**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

**FORM10-KSB**
| **x**      | ** ** | **ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                      |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                     |
|       | ** ** | **FOR THE FISCAL YEAR ENDED JUNE 30, 2006**                                                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | **For the transition period from                        to                    ** |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | **Commission File Number 33-58694**                                                                                                                                                                                                                                                      |

 

**TIME AMERICA, INC.**

(Name of smallbusiness issuer in its charter)

| **Nevada**                                                  | ** ** | **13-3465289**       |
|-------------------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of                            |       | (I.R.S. Employer     |
| incorporation of  organization)                             |       | Identification  No.) |
|                                                        |       |                 |
| **8840  East Chaparral Rd, Suite 100, Scottsdale, Arizona** | ** ** | **85250**            |
| (Address of  principal executive offices)                   |       | Zip Code             |

 

**(480)296-0400**

(Issuer’stelephone number)

Securitiesregistered under Section 12(b) of the Exchange Act:  **None**

Securities registeredunder Section 12(g) of the Exchange Act:

**CommonStock, $.005 par value**

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. Yes x No o

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. o

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

The issuer’srevenues for the fiscal year ended June 30, 2006 were $6,716,150.

Theaggregate market value of the voting stock and non-voting common equity (basedon the closing price on that date) held by non-affiliates of the registrant asof September 26, 2006 was approximately $2,385,000.

AtSeptember 23, 2006, the issuer had outstanding 15,004,404 shares of CommonStock, par value $.005 per share.

Transitional SmallBusiness Disclosure Format:   Yes o No x

 

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**PARTI**

# **Forward-Looking Information**

The statements contained in this Annual Report on Form10-KSB that are not historical fact are forward-looking statements (as suchterm is defined in the Private Securities Litigation Reform Act of 1995),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.  The forward-looking statements containedherein are based on current expectations that involve a number of risks anduncertainties.  These statements can beidentified by the use of forward-looking terminology such as “believes,” “expects,”“may,” “will,” “should,” or “anticipates,” or the negative thereof or othervariations thereon or comparable terminology, or by discussions of strategythat involve risks and uncertainties. The Company wishes to caution the reader that these forward-lookingstatements that are not historical facts are only predictions.  No assurances can be given that the futureresults indicated, whether expressed or implied, will be achieved.  While sometimes presented with numericalspecificity, these projections and other forward-looking statements are basedupon a variety of assumptions relating to the business of the Company, which,although considered reasonable by the Company, may not be realized.  Because of the number and range ofassumptions underlying the Company’s projections and forward-lookingstatements, many of which are subject to significant uncertainties andcontingencies that are beyond the reasonable control of the Company, some ofthe assumptions inevitably will not materialize, and unanticipated events andcircumstances may occur subsequent to the date of this report.  These forward-looking statements are based oncurrent expectations and the Company assumes no obligation to update thisinformation.  Therefore, the actualexperience of the Company and the results achieved during the period covered byany particular projections or forward-looking statements may differsubstantially from those projected. Consequently, the inclusion of projections and other forward-lookingstatements should not be regarded as a representation by the Company or anyother person that these estimates and projections will be realized, and actualresults may vary materially.  There canbe no assurance that any of these expectations will be realized or that any ofthe forward-looking statements contained herein will prove to be accurate.

**Item1.  Description Of Business.**

# **General**

Time America, Inc.is a Nevada corporation. We changed our name from Vitrix, Inc. to Time America,Inc. in December 2003. We develop, manufacture and market a line of time andlabor management software and hardware products.  Our products are designed to improveproductivity by automating time and attendance, workforce scheduling andmanagement of labor resources. We target our product solutions at small tomid-sized companies from 25 to 2,000 or more employees. Our solutions areoffered in a 100% web-based application service provider model, as well asclient/server and PC-based applications.

The followingbullet points provide a timeline and overview of our development and corporatehistory:

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·                                          June6, 1988—Richard Barrie Fragrances, Inc., a Nevada corporation, was formed onthis date for the purpose of developing, manufacturing and marketingfragrances, cosmetics, skin treatment and personal care products sold primarilythrough department and specialty stores and drugstores.

·                                          June30, 1996—Richard Barrie Fragrances sells substantially all of its propertiesand rights to Parlux Fragrances, Inc. During the period from this asset sale toApril 1999, our operations were limited to conducting administrative activitiesand discussions with third parties regarding possible business combinations.

·                                          July1, 1996—Following the asset sale, Richard Barrie Fragrances changes its name toFBR Capital Corporation.

·                                          April15, l999—FBR Capital Corporation acquires the outstanding capital stock ofVitrix Incorporated, a privately held Arizona corporation formed on April 26,1996, pursuant to the terms of an Exchange Agreement, dated as of such date,among FBR Capital Corporation, Vitrix Incorporated and certain of the VitrixIncorporated shareholders. Vitrix Incorporated becomes a majority ownedsubsidiary of FBR Capital Corporation as a result of this transaction. FBRCapital Corporation issued an aggregate of 8,592,826 shares of common stock and10,000,000 shares of preferred stock in consideration for the purchase ofVitrix Incorporated. This transaction resulted in the shareholders of VitrixIncorporated acquiring approximately 80% of the outstanding shares of commonstock of FBR Capital Corporation, assuming conversion of the preferred stockinto common stock and excluding outstanding options and warrants. The existingshareholders of FBR Capital Corporation held the remaining 20% of itsoutstanding common stock. This transaction was accounted for as arecapitalization of Vitrix Incorporated and the purchase of FBR CapitalCorporation by Vitrix Incorporated, since Vitrix Incorporated became thecontrolling company after the transaction.

·                                          October7, 1999—On this date we changed our name from FBR Capital Corporation toVitrix, Inc. in order to associate the name of the parent corporation to ouroperating subsidiary, Vitrix Incorporated.

·                                          March28, 2001—We acquired Time America, Inc., a private Arizona-based time andattendance software development company, in a merger transaction pursuant towhich Time America was merged into our wholly-owned subsidiary, Vitrix Incorporated.This transaction was accounted for as a pooling of interests. As a condition tothe merger, we sought and obtained the approval of our shareholders to effect a1-for-10 reverse stock split, which occurred on April 5, 2001. We issued3,147,914 shares of Vitrix, Inc. common stock, on a post reverse stock splitbasis, as consideration in the merger, which represented approximately 50% ofVitrix Inc.’s then issued and outstanding capital stock.

·                                          April17, 2001—We changed the name of our wholly-owned subsidiary from VitrixIncorporated to Time America, Inc. in order to capitalize on Time

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America’s name recognition gained from its 13 year history in the timeand attendance industry.

·                                          December9, 2003—On this date we changed the name of our parent company, Vitrix, Inc.,to Time America, Inc., to further capitalize on the name recognition of TimeAmerica as described above.

·                                          October20, 2005—On this date we formed a subsidiary, NetEdge Devices, LLC, an Arizonalimited liability company, to manufacture and distribute a new line of advanceddata collection devices that track and display critical labor informationacross a variety of industries.

We market our products tocompanies in the U.S. and abroad through our Business Alliance and ResellerProgram.

Time America, Inc. is a holding corporation.  Our operations are conducted through ourwholly-owned subsidiaries, one of which is also named Time America, Inc.  Our other subsidiary is NetEdge Devices,LLC.  Unless the context indicatesotherwise, references to the Company in this report shall include both TimeAmerica (the parent company organized in Nevada), Time America (ourwholly-owned subsidiary organized in Arizona) and NetEdge Devices LLC.

# **Productsand Services**

### **Summary**

Wedesign, develop, manufacture and market a line of time and labor managementhardware and software products targeting small, medium, and enterprise levelcompanies. Our solutions are offered in a 100% web-based licensed or hostedmodel, client/server configuration, and in a PC-based application.  Our products are internally developed,proprietary software applications that maintain and automate the process ofcollecting time and human resource data. We provide automated interfaces to most popular payroll, accounting andERP software solutions in the marketplace and enable users to generate avariety of reports that track and analyze workforce productivity. Our productsalso automatically accrue vacation, sick and personal time, and effectivelyreplace the traditional punch clock with a fully automated system designed toimprove workforce productivity and provide significant time and cost savings toits users.

### **SoftwareSolutions**

We currently have a suite of seven different softwaresolutions to meet the needs of a wide variety of clients.  Features that are common to our softwaresolutions include:

·                                          **Time Management** – Our products automate the management,collection, and distribution of employee time, eliminating the need for manualtimesheets.  Our products have flexiblerules engines that apply complex work and pay rules accurately and consistentlythroughout an organization.

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·                                          **Attendance Management –**Our products allow organizations toautomate and streamline the administration and enforcement of complexattendance policies.  They providemanagement the tools to control absenteeism and reduce the costs associatedwith it.

·                                          **Workforce Scheduling**– Our software suites’ schedulingfeatures help manage payroll costs and productivity concerns by minimizing thelikelihood of expensive overstaffing and the negative effects of understaffing.Schedule creation is performed with the assistance of a unique visualinterface, allowing administrators to view employees’ schedules in a convenientcalendar format.

·                                          **Customization** – Our product architecture allows forthe products to be easily customized to conform to an organization’s unique setof payroll policies and concerns.

·                                          **Accrual Management**– Leave records for vacation, sick andpersonal time are maintained by our software. Our products also track hours that are specific to a certain accrualtype (i.e. PTO, jury duty, training, etc.), and automate benefit accruals byusing a company’s policies to calculate how much benefit time an employee hasearned.

·                                          **Strategic Reporting** – Our products also feature a multitudeof standard reports. These reports allow users to transform basic data intohelpful information that enable managers and executives to gain valuableinsight and more effectively manage their organizations. Reports can also beused to share information such as time tracking, benefit usage, job costing,human resource functionality and employee scheduling with third-partyapplications and/or service bureaus.

·                                          **Job and Task Tracking**– In addition to tracking total timespent on the job, our products enable employers to track the time employeesspend on specific jobs and tasks.  Thispowerful feature assists companies with job costing, analysis and billing.

Oursuite of software products includes the following:

#### **NETtime**

NETtime is a 100% web-based softwareapplication provided to customers through both a licensed and hosted modelwhich allows for unique customization andflexibility.  Administrators andemployees determine which data NETtime will display for them, allowingcustomers to work at optimum efficiency. NETtime has the capability of working in any environment required byclients.  For example, clients with amobile workforce have the ability to access the NETtime pages using anyweb-enabled cellular phone.  BecauseNETtime is delivered via the Internet through any web browser, it brings theuser closer to our “anytime, anywhere” vision for performing or self-servicinghuman resources tasks.  Wherever clientshave Internet access, they have access to NETtime and the functionality and wealthof information it provides.

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NETtime allows customer self service by giving usersthe ability to view their account status online. They can even order additionalTime America products, obtain system help, or contact a support representativedirectly from our NETtime website.

With NETtime’s flexibility and scalability the productis used in all the market segments the Company sells in.  We believe that web-based software and thehosted model will continue to gain acceptance in the marketplace and, becauseof this belief we consider NETtime vital to our future.

#### **GENESISSQL**

Our****GENESIS SQL product is a powerful, client-server softwaresystem that is primarily used by medium and enterprise level companies.  It is our most feature-rich product in oursuite of software solutions, with over 15 years of product evolution.  GENESIS SQL supports complex pay rules andhas the most robust scheduling functionality of our product suite.  GENESIS SQL also has access control andoccurrence ratings modules that are not currently found in any of our otherproducts.

#### **GENESISPRO**

GENESIS PRO is amedium and enterprise level PC-based software application that has the samefeature set of GENESIS SQL.

#### **HourTrack**

HourTrack is the predecessor to NETtime and is aclient-server software system that is primarily used by medium and enterpriselevel companies.

#### **TA100PRO**

Our TA100 PRO PC-based time and attendance solution isdesigned for companies with fewer than 500 employees.  An optional feature of the TA100 PRO solutionincludes a Bell Control Module that allows a client to define bell-ringingschedules and prompt terminals to activate a user supplied bell, alarm, orother audible signaling device.

#### **TA50PRO**

TA50 PRO is an easy to use, yet powerful PC-based timeand attendance solution designed for companies with fewer than 200employees.  TA50 PRO enables companies toautomate their timekeeping and attendance tracking with easy to use built-insetup wizards and a simplified user interface.

#### **TA50XL**

TA50XL is a userfriendly PC-based time and attendance solution that includes the softwarefeatures of TA50 PRO and an XL data terminal and accessories in acost-effective package.

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### **DataCollection Products**

InNovember 2005, we formed a subsidiary, NetEdge Devices, LLC, an Arizona limitedliability company, to manufacture and distribute a new line of advanced datacollection devices that track and display critical labor information across avariety of industries.  NetEdge Devices,which is headquartered in Scottsdale, Arizona, offers the TA7000 family of datacollection devices as a private label solution to software applicationdevelopment companies, systems integration providers and value-addedresellers.  The TA7000 device tracks timeand attendance information, and can easily be integrated into a company’sexisting human resources system, including payroll.  The device can also integrate with othercorporate systems, such as employee self services, enterprise resourceplanning, manufacturing resource planning and security and access control.  The TA7000 family of products is manufacturedand offered through our subsidiary, NetEdge Devices.

Ourtime and attendance product solutions typically include hardware devices and/orsoftware designed to collect employees’ clock in and out times.  The following paragraphs summarize thevarious hardware devices and software tools we have developed to meet thechallenges of a diverse array of work environments:

·                                          **Badge Terminals** – Our badge readers are well suited fora wide variety of environments, from doctors’ offices to manufacturing plants.Employees clock in and out by simply sliding a badge through a scanner.

·                                          **Fingerprint Terminals –**Our fingerprintterminal uses one-to-one and one-to-many technology to verify the user’sidentity.  The use offingerprint technology eliminates losses due to buddy-punching (the practice ofone employee clocking in or out for another employee).

·                                          **HandPunch Biometric Terminals –**Our devicesanalyze the biometric measurements of a user’s hand to verify theiridentity.  Instead of using a badge, anemployee clocks in and out by placing his or her hand onto the scanner andawaiting verification.  This terminaleliminates losses due to buddy-punching.

·                                          **Iris Technology Terminal –**Our iristechnology devices use digital video imaging of the uniquepatterns found in the iris of the eye and provide high integrity biometricauthentication of an employee without PIN numbers, passwords or ID cards.

·                                          **TelePunch**– Our TelePunch solution allows employeesto clock in and out for the day, for jobs, or for departments using anytouch-tone telephone.  Clients whopurchase this solution receive a pre-configured, telephony server from us. Thisserver runs our software, and allows callers to interact with HourTrack from aremote location.

·                                          **WebClock**– Our eWebClock partially reduces a user’stotal time and attendance product investment by utilizing the Internet tocollect employee clock in and out

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times.  Employees can clock in and out by simplylogging on to a web page (via the local network or the World Wide Web).

·                                          **PC Time Clock**– PC Time Clock allows employees to clockin and out on a Windows-based computer. This device is generally beneficial in office environments whereemployees each have access to their own desktop computer.

·                                          **Web browser** – NETtime allows clients to access theirtime and attendance service through a standard web browser.  The full range of actions (clocking in andout, transferring jobs and departments, etc.) and information (hours worked,schedules, status board, etc.) are available.

·                                          **Web-enabled cell phone**– A streamlined version of NETtime isavailable to clients accessing the service through a text-only browser, such asthose operating on cell phones with wireless access protocol (wap)capability.  Essential services such asclocking in and out are available.

·                                          **TCP/IP-enabled hardware** – Customers may utilize TCP/IP-enabledhardware devices, such as badge readers, to collect clock in and out data fromtheir employees.

·                                          **Wireless enabled hardware**– Our wireless enabled hardware devicesallow clients to connect their time clocks to a host system without theinconvenience of wiring. The wireless units are small, reliable and easy tointegrate into a user’s existing system.

