercisable at a price of $7.91 per share. Such RSUs and options vest in equal quarterly installments beginning on the three month anniversary of the date of grant; provided, however, that upon a “change of control” (as defined in the employment agreement), all unvested RSUs and options shall automatically vest. Mr. Long is also eligible to receive an annual bonus for each fiscal year of up 100% of his base salary based on achieving certain goals, which are to be mutually agreed upon, including a prorated bonus for the fiscal year ending May 31, 2011. Such bonus will be payable in cash unless the Board of Directors or the Compensation Committee of the Board determines, in its sole discretion to pay up to, but not more than, 50% of such bonus in fully vested RSUs. In the event that Mr. Long is terminated without “cause” or resigns for “good reason” (as such terms are defined in the employment agreement), Mr. Long will be entitled to severance equal to his then current salary for a period of six months following the date of termination, certain benefits for such six-month period and a prorated bonus for the year in which he is terminated.

David Kennedy, Chief Operating Officer. Mr. Kennedy earns an initial base salary of $125,000. Upon entering into the employment agreement, Mr. Kennedy received 25,435 RSUs and options to purchase 12,718 common shares exercisable at a price of $7.91 per share. Such RSUs and options vest in equal quarterly installments beginning on the three month anniversary of the date of grant; provided, however, that upon a “change of control” (as defined in the employment agreement), all unvested RSUs and options shall automatically vest. Mr. Kennedy is also eligible to receive an annual bonus for each fiscal year of up 100% of his base salary based on achieving certain goals, which are to be mutually agreed upon, including a prorated bonus for the fiscal year ending May 31, 2011. Such bonus will be payable in cash unless the Board of Directors or the Compensation Committee of the Board determines, in its sole discretion to pay up to, but not more than, 50% of such bonus in fully vested RSUs. In the event that Mr. Kennedy is terminated without “cause” or resigns for “good reason” (as such terms are defined in the employment agreement), Mr. Kennedy will be entitled to severance equal to his then current salary for a period of six months following the date of termination, certain benefits for such six-month period and a prorated bonus for the year in which he is terminated.

Ezra Schneier, Corporate Development Officer. Mr. Schneier earns an initial base salary of $125,000. Upon entering into the employment agreement, Mr. Schneier received 25,435 RSUs and options to purchase 12,718 common shares exercisable at a price of $7.91 per share. Such RSUs and options vest in equal quarterly installments beginning on the three month anniversary of the date of grant; provided, however, that upon a “change of control” (as defined in the employment agreement), all unvested RSUs and options shall automatically vest. Mr. Schneier is also eligible to receive an annual bonus for each fiscal year of up 100% of his base salary based on achieving certain goals, which are to be mutually agreed upon, including a prorated bonus for the fiscal year ending May 31, 2011. Such bonus will be payable in cash unless the Board of Directors or the Compensation Committee of the Board determines, in its sole discretion to pay up to, but not more than, 50% of such bonus in fully vested RSUs. In the event that Mr. Schneier is terminated without “cause” or resigns for “good reason” (as such terms are defined in the employment agreement), Mr. Schneier will be entitled to severance equal to his then current salary for a period of six months following the date of termination, certain benefits for such six-month period and a prorated bonus for the year in which he is terminated.

In connection with the consummation of the transactions contemplated by the Exchange Agreements on August 13, 2010, Thomas Danis and Mitch Tuchman resigned as members of the Board of Directors of the Company. The Board of Directors appointed in their place Denis Sutton and John Long. Effective as of August 14, 2010, Mr. Mullarkey and Michael Gerrior resigned as members of the Board of Directors and Jeffrey Moss (Chairman) and Biju Kulathakal was appointed in their place. Upon their appointment to the Board of Directors, each new member other than Mr. Long was granted 662 RSUs and options to purchase 3,375 common shares pursuant to the terms of the Company’s 2002 Amended and Restated Stock Option Plan with an exercise price of $11.72. The RSUs and options are exercisable on the one year anniversary of the date of their grant. In addition, each non-employee director will be entitled to receive a cash Board Fee equal to $3,000 per calendar month (or $36,000 per year), payable on a quarterly basis within 10 days of the end of each such quarter. For fiscal 2011, the Board fees were paid in common shares instead of cash per the agreement of the Board of Directors. This resulted in 13,743 of common shares valued at $80,772 being issued to the Board of Directors. Additionally, for each quarter following the first quarter board fees will be paid in common shares instead of cash unless otherwise decided by the board of directors.

On October 28, 2010, the Board of Directors revised the management team’s employment agreements to replace the Restricted Stock Units granted under their employment agreements with Rule 144 common shares that will be issued in accordance with the vesting terms of the original Restricted Stock Units.

William Becker, Senior Vice President, Tax Credit and Incentive Services. Mr. Becker has entered into a three year employment agreement with the Company and earns an initial base salary of $145,000. Mr. Becker is also eligible to receive a quarterly bonus for each calendar quarter of up $15,000 based on achieving certain goals, which are to be mutually agreed upon. Mr. Becker is also eligible to receive annual bonus of 12.5% of the difference between $400,000 and the calendar year 2011 EBITDA. Such bonus will be payable in cash within 30 days following the accounting and financial closing of the quarterly period.

Shaung Liu, Senior Vice President, Tax Credit and Incentive Services. Mr. Liu has entered into a three year employment agreement with the Company and earns an initial base salary of $145,000. Mr. Liu is also eligible to receive a quarterly bonus for each calendar quarter of up $15,000 based on achieving certain goals, which are to be mutually agreed upon. Mr. Liu is also eligible to receive annual bonus of 12.5% of the difference between $400,000 and the calendar year 2011 EBITDA. Such bonus will be payable in cash within 30 days following the accounting and financial closing of the quarterly period.

NOTE 2.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

	Year Ended			Year Ended
	May 31, 2011			May 31, 2010

Balance at beginning of the period	$	442,195		$	928,430
Charged to bad debt expense		296,901			553,443
Write-offs and effect of exchange rate changes		(168,018	)		(1,039,678	)
Balance at end of the period	$	571,078		$	442,195

The Company uses historical experience and knowledge of and experience with specific customers in order to assess the adequacy of the allowance for doubtful accounts. Any adjustments to this account are reflected in the accompanying consolidated statements of operations and comprehensive loss as a selling and marketing expense.

NOTE 3.

SENIOR SECURED NOTES PAYABLE

On December 11, 2009, the Company entered into an Exchange Agreement (collectively, the “2009 Exchange Agreements”) with each of the Holders of its 2008 Notes pursuant to which, among other things, each Holder exchanged its existing 2008 Note for: (i) a replacement senior secured non-convertible note (a “Non-Convertible Note”); (ii) a senior secured convertible note that is convertible into the Company's common shares at a conversion price of $100.00 (a “$100.00 Convertible Note”); and, (iii) a senior secured convertible note that is convertible into the Company's common shares at a conversion price of $40.00 (a “$40.00 Convertible Note,” and together with the Non-Convertible Notes and the $100.00 Convertible Notes, collectively, the “2009 Secured Notes”). Pursuant to the terms of the separate 2009 Exchange Agreements, the Company issued Non-Convertible Notes in an aggregate principal amount of $9,500,000, $100.00 Convertible Notes in an aggregate principal amount of $6,650,000, and $40.00 Convertible Notes in an aggregate principal amount of $5,361,337. The aggregate principal amount of all of the 2009 Secured Notes issued pursuant to the 2009 Exchange Agreements was $21,613,516, which was the aggregate amount of principal and accrued interest outstanding under the 2008 Notes on December 11, 2009. This transaction is deemed an extinguishment of debt and new issuance for accounting purposes in accordance with ASC 470-50-40.

Each 2009 Secured Note continued to be secured by a lien on all of the assets of the Company and its subsidiaries pursuant to the terms of the then existing Security Agreement with the Holders. Interest on the 2009 Secured Note accrued at an annual rate of 9.5% increasing to 14.5% upon occurrence of default. Interest on the $100.00 Convertible Notes and the $40.00 Convertible Notes compound on a quarterly basis and was to be payable, together with principal, on July 31, 2012 (the “Original Maturity Date”). Interest on the Non-Convertible Notes compounded on a quarterly basis and was to be payable on the Original Maturity Date, while part of the principal was to be payable on a quarterly basis pursuant to an agreed upon schedule.