# **Services and Support**

We maintain a professional service andtechnical support organization, which provides a suite of maintenance andprofessional services.  These servicesare designed to support our customers throughout the life cycle of ourproducts.  Our professional servicesinclude implementation, training, and technical consulting.  Maintenance service options are deliveredthrough our centralized support operation or through local servicepersonnel.  Our educational servicesoffer a full range of curriculums, which are delivered through local trainingat our Scottsdale, Arizona headquarters via the Internet.  When necessary, we also provide softwarecustomization services to meet a customer’s unique requirements.

# **Marketing and Sales**

Wemarket and sell our products to the small, medium and select enterprise marketsin the United States and foreign countries through our Reseller Program and ourBusiness Alliance Program.  As discussedmore fully below, we sold certain of our direct sales assets in March 2006 andnow have limited direct sales operations. We believe the market for time and labor management products consist ofthe following three business segments:

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·                                          *Small Businesses*.  The small business segment is comprised ofcompanies with fewer than 250 employees and one to three administrator(s) who performtime sheet edits and prepare employee hours for payroll.

·                                          *Medium Sized Businesses*.  The medium sized business segment iscomprised of companies with 250 to 1,000 employees.  These companies normally have two or moreadministrators who perform time sheet edits and prepare employee hours from asingle office.  In many cases multiplestations are necessary for clocking in and out, however, all data isadministered from a central location.

·                                          *Enterprise Businesses*.  Enterprise businesses generally have over1,000 employees with multiple field offices, each of which have one or moreadministrators.  Payroll is performed ateither distributed locations or centrally at a headquarters office.  An enterprise customer is analogous to acollection of mid-sized businesses requiring centralized data collection andstorage to ensure regulatory compliance and common application of pay rules.

***Direct Sales***

Effective March 31, 2006, we closed on the sale ofcertain of our direct sales assets to a third party pursuant to an AssetPurchase Agreement.  Under the terms ofthe agreement, certain assets that were associated with our direct salesbusiness were sold, including a copy of the source code and other intellectualproperty relating to our NETtime, HourTrack and GENESIS time and attendancesoftware products, related ASP and maintenance contracts, and certain specifieddirect channel sales opportunities. Prior to this sale, we employed five direct sales account managersresponsible for designated geographic regions. The primary markets for our direct sales were the upper mid-sized andenterprise markets. Generally, this is a horizontal market (i.e., the productsare able to meet the needs of more than one industry), however, there tends tobe higher concentrations of solution adopters in retail, financialinstitutions, manufacturing and service industries, and in the public andprivate sectors.  City, state and localgovernments are also adopters of our solutions.

Subsequent to the March 31, 2006 asset sale, we onlysell directly to a few select accounts. Our direct sales group also sells to companies that are referred to usthrough a member company in our Business Alliance Program.

***Reseller Program***

OurReseller Program is comprised of a network of approximately 250 value addedresellers located throughout the United States and in certain foreigncountries.  These resellers market ourproducts along with their complementary product and service offerings andtypically sell to the small and medium markets.

***Business Alliance Program***

OurBusiness Alliance Program is a program that allows organizations to align withthe Company through the use of private label, OEM or referral programs.

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***Growth Strategy***

We have a longhistory of providing high quality time and labor management products to ourtargeted markets. Our goal is to maintain and strengthen our market position.We intend to pursue the following growth strategies to attain this goal:

·                                          *Expand Business Alliance Program*.  We plan to continue to add partners to ourbusiness alliance program.

·                                          *Leveraged Distribution*. We plan to continue to enter into relationships with strategic partnersto enable us to do rapid and wide-scale private label distribution of ourproducts.

·                                          *Expand Reseller Sales Organization*.  To better service our growing reseller base,we have added an additional Regional Account Representative to cover our newlycreated North Central territory.  In addition, we have added a pre-salessupport person to help resellers with product demonstrations, qualifications,and to address all other channel sales needs, as necessary.  This positionwill also have responsibility for developing remote dealer workshops and salestraining courses.

·                                          *Introduction of New Technologies*.  We intend to continue to introduce and expandinto new technologies that will differentiate us from our competitors by makingour products more scalable, easily customized and adding new features.  In July 2005, we introduced our internallydeveloped proprietary hardware device designed to support multiple modes ofemployee data identification, including biometrics.

***Market Opportunity***

We believe the market for time and labor managementsoftware and hardware products is large and growing. Our belief is based onmarket data on associated markets, such as payroll, which show that thesemarkets are growing and we believe there is a correlation between these marketsand the time and labor management market. This belief is further bolstered by the numerous competitors that existin the time and attendance space.  Therealso exists opportunities to displace a current provider or an in-housesolution. There are currently no definitive figures on the market size of thetime and attendance market.

***Backlog***

We believe that the dollar amount of our backlog isnot material to an understanding of our business since substantially all of ourproduct revenues in each quarter result from orders received in that quarter. As of June 30, 2006, we had no backlog.

# **Manufacturing and Sources of Supply**

The duplication of oursoftware products is performed internally. The printing of documentation is primarily outsourced to suppliers.  In July 2005, we began producing our own

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datacollection hardware device, which we had previously purchased fromsuppliers.  The majority of the assembly of the printed circuit boardsused in our data collection terminals is completed by approved suppliers.  All final assembly and testing of our datacollection terminals is completed at our Scottsdale, Arizona facility.

Although most of theparts and components included within our products are available from multiplesuppliers, certain parts and components are purchased from singlesuppliers.  We have chosen to sourcethese items from single suppliers because we believe that the supplier chosenis able to consistently provide us with the highest quality product at acompetitive price on a timely basis. While to date we have been able to obtain adequate supplies of theseparts and components, the inability to transition to alternate supply sources ona timely basis if required in the future, could result in delays or reductionsin product shipments, which could have a material adverse effect on ourbusiness and operating results.

# **Product Development**

Our product development efforts are focused on enhancingand increasing the performance of our existing products and developing newproducts. During fiscal 2006 and 2005, research and development expenses were$1,496,686 and $1,405,477, respectively. The increase in research and development expenses in fiscal 2006 isattributable to increased payroll expense and contract labor expensesattributable to the development of our new hardware device.  We intend to continue to commit resources toenhance and extend our product lines and develop interfaces to third partyproducts and expect to fund such efforts with our cash flow from our operationsand borrowings under our existing credit facilities.  Although we are continually seeking tofurther enhance our product offerings and to develop new products, there can beno assurance that these efforts will succeed, or that, if successful, suchproduct enhancements or new products will achieve widespread market acceptance,or that our competitors will not develop and market products that are superiorto our products or achieve greater market acceptance.  We also depend upon the reliability andviability of a variety of software development tools owned by third parties todevelop our products. If these tools prove inadequate or are not properlysupported, our ability to release competitive products in a timely manner couldbe materially adversely impacted.

# **Proprietary Rights**

We rely on a combination of trademarks, trade secretlaw and contracts to protect our proprietary technology.  We generally provide software products toend-users under non-exclusive shrink-wrap licenses or under signed licenses,both of which may be terminated by us if the end user breaches the terms of thelicense.  These licenses generallyrequire that the software be used only internally subject to certainlimitations, such as the number of employees, simultaneous users, computermodel and serial number, features and/or terminals for which the end user haspaid the required license fee.  Weauthorize our resellers to sublicense software products to end users undersimilar terms.  In certain circumstances,we also make master software licenses available to end users, which permiteither a specified limited number of copies or an unlimited number of copies ofthe software to be made for internal use.  Some customers license software products underindividually negotiated terms.  Despitethe precautions we have

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taken to protect our proprietary technology, it may be possible to copyor otherwise obtain and use our products or technology without authorization.  In addition, effective copyright and******trade secret protection may beunavailable or limited in certain foreign countries.

# **Competition**

We provide time labor management and data collectionsolutions that enable businesses to optimize their labor resources.  The labor management industry is highlycompetitive.  Competition is increasingas businesses in related industries, such as human resources management,payroll processing and enterprise resource planning (“ERP”), enter the time andattendance market.  Advances in softwaredevelopment tools have accelerated the software development process and,therefore, enable competitors to penetrate our markets more readily.  We believe we have certain technological andother competitive advantages over a number of our competitors.  These advantages include our productfeatures, our ability to customize our products quickly and our ability tointroduce and implement new technologies quickly.  Although we believe these advantages existtoday, maintaining them will require continued investment by us in research anddevelopment and marketing and sales initiatives.  There can be no assurance that we will havesufficient resources to make such investments or to achieve the technologicaladvances necessary to maintain our competitive advantages.  Increased competition could adversely affectour operating results through price reductions and/or loss of market share.

We compete primarily on the basis ofprice/performance, quality, reliability and customer service.  In the time and attendance market, we competeagainst firms that sell automated time and attendance products to manyindustries, firms that focus on specific industries, and firms selling relatedproducts, such as payroll processing, human resources management, or ERPsystems.  Many of our competitors may be able to adaptmore quickly to new or emerging technologies or to devote greater financial andother resources to the promotion and sale of their products. Some of ourcompetitors have significantly greater financial, technical and sales andmarketing resources than we have, as well as more experience in delivering timeand attendance solutions.  Our majorcompetitor, Kronos Corporation, is substantially larger and has access tosignificantly greater financial resources than we do.  Competitive market conditions could have amaterial adverse effect on our business, financial condition and results ofoperations.

# **Employees**

As of June 30, 2006, we employed 41 individuals.  None of our employees are represented by a unionor other collective bargaining agreement, and we consider our relations withour employees to be good.  We haveencountered competition for experienced technical personnel for productdevelopment, technical support and sales and expect such competition tocontinue in the future.  Any inability toattract and retain a sufficient number of qualified technical personnel couldadversely affect our ability to produce, support and sell our products in atimely manner.

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**Item 2.Description of Property.**

Our executiveoffices are located in Scottsdale, Arizona and consist of approximately 13,000square feet under a lease that expires in April 2010.  Our annual rental expense for this facility,and our previous facility, in fiscal 2006 was approximately $320,000.

We believe ourpresent facilities are adequate for our current requirements and thatadditional space will be available as needed in the future.

**Item 3.Legal Proceedings.**

We are from timeto time involved in legal proceedings arising from the normal course ofbusiness.  As of the date of this report,we were not currently involved in any legal proceedings.

**Item 4.Submission Of Matters To A Vote Of Security Holders.**

No matter wassubmitted to vote of our security holders during the fourth fiscal quarter coveredby this report.

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**PARTII**

**Item 5. Market For Common Equity AndRelated Stockholder Matters.**

**Market for Common Stock**

Our common stock is quoted on the Over-The-CounterBulletin Board maintained by the NASD under the symbol “TMAM.OB.”  The high and low bid prices of our commonstock as reported for the periods presented, by fiscal quarter (i.e., 1st Quarter = July 1 through September 30), wereas follows.  The quotations reflectinter-dealer prices, without retail markup, mark-down or commission and may notrepresent actual transactions.

|                                   | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------|------------|----------|------------|---------|------------|
| FISCAL YEAR ENDED: June  30, 2004 |       |     |       |    |       |
| First Quarter                     |       | $        | 1.00       |    | $          | 0.35 |   |
| Second Quarter                    |       | 1.50     |       | 0.77    |       |
| Third Quarter                     |       | 1.45     |       | 1.05    |       |
| Fourth Quarter                    |       | 1.20     |       | 0.85    |       |
|                              |       |     |       |    |       |
| FISCAL YEAR ENDED: June  30, 2005 |       |     |       |    |       |
| First Quarter                     |       | $        | 0.91       |    | $          | 0.51 |   |
| Second Quarter                    |       | 1.00     |       | 0.51    |       |
| Third Quarter                     |       | 1.00     |       | 0.55    |       |
| Fourth Quarter                    |       | 0.75     |       | 0.51    |       |
|                              |       |     |       |    |       |
| FISCAL YEAR ENDED: June  30, 2006 |       |     |       |    |       |
| First Quarter                     |       | $        | 0.75       |    | $          | 0.51 |   |
| Second Quarter                    |       | 0.72     |       | 0.55    |       |
| Third Quarter                     |       | 0.63     |       | 0.45    |       |
| Fourth Quarter                    |       | 0.55     |       | 0.36    |       |

 

**Holders**

As of September 25, 2006, there were approximately 260holders of record of our common stock. We believe there were approximately 900 beneficial owners as of suchdate.

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**Dividend Policy**

To date, we have not paid any cash dividends and ourpresent policy is to retain earnings for use in our business.

**EQUITYCOMPENSATION PLAN INFORMATION**

The following table sets forth information regardingthe number of shares of our common stock that may be issued pursuant to our equitycompensation plans or arrangements as of the end of fiscal 2006.
| **Plan Category**                                     | ** ** | **Number of Securities  To Be Issued Upon  Exercise of Outstanding  Options, Warrants  and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available For  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected  in First Column)** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by securityholders     |       | 497,985                                                                                                                                          | (1)        | $                                                                                                           | 2.95       |                                                                                                                                                                                                           | 102,015    | (2) |
| Equity compensation plans  not approved by securityholders |       | 3,456,946                                                                                                                                        | (3)        | $                                                                                                           | 0.69       |                                                                                                                                                                                                           | —     |   |
| TOTAL                                                      |       | 3,954,931                                                                                                                                        |       | $                                                                                                           | 0.98       |                                                                                                                                                                                                           | 102,015    |   |

 

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(1)          Representsshares of common stock that may be issued pursuant to outstanding optionsgranted under our 1999 Equity Compensation Plan.

(2)          Representsshares of common stock that may be issued pursuant to options available forfuture grant under our 1999 Equity Compensation Plan.

(3)          Represents(a) an aggregate of 2,165,490 shares of common stock underlying non-statutorystock options approved by the Company’s board of directors and granted todirectors and employees of the Company (the “Options”).  The options have vesting schedules rangingfrom immediate vesting to four year vesting and have an exercise price equal tothe closing bid price of the common stock on the date of grant and a ten yearterm; and (b) an aggregate of 1,291,456 shares of common stock purchasable uponexercise of warrants issued to various parties in connection with debt andequity offerings and for services rendered by contractors.  See Note No. 7 to our Consolidated FinancialStatements for a detailed description of the terms of these warrants.

**Recent Sales of UnregisteredSecurities**

Set forth below isinformation regarding securities sold by us since January 1, 2002 which werenot registered under the Securities Act.

In March 2003, weissued 47,797 shares of our common stock to certain resellers of our productspursuant to an incentive sales program. The program established the grant of common stock based on theachievement of certain sales levels during the period September 1, 2002 toDecember 31, 2002.  We did not receiveany funds in consideration for the issuance of the

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common stock.  We issued these shares in a transactionexempt from registration under Section 4(2) of the Securities Act.

In August 2003, wecompleted a private placement of 1,303,000 shares of common stock at a price of$0.42 per share.  We received netproceeds of $519,897 and used those funds primarily for additional sales andengineering resources.  We issued theseshares in a transaction exempt from registration under Section 4(2) of theSecurities Act.

In November 2003,we completed a private placement of 1,433,999 shares of common stock at a priceof $0.75 per share.  We received netproceeds of $967,950 and used those funds primarily for additional sales andengineering resources.  We issued theseshares in a transaction exempt from registration under Section 4(2) of theSecurities Act.

In November 2003,we issued 143,400 warrants to brokers in connection with a private placement ofour common stock.  The exercise price ofthe warrants is $0.90 per share and is exercisable through November 2006.  We issued these warrants in a transactionexempt from registration under Section 4(2) of the Securities Act.