Upon the occurrence of an event of default, as defined in the 2009 Secured Notes, a Holder could require the Company to redeem all or a portion of such Holder’s 2009 Notes. Upon a disposition of assets or liquidity event (each as defined in the 2009 Secured Notes), the Company was required to use 100% of the net proceeds to redeem the 2009 Secured Notes. Each 2009 Secured Note also contained certain financial and other customary covenants with which the Company was required to comply. Each subsidiary of the Company previously agreed to guarantee the obligations of the Company under the 2008 Notes and reaffirmed such guarantee with respect to the 2009 Secured Notes by delivering to the Holders a Reaffirmation of Guaranty. The Company and each of the Holders also entered into a Second Amended and Restated Registration Rights Agreement principally in order to include the common shares of the Company into which the $100.00 Convertible Notes and the $40.00 Convertible Notes were convertible as registrable securities.

The Company’s 2009 Secured Notes and embedded put derivatives were valued in accordance with ASC 820 using multiple, probability-weighted cash flow outcomes at credit-risk adjusted market rates (“Forward Value”). The Senior Secured Notes with options to convert principal balances into common equity derive their value from a combination of the Forward Value and the fair value of the embedded conversion feature (“ECF”). For purposes of the ECF, management concluded that the Monte Carlo Simulations Method (“MCS”) was the appropriate technique to embody all assumptions market participants would likely consider in estimating the ECF value. The fair value of the 2009 Secured Notes and embedded put derivatives was estimated to be $33,587,376 on the date of the exchange, which resulted in a loss on extinguishment of debt of $12,076,040 included in the statement of operations for the period ending May 31, 2010. Further, in accordance with ASC 470-20-25 and ASC 470-50-40, the net premium of $12,076,040 associated with the 2009 Secured Notes was reclassified to additional paid-in capital under the presumption that such net premium represented a capital contribution in which the 2009 Secured Notes were being carried at face value.

Each of the warrants issued in connection with the 2008 Exchange Transaction that occurred in fiscal 2009 contained anti-dilution protection provisions. As a result of the Company’s issuance of the $40.00 Convertible Notes, the exercise price of the warrants that remain outstanding was adjusted to $40.00 per share from $100.00 per share and the number of common shares issuable upon exercise was proportionately increased by 10,500 to 17,500 in which $995,400 representing the fair value of this increase was included in the loss on extinguishment of debt in the statement of operations as it was directly related to the exchange of the New Secured Notes.

Furthermore, in accordance with the guidance in ASC 470-20-30, the Payment-in-Kind (“PIK”) interest associated with the $40.00 Convertible Note and $100.00 Convertible Note accrued during each quarter has to be compared to the fair value of the Company’s commons shares at the quarter end, or the commitment date, for potential interest charges derived from beneficial conversion features. During the year ended May 31, 2010, the Company recognized additional interest expense of $137,804 associated with the PIK interest’s beneficial conversion feature.

In January 2010, $148,856 of principal and accrued interest related to the $40.00 Convertible Notes was converted into 3,721 of the Company’s common shares and in February 2010, $88,932 of principal and accrued interest related to the $100.00 Convertible Notes was converted into 889 of the Company’s common shares. In March 2010, $302,203 of principal and accrued interest related to the $40.00 Convertible Notes was converted into 7,555 shares of the Company’s common stock. In April 2010, $274,790 of principal and accrued interest related to the $40.00 Convertible Notes was converted into 6,869 of the Company’s common shares.

On May 31, 2010, the Company defaulted on the 2009 Secured Notes when the quarterly principal payment was not made and the Company fell out of compliance with certain covenants. Upon default, the interest rate on the 2009 Secured Notes increased by 5%.

On August 13, 2010, the Company entered into separate 2010 Exchange and Share Purchase Agreements and a 2010 Exchange Agreement (collectively, the “Exchange Agreements”) with each of the Holders of its 2009 Secured Notes (collectively, the “Investors”) pursuant to which, among other things, the Investors exchanged their existing senior secured non-convertible notes and senior secured convertible notes (collectively, the “Notes”) (the aggregate principal amount of all the Notes, together with accrued but unpaid interest and penalties, was $22,356,665) for a total of 1,707,130 of the Company’s common shares (the “Exchange Shares”). The issuance of the Exchange Shares was deemed to be exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933. The Warrants were not affected by the transactions effected by the 2010 Exchange Agreements.

Simultaneous and in connection with the consummation of the transactions contemplated by the 2010 Exchange Agreements, the Company received an additional $750,000 from one Holder (the “Lending Investor”) in exchange for a senior secured note (the “2010 Note”). The 2010 Note secured by a lien on all of the assets of the Company and its subsidiaries pursuant to the terms of a Security Agreement among the Company, its subsidiaries and the Lending Investor (the “Security Agreement”). This note was settled in the first quarter of fiscal 2012.

Interest on the 2010 Note accrues at an annual rate of 12%. From and after the occurrence and during the continuance of any event of default under the 2010 Note, the interest rate then in effect will be automatically increased to 15% per year. Principal and interest is payable upon the maturity date of October 13, 2012. Upon the occurrence of an event of default, as defined in the 2010 Note, the Lending Investor may require the Company to redeem all or a portion of the 2010 Note. Upon a Disposition (as defined in the 2010 Note), the Company has agreed to use the Net Proceeds from such Disposition to redeem the 2010 Note. Under the 2010 Note, the Company is required to comply with various financial and other covenants and restrictions. Material covenants and restrictions include that: the Company and its subsidiaries may not redeem or repurchase any of its capital shares or declare or pay any dividend without the consent of the Lending Investor; subject to certain exceptions, the Company and its subsidiaries may not sell, lease, license, assign, transfer, convey or otherwise dispose of any assets in excess of $250,000 in any twelve-month period without the consent of the Lending Investor; the Company must maintain a minimum cash balance of not less than $250,000; as of the end of each calendar month, the Company’s cash balance plus accounts receivable that are less than 90 days old must be equal to or greater than 200% of the outstanding principal amount, interest due and late charges owing under the 2010 Note; and the Company and its subsidiaries may not have any material weakness in their control environments as reported by the Company’s auditors. Each subsidiary of the Company delivered a Guaranty pursuant to which it agreed to guarantee the obligations of the Company under the 2010 Note. On August 13, 2010, the 2010 Note had a fair value of $835,743. The Company’s 2010 Note was valued using the fair value of the forward cash flows including principal and interest payable at the maturity date using the credit-risk adjusted market rates. This value is being accreted to the face value of the 2010 Note, including accrued interest through the maturity date using the effective interest method.

The 2010 Note contains a contingent put reflected in the contractual rights of default. Upon the occurrence of an event of default, as defined in the 2010 Note, the holder could require us to redeem all or a portion of such holder’s 2010 Note at a price equal to 100% of the sum of the principal amount of the 2010 Note, accrued and unpaid interest and late fees, if any, to be redeemed. Upon the occurrence of a disposition or liquidity event, as defined in the 2010 Note, the Holder could require us to redeem all of a portion of such Holder’s 2010 Note at an amount equal to the net proceeds up to the maximum amount owed under the note including outstanding principal, unpaid interest and late fees. Under ASC 815, Derivatives and Hedging, embedded put derivatives such as these require bifurcation and separate classification at fair value. The value of the embedded put derivatives where deemed to be nil on August 13, 2010 and May 31, 2011.

Simultaneous and in connection with the 2010 Exchange Agreements and the 2010 Note, we issued 158,069 shares in a private placement of $1,250,000 by the new management team and the 2009 Note holders.

The 2010 exchange transaction met the requirements of and was accounted for under ASC 470-60, Debt: Troubled Debt Restructuring By Debtor. The Company has performed an evaluation and determined that certain prescribed indicators provided by ASC 470 guidance were met to provide evidence that the Company was having financial difficulty. In addition, the Company determined that creditor granted a concession to the Company since the fair value of the stock and 2010 Note issued to the investors was less than the carrying value of the 2009 Secured Notes and the cash received from the private placement and the 2010 Note. The fair value of the stock issued in the exchange and the private placement was determined to be $12.00 per share considering guidance of ASC 820, Fair Value Measurements and Disclosures. The excess of the carrying value of the 2009 Secured Notes, less issuance costs, plus cash received in the exchange over the fair value of the common stock and debt issued in the exchange was recorded as a gain on extinguishment of debt totaling $1,192,635. The basic gain per common share was $0.66 and the diluted gain per common share was $0.62.

NOTE 4.

LONG-TERM DEBT – RELATED PARTY

On January 18, 2011, the Company acquired Incentives Advisors. Part of the consideration given was two notes payable to the managing members of Incentives Advisors. These two individuals are the Senior Vice Presidents, Tax Credit and Incentive Services. Each note is for $117,500 and accrues interest at the rate of five percent per annum. Each note is payable in thirty equal monthly installments of principal plus interest starting on March 1, 2011. The notes may be voluntarily prepaid, in whole or in part prior to the maturity date without premium or penalty. The only event of default is failure to pay when due any principal or interest due within 10 business days thereafter. If a default does occur, the note holders have the right to declare the entire unpaid principal balance of the note, together with all accrued and unpaid interest thereon, immediately due and payable. The notes are subordinated to the Company’s Senior Secured Notes payable.