In March 2004, weconsummated a private placement pursuant to which we issued a $2,000,000principal amount secured convertible term note due March 22, 2007, togetherwith a common stock purchase warrant entitling the holder to purchase 280,000shares of common stock.  The note and thewarrant were sold to a single “accredited investor”, as such term is defined inthe rules promulgated under the Securities Act, Laurus Master Fund, Ltd., for apurchase price of $2,000,000.  Theprincipal and unpaid interest on the note are convertible into shares of ourcommon stock at an original fixed conversion price of $1.17 per share, whichwas based on the weighted average price of our common stock for the twentytrading days immediately prior to the issuance of the note.  Such conversion price is subject toanti-dilution adjustments based on the occurrence of certain corporateevents.  The note provides for monthlypayments of interest at the prime rate, which is subject to reduction if themarket price of our common stock exceeds certain designated thresholds.  Under the terms of the note, if the averageprice of the stock for the five trading days preceding a scheduled payment is10% greater than the fixed conversion price, the scheduled payment is paid bythe conversion of common stock. If the scheduled payment is not made withcommon stock, the payment is made with cash. In June 2005, we amended the conversion price of the note. Theconversion price on the first $300,000 of the note was reduced to $0.50 pershare and the conversion price on the remainder of the note was reduced to$0.65 per share.  The warrant entitlesthe holder thereof to purchase, at any time through March 22, 2011, 200,000shares of our common stock at a price of $1.29 per share; 40,000 shares of ourcommon stock at a price of $1.35 per share; and 40,000 shares of our commonstock at a price of $1.40 per share.  Weissued the note and the warrant in a transaction exempt from registration underSection 4(2) of the Securities Act.

The privateplacement of the note and the warrant with Laurus in March 2004 was facilitatedby The Oberon Group, LLC (Oberon) in consideration for which Oberon was paid anadvisory fee of $150,000, and granted a warrant to purchase, at any timethrough March 22, 2007, 136,364 shares of our common stock at a per share priceof $1.10.  We issued the warrant in atransaction exempt from registration under Section 4(2) of the SecuritiesAct.

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In April 2004, theCompany entered into a subordinated note agreement with a shareholder and existingdebt holder.  Under the terms of theagreement, an existing term note was refinanced as a five year term note withmonthly principal and interest payments at 15%. In consideration for agreeing to subordinate repayment of the note tothe Laurus note, we issued 25,000 shares of restricted common stock to theholder of the subordinated note.  Weissued these shares in a transaction exempt from registration underSection 4(2) of the Securities Act.

In June 2005, weentered into a security agreement with Laurus that provided that we may borrowfrom time to time revolving loans up to $1,500,000 subject to a borrowing basecalculation based on our eligible accounts receivable.  Borrowings under the revolving facility,evidenced by notes, accrue interest at the prime rate payable monthly. Pursuantto the terms of the Agreement, Laurus shall have the right at any time untilthe maturity date, or during an event of default, to convert all or any portionof the outstanding notes into fully paid restricted shares of our common stockat a fixed conversion price of $0.65. The principal amount of all outstanding loans together with any accruedand unpaid interest is due as of June 23, 2008. We also issued Laurus a common stock purchase warrant entitling theholder to purchase 210,000 shares of common stock, at any time through June 23,2012, as follows:  150,000 shares of at aprice of $0.72 per share; 30,000 shares at a price of $0.75 per share; and30,000 shares at a price of $0.78 per share. We issued the notes and the warrant in a transaction exempt fromregistration under Section 4(2) of the Securities Act.

The privateplacement of the credit facility and the warrant with Laurus in June 2005 wasfacilitated by Oberon in consideration for which we agreed to pay Oberon anadvisory fee of $112,500, and granted Oberon a warrant to purchase, at any timethrough June 23, 2008, 173,077 shares of the Company’s common stock at a pershare price of $0.65.  In January 2006,Oberon agreed to accept one-half of its advisory fee, or $56,250, in shares ofour common stock, at a per share price determined by the average price at whichour common stock trades in the five days following the date on which thisregistration statement is declared effective. We issued the warrant, and will issue the shares, in transactions exemptfrom registration under Section 4(2) of the Securities Act.

In January 2006,we entered into a security and purchase agreement with Laurus to refinance ourobligations to Laurus under our prior arrangements, and to obtain an additional$1 million in new financing.  Under theterms of the agreement, we issued a $2 million convertible term note and a $1.5million non-convertible revolving note. The term note was fully drawn, with $1,058,310 of the proceeds of theterm note used to repay in full the March 22, 2004 Laurus note. Under therevolving facility, we may borrow from time to time revolving loans up to$1,500,000 subject to a borrowing base calculation based on our eligibleaccounts receivable and eligible inventory. Borrowings under the notes accrue interest at the prime rate plus 2%,with a 7.25% minimum interest rate, payable monthly.  Pursuant to the terms of the agreement,Laurus has the right to convert all or any portion of the outstanding term noteinto fully paid restricted shares of the Company’s common stock at a fixedconversion price of $0.65 if the average market price of such stock for thefive (5) days preceding the payment is 10% above the initial fixed conversionprice of $0.65 per share.  The revolvingnote matures on January 3, 2008 and the term note matures on January 3,2009.  We also issued to Laurus a commonstock purchase warrant entitling the holder to purchase 140,000 shares ofcommon stock, at any time through

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January 3, 2013, at aprice of $0.65 per share.  We issued thenotes and the warrant in a transaction exempt from registration underSection 4(2) of the Securities Act.

The privateplacement of the notes and the warrant with Laurus in January 2006 wasfacilitated by Oberon in consideration for which we agreed to pay Oberon anadvisory fee of $70,627, payable in shares of our common stock, at a per shareprice determined by the average price at which our common stock trades in thefive days following the date on which this registration statement is declaredeffective.  We also granted Oberon awarrant to purchase, at any time through January 3, 2009, 108,657 shares of ourcommon stock at a per share price of $0.65. We issued the warrant, and will issue the shares, in transactions exemptfrom registration under Section 4(2) of the Securities Act.

No underwriterswere involved in the foregoing sales of securities.  The securities described in the foregoingparagraphs were issued in reliance upon the exemption from the registrationrequirements of the Securities Act under Section 4(2) of the Securities Act andRule 506 of Regulation D promulgated thereunder relating to sales by an issuernot involving any public offering.  Thepurchasers of our securities represented to us in connection with theirpurchase that they were accredited investors and were acquiring the shares forinvestment and not distribution, that they could bear the risks of theinvestment and could hold the securities for an indefinite period of time.  The purchasers received written disclosuresthat the securities had not been registered under the Securities Act and thatany resale must be made pursuant to an effective registration statement or anavailable exemption from such registration requirement.  We did not engage in any general solicitationor advertising in connection with the sales. Unless otherwise indicated, the proceeds from the private offering wereused for general working capital needs.

**Item 6.  Management’sDiscussion and Analysis Or Plan Of Operation.**

The following discussion and analysis providesinformation that management believes is relevant to an assessment andunderstanding of our results of operations and financial condition for theperiods presented.  The following selected financial information isderived from our historical financial statements and should be read inconjunction with such financial statements and notes thereto set forthelsewhere herein and the “Forward-Looking Statements” explanation includedherein.

**Critical Accounting Policies**

The discussion andanalysis of our financial condition and results of operations is based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amount of revenues and expenses for each period.  Criticalaccounting policies are defined as policies that management believes are (a)the most important to the portrayal of our financial condition and results ofoperations; and (b) that require our most difficult, subjective or complexjudgments, often as a result of the need to make estimates about the effects ofmatters that are inherently uncertain.

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Our significantaccounting policies are described in the audited consolidated financialstatements and notes thereto included herein.  We believe our mostcritical accounting policies are revenue recognition, software developmentcosts and the allowance for potentially uncollectible accounts receivable. Thislisting is not a comprehensive list of all of our accounting policies. Please refer to Note 1 in the notes to our consolidated financial statementsincorporated by reference herein for further information.

We licensesoftware and sell data collection hardware and related ancillary products toend-user customers through our direct sales force as well as reseller channelcustomers through independent resellers. Our software license revenue is earnedfrom perpetual licenses of off-the-shelf software requiring none or minormodification or customization. The software license, data collection hardwareand related ancillary product revenues from our end-user customers and resellerchannel customers are generally recognized when:

·                  Persuasiveevidence of an arrangement exists, which is typically when a non-cancelablesales and software license agreement or purchase order has been signed;

·                  Delivery,which is typically FOB shipping point, is complete for the software (eitherphysically or electronically), data collection hardware and related ancillaryproducts;

·                  Thecustomer’s fee is deemed to be fixed or determinable and free of contingenciesor significant uncertainties;

·                  Collectibilityis probable; and

·                  Objectiveevidence of fair value exists for all undelivered elements, typicallymaintenance and professional services.

The fair value of the undelivered elements is deferredand the remaining portion of the arrangement fee is allocated to the deliveredelements and is recognized as revenue, assuming all other conditions forrevenue recognition have been satisfied. Substantially all of our salesagreements contain allocations of the purchase price among the various elementsof the arrangement.  If we cannotdetermine the fair value of any undelivered element included in an arrangement,we will defer revenue until all elements are delivered, services are performedor until fair value can be objectively determined.

As part of an arrangement, end-user customerstypically purchase maintenance contracts as well as professional services fromus.  Maintenance services includetelephone and web-based support as well as rights to unspecified upgrades andenhancements, when and if we make them generally available. Professionalservices are typically for implementation, installation of the software anddata collection hardware, training, building interfaces and custom features,and running test data.

Revenues from maintenance services are recognizedratably over the term of the maintenance contract period, which is usually oneyear.  Maintenance services are typicallystated separately in an arrangement. We have classified the value of revenuespertaining to the contractual maintenance obligations that exist for the12-month period subsequent to the balance sheet date as a current liability,and the contractual obligations with a term beyond 12 months, if present, as anon-current liability.

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Revenues from customer support services are recognizedas the services are delivered.  Revenuesfrom professional services are generally recognized based on vendor specificobjective evidence of fair value when:

·                  Anon-cancelable agreement for the services has been signed or a customer’spurchase order has been received;

·                  Theprofessional services have been delivered;

·                  Thecustomer’s fee is deemed to be fixed or determinable and free of contingenciesor significant uncertainties; and

·                  Collectibilityis probable.

Vendor specific objective evidence of fair value isbased upon the price charged when these services are sold separately and aretypically an hourly rate for professional services and a per-class rate fortraining. Based upon our experience in completing professional services, wehave determined that these services are typically delivered within a 12-monthperiod subsequent to the contract signing and therefore classify deferred professionalservices as a current liability.

Our arrangements with end-user customers and resellerchannel customers do not include any rights of return or price protection, nordo arrangements with reseller channel customers include any acceptanceprovisions. Our arrangements with end-user customers generally include ourstandard acceptance provision. Our standard acceptance provision states thatthe customer’s acceptance of the products shall be deemed to occur uponcompletion of running our standard diagnostic tests.

At the time we enter into an arrangement, we assessthe probability of collection of the fee and the terms granted to thecustomer.  For end-user customers, thetypical payment terms include a deposit and subsequent payments, based onspecific due dates, such that all payments for the software license, datacollection hardware and related ancillary products, as well as servicesincluded in the original arrangement, are ordinarily due within one year ofcontract signing. Our payment terms for reseller channel customers aretypically due within 30 days of the invoice date.

If the arrangement includes a substantive acceptanceprovision, we defer revenue not meeting the criterion for recognition underStatement of Position 97-2, “Software Revenue Recognition,” and classify thisrevenue as deferred revenue, including deferred product revenue. This revenueis recognized, assuming all other conditions for revenue recognition have beensatisfied when the uncertainty regarding acceptance is resolved as generallyevidenced by written acceptance or payment of the arrangement fee. If thepayment terms for the arrangement are considered extended, we defer revenue onthe arrangement until the payment of the arrangement fee becomes due. Thedeferred amounts related to arrangements with extended payment terms areremoved from deferred revenue and accounts receivable, as we have determinedthat these amounts do not represent either receivables or deferred revenueuntil the payment becomes due. We report the allocated fair value of revenuesrelated to the product element of arrangements as a current liability becauseof the expectation that these revenues will be recognized within 12 months ofthe balance sheet date.

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We capitalize software development costs in accordancewith Statement of Financial Accounting Standards No. 86, “Accounting for theCosts of Computer Software to be Sold, Leased, or Otherwise Marketed.”Capitalization of software development costs begins upon the establishment oftechnological feasibility of the product.  The establishment oftechnological feasibility and the ongoing assessment of the recoverability ofthese costs requires considerable judgment by management with respect tocertain external factors including, but not limited to, anticipated futuregross product revenue, estimated economic life, and changes in software andhardware technology.  Amortization of capitalized software developmentcosts begins when the products are available for general release to customersand is computed on a product-by-product basis using straight-line amortizationwith useful lives of five years or, if less, the remaining estimated economiclife of the product.  Amounts related to internal software developmentthat could be capitalized under this statement were deemed immaterial for theyears ended June 30, 2006 and 2005.

Weprovide for potentially uncollectible accounts receivable by use of theallowance method.  The allowance isprovided based upon a review of the individual accounts outstanding, and ourprior history of uncollectible accounts receivable.  It is our practice torecord an estimated allowance for sales returns and adjustments based onhistorical experience and to record individual charges for sales returns andadjustments directly to revenue as incurred.

**Results of Operations**

**SELECTED FINANCIAL INFORMATION**
| ** **                          | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                |       |                                                |       |   |   |   |   |
| Total Revenues                      |       | $                                                   | 6,716,150  |   | $ | 6,082,238 |   | $ | 4,837,121 |   |
| Costs of Revenues                   |       | 3,255,645                                           |       | 2,575,742 |   | 2,123,704 |   |
| Gross Profit                        |       | 3,460,505                                           |       | 3,506,496 |   | 2,713,417 |   |
| Sales and Marketing  Expense        |       | 2,133,116                                           |       | 2,012,813 |   | 1,903,044 |   |
| Research and  Development Expense   |       | 1,496,686                                           |       | 1,405,477 |   | 890,093 |   |
| General and  Administrative Expense |       | 1,373,055                                           |       | 1,785,779 |   | 922,495 |   |
| Other Expense                       |       | 403,383                                             |       | 322,821 |   | 148,228 |   |
| Net Loss                            |       | (1,945,735                                          | )          | (2,020,394 | ) | (1,150,443 | ) |
| Basic Loss per Share                |       | (0.13                                               | )          | (0.15 | ) | (0.09 | ) |
|                                     |            |                                                     |            |  |  |  |  |  |  |  |

*Revenues:*
| ** ** | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |
|------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| ** ** | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
|       |       |                 |       |                       |       |                 |       |                       |       |                 |       |
| Revenues   |       | 6,716,150            |       | 10                         | %          | $                    | 6,082,238  |                       | 26         | %                    | $          | 4,837,121 |   |
|            |            |                      |            |                            |            |                      |            |                            |            |                      |            |  |  |

See “Product Sales”and “Service Revenue” below for discussion on the change.

*Product Sales:*
| ** **                                   | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |
|----------------------------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
|                                         |       |                 |       |                       |       |                 |       |                       |       |                 |       |
| Product sales                                |       | 4,802,715            |       | 9                          | %          | $                    | 4,421,647  |                       | 20         | %                    | $          | 3,686,428 |   |
| Product sales as a percent of total revenues |       | 72                   | %          | —                     |       | 73                   | %          | —                     |       | 76                   | %          |
|                                              |            |                      |            |                            |            |                      |            |                            |            |                      |            |  |  |

 

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Product revenues increased in fiscal years 2006 and2005 as a result of an increase in customer demand for our products in eachfiscal period.  The increase in theamount of product sales was accomplished through an increase in sales volume asour pricing has remained relatively flat over the last two fiscal years.

The decline in product sales as a percent of totalrevenues is principally due to our increased focus on selling more serviceswith each product sale.  We believe thatincreasing the level of services in each sale leads to a better overallsolution for our customers.