	2011		2010
Secured note payable and accrued interest, net-related party(2010 Note)	$	464,301	$	-
Long-term debt, related party		212,476		-
		676,777		-

Less current portion of:
Secured note payable and accrued interest, net-related party(2010 Note)		-		-
Long-term debt, related party		94,000		-
	$	582,777	$	-


Fiscal 2012	$	94,000
Fiscal 2013		559,277
Fiscal 2014		23,500
	$	676,777

NOTE 5.

EQUIPMENT

Equipment consists of the following at May 31:

	2011			2010
Furniture, equipment
and leasehold improvements	$	165,372		$	147,617
Office equipment		584,018			558,958
Computers and software		9,893,481			9,280,323
		10,642,871			9,986,898
Less accumulated depreciation		(10,434,146	)		(9,691,100	)
Equipment, net	$	208,725		$	295,798

Equipment includes equipment under capital lease totaling $761,355 and $1,772,545 at May 31, 2011 and 2010, respectively. Accumulated amortization relating to equipment under capital leases totaled $625,820 and $1,624,262 at May 31, 2011 and 2010, respectively. Depreciation expense for equipment was $189,619 and $801,403 for the years ended May 31, 2011 and 2010, respectively.

NOTE 6.

ACQUIRED INTANGIBLE ASSETS AND GOODWILL

Acquired intangible assets consist of the following at May 31:

	2011					2010
				Accumulated					Accumulated
	Cost			Amortization		Cost			Amortization
Customer relationships	$	663,000		$	48,834	$	-		$	-
Software developed for internal use		348,172			-		-			-
Intellectual property		1,322,760			1,322,760		1,322,760			1,322,760
		2,333,932		$	1,371,594		1,322,760		$	1,322,760

Less accumulated amortization		(1,371,594	)				(1,322,760	)
Net acquired intangible assets	$	962,338				$	-

Amortization expense for intangible assets was $48,834 and $21,500 for the fiscal years ended May 31, 2011 and 2010, respectively.

Expected future amortization expense for the customer relationships as of May 31, 2011 follows:

	Amount
Year ended May 31:
2012		132,600
2013		132,600
2014		132,600
2015		132,600
2016		83,766

Total	$	614,166

The following represents the detail of the changes in the goodwill account for the years ended May 31, 2011 and 2010:

	Human Resource			Career
	Software and			Transition
	Services			Services			Total

Goodwill at May 31, 2009	$	11,381,660		$	6,347,788		$	17,729,448
Impairment		(5,335,760	)		(6,347,788	)		(11,683,548	)
Goodwill at May 31, 2010	$	6,045,900		$	-		$	6,045,900
Purchase of Incentives Advisors	$	1,875,115		$	-			1,875,115
Impairment adjustment		685,426			-			685,426
Goodwill at May 31, 2011	$	8,606,441		$	-		$	8,606,441

Effective as of January 18, 2011, Workstream Inc. acquired Incentives Advisors. This acquisition was accounted for under the acquisition method per ASC Topic 805, Business Combinations (see Note 15). We recognized goodwill of $1,875,115 for the excess of the purchase price over the fair value of the acquired assets and liabilities assumed.

During the fourth quarter of fiscal 2010, the Company determined that indicators of impairment existed for the goodwill associated with its Human Resource Software and Services operating segment. Based on this determination, the Company performed an impairment test. In considering the current and expected future market conditions, the Company determined that the Human Resource segment goodwill was impaired in accordance with ASC 350, Intangibles – Goodwill and Other, and the Company recorded non-cash, pre-tax goodwill impairment charges of $5,335,760 during the fiscal year ended May 31, 2010. The Human Resource operating segment goodwill impairment was an estimate that had not yet been finalized. During the 1st quarter of fiscal year 2011, we had a change in management and well as a conversion of our 2009 Notes to Equity (see Note 3 for further discussion). The Company felt that these transactions could have impacted the impairment test. This delayed the impairment test and the Company was unable to fully complete Step 2 of its goodwill impairment testing prior to the issuance of the financials for fiscal year 2010. Upon finalization of Step 2, a significant adjustment to the impairment estimate was made in the 1st quarter of fiscal year 2011 totaling $685,426 resulting in a partial reversal of the estimated impairment made in the fourth quarter of fiscal 2010. During the third quarter of fiscal 2010, the Company determined that indicators of impairment existed for the goodwill associated with the Career Transition Services operating segment. The Company performed an impairment test and recorded non-cash, pre-tax goodwill impairment charges of $6,347,788 during the fiscal year ended May 31, 2010. The Company’s impairment test is based on a discounted cash flow method. The discounted cash flows analysis is an income method to valuation wherein the total fair value of the business entity is calculated by discounting projected future cash flows back to the date of valuation.

During fiscal year 2011, the Company tested the goodwill of the Human Resource operating segment for impairment and found no impairment was necessary.

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

NOTE 7. ACCRUED LIABILITIES AND ACCOUNTS PAYABLE

Accrued liabilities consist of the following at May 31:

	2011		2010
Legal, audit & professional fees	$	90,772	$	597,859
Merger costs		80,000		80,000
Consulting fees		107,958		1,208,218
Sales tax payable		329,746		637,157
Other		738,061		687,890
	$	1,346,537	$	3,211,124

NOTE 8. OTHER LONG-TERM OBLIGATIONS

The Company entered into various capital lease obligations for equipment to be housed in an outside data center facility. All capital leases are being paid on a monthly and quarterly basis.

On May 10, 2011, Workstream Inc. (the “Company”) entered into a Business Financing Agreement (the “Financing Agreement”) with Bridge Bank, National Association. The Financing Agreement is secured by a lien on all of the assets of the Company and its subsidiaries pursuant to the terms of a Stock Pledge Agreement among the Company, its subsidiaries and the Lending Investor (the “Pledge Agreement”). The credit limit on the Financing Agreement is $3,000,000. Interest on the Financing Agreement accrues at an annual rate of the Prime Rate plus 2% with the Prime Rate having a minimum of 3.25%. From and after the occurrence and during the continuance of any event of default under the Financing Agreement, the interest rate then in effect will be automatically increased by 5% per year. The Financing Agreement has an annual facility fee of $15,000 or .5% of the advance balance. The Financing Agreement has a monthly maintenance fee of .125% of the average monthly balance. The Financing Agreement contains customary covenants of providing monthly financial statements within 30 days, annual audited financials with 180 days, annual board approved budget within 60 days of fiscal year end and a semi-annual accounts receivable audit. The Company must also maintain a minimum asset coverage ratio of 1.5 to 1. The Pledge Agreement sets forth that the Company has granted a security interest in all shares of capital stock, corporations, limited partnership interests and limited liability company interests that the Company now owns or hereafter acquires.

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

	2011		2010
Secured notes payable	$	901,663	$	-
Long-term payables		83,333		-
Capital lease obligations		205,111		322,973
Leasehold inducements		4,321		16,355
		1,194,428		339,328

Less current portion of:
Senior secured notes payable		-		-
Long-term obligations		135,110		200,470
	$	1,059,318	$	138,858

Maturities
Fiscal 2012	$	135,110
Fiscal 2013		1,052,513
Fiscal 2014		6,805
	$	1,194,428

NOTE 9.

COMMITMENTS AND CONTINGENCIES

Litigation

Management is not aware of any legal proceedings against the company. In the ordinary course of business the Company is sometimes subject to legal proceedings and claims. The Company does not believe that the resolution of such actions will materially affect the Company’s business, results of operations, financial condition or cash flows.

Lease Commitments

A summary of the future minimum lease payments under the Company’s non-cancelable leases as of May 31, 2011 is as follows:

	Capital Leases			Operating Leases
				Facilities		Equipment		Total
Year ended May 31:
2012		146,108			353,691		27,490		527,289
2013		75,154			308,235		20,929		404,318
2014		2,598			246,418		-		249,016


Total minimum lease payments		223,860		$	908,344	$	48,419	$	1,180,623

Less amount representing interest		(18,749	)
Total principal lease payments		205,111
Less current maturities		(146,108	)

	$	59,003

Rent expense, recorded on the consolidated statements of operations and comprehensive loss in general and administrative expense, totaled $406,789 and $448,956 for the years ended May 31, 2011 and 2010, respectively.

Retirement Plans

Since fiscal 2009, the Company has one plan with ADP Retirement Services. The Plan is a defined 401(K) contribution plan which all employees, over the age of 21, are eligible to participate in after twelve months of service. The Company is not required to contribute to the plan. There were no employer contributions made during the fiscal years ended May 31, 2011 and 2010.