*Service Revenue:*
| ** **                                     | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |   |
|------------------------------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|--------|
| ** **                                     | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
|                                           |       |                 |       |                       |       |                 |       |                       |       |                 |       |
| Service Revenue                                |       | $                    | 1,913,435  |                       | 15         | %                    | $          | 1,660,591                  |       | 44                   | %          | $      | 1,150,693 |   |
| Service revenue as a percent of total revenues |       | 28                   | %          | —                     |       | 27                   | %          | —                     |       | 24                   | %          |
|                                                |            |                      |            |                            |            |                      |            |                            |            |                      |            |        |  |  |  |

The increase inservice revenue in fiscal 2006 and 2005 was primarily attributable to theincrease in product sales during these periods, as services are generally soldin conjunction with product sales.  Asdiscussed above, we have focused on selling more services with each productsale.  In addition, our hosted NETtimeservice revenue increased by 53% and 84%, respectively, in fiscal 2006 and 2005as this product has continued to gain acceptance in the marketplace.

*Gross Profit*:

|                      | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
|                 |       |                 |       |                 |       |                 |       |
| Product gross margin |       | 50                   | %          | 59                   | %          | 58                   | %          |
|                 |       |                 |       |                 |       |                 |       |
| Service gross margin |       | 56                   | %          | 53                   | %          | 49                   | %          |
|                 |       |                 |       |                 |       |                 |       |
| Total gross margin   |       | 52                   | %          | 58                   | %          | 56                   | %          |

The decrease inoverall and product gross profit is primarily due to a loss on the softwareportion of a $2,150,000 software and hardware contract with a Fortune 100company.  The costs for development ofthe software exceed our revenues for the software by approximately$177,000.  If the revenue and costs underthis contract were removed, our overall product margins for the current yearwould be in line with our normal margins as discussed below.  Notwithstanding the foregoing, we do expectto achieve a gross profit on the contract as a whole as it is fulfilled overthe next year.

The gross profitpercentage on our products is within our historical range of gross profitpercentages. Our gross profit percentage on products is typically between 55%and 60% depending upon the mix of software versus hardware sales and the makeupof hardware sales.

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Our product revenue iscomprised of software and hardware sales, with hardware sales yielding asignificantly lower gross profit than software sales.   Hardwarerevenue is principally comprised of two versions of general data collectionterminals, badge terminals and biometric units.  Our gross profit isgreater on badge terminals than biometric units because the market for ourbiometric units is very price sensitive and therefore constrains the margin onthe terminals.  The market for badgeterminals is not as price sensitive and, as a result, we are able to achievehigher margins on those units.

Theincrease in the gross profit percentage on services revenue is due to theincrease in services revenue while increasing our utilization rate of ourservice personnel.

*TotalExpenses*:
| ** **                                               | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
|                                                     |       |                 |       |                       |       |                 |       |                       |       |                 |       |
| Total costs and  expenses                                |       | 5,002,857            |       | (4                         | )%         | $                    | 5,204,069  |                       | 40         | %                    | $          | 3,715,632 |   |
| Total costs and expenses as a percent  of total revenues |       | 75                   | %          | —                     |       | 86                   | %          | —                     |       | 77                   | %          |
|                                                          |            |                      |            |                            |            |                      |            |                            |            |                      |            |  |  |

 

See the belowdiscussion for details on the changes within the expense categories.

*Sales andMarketing Expense*:
| ** **                                                 | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |
|------------------------------------------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
|                                                       |       |                 |       |                       |       |                 |       |                       |       |                 |       |
| Sales and marketing  expense                               |       | $                    | 2,133,116  |                       | 6          | %                    | $          | 2,012,813                  |       | 6                    | %          | $ | 1,903,044 |   |
| Sales and marketing expense as a percent of total revenues |       | 32                   | %          | —                     |       | 33                   | %          | —                     |       | 39                   | %          |
|                                                            |            |                      |            |                            |            |                      |            |                            |            |                      |            |  |  |  |

 

Sales and marketing expenses increased by 6% fromfiscal 2005 to 2006, with the percent of revenue figure decreasing by 1% asrevenues increased by 10% over the prior year. We experienced an increase of approximately $230,000 in payroll andcommission expenses in fiscal 2006, which were offset by an approximatedecrease of $155,000 in marketing programs. These marketing programs consisted of trade shows, advertising and leadgeneration programs.

Sales and marketing expenses increased by 6% fromfiscal 2004 to 2005, with the percent of revenue figure decreasing by 6% asrevenues increased by 26% over the prior year. We experienced a decrease of approximately $95,000 in payroll andcommission expenses in fiscal 2005, which were offset by an approximateincrease of $160,000 in marketing programs implemented to expand marketawareness of our products in fiscal 2005.

*Researchand Development Expense:*
| ** **                                                      | ** ** | ** **           | ** ** | **% Change**     | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
|                                                            |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Research and  development expense                               |       | $                    | 1,496,686  |                  | 6          | %                    | $          | 1,405,477                  |       | 58                   | %          | $ | 890,093 |   |
| Research and development expense as a percent of total revenues |       | 22                   | %          | —                |       | 23                   | %          | —                     |       | 18                   | %          |
|                                                                 |            |                      |            |                       |            |                      |            |                            |            |                      |            |  |  |  |

 

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The increase inresearch and development expenses from fiscal 2005 to 2006 is primarily due toincreases of approximately $133,000 in payroll expense.  The increase in research and developmentexpenses from fiscal 2004 to 2005 is primarily due to increases ofapproximately $250,000 in payroll expense and contract labor and $165,000 indevelopment costs attributable to our new hardware device.  We have increased our payroll and contractlabor over the last two years in order to make significant improvements to oursoftware products and develop our own proprietary hardware device.  We are also devoting resources for asignificant contract for a customized solution for a Fortune 100 company.

*Generaland Administrative Expense*:
| ** **                                                        | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |
|-------------------------------------------------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
|                                                              |       |                 |       |                       |       |                 |       |                       |       |                 |       |
| General and  administrative expense                               |       | $                    | 1,373,055  |                       | (23        | %)                   | $          | 1,785,779                  |       | 94                   | %          | $ | 922,495 |   |
| General and administrative expense as a percent of total revenues |       | 20                   | %          | —                     |       | 29                   | %          | —                     |       | 19                   | %          |
|                                                                   |            |                      |            |                            |            |                      |            |                            |            |                      |            |  |  |  |

 

The decrease ingeneral and administrative expenses from fiscal 2005 to fiscal 2006 isprimarily attributable to an expense of $729,500 associated with the inducedconversion on a convertible debt instrument in 2005, as discussed below.  In the current year payroll costs increasedby approximately $113,000 over the prior year and we incurred approximately$87,000 in general and administrative costs in the current year as a result ofthe adoption of FASB Statement No. 123(R) at the beginning of fiscal 2006.  We also incurred approximately $60,000 inexpenses associated with the preparation and filing of a registration statementin the current year.

The increase in general and administrative expensesfrom fiscal 2004 to fiscal 2005 is primarily attributable to an expense of$729,500 associated with the induced conversion on a convertible debtinstrument. We amended the conversion price of an existing convertible notewith Laurus Master Funds. The conversion price on the first $300,000 of thenote was reduced to $0.50 per share and the conversion price on the remainderof the note was reduced to $0.65 per share. We agreed to amend the conversion price to increase our ability to makescheduled future debt service payments in common stock rather than cash,thereby conserving our cash.

*Other Expense*:
| ** **                                   | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |
|----------------------------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
|                                         |       |                 |       |                       |       |                 |       |                       |       |                 |       |
| Other Expense                                |       | $                    | 403,383    |                       | 25         | %                    | $          | 322,821                    |       | 118                  | %          | $ | 148,228 |   |
| Other expense as a percent of total revenues |       | 6                    | %          |                       |       | 5                    | %          | —                     |       | 3                    | %          |
|                                              |            |                      |            |                            |            |                      |            |                            |            |                      |            |  |  |  |

 

Other income(expense) consists primarily of interest expense.  The increase in otherexpense is primarily due to an increase of approximately $330,000 in interestexpense for the current year.  Interestexpense has increased because we are carrying over $1,050,000 in additionaldebt since June 2005.  Also included in other income in 2006 is again on sale of assets of

24

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approximately $510,000 as discussed inthe notes of the accompanying consolidated financial statements.

We recorded a losson extinguishment of debt in the amount of $298,000 in the current year as aresult of a restructuring of debt in January of this year as discussed in thenotes to the accompanying consolidated financial statements.

**Liquidityand Capital Resources**

CashFlow Highlights:
| ** **                                                | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** | **% Change**          | ** ** | ** **           | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **Fiscal 2006** | ** ** | **2006 to 2005** | ** ** | **Fiscal 2005** | ** ** | **2005 to 2004** | ** ** | **Fiscal 2004** | ** ** |
| Net cash from  operations                                 |       | $                    | (2,300,699 | )                          | (150       | )%                   | $          | (918,819                   | )          | 50                   | %          | $ | (1,843,648 | ) |
| Purchase of property  and equipment                       |       | $                    | (256,475   | )                          | 2          | %                    | $          | (262,673                   | )          | (74                  | )%         | $ | (147,751 | ) |
| Cash from sale of  assets                                 |       | $                    | 530,428    |                       | n/a        |                 | $          | —                     |       | n/a                  |       | $ | — |   |
| Proceeds from debt                                        |       | $                    | 2,650,797  |                       | 77         | %                    | $          | 1,500,000                  |       | (40                  | )%         | $ | 2,500,000 |   |
| Repayment of debt                                         |       | $                    | (1,372,239 | )                          | (35        | )%                   | $          | (1,016,156                 | )          | (478                 | )%         | $ | (175,613 | ) |
| Proceeds from stock and  exercise of options and warrants |       | $                    | 1,675      |                       | 284        | %                    | $          | 436                        |       | (100                 | )%         | $ | 1,492,288 |   |
| Net change is cash                                        |       | $                    | (746,513   | )                          | (7         | )%                   | $          | (697,212                   | )          | (138                 | )%         | $ | 1,813,134 |   |
| Cash at end of year                                       |       | $                    | 615,204    |                       | (55        | )%                   | $          | 1,361,717                  |       | (34                  | )%         | $ | 2,058,929 |   |

 

As of June 30,2006, we had a working capital deficit of $580,808, as compared to workingcapital of $851,916 at June 30, 2005.

*Operations*.  Thenet cash used from operations in fiscal 2006 was primarily attributable to thenet loss of $1,945,735.  Alsocontributing to the net cash used were increases in accounts receivable of$810,152 and inventory of $175,440.  Netcash used during this period was partially offset by an increase in accountspayable of $265,227.

*Investment Activities*. Our use of cash for property and equipment includes investments in informationsystems and infrastructure to support expanding operations.  We also relocated our facilities duringfiscal 2005.

EffectiveMarch 31, 2006, we closed on the sale of certain of our direct sales assets toa third party pursuant to the terms of an Asset Purchase Agreement (the “PurchaseAgreement”). Under the terms of the Purchase Agreement, certain assetsassociated with our direct sales business were sold, including a copy of thesource code and other intellectual property relating to our NETtime, HourTrackand GENESIS time and attendance software products, related ASP and maintenancecontracts, and certain specified direct channel sales opportunities.

25

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The sale generated cash to us at closing ofapproximately $530,000. The purchase price under the Purchase Agreementincluded cash payable to us at the closing in consideration for a copy of thesource code and related intellectual property sold in the transaction. Theconsideration for the ASP and maintenance contracts was determined based onmultiples of the projected annualized revenues under such contracts.  At closing, we received in cash 100% of thetotal consideration for the customer ASP contracts and 40% of the totalconsideration for the maintenance contracts conveyed to the purchaser.  The remaining consideration for themaintenance contracts is payable quarterly over the 14 month period ending inJune 2007.  We will also be transitioningover additional ASP customers over the next six months, which the Company willbe paid for at the time of such transfers. Additionally, for the 12-month period following the closing, we willreceive monthly royalty payments equal to 27.5% of the revenues in connectionwith direct channel sales opportunities specified at closing.

*Financing Activities.* Our repayment of debt in the current period increased from the prior yearperiod as we paid off the balance on a term note.  Further information regarding this can befound in Note 4 in the accompanying consolidated financial statements.

Our liquidity isaffected by many factors, some based on the normal ongoing operations of ourbusiness and others related to the uncertainties of the time and attendanceindustry and global economies.  Althoughour cash requirements will continue to fluctuate based on the timing and extentof these factors, we believe that our current cash reserves, cash generatedfrom operations, cash received from our asset sale (see “Investment Activities”above), recent financings, and our borrowing capacity under our two creditfacilities, will be sufficient to satisfy commitments for capital expendituresand other cash requirements for the next 6 months. At August 31, 2006 we hadapproximately $1,350,000 outstanding under our $1,500,000 revolving note (see “RecentSales of Unregistered Securities”).  Wecan borrow up to the $1,500,000 limit assuming we have sufficient eligibleaccounts receivable and inventory balances. We also have $250,000 in unused capacity under a line of credit with ashareholder of the Company (see “CertainRelationships and Related Transactions”).

The ability to raise additional capital in public orprivate markets will primarily be dependent upon prevailing market conditionsand the demand for our products and services. No assurance can be given that we will be able to raise additionalcapital, when needed or at all, or that such capital, if available, will be onacceptable terms. In the absence of obtaining additional financing, the Companymay be unable to fund its operations and may experience defaults under certainof its contractual agreements, including our credit facilities and leaseagreements for our corporate headquarters. Our lease agreements are subject to termination in the event of adefault.  Certain of the parties to theseagreements could take legal action against the Company to collect amounts owedto them.  Accordingly, the Company’sfinancial condition could require that the Company seek the protection ofapplicable reorganization laws in order to avoid or delay actions by thirdparties, which could materially adversely affect, interrupt or cause thecessation of the Company’s operations. As a result, the Company’s independentcertified public accountants have issued a going concern opinion on the consolidatedfinancial statements of the Company for the fiscal year ended June 30, 2006.

26

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# **Certain Factors That May Affect Future OperatingResults**

Ouractual operating results may differ from those indicated by forward-lookingstatements made in this Form 10-KSB and presented elsewhere by managementbecause of a number of factors, including the demand for our softwaresolutions, level of competition, success in establishing and expanding ourdistribution channels, success in attracting and retaining motivated andqualified personnel, ability to expand into existing and new domestic andinternational markets, development and marketing of new products and services,ability to control costs, our ability to develop and market our products andservices, competitive pricing pressure, ability to attract and retain strategicpartners, managing growth and capital and general economic conditions.  Our operating results will be materially andadversely affected if we do not successfully address these and otherrisks.  Many of these factors are beyondour control.

*Growth and Capital Needs.*** **The growth of ourbusiness could require us to expend funds in excess of the cash generated byour operations.  We may need to raiseadditional funds in the future in order to develop new and enhanced products;to increase customer support or technical staff; to respond to competitivepressures; and to acquire complimentary businesses, technologies, or services.  We cannot predict the timing and amount ofany such capital requirements at this time. If we raise additional funds through the issuance of equity orconvertible securities, existing stockholders may experience additionaldilution and such securities may have rights, preferences, or privileges seniorto those of the rights of our common stockholders.  There can be no assurance that we will beable to obtain additional financing on acceptable terms, or at all.  If adequate funds are not available onacceptable terms, we may not be able to fund expansion, promote our products,take advantage of acquisition opportunities, develop or enhance products andservices, or respond to competitive pressures.

*Competitive Factors*.  The market for software solutions is constantlyevolving and extremely competitive.  Weexpect competition to intensify in the future. We compete with major domesticcompanies.  Many of these competitorshave greater market recognition and substantially greater financial, technical,marketing, distribution, and other resources than we have, and we may be unableto compete effectively against them. Emerging companies also may increase theirparticipation in the market for software applications such as that offered bythe Company.