NOTE 10.

CAPITAL STOCK

Classes of Stock

The authorized share capital consists of an unlimited number of common shares, no par value, 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 2,517,643 common shares issued, including 270 shares being held in escrow, as of May 31, 2011. There was no Class A Preferred Shares or Series A Shares outstanding as of May 31, 2011.

Stock Plans and Stock-Based Compensation

The Company grants stock options to employees, directors and consultants under the 2002 Amended and Restated Stock Option Plan (the “Plan”), which was most recently amended in April 2011 at the annual shareholders’ meeting. Under the Plan, as amended, the Company is authorized to issue up to 375,000 shares of common stock upon the exercise of stock options or restricted stock unit grants. The Audit Committee of the Board of Directors administers the Plan. Under the terms of the Plan, the exercise price of any stock options granted shall not be lower than the market price 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 ASC 718, which requires it to recognize expense related to the fair value of stock-based compensation awards. Stock-based compensation expense for all stock-based compensation awards granted on or subsequent to June 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of ASC 718. Compensation expense for stock option awards is recognized on a straight-line basis over the requisite service period of the award. The assumptions used to calculate the fair-value of share-based payment awards are found in Note 1 under Accounting for Stock-Based Compensation. The Company recognized the following for stock-based compensation expense resulting from stock options in the consolidated statements of operations under general and administrative expenses:

	Fiscal Years Ended
	May 31, 2011		May 31, 2010

Stock compensation expense - options	$	216,169	$	82,176

Stock option activity and related information is summarized as follows:

								Weighted
				Weighted				Average
				Average		Weighted		Remaining		Aggregate
	Number			Exercise		Average		Contractual		Intrinsic
	of Options			Price		Fair Value		Term (in Years)		Value

Balance outstanding - May 31, 2009		3,577		$	447.27
Granted		3,060			120.00	$	104.00
Exercised		-			-
Forfeited or expired		(2,251	)		412.00
Balance outstanding - May 31, 2010		4,386			236.00
Granted		81,346			8.38	$	11.71
Exercised		-			-
Forfeited or expired		(22,621	)		31.35
Balance outstanding - May 31, 2011		63,111		$	16.07				4.2	$	-

Exercisable - May 31, 2011		14,079		$	35.88				4.0	$	-

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 of $3.70 on May 31, 2011, the last trading day of the reporting period 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, 2011.

There were no options exercised during the twelve months ended May 31, 2011 and 2010; and therefore, no intrinsic value or cash received from option exercises during the period.

The Company issues new shares of common stock upon the exercise of stock options. The following table is a summary of the number and weighted average grant date fair values regarding our unexercisable/unvested awards as of May 31, 2011 and changes during the year then ended:

				Weighted
				Average
	Number			Fair Value
	of Options			Price

Unexerciseable/unvested awards
Balance outstanding - May 31, 2010		2,822		$	88.00
Granted		81,346			11.71
Vested		(13,180	)		12.52
Forfeited or expired		(21,956	)		16.07
Balance outstanding - May 31, 2011		49,032		$	14.96

The following table summarizes information about options outstanding at May 31, 2011:

Range of Exercise Prices		Number of Options Outstanding		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price		Number of Options Exercisable		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price

$	7.90 - $99.00		61,021		4.2	$	8.57		12,733		4.2	$	7.99
$	100.00 - $299.00		1,250		3.1	$	117.91		506		3.2	$	117.00
$	300.00 - $399.00		457		1.6	$	313.98		457		1.6	$	313.98
$	400.00 - $599.00		383		0.1	$	523.91		383		0.1	$	523.91
			63,111		4.2	$	16.07		14,079		4.0	$	35.88

As of May 31, 2011, $529,941of total unrecognized compensation costs related to non-vested stock options is expected to be recognized ratably over the remaining individual vesting periods up to three years. The realized tax benefit from stock options and other share based payments was nil for the twelve months ended May 31, 2011 and 2010 due to the uncertainty of realizability.

The Company grants restricted stock units (“RSUs”) 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 upon exercise by the grantee. During the vesting period, the restricted stock units cannot be transferred, and the grantee has no voting rights. The cost of the awards, determined as the fair value of the shares on the grant date, is expensed ratably over the vesting period. The stock-based compensation expense associated with the restricted stock units included in general and administrative expenses on the consolidated statements of operations and in additional paid-in capital on the consolidated balance sheets is as follows:

	Fiscal Years Ended
	May 31, 2011		May 31, 2010

Stock compensation expense - RSUs	$	531,281	$	79,504

As of May 31, 2011, $1,002,254 of total unrecognized compensation costs related to non-vested restricted stock unit grants is expected to be recognized ratably over the remaining individual vesting periods up to three years.

				Weighted
	Number			Average
	of Units			Fair Value

Outstanding - May 31, 2009		194
Granted		775		$	128.00
Vested and issued		(252	)
Forfeited or expired		-
Non-Vested Outstanding - May 31, 2010		717
Granted		155,298		$	11.83
Vested and issued		(25,437	)
Vested and unissued		(19,010	)
Forfeited or expired		(21,024	)
Non-Vested Outstanding - May 31, 2011		90,544

Warrants

As of May 31, 2011, the Company had outstanding warrants to purchase shares of common stock which were issued in connection with past financing arrangements. Information related to these warrants is summarized as follows:


Exercise		Expiration
Price		Date	Shares
$	4.00	October 2011		3,750
$	40.00	August 2012		16,250
				20,000

In May 2009, a warrant to purchase 2,500 shares of common stock was exercised at $100.00 per share in a series of cashless exercise transactions resulting in the issuance of 910 shares of common stock. The holder of the warrant forfeited the right to acquire 1,589 shares of our common stock under the warrant as consideration for this cashless exercise. In March 2010, a warrant to purchase 2,125 shares of common stock was exercised at $4.00 per share in a series of cashless exercise transactions resulting in the issuance of 2,006 shares of common stock. The holder of the warrant forfeited the right to acquire 118 shares of our common stock under the warrant as consideration for this consideration for this cashless exercise. In April 2010, a warrant to purchase 1,250 shares of common stock was exercised at $40.00 per share in a series of cashless exercise transactions resulting in the issuance of 155,173 shares of common stock. The holder of the warrant forfeited the right to acquire 862 shares of our common stock under the warrant as consideration for this cashless exercise. Upon the exercise of this warrant, $22,500 of common stock warrant liability was reclassified to equity.

NOTE 11.

SEGMENT AND GEOGRAPHIC INFORMATION

The Company has two reportable segments: Human Resource Software and Services and Career Transition Services. The revenue for the Human Resource Software and Services consists of revenue generated from Human Resource software, related professional services, tax incentives, applicant sourcing and recruitment research services.

The Company changed its reportable segments during fiscal year 2011. The Company was reporting the segments as Enterprise which included software and professional services and Career Networks which included recruitment research services and career transition services. The Company consolidated management, and began cross-selling the various product lines. Management believes the new segment reporting more accurately represents the present conditions within the Company.

The following tables summarize the Company’s operations by business segment for the twelve months ended May 31, 2011 and 2010:

Business Segment Information

	Fiscal Year Ended
	May 31, 2011
	Human Resource
	Software and Services			Career Transition Services			Total
Software	$	4,357,599		$	-		$	4,357,599
Professional services		342,163			-			342,163
Tax incentives		647,456			-			647,456
Job board		1,352,685			-			1,352,685
Career transition services		-			936,387			936,387
Revenue, net		6,699,903			936,387			7,636,290
Cost of revenues:
Other		703,125			33,878			737,003
Gross profit		5,996,778			902,509			6,899,287
Expenses		8,102,513			1,327,598			9,430,111
Impairment charges - goodwill		(685,426	)		-			(685,426	)
Amortization and depreciation		222,524			16,613			239,137
Business segment loss from continuing operations	$	(1,642,833	)	$	(441,702	)		(2,084,535	)

Other income and expense and income tax								776,436

Net Loss from Continuing Operations							$	(1,308,099	)
Net Income from Discontinued Operations							$	1,145,380
Net loss							$	(162,719	)

	As of May 31, 2011
	Human Resource
	Software and Services		Career Transition Services		Total

Business segment assets	$	1,497,095	$	273,169	$	1,770,264
Intangible assets, net		962,338		-		962,338
Goodwill		8,606,441		-		8,606,441
	$	11,065,874	$	273,169		11,339,043
Assets not allocated
to business segments						813,333

Total assets					$	12,152,376

Fiscal Year Ended

May 31, 2010

Human Resource

WORKSTREAM INC 10-K