*ProductDevelopment and Technological Change*. Our success depends inpart upon our ability to enhance our existing products and services and todevelop new products and services on a timely and cost effective basis.  We cannot provide assurance that we will beable to successfully identify new opportunities and develop and bring to marketnew products and services in a timely and cost-effective manner.  In addition, we cannot provide assurance thatour products and services will not become obsolete, noncompetitive, or that theywill sustain market acceptance.

We maynot be able to adapt to rapidly changing technologies or we may incursignificant costs in doing so.  Thesoftware industry is characterized by rapidly changing technologies, evolvingindustry standards, frequent new product and service introductions, andchanging customer demands.  New turn keybusiness solution products and services based on new technologies or newindustry standards could render our existing products and services obsolete andunmarketable.  To be successful, we mustadapt to our rapidly evolving market by

27

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continually enhancing ourproducts and services and introducing new products and services to address ourusers’ changing and increasingly sophisticated requirements.  We may use new technologies ineffectively orwe may fail to adapt our products and infrastructure to meet customerrequirements, competitive pressures, or emerging industry standards.  We could incur substantial costs if we needto modify our services or infrastructure. Our business could be materially and adversely affected if we incursignificant costs to adapt, or cannot adapt, to these changes.

*Strategic Partners.*** **Our success depends on forming relationshipswith affiliates, resellers and licensees.** **The success of our business modeldepends upon a constant revenue stream generated by a high number ofend-users.  Our business modelcontemplates attracting end-users by forming relationships with affiliates,resellers, and licensees that market our products and services.  We believe that it will be less costly andmore efficient for us to attract end-users through indirect distributionchannels than to attempt to attract the end-users directly, which is why weelected to sell certain of the assets associated with our direct sales business.  Consequently, we must establish and maintainrelationships with resellers and licensees. We may not be able to attract additional affiliates, resellers, orlicensees on acceptable terms, or at all. Our business, financial condition and results of operations will bematerially and adversely affected if we fail to establish and maintainrelationships with affiliates, resellers, and licensees on a cost-effectivebasis.

# **Recent Accounting Pronouncements**

In November 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 151(“SFAS 151”), “Inventory Costs.” SFAS 151 amends the guidance in APBNo. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage). SFAS 151 requires that those items be recognized ascurrent period charges regardless of whether they meet the criteria of “soabnormal.” In addition, SFAS 151 requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. SFAS 151 is effective for financial statementsissued for fiscal years beginning after June 15, 2005. The adoption ofSFAS 151 did not have a material affect on our financial position orresults of operations.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 153 (“SFAS 153”), “Exchanges ofNonmonetary Assets.”  SFAS 153amends the guidance in APB No. 29, “Accounting for Nonmonetary Assets.”  APB No. 29 was based on the principlethat exchanges of nonmonetary assets should be measured on the fair value ofthe assets exchanged. SFAS 153 amends APB No. 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance if the future cash flows of the entity are expectedto change significantly as a result of the exchange. SFAS 153 is effectivefor financial statements issued for fiscal years beginning after June 15,2005. The adoption of SFAS 153 did not have a material affect on ourfinancial position or results of operations.

28

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Effective July 1, 2005, we adopted the fair valuerecognition provisions of Statement of Financial Accounting StandardNo. 123(R), “Share–Based Payment,” using the modifiedprospective-transition method. Under this transition method, compensationexpense recognized for the year ended June 30, 2006 includes: (a) compensation expense for all share-based payments granted prior to,but not yet vested as of June 30, 2005, based on the grant date fair valueestimated and (b) compensation expense for all share-based paymentsgranted subsequent to June 30, 2005, based on the grant date fair valueestimated in accordance with the provisions of SFAS 123 (R). Results for priorperiods have not been restated. The fair value of option grants is estimated asof the date of grant utilizing the Black-Scholes option-pricing model and amortizedto expense over the options’ vesting period.

As a result of adopting SFAS 123(R) on July 1,2005, our net loss for the year ended June 30, 2006 was $129,183 higher than ifwe had continued to account for share-based compensation under APB 25.

In June 2005, the FASB issued Statement of FinancialAccounting Standards No. 154, (“SFAS 154”), “Accounting Changes andError Corrections, a replacement of APB Opinion No. 20, “AccountingChanges” and FASB Statement No. 3, “Reporting Accounting Changes in InterimFinancial Statements.”  SFAS 154 appliesto all voluntary changes in accounting principle and changes the requirementsfor accounting for and reporting a change in accounting principle. SFAS 154requires the retrospective application to prior periods’ financial statementsof the direct effect of a voluntary change in accounting principle unless it isimpracticable. APB No. 20 required that most voluntary changes inaccounting principle be recognized by including in net income of the period ofthe change the cumulative effect of changing to the new accounting principle.FASB stated that SFAS 154 improves financial reporting because its requirementsenhance the consistency of financial information between periods. Unless earlyadoption is elected, SFAS 154 is effective for fiscal years beginning afterDecember 15, 2005. Early adoption is permitted for fiscal years beginningafter June 1, 2005. SFAS 154 does not change the transition provisions ofany existing accounting pronouncements, including those that are in atransition phase as of the effective date of this statement.  The adoption of SFAS 154 is not expectedto have a material affect on our financial position or results of operations.

In June 2006, the Financial Accounting StandardsBoard (FASB) issued FASB Interpretation No. (FIN) 48, “Accounting forUncertainty in Income Taxes—An Interpretation of FASB Statement No. 109”,which prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The adoption of FIN 48 is not expected tohave a material affect on our financial position or results of operations.

In February 2006, the FASB issued SFASNo. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment ofFASB statements No. 133 and 140” (“SFAS 155”). SFAS No. 155 allows financialinstruments that have embedded derivatives to be accounted for as a whole(eliminating the need to bifurcate the derivative from its host) as long as theentire instrument is valued on a fair value basis. The statement also resolvesand clarifies other specific SFAS No. 133 and SFAS No. 140 related issues. SFASNo. 155 is effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15,2006. The adoption of SFAS 155 is not expected to have a material affect on ourfinancial position or results of operations.

In March 2006, theFASB issued Statement of SFAS No. 156, “Accounting for Servicing of FinancialAssets—an amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 requiresan entity to recognize a servicing asset or servicing liability each time itundertakes an obligation to service a financial asset by entering into aservicing contract in specific situations. Additionally, the servicing asset orservicing liability shall be initially measured at fair value, if practicable.SFAS 156 permits an entity to choose either the amortization method or fairvalue measurement method for subsequent measurement of the servicing asset orservicing liability. SFAS 156 is effective for our fiscal year ending June 30,2008. The adoption of SFAS 156 is not expected to have a material affect on ourfinancial position or results of operations.

In September,2006, the Financial Accounting Standard Board issued a Statement of FinancialAccounting Standards SFAS No. 157 (“SFAS 157”). The Statement defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement is effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. The adoption of SFAS 157 is not expected to have a materialaffect on our financial position or results of operations.

# **Inflationand Seasonality**

We do not believethat our operations are significantly impacted by inflation.  Our business is not seasonal in nature.

29

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**Item 7. Financial Statements.**

The financial statements and schedules are includedherewith commencing on page F-1.
| Report of Independent  Registered Public Accounting Firm                   |   |   |
|----------------------------------------------------------------------------|--------|--------|
| Consolidated Balance Sheet                                                 |   |   |
| Consolidated Statements of Operations                                      |   |   |
| Consolidated Statements of Changes in Stockholders’  Equity (Deficit) |   |   |
| Consolidated Statements of Cash Flows                                      |   |   |
| Notes to Consolidated Financial Statements                                 |   |   |

 

**Item 8.  Changes In And Disagreements With AccountantsOn Accounting And Financial Disclosure.**

Not applicable.

**Item 8A. Controls and Procedures.**

Based on an evaluation of the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)under the Securities Exchange Act of 1934, as amended), our Chief ExecutiveOfficer and Chief Financial Officer have concluded that such controls andprocedures were effective as of the end of the period covered by this report.

In connection with such evaluation, no change inour internal control over financial reporting occurred during the fourth fiscalquarter of the period covered by this report that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

**Item 8B. Other Information.**

None.

30

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**Reportof Independent Registered Public Accounting Firm**

Boardof Directors and Stockholders ofTime America, Inc. and Subsidiary

We haveaudited the accompanying consolidated balance sheets of Time America, Inc.and Subsidiary as of June 30, 2006 and 2005 and the related consolidatedstatements of operations, stockholders’ equity (deficit), and cash flows forthe years then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audits include consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of TimeAmerica, Inc. and Subsidiary at June 30, 2006 and 2005 and theresults of its consolidated operations and its cash flows for the years thenended, in conformity with accounting principles generally accepted in the UnitedStates.

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 9 to theconsolidated financial statements, the Company has suffered recurring lossesfrom operations and has a net capital deficiency that raise substantial doubtabout its ability to continue as a going concern. Management’s plans in regardto these matters are also described in Note 9. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.
| /s/ Semple & Cooper, LLP |   |   |
|------------------------------|--------|--------|
|                         |
| Phoenix, Arizona             |
| August 30, 2006              |

 

F-1

----

** **

**TIME AMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED BALANCE SHEETS
| ** **                                                                                                             | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                             | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| ** **                                                                                                             | ** ** | ** **        | ** ** | ** **        | ** ** |
| **ASSETS**                                                                                                             | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Current Assets:**                                                                                                    | ** ** | ** **        | ** ** | ** **        | ** ** |
| Cash and cash  equivalents (Note 1)                                                                                    |       | $                 | 615,204    |              | $          | 1,361,717 |   |
| Accounts  receivable – trade, net (Notes 1 and 2)                                                                 |       | 2,289,678         |       | 1,479,526         |       |
| Inventory (Note  1)                                                                                                    |       | 653,159           |       | 477,719           |       |
| Deferred loan  costs and other current assets (Note 4)                                                                 |       | 315,226           |       | 268,373           |       |
|                                                                                                                   |       |              |       |              |       |
| **Total  Current Assets**                                                                                              |       | 3,873,267         |       | 3,587,335         |       |
|                                                                                                                   |       |              |       |              |       |
| **Property and equipment, net  (Notes 1 and 3)**                                                                       |       | 502,309           |       | 374,269           |       |
| **Other Assets (Note 4)**                                                                                              |       | 202,952           |       | 330,882           |       |
|                                                                                                                   |       |              |       |              |       |
| **Total  Assets**                                                                                                      |       | $                 | 4,578,528  |              | $          | 4,292,486 |   |
|                                                                                                                   |       |              |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                               | ** ** | ** **        | ** ** | ** **        | ** ** |
|                                                                                                                   |       |              |       |              |       |
| **Current Liabilities:**                                                                                               | ** ** | ** **        | ** ** | ** **        | ** ** |
| Current portion  of long-term debt (Note 4)                                                                            |       | $                 | 2,081,122  |              | $          | 998,061 |   |
| Accounts payable  (Note 1)                                                                                             |       | 688,623           |       | 423,396           |       |
| Accrued  liabilities                                                                                                   |       | 739,958           |       | 436,180           |       |
| Deferred revenue  (Note 1)                                                                                             |       | 944,372           |       | 877,782           |       |
|                                                                                                                   |       |              |       |              |       |
| **Total  Current Liabilities**                                                                                         |       | 4,454,075         |       | 2,735,419         |       |
|                                                                                                                   |       |              |       |              |       |
| **Long-term debt, less current  portion (Note 4)**                                                                     |       | 2,192,472         |       | 2,210,592         |       |
|                                                                                                                   |       |              |       |              |       |
| **Total  Liabilities**                                                                                                 |       | 6,646,547         |       | 4,946,011         |       |
|                                                                                                                   |       |              |       |              |       |
| **Common  stock subject to registration rights**(351,923 shares)                                                       |       | 207,635           |       | —            |       |
|                                                                                                                   |       |              |       |              |       |
| **Commitments: (Note 6)**                                                                                              |       | —            |       | —            |       |
|                                                                                                                   |       |              |       |              |       |
| **Stockholders’ Equity (Deficit):  (Note 7)**                                                                     | ** ** | ** **        | ** ** | ** **        | ** ** |
| Common stock,  $.005 par value, 50,000,000 shares authorized, 14,652,481 and 14,251,552  shares issued and outstanding |       | 73,263            |       | 71,258            |       |
| Contributed  capital                                                                                                   |       | 9,591,098         |       | 9,269,497         |       |
| Accumulated  deficit                                                                                                   |       | (11,940,015       | )          | (9,994,280        | )          |
|                                                                                                                   |       |              |       |              |       |
| **Total  Stockholders’ Equity (Deficit)**                                                                         |       | (2,275,654        | )          | (653,525          | )          |
|                                                                                                                   |       |              |       |              |       |
| **Total Liabilities and  Stockholders’ Equity (Deficit)**                                                         |       | $                 | 4,578,528  |              | $          | 4,292,486 |   |

 

The Accompanying Notesare an Integral Partof the Consolidated Financial Statements

F-2

----

 

#### **TIME AMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF OPERATIONS
| ** **                                               | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                | ** ** | **2005** | ** ** |
|                                                     |       |                                    |       |   |   |
| **Revenues:**                                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Product sales                                            |       | $                                       | 4,802,715  |   | $ | 4,421,647 |   |
| Services revenue                                         |       | 1,913,435                               |       | 1,660,591 |   |
|                                                     |       |                                    |       |   |   |
| **Total Revenues**                                       |       | 6,716,150                               |       | 6,082,238 |   |
|                                                     |       |                                    |       |   |   |
| **Cost of  Revenues:**                                   | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Product                                                  |       | 2,413,030                               |       | 1,796,574 |   |
| Services                                                 |       | 842,615                                 |       | 779,168 |   |
| ** **                                               | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Total Cost of Revenues**                               |       | 3,255,645                               |       | 2,575,742 |   |
| ** **                                               | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Gross  Profit**                                        |       | 3,460,505                               |       | 3,506,496 |   |
|                                                     |       |                                    |       |   |   |
| **Costs  and Expenses:**                                 | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Sales and marketing                                      |       | 2,133,116                               |       | 2,012,813 |   |
| Research and development                                 |       | 1,496,686                               |       | 1,405,477 |   |
| General and administrative                               |       | 1,373,055                               |       | 1,785,779 |   |
|                                                     |       |                                    |       |   |   |
| **Total Costs and Expenses**                             |       | 5,002,857                               |       | 5,204,069 |   |
|                                                     |       |                                    |       |   |   |
| **Net  Loss from Operations**                            |       | (1,542,352                              | )          | (1,697,573 | ) |
|                                                     |       |                                    |       |   |   |
| **Other  Income (Expense):**                             | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Interest expense                                         |       | (691,835                                | )          | (361,840 | ) |
| Loss on debt extinguishment                              |       | (298,108                                | )          | — |   |
| Other                                                    |       | 573,022                                 |       | 25,991 |   |
| Interest income                                          |       | 13,538                                  |       | 13,028 |   |
|                                                     |       |                                    |       |   |   |
|                                                     |       | (403,383                                | )          | (322,821 | ) |
|                                                     |       |                                    |       |   |   |
| **Net  Loss**                                            |       | $                                       | (1,945,735 | ) | $ | (2,020,394 | ) |
|                                                     |       |                                    |       |   |   |
| **Basic  Loss per Share (Note 1)**                       |       | $                                       | (0.13      | ) | $ | (0.15 | ) |
| ** **                                               | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Weighted Average Number of  Basic Shares Outstanding** |       | 14,553,152                              |       | 13,648,711 |   |

 

The Accompanying Notesare an Integral Partof the Consolidated Financial Statements

F-3

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**TIME AMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY (DEFICIT)

FOR THE YEARSENDED JUNE 30, 2006 AND 2005
| ** **                              | ** ** | **Common Stock** | ** ** | **Contributed** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|
| ** **                              | ** ** | **Shares**            | ** ** | **Amount**      | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                    |       |                  |       |            |       |            |       |        |       |   |   |
| Balance at June  30, 2004               |       | 13,599,552            |       | $               | 67,998     |            | $          | 8,027,121   |       | $ | (7,973,886 | ) | $ | 121,233 |   |
|                                    |       |                  |       |            |       |            |       |        |       |   |   |
| Conversion of  debt to common stock     |       | 600,000               |       | 3,000           |       | 297,000         |       | —      |       | 300,000 |   |
| Exercise of  stock options              |       | 2,000                 |       | 10              |       | 426             |       | —      |       | 436 |   |
| Issuance of  common stock warrants      |       | —                |       | —          |       | 168,700         |       | —      |       | 168,700 |   |
| Issuance of  common stock for services  |       | 50,000                |       | 250             |       | 31,250          |       | —      |       | 31,500 |   |
| Issuance of  stock options for services |       | —                |       | —          |       | 15,500          |       | —      |       | 15,500 |   |
| Induced  conversion of debt             |       | —                |       | —          |       | 729,500         |       | —      |       | 729,500 |   |
| Net loss                                |       | —                |       | —          |       | —          |       | (2,020,394  | )          | (2,020,394 | ) |
| Balance at June  30, 2005               |       | 14,251,552            |       | 71,258          |       | 9,269,497       |       | (9,994,280  | )          | (653,525 | ) |
|                                    |       |                  |       |            |       |            |       |        |       |   |   |
| Exercise of  stock options              |       | 4,500                 |       | 22              |       | 1,653           |       | —      |       | 1,675 |   |
| Conversion of  debt to common stock     |       | 446,429               |       | 2,233           |       | 247,767         |       | —      |       | 250,000 |   |
| Induced  conversion of debt             |       | —                |       | —          |       | 40,179          |       | —      |       | 40,179 |   |
| Transfer of  warrants to liability      |       | —                |       | —          |       | (102,900        | )          | —      |       | (102,900 | ) |
| Share-based  awards compensation        |       | —                |       | —          |       | 129,183         |       | —      |       | 129,183 |   |
| Recission of  common stock for services |       | (50,000               | )          | (250            | )          | (31,250         | )          | —      |       | (31,500 | ) |
| Issuance of  common stock warrants      |       | —                |       | —          |       | 36,969          |       | —      |       | 36,969 |   |
| Net loss                                |       | —                |       | —          |       | —          |       | (1,945,735  | )          | (1,945,735 | ) |
| Balance at June 30,  2006               |       | 14,652,481            |       | $               | 73,263     |            | $          | 9,591,098   |       | $ | (11,940,015 | ) | $ | (2,275,654 | ) |

 

The AccompanyingNotes are an Integral Part

of theConsolidated Financial Statements

F-4

----

####  

#### **TIME AMERICA, INC. AND SUBSIDIARY**

#### CONSOLIDATED STATEMENTS OF CASH FLOWS

| ** **                                                                   | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| **Increase  (Decrease) in Cash and Cash Equivalents:**                       | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                    | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net Loss                                                                     |       | $                                       | (1,945,735 | ) | $ | (2,020,394 | ) |
| Adjustments to reconcile net loss to net cash used  by operating activities: |       |                                    |       |   |   |
| Depreciation                                                                 |       | 128,435                                 |       | 91,714 |   |
| Amortization of discounts and deferred financing  costs                      |       | 296,210                                 |       | 161,046 |   |
| Share based compensation expense                                             |       | 129,183                                 |       | — |   |
| Common stock, stock options and warrants issued for  services                |       | (31,500                                 | )          | 112,800 |   |
| Induced conversion of debt charge                                            |       | 40,179                                  |       | 729,500 |   |
| Loss on debt extinguishment                                                  |       | 230,107                                 |       | — |   |
| Non operating cash reclass from sale of assets                               |       | (530,428                                | )          | — |   |
| Changes in Assets and Liabilities:                                           |       |                                    |       |   |   |
| Accounts receivable-trade                                                    |       | (810,152                                | )          | (450,676 | ) |
| Inventory                                                                    |       | (175,440                                | )          | (106,935 | ) |
| Deferred loan costs and other current assets                                 |       | (22,247                                 | )          | (104,862 | ) |
| Other assets                                                                 |       | (5,810                                  | )          | (96,241 | ) |
| Accounts payable                                                             |       | 265,227                                 |       | 55,166 |   |
| Accrued liabilities                                                          |       | 64,682                                  |       | 248,795 |   |
| Deferred revenue                                                             |       | 66,590                                  |       | 461,268 |   |
| **Net cash used by operating activities**                                    |       | (2,300,699                              | )          | (918,819 | ) |
|                                                                         |       |                                    |       |   |   |
| **Cash flows from investing activities:**                                    | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                           |       | (256,475                                | )          | (262,673 | ) |
| Cash from sale of assets                                                     |       | 530,428                                 |       | — |   |
| **Net cash provided (used) by investing activities**                         |       | 273,953                                 |       | (262,673 | ) |
|                                                                         |       |                                    |       |   |   |
| **Cash flows from financing activities:**                                    | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Proceeds from debt                                                           |       | 2,650,797                               |       | 1,500,000 |   |
| Repayment of debt                                                            |       | (1,372,239                              | )          | (1,016,156 | ) |
| Proceeds from exercise of options and warrants                               |       | 1,675                                   |       | 436 |   |
| **Net cash provided by financing activities**                                |       | 1,280,233                               |       | 484,280 |   |
|                                                                         |       |                                    |       |   |   |
| Net change in  cash and cash equivalents                                     |       | (746,513                                | )          | (697,212 | ) |
|                                                                         |       |                                    |       |   |   |
| Cash and cash  equivalents at beginning of year                              |       | 1,361,717                               |       | 2,058,929 |   |
|                                                                         |       |                                    |       |   |   |
| Cash and cash  equivalents at end of year                                    |       | $                                       | 615,204    |   | $ | 1,361,717 |   |
|                                                                         |       |                                    |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Interest paid                                                                |       | $                                       | 332,183    |   | $ | 360,320 |   |
| Income taxes paid                                                            |       | $                                       | —     |   | $ | — |   |
|                                                                         |       |                                    |       |   |   |
| **Noncash  investing and financing activities:**                             | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Conversion of  debt to equity                                                |       | $                                       | 250,000    |   | $ | 300,000 |   |

 

#### TheAccompanying Notes are an Integral Part

of theConsolidated Financial Statements

F-5

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**TIMEAMERICA, INC. AND SUBSIDIARY**

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

**Note 1**

**Summary of Significant Accounting Policies, Nature of Operations andUse of Estimates:**

***Nature of Business and Name Change:***

Time America, Inc. (“Time America”), a Nevada corporation,through its wholly owned subsidiary, Time America, Inc., an Arizonacorporation, provides time and labor management solutions. Time Americaproducts improve productivity by automating time and attendance, workforcescheduling, and the management of labor resources, with features such asemployee self-service, data capture technology, time sheet submittal, strategicreporting, and interface tools for payroll, human resources, resource planning,and third party application integration. Time America solutions are offered ina Web-based product, a PC based application, or in a client/serverconfiguration.

InNovember 2005, we formed a subsidiary, NetEdge Devices, LLC, an Arizona limitedliability company, to manufacture and distribute a new line of advanced datacollection devices that track and display critical labor information across avariety of industries.  NetEdge Devices,which is headquartered in Scottsdale, Arizona, offers the TA7000 family of datacollection devices as a private label solution to software applicationdevelopment companies, systems integration providers and value-added resellers.

OnDecember 9, 2003 Vitrix, Inc. (the parent company) changed its name to TimeAmerica, Inc.

***Principles of Consolidation:***

Theconsolidated financial statements include the accounts of Time America, Inc.and its wholly-owned subsidiaries (the “Company”). All intercompany accountsand transactions have been eliminated in consolidation.

***Pervasiveness of Estimates:***

The preparation of financial statements in conformitywith generally accepted accounting principles in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.  Significant estimatesinclude the allowance for doubtful accounts and sales returns, deferred incometaxes, and stock-based compensation.

***Cash and Major Customer and SupplierConcentrations:***

The Company maintainscash and cash equivalents at a financial institution.  Deposits not to exceed $100,000 at thefinancial institution are insured by the Federal Deposit InsuranceCorporation.  At June 30, 2006 and 2005,the Company had uninsured cash and cash equivalents of approximately $533,000and $1,290,000, respectively.

For the year endedJune 30, 2006, the Company had one (1) major customer representing approximatelyeleven percent (11%) of revenues. At June 30, 2006 the amount due from thiscustomer included in accounts receivable was approximately $752,000.

For the year endedJune 30, 2006, the Company had two (2) major suppliers representingapproximately fifty percent (50%) of cost of product revenues.  At June 30, 2006, the amount due to thesesuppliers included in accounts payable was $123,457.

For the year endedJune 30, 2005, the Company had two (2) major suppliers representingapproximately eighty four percent (84%) of cost of product revenues.  At June 30, 2005, the amount due to thesesuppliers included in accounts payable was $131,678.

***Allowance for**Doubtful Accounts and Sales Returns:***

The Company provides forpotentially uncollectible accounts receivable by use of the allowance method.The allowance is provided based upon a review of the individual accountsoutstanding, and the

F-6

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Company’s prior historyof uncollectible accounts receivable. It is the Company’s practice to record anestimated allowance for sales returns and adjustments based on historicalexperience and to record individual charges for sales returns and adjustmentsdirectly to revenue as incurred.

***Cash and Cash Equivalents:***

Cash and cashequivalents are considered to be all highly liquid investments purchased withan initial maturity of three (3) months or less.

***Inventory:***

Inventory is stated at the lower of cost (first-in,first-out method) or market.  At June 30,2006 and 2005 no allowance for potential obsolete or slow moving inventory wasnecessary.  At June 30, 2006 and 2005 inventory consists of:
|                | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------|------------|------------|------------|------------|------------|
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Raw materials  |       | $          | 362,193    |       | $          | — |   |
| Finished goods |       | 290,966    |       | 477,719    |       |
|           |       |       |       |       |       |
|           |       | $          | 653,159    |       | $          | 477,719 |   |

 

F-7

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***Property and Equipment:***

Property and equipmentare recorded at cost. Depreciation is provided for on the straight-linemethod over the estimated useful lives of the assets. The average lives rangefrom three to five years. Leasehold improvements are recorded at cost and areamortized using the straight-line method over the shorter of their estimateduseful lives or the term of the related lease.  Maintenance and repairs that neithermaterially add to the value of the property nor appreciably prolong its lifeare charged to expense as incurred. Betterments or renewals are capitalizedwhen incurred.  Property and equipmentare reviewed each year to determine whether any events or circumstancesindicate that the carrying amount of the assets may not be recoverable.  Such review includes estimating future cashflows.  Property and equipment costs areexpensed when determined not realizable.

***Software Development Costs:***

TheCompany capitalizes software development costs in accordance with Statement ofFinancial Accounting Standards No. 86, “Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed.” Capitalization of softwaredevelopment costs begins upon the establishment of technological feasibility ofthe product.  The establishment oftechnological feasibility and the ongoing assessment of the recoverability ofthese costs requires considerable judgment by management with respect tocertain external factors including, but not limited to, anticipated futuregross product revenue, estimated economic life, and changes in software andhardware technology.  Amortization ofcapitalized software development costs begins when the products are availablefor general release to customers and is computed on a product-by-product basisusing straight-line amortization with useful lives of five years or, if less,the remaining estimated economic life of the product.  Amounts related to internal softwaredevelopment that could be capitalized under this statement were deemed to be immaterial.

***Revenue Recognition and Deferred Revenue:***

The Company licenses software and sells data collectionhardware and related ancillary products to end-user customers through a directsales force as well as reseller channel customers through independentresellers. Software license revenue is earned from perpetual licenses ofoff-the-shelf software requiring none or minor modification or customization.The software license, data collection hardware and related ancillary productrevenues from end-user customers and reseller channel customers are generallyrecognized when:

·                  Persuasiveevidence of an arrangement exists, which is typically when a non-cancelablesales and software license agreement or purchase order has been signed;

·                  Delivery,which is typically FOB shipping point, is complete for the software (eitherphysically or electronically), data collection hardware and related ancillaryproducts;

·                  Thecustomer’s fee is deemed to be fixed or determinable and free of contingenciesor significant uncertainties;

·                  Collectibilityis probable; and

·                  Objective evidenceof fair value exists for all undelivered elements, typically maintenance andprofessional services.

The fair value of the undelivered elements is deferred andthe remaining portion of the arrangement fee is allocated to the deliveredelements and is recognized as revenue, assuming all other conditions forrevenue recognition have been satisfied. Substantially all of the Company’ssales agreements contain allocations of the purchase price among the variouselements of the arrangement.  If theCompany cannot determine the fair value of any undelivered element included inan arrangement, the Company will defer revenue until all elements aredelivered, services are performed or until fair value can be objectivelydetermined.

F-8

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As part of an arrangement, end-user customers typicallypurchase maintenance contracts as well as professional services.  Maintenance services include telephone andWeb-based support as well as rights to unspecified upgrades and enhancements,when and if we make them generally available. Professional services aretypically for implementation, installation of the software and data collectionhardware, training, building interfaces and custom features and running testdata.

Revenues from maintenance services are recognized ratablyover the term of the maintenance contract period, which is usually oneyear.  Maintenance services are typicallystated separately in an arrangement. The Company classifies the value ofrevenues pertaining to the contractual maintenance obligations that exist for the12-month period subsequent to the balance sheet date as a current liability,and the contractual obligations with a term beyond 12 months, if present, as anon-current liability.

Revenues from customer support services are recognized asthe services are delivered.  Revenuesfrom professional services are generally recognized based on vendor specificobjective evidence of fair value when:

·                  Anon-cancelable agreement for the services has been signed or a customer’spurchase order has been received;

·                  Theprofessional services have been delivered;

·                  Thecustomer’s fee is deemed to be fixed or determinable and free of contingenciesor significant uncertainties; and

·                  Collectibilityis probable.

Vendor specific objective evidence of fair value is basedupon the price charged when these services are sold separately and aretypically an hourly rate for professional services and a per-class rate fortraining. Based upon the Company’s experience in completing professionalservices, the Company has determined that these services are typicallydelivered within a 12-month period subsequent to the contract signing andtherefore classify deferred professional services as a current liability.

Arrangements with end-user customers and reseller channelcustomers do not include any rights of return or price protection, nor doarrangements with reseller channel customers include any acceptance provisions.Our arrangements with end-user customers generally include our standardacceptance provision. Our standard acceptance provision states that thecustomer’s acceptance of the products shall be deemed to occur upon completionof running our standard diagnostic tests.

At the time the Company enters into an arrangement, weassess the probability of collection of the fee and the terms granted to thecustomer.  For end-user customers, thetypical payment terms include a deposit and subsequent payments, based onspecific due dates, such that all payments for the software license, datacollection hardware and related ancillary products, as well as servicesincluded in the original arrangement, are ordinarily due within one year ofcontract signing. Our payment terms for reseller channel customers aretypically due within 30 days of the invoice date.

If the arrangement includes a substantive acceptanceprovision, the Company defers revenue not meeting the criterion for recognitionunder Statement of Position 97-2, “Software Revenue Recognition,” andclassifies this revenue as deferred revenue, including deferred productrevenue. This revenue is recognized, assuming all other conditions for revenuerecognition have been satisfied when the uncertainty regarding acceptance isresolved as generally evidenced by written acceptance

F-9

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or payment of the arrangement fee. If the payment terms forthe arrangement are considered extended, we defer revenue on the arrangementuntil the payment of the arrangement fee becomes due. The deferred amountsrelated to arrangements with extended payment terms are removed from deferredrevenue and accounts receivable, as we have determined that these amounts donot represent either receivables or deferred revenue until the payment becomesdue. We report the allocated fair value of revenues related to the productelement of arrangements as a current liability because of the expectation thatthese revenues will be recognized within 12 months of the balance sheet date.

***Deferred Income Taxes****:*

Deferred income taxes areprovided on an asset and liability method, whereby deferred tax assets arerecognized for deductible temporary differences and operating loss and taxcredit carryforwards and deferred tax liabilities are recognized for taxabletemporary differences. Temporary differences are the differences between thereported amounts of assets and liabilities and their tax basis. Deferred taxassets are reduced by a valuation allowance when, in the opinion of management,there is uncertainty of the utilization of these assets in future periods.Deferred tax assets and liabilities are adjusted for the effects of changes intax laws and rates on the date of enactment.

***Fair Value of Financial Instruments:***

Thecarrying values of cash, cash equivalents, accounts receivable, accountspayable, accrued liabilities and current notes payable approximate their fairvalues because of the short maturity of these instruments.  With respect to long-term debt, the amountsreported approximate the fair value of the respective financial instruments,based on the borrowing rates currently available to the Company for similarbank and equipment loans.

***Loss Per Share:***

Diluted earnings pershare are computed based on the weighted average number of shares of commonstock and dilutive securities outstanding during the period.  Dilutive securities are options and warrantsthat are freely exercisable into common stock at less than the prevailingmarket price.  Dilutive securities arenot included in the weighted average number of shares when inclusion wouldincrease the earnings per share or decrease the loss per share.  At June 30, 2006 and 2005, there were optionsand warrants outstanding to purchase 3,954,931 and 3,300,774, respectively,shares of the Company’s common stock and 3,076,923 and 3,464,039, respectively,shares of common stock issuable upon conversion of convertible debt. None ofthese were included in the determination of diluted loss per share as theireffect was anti-dilutive.

***Stock-Based Compensation:***

Prior to July 1, 2005, the Company accounted forstock-based compensation arrangements in accordance with the provisions ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” (“APB 25”). Accordingly, compensation expense, if any, wasmeasured as the excess of the underlying stock price over the exercise price onthe date of grant. The Company complied with the disclosure provisions ofStatement of Financial Accounting Standards Board No. 123 (“SFAS 123”) “Accountingfor Stock Based Compensation” as amended by SFAS 148 “Accounting forStock-Based Compensation-Transition and Disclosure,” which required pro-formadisclosure of compensation expense associated with stock options under the fairvalue method.

F-10

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Effective July 1,2005, the Company adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards Board No. 123(R), “Share–Based Payment,”using the modified prospective-transition method. Under this transition method,compensation expense recognized for the year ended June 30, 2006includes:  (a) compensation expense for all share-based paymentsgranted prior to, but not yet vested as of June 30, 2005 based on thegrant date fair value estimated and (b) compensation expense for allshare-based payments granted subsequent to June 30, 2005, based on thegrant date fair value estimated in accordance with the provisions of SFAS 123(R).Results for prior periods have not been restated. The fair value of optiongrants is estimated as of the date of grant utilizing the Black-Scholesoption-pricing model and amortized to expense over the options’ vesting period.

As a result of adopting SFAS 123(R) on July 1,2005, the Company’s net loss for the year ended June 30, 2006 is $129,183 greaterthan if it had continued to account for share-based compensation under APB 25.

The following table illustrates the effect on the Company’snet loss and loss per share for the year ended June 30, 2005 if the Company hadapplied the fair value recognition provisions of SFAS 123 to options grantedunder the Company’s stock option plans.
|                                                                                                                                                   | ** ** | **Year Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                                                                                        | ** ** | **June 30,**   | ** ** |
| ** **                                                                                                                                        | ** ** | **2005**            | ** ** |
| **Net  loss:**                                                                                                                                    | ** ** | ** **          | ** ** |
| As reported                                                                                                                                       |       | $                   | (2,020,394 | ) |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |       | (166,256            | )          |
|                                                                                                                                              |       |                |       |
| Pro forma                                                                                                                                         |       | $                   | (2,186,650 | ) |
|                                                                                                                                              |       |                |       |
| **Loss per  share:**                                                                                                                              | ** ** | ** **          | ** ** |
| As reported                                                                                                                                       |       | $                   | (0.15      | ) |
| Pro forma                                                                                                                                         |       | $                   | (0.16      | ) |

 

*****Recent Accounting Pronouncements:*****

InNovember 2004, the Financial Accounting Standards Board or “FASB” issuedStatement of Financial Accounting Standards No. 151 (“SFAS 151”), “InventoryCosts.” SFAS 151 amends the guidance in APB No. 43, Chapter 4, “InventoryPricing,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). SFAS 151requires that those items be

F-11

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recognizedas current period charges regardless of whether they meet the criteria of “soabnormal.” In addition, SFAS 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS 151 is effective for financialstatements issued for fiscal years beginning after June 15, 2005. Theadoption of SFAS 151 did not have a material affect on our financialposition or results of operations.

InDecember 2004, the FASB issued Statement of Financial Accounting StandardsNo. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets.”SFAS 153 amends the guidance in APB No. 29, “Accounting forNonmonetary Assets.” APB No. 29 was based on the principle that exchangesof nonmonetary assets should be measured on the fair value of the assetsexchanged. SFAS 153 amends APB No. 29 to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not have commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective forfinancial statements issued for fiscal years beginning after June 15,2005. The adoption of SFAS 153 did not have a material affect on ourfinancial position or results of operations.

InJune 2005, the FASB issued Statement of Financial Accounting StandardsNo. 154, (“SFAS 154”), “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20, “Accounting Changes” and FASB StatementNo. 3, “Reporting Accounting Changes in Interim Financial Statements.”SFAS 154 applies to all voluntary changes in accounting principle and changesthe requirements for accounting for and reporting a change in accountingprinciple. SFAS 154 requires the retrospective application to prior periods’financial statements of the direct effect of a voluntary change in accountingprinciple unless it is impracticable. APB No. 20 required that mostvoluntary changes in accounting principle be recognized by including in netincome of the period of the change the cumulative effect of changing to the newaccounting principle. FASB stated that SFAS 154 improves financial reportingbecause its requirements enhance the consistency of financial informationbetween periods. Unless early adoption is elected, SFAS 154 is effective forfiscal years beginning after December 15, 2005. Early adoption ispermitted for fiscal years beginning after June 1, 2005. SFAS 154 does notchange the transition provisions of any existing accounting pronouncements,including those that are in a transition phase as of the effective date of thisstatement.  The adoption of SFAS 154is not expected to have a material affect on our financial position or resultsof operations.

InJune 2006, the Financial Accounting Standards Board (FASB) issued FASBInterpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes - AnInterpretation of FASB Statement No. 109”, which prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.The adoption of FIN 48 is not expected to have a material affect on ourfinancial position or results of operations.

InFebruary 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment ofFASB statements No. 133 and 140”**(“SFAS155”). SFAS No. 155 allows financial instruments that have embeddedderivatives to be accounted for as a whole (eliminating the need to bifurcatethe derivative from its host) as long as the entire instrument is valued on afair value basis. The statement also resolves and clarifies other specific SFASNo. 133 and SFAS No. 140 related issues. SFAS No. 155 iseffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006. Theadoption of SFAS 155 is not expected to have a material affect on our financialposition or results of operations.

InMarch 2006, the FASB issued Statement of SFAS No. 156, “Accounting forServicing of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS156”). SFAS 156 requires an entity to recognize a servicing asset or servicingliability each time it undertakes an obligation to service a financial asset byentering into a servicing contract in specific situations. Additionally, theservicing asset or servicing liability shall be initially measured at fairvalue, if practicable. SFAS 156 permits an entity to choose either theamortization method or fair value measurement method for subsequent measurementof the servicing asset or servicing liability. SFAS 156 is effective for ourfiscal year ending June 30, 2008.

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Theadoption of SFAS 156 is not expected to have a material affect on our financialposition or results of operations.

In September 2006,the Financial Accounting Standard Board issued a Statement of FinancialAccounting Standards SFAS No. 157 (“SFAS 157”). The Statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements.      This Statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. The adoption of SFAS 157 is notexpected to have a material affect on our financial position or results ofoperations. 

**Note 2**

**AccountsReceivable - Trade:**

At June 30, 2006 and 2005accounts receivable – trade consists of:
|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Accounts receivable -  trade     |       | $        | 2,427,678  |     | $          | 1,583,526 |   |
| Less:                            |       |     |       |     |       |
| Allowance for doubtful  accounts |       | (30,000  | )          | (20,000  | )          |
| Allowance for sales returns      |       | (108,000 | )          | (84,000  | )          |
|                             |       |     |       |     |       |
|                             |       | $        | 2,289,678  |     | $          | 1,479,526 |   |

 

**Note 3**

**Propertyand Equipment:**

At June 30, 2006 and 2005property and equipment consists of:
|                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Computers, software and  equipment |       | $        | 589,190    |     | $          | 438,459 |   |
| Furniture and fixtures             |       | 42,787   |       | 83,923   |       |
| Leasehold improvements             |       | 122,181  |       | 116,596  |       |
|                               |       | 754,158  |       | 638,978  |       |
| Less: accumulated  depreciation    |       | (251,849 | )          | (264,709 | )          |
|                               |       | $        | 502,309    |     | $          | 374,269 |   |

 

Depreciation expense was$128,435 and $91,714, respectively, for the years ended June 30, 2006 and 2005.

F-13

----

**Note 4**

**Long-termDebt:**

At June 30, 2006 and 2005long-term debt consists of the following:
|                                                                                                                                                                                                                                                                                                                  | ** ** | **2006**   | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| Prime rate convertible  term note, monthly interest and varying monthly principal payments, due March  2007; Collateralized by all assets of the Company.  Less unamortized discount of $56,686.                                                                                                            |       | $          | —     |      | $          | 1,251,625 |   |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| 2% above prime rate  convertible three-year term note, monthly interest and thirty $66,667 monthly  principal payments through January 2009; Collateralized by all assets of the  Company.  Less unamortized discount of  $54,603.                                                                          |       | 1,945,397  |       | —    |       |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| 2% above prime rate  $1,500,000 credit facility, monthly interest payments, advances on the  faciltiy are based on a percentage of the Company’s outstanding accounts  receivable and inventory, due March 2007; Collateralized by all assets of the  Company.  Less unamortized discount of  $68,600. |       | 1,082,197  |       | 897,100   |       |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| 10% promissory note to  a related party, 60 monthly principal and interest payments of $8,919 through  March 2009; Collateralized by all assets of the Company.                                                                                                                                                  |       | 256,395    |       | 327,401   |       |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| Prime rate plus 1  percent promissory note to a related party, monthly interest only payments  through November 2001 followed by twenty four monthly principal and interest  payments of approximately $9,000.                                                                                                   |       |       |       |      |       |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| Due in full in October  2004. Collateralized by all assets of the Company.                                                                                                                                                                                                                                       |       | —     |       | 98,329    |       |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| $400,000 revolving line  of credit with a related party, expiring on December 31, 2007, interest at  10%. Interest only payments due monthly.   Collateralized by all assets of the Company.                                                                                                                |       | 150,000    |       | 150,000   |       |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| 10% promissory note to  a related party, 60 monthly principal and interest payments of $10,562  through May 2010; Collateralized by all assets of the Company.                                                                                                                                                   |       | 409,337    |       | 484,198   |       |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| 15% promissory note to  a related party, 60 monthly principal and interest payments of $17,288  through December 2008; Collateralized by all assets of the Company.                                                                                                                                              |       | 430,268    |       | —    |       |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
|                                                                                                                                                                                                                                                                                                             |       | 4,273,594  |       | 3,208,653 |       |
| Less: current portion                                                                                                                                                                                                                                                                                            |       | (2,081,122 | )          | (998,061  | )          |
|                                                                                                                                                                                                                                                                                                             |       |       |       |      |       |
| Long-term debt                                                                                                                                                                                                                                                                                                   |       | $          | 2,192,472  |      | $          | 2,210,592 |   |

 

F-14

----

In March 2004, the Company consummated a privateplacement pursuant to which the Company issued a $2,000,000 principal amountsecured convertible term note due March 22, 2007 (the “Laurus Note-March 04”),together with a common stock purchase warrant entitling the holder to purchase280,000 shares of common stock (the “Laurus Note Warrant-March 04”).  TheLaurus Note-March 04 and the Laurus Note Warrant-March 04 were sold to a single“accredited investor” (as such term is defined in the rules promulgated underthe Securities Act of 1933, as amended (the “Act”)), Laurus Master Fund, Ltd. (“Laurus”),for a purchase price of $2,000,000.  The principal and unpaid interest onthe Laurus Note-March 04 are convertible into shares of the Company’s commonstock at an original price of $1.17 per share (the “Fixed Conversion Price”),which was based on the weighted average price of the Company’s common stock forthe twenty trading days immediately prior to the issuance of the LaurusNote-March 04.  Such conversion price is subject to antidilutionadjustments based on the occurrence of certain corporate events.  In June 2005, the Company amended the conversionprice of the Laurus Note-March 04.The conversion price on the first $300,000 of the note was reduced to $0.50 pershare and the conversion price on the remainder of the note was reduced to$0.65 per share.  In connection with the amendment, the companytook a non-cash charge of $729,500.

The Laurus NoteWarrant-March 04 entitles the holder thereof to purchase, at any time throughMarch 22, 2011; 200,000 shares of the Company’s common stock at a price of$1.29 per share; 40,000 shares of the Company’s common stock at a price of$1.35 per share; and 40,000 shares of the Company’s common stock at a price of$1.40 per share.

The private placement ofthe Laurus Note-March 04 and the Laurus Note Warrant-March 04 was facilitatedby The Oberon Group, LLC (Oberon) in consideration for which Oberon was paid anadvisory fee of $150,000, and granted a warrant to purchase, at any timethrough March 22, 2007, 136,364 shares of the Company’s common stock at a pershare price of $1.10.  The cash fee andfair value of the warrant has been recorded as a deferred loan issue charge.

In March 2004, theCompany entered into a subordinated note agreement with a shareholder andexisting debt holder.  Under the terms ofthe agreement, an existing term note was refinanced as a five year term notewith monthly principal and interest payments at 15%.  In consideration for agreeing to subordinaterepayment of the note to the Laurus Note-March 04, the Company issued 25,000shares of restricted common stock to the holder of the subordinated note.  The fair value of the stock has been recordedas a deferred loan issue charge.

In April 2004, theCompany entered into a subordinated note agreement with a shareholder andexisting debt holder.  The note is a fiveyear term note with monthly principal and interest payments at 15%.  In consideration for agreeing to subordinaterepayment of the note to the Laurus Note-March 04, the Company issued 25,000shares of restricted common stock to the holder of the subordinated note.  The fair value of the stock has been recordedas a deferred loan issue charge.

InJune 2005, the Company entered into a Security Agreement (the “Laurus CreditFacility-June 05”) together with a common stock purchase warrant entitling theholder to purchase 210,000 shares of common stock (the “Laurus Credit FacilityWarrant-June 05”) with Laurus.  Under theterms of the Laurus Credit Facility-June 05, the Company may borrow from timeto time revolving loans up to $1,500,000 subject to a borrowing basecalculation based on the Company’s eligible accounts receivable. Borrowingsunder the facility accrue interest at the prime rate payable monthly. 

F-15

----

Pursuantto the terms of the Agreements, the Company’s obligations are secured by a lienon all of the Company’s assets. Moreover, Laurus shall have the right at anytime until the maturity date, or during an event of default, to convert all orany portion of the outstanding principal amount into fully paid restrictedshares of the Company’s common stock at a fixed conversion price of $0.65.

TheLaurus Credit Facility Warrant-June 05 entitles the holder thereof to purchase,at any time through June 23, 2012; 150,000 shares of the Company’s common stockat a price of $0.72 per share; 30,000 shares of the Company’s common stock at aprice of $0.75 per share; and 30,000 shares of the Company’s common stock at aprice of $0.78 per share.

The private placement ofthe Laurus Credit Facility-June 05 and the Laurus Credit Facility Warrant-June05 was facilitated by The Oberon Group, LLC (Oberon) in consideration for whichOberon was paid an advisory fee of $112,500, and granted a warrant to purchase,at any time through June 23, 2008, 173,077 shares of the Company’s common stockat a per share price of $0.65.  The cashfee and fair value of the warrant has been recorded as a deferred loan issuecharge. $56,250 of the advisory fee is to be paid through the issuance ofcommon stock.  The number of shares to beissued will be based on the market price of the common stock after aregistration statement covering the shares has been declared effective.  If the company is unable to have theregistration statement declared effective, then the amount will be paid incash.  

In November 2005, the Company and a shareholderagreed to extend the term of its $400,000 line of credit facility to December31, 2007.  All other terms of theagreement remained unchanged.

InJanuary 2006, the Company entered into a Security and Purchase Agreement withLaurus Master Fund, Ltd., a CaymanIslands company (“Laurus”).  Underthe Security and Purchase Agreement, Laurus purchased from the Company aSecured Convertible Term Note (the “Laurus Note-January 06”) in the aggregateprincipal amount of $2,000,000, and a Secured Non-Convertible Revolving Note(the “Laurus Revolving Note-January 06”) in the aggregate principal amount of$1,500,000.  The transaction was arecapitalization of existing agreements with Laurus.  The Laurus Note-January 06 replaced anexisting secured convertible term note (Laurus Note-March 04) issued March 22,2004 and a principal balance of $1,058,310 that was paid in full with theproceeds of the Laurus Note-January 06. Gross proceeds received by the Company under the Laurus Note-January 06were $941,690.  The Laurus RevolvingNote-January 06 replaced an existing $1,500,000 revolving facility (LaurusCredit Facility-June 05)  that had anoutstanding balance of $1,000,000 that was paid in full with proceeds from theLaurus Revolving Note-January 06.  TheCompany did not receive any of the proceeds from the Laurus RevolvingNote-January 06.

TheLaurus Note-January 06 has a three-year term, and bears interest at 2% abovethe prime rate, with a minimum interest rate of 7.25%.  The Laurus Note-January 06 provides forprincipal repayment, in cash or stock, in thirty (30) equal monthlyinstallments of $66,666.67 commencing on July 1, 2006.  Monthly principal and interest payments willbe converted, subject to certain volume limitations, into shares of the Company’scommon stock if the average market price of such stock for the five (5) dayspreceding the payment is 10% above the initial fixed conversion price of $0.65per share.  The Company may not convertany of its repayment obligations under the Laurus Note-January 06 to commonstock unless either there exists an effective registration statement coveringthe shares to be issued, or an exemption for the resale of all of the commonstock issued and issuable under the Laurus Note-January 06 is available underRule 144 of the Securities Act of 1933, as amended.  The Company may redeem the LaurusNote-January 06 upon payment to Laurus of 115% of the outstanding principalunder the Laurus Note-January 06 together with accrued but unpaidinterest.  

TheLaurus Revolving Note-January 06 has a two-year term, and bears interest at 2%above the prime rate, with a minimum interest rate of 7.25%.  Availability under the Laurus RevolvingNote-January 06 is based on an advance rate equal to 90% of eligible accountsreceivable and 30% of inventory subject to a

F-16

----

$1,000,000cap.  The Laurus Revolving Note-January06 is subject to an early termination fee of 5% of the face amount of theLaurus Revolving Note-January 06 in the first year, and 4% thereafter.  If an event of default occurs, Laurus mayelect to require the Company and its subsidiaries to make a default payment inthe amount of 125% of the outstanding principal amount of the Revolving Note.

TheCompany’s obligations under Laurus Note-January 06 and the Laurus RevolvingNote-January 06 are secured by a first lien on all assets of the Company, andLaurus may accelerate all outstanding obligations under the notes upon theoccurrence and continuation of an event of default.  In addition to the notes, the Company issuedLaurus a seven-year warrant to purchase 140,000 shares of the Company’s commonstock at an exercise price of $0.65 per share, subject to adjustment based onthe occurrence of certain corporate events. On the closing of the Laurus Note-January 06 and the Laurus RevolvingNote-January 06, the Company issued an aggregate of 351,923 shares of commonstock to Laurus for payment of fees due.

TheCompany considered the Laurus Note – January 2006 to be substantively modified(as defined in EITF No. 96-19 “Debtor’s Accounting for a Modification orExchange of Debt Instruments”) and accounted for the transaction as anextinguishment of the prior outstanding term note and, as a result, recorded aloss on extinguishment in the amount of $298,108.  The Company deemed that the Laurus RevolvingNote-January 06 was not substantially modified and did not record the previousnote as being extinguished.

The private placement ofthe Laurus Note-January 06 and the Laurus Revolving Note-January 06 wasfacilitated by The Oberon Group, LLC (Oberon) in consideration for which Oberonwas paid an advisory fee of $70,627, and granted a warrant to purchase, at anytime through January 3, 2009, 108,657 shares of the Company’s common stock at aper share price of $0.65.  The fee andfair value of the warrant has been recorded as a deferred loan issue charge.  The advisory fee is to be paid through theissuance of common stock.  The number ofshares to be issued will be based on the market price of the common stock aftera registration statement covering the shares has been declared effective.  If the company is unable to have theregistration statement declared effective, then the amount will be paid incash.  

Pursuant to aRegistration Rights Agreement (the “Laurus Credit Facility Registration RightsAgreement”) entered into between the Company and Laurus, the Company isobligated to: (a) file a registration statement under the Act to register theresale of the shares of the Company’s common stock issuable upon conversion ofthe Laurus Note-January 06, common stock issued for payment of fees, and exerciseof the Laurus Warrants (the “Registration Statement”) within 30 days of thedate of the funding with respect to the Laurus Note-January 06; (b) use itsbest efforts to have the Registration Statement declared effective under theAct as promptly as possible, but in any event prior to the 90th day following the filing day; and (c) maintainthe effectiveness of the Registration Statement until the earlier date of when(i) all registrable securities have been sold or (ii) all registrablesecurities may be sold immediately without registration under the Act andwithout volume restrictions pursuant to Rule 144(k).  Laurus, or otherholders of the Laurus Note-January 06 and the Laurus Warrants, are entitled tocertain specified remedies if the Company does not timely comply with itsregistration obligations.  Theregistration statement has been filed but not declared effective.

F-17

----

Asof June 30, 2006 future minimum payments due under the debt agreements are asfollows:
| Year Ending  | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|
| **June 30,** | ** ** | ** ** | ** ** |
|              |       |       |       |
| 2007              |       | $          | 2,081,122  |   |
| 2008              |       | 1,246,383  |       |
| 2009              |       | 770,879    |       |
| 2010              |       | 133,829    |       |
| 2011              |       | 41,381     |       |
|              |       |       |       |
| Total             |       | $          | 4,273,594  |   |

 

The Company incurredloan issue costs associated with the issuance of the Laurus Note, Laurus CreditFacility and shareholder notes.  Thecosts are being amortized over the term of the notes. Included in other assetsat June 30, 2006 and 2005 are deferred costs in the amount of $418,976 and$528,111, respectively, net of accumulated amortization of $392,731 and$158,793, respectively.  Amortizationexpense charged to interest expense was $233,938 and $127,034, respectively,for the years ended June 30, 2006 and 2005.

The Laurus Note-January06 Warrants were valued at $65,800 and recorded as a discount to the LaurusNote-January 06. The Laurus Credit Facility Warrants were valued at $102,900and recorded as a discount to the Laurus Credit Facility.  The discounts are being amortized over theterms of the debt.  Amortization of thediscounts charged to interest expense was $62,272 and $34,011, respectively,for the years ended June 30, 2006 and 2005.

**Note 5**

**IncomeTaxes:**

As of June 30, 2006 and 2005deferred tax assets consist of the following:

F-18

----

 
|                             | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
|                        |       |       |       |       |       |
| Federal loss  carryforwards |       | $          | 2,502,000  |       | $          | 1,970,000 |   |
| State loss  carryforwards   |       | 412,000    |       | 490,000    |       |
| Other                       |       | 124,000    |       | 69,000     |       |
|                        |       | 3,038,000  |       | 2,529,000  |       |
| Less: valuation  allowances |       | (3,038,000 | )          | (2,529,000 | )          |
|                        |       |       |       |       |       |
|                        |       | $          | —     |       | $          | — |   |

 

The Company hasestablished a valuation allowance equal to the full amount of the deferred taxassets primarily because of uncertainty in the utilization of net operatingloss carryforwards.

As a result of stockownership changes, the Company’s ability to utilize net operating losses in thefuture could be limited, in whole or part, under Internal Revenue Code Section382.  The Company was treated as anS-Corporation for income tax purposes through May 13, 1997.  As of June 30, 2006 the Company’s federal netoperating loss carryforwards were approximately $7,819,000 and begin expiringin 2012 through 2025.

The Company’s taxexpense (benefit) differed from the statutory rate primarily due to the$509,000 change in the deferred tax asset valuation allowance from June 30,2005.

**Note 6 **

**Commitments:**

TheCompany currently leases a facility in Scottsdale, Arizona under non-cancelableoperating lease agreement which expires in April 2010. For the years ended June30, 2006 and 2005, expense under non-cancelable operating lease agreements wasapproximately $320,000 and $263,000, respectively.

Futureminimum lease payments due under the operating lease agreement are as follows:
| Year Ending  | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|
| **June 30,** | ** ** | ** ** | ** ** |
| 2007              |       | $          | 268,476    |   |
| 2008              |       | 268,476    |       |
| 2009              |       | 268,476    |       |
| 2010              |       | 244,069    |       |
|              |       |       |       |
|              |       | $          | 1,049,497  |   |

 

Under the terms of the Company’s revolving debt, theCompany has agreed to clear all cash receipts through a lender controlled lockbox arrangement. Under the terms of this agreement, the Company’s operatingcash flow could be retained by the lender in the event of a default on the revolvingdebt.

F-19

----

**Note 7**

**Stockholders’Equity:**

***Stock Options:***

OnJuly 13, 1999, the Board of Directors authorized the implementation of the 1999Equity Compensation Plan.  The planallows for the award of incentive stock options, non-statutory stock options orrestricted stock awards to certain employees, directors, consultants andindependent contractors.  The Company hasreserved an aggregate of 600,000 shares of common stock for distribution underthe plan.  Incentive stock optionsgranted under the plan may be granted to employees only, and may not have anexercise price less than the fair market value of the common stock on the dateof grant. Options may be exercised on a one-for-one basis, with a maximum termof ten (10) years from the date of grant. Incentive stock options granted to employees generally vest annuallyover a four year period.

Thefair value of option grants is estimated as of the date of grant utilizing theBlack-Scholes option-pricing model with the following weighted averageassumptions:
|                           | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2006**                               | ** ** | **2005** | ** ** |
|                      |       |                                   |       |   |   |
| Expected volatility       |       | 138.0                                  | %          | 120.0 | % |
| Risk-free interest rate   |       | 4.0                                    | %          | 4.0 | % |
| Expected Dividends        |       | 0                                      | %          | 0 | % |
| Expected lives (in years) |       | 3.0                                    |       | 3.0 |   |

 

Theweighted average fair value at date of grant for options granted during theyears ended June 30, 2006 and 2005 approximated $.38 and $.57, respectively.

F-20

----

A summary of the activityof options under the plan and non-statutory options granted outside the planfollows:
|                               | ** ** | **Number of** | ** ** | **Weighted Average** | ** ** |
|-------------------------------|------------|--------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **Options**        | ** ** | **Exercise Price**   | ** ** |
|                          |       |               |       |                      |       |
| Outstanding at June 30,  2004 |       | 1,973,475          |       | $                         | 1.02       |   |
|                          |       |               |       |                      |       |
| Granted                       |       | 312,500            |       | 0.79                      |       |
| Exercised                     |       | (2,000             | )          | 0.22                      |       |
| Forfeited                     |       | (26,000            | )          | 0.62                      |       |
|                          |       |               |       |                      |       |
| Outstanding at June 30,  2005 |       | 2,257,975          |       | 0.89                      |       |
|                          |       |               |       |                      |       |
| Granted                       |       | 498,500            |       | 0.48                      |       |
| Exercised                     |       | (4,500             | )          | 0.37                      |       |
| Forfeited                     |       | (88,500            | )          | 1.29                      |       |
|                          |       |               |       |                      |       |
| Outstanding at June 30, 2006  |       | 2,663,475          |       | $                         | 0.80       |   |

 

Additional informationabout outstanding options to purchase the Company’s common stock as of June 30,2006 is as follows:
| ** **    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**  | ** ** |
|---------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **    | ** ** | ** **                   | ** ** | **Weighted Avg.**        | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **    | ** ** | ** **                   | ** ** | **Remaining**                 | ** ** | **Average** | ** ** | **Aggregate** | ** ** | ** ** | ** ** | **Average** | ** ** | **Aggregate** | ** ** |
| **Exercise**  | ** ** | **Number of**           | ** ** | **Contractural**              | ** ** | **Exercise** | ** ** | **Intrinsic** | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Intrinsic** | ** ** |
| **Price**     | ** ** | **Shares**                   | ** ** | **Life (In Years)** | ** ** | **Price** | ** ** | **Value** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Value** | ** ** |
|          |       |                         |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| $9.40         |       | 100,000                      |       | 3.63                          |       | $ | 9.40 |   | — |   | 100,000 |   | $ | 9.40 |   | — |   |
| $3.40 - $2.20 |       | 137,023                      |       | 4.01                          |       | $ | 3.18 |   | — |   | 137,023 |   | $ | 3.18 |   | — |   |
| $1.40 - $1.00 |       | 288,436                      |       | 7.00                          |       | $ | 1.04 |   | — |   | 216,686 |   | $ | 1.05 |   | — |   |
| $0.92 - $0.60 |       | 813,020                      |       | 7.59                          |       | $ | 0.75 |   | — |   | 615,770 |   | $ | 0.76 |   | — |   |
| $0.57 - $0.40 |       | 851,496                      |       | 7.20                          |       | $ | 0.42 |   | $ | 19,845 |   | 581,117 |   | $ | 0.43 |   | $ | 12,450 |   |
| $0.32 - $0.14 |       | 473,500                      |       | 6.20                          |       | $ | 0.22 |   | $ | 100,010 |   | 467,750 |   | $ | 0.22 |   | $ | 98,600 |   |

 

Asummary of the status of the Company’s nonvested shares as of June 30, 2006 andchanges during the year ended June 30, 2006 is presented below:
|                                           | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **Grant-Date**            | ** ** |
| ** **                                | ** ** | **Shares** | ** ** | **Fair Value**       | ** ** |
|                                      |       |       |       |                      |       |
| Nonvested stock  options at July 1, 2005  |       | 510,875    |       | $                         | 0.35       |   |
| Granted                                   |       | 338,500    |       | 0.36                      |       |
| Vested                                    |       | (218,500   | )          | 0.31                      |       |
| Forfeited                                 |       | (80,750    | )          | 0.44                      |       |
| Nonvested stock options  at June 30, 2006 |       | 550,125    |       | $                         | 0.35       |   |

 

F-21

----

Duringthe year ended June 30, 2006 the Company recognized compensation expense of$129,183.  As of June 30, 2006, there was$192,485 of total unrecognized compensation cost related to nonvested sharestock options under the Plan.  That costis expected to be recognized over the weighted average period of 3.5 years.  The total fair value of the 218,500 optionsvested during the year ended June 30, 2006 was $68,823.

***Non-Employee Stock Options and Warrants:***

Duringthe year ended June 30, 2002 the Company issued 62,958 warrants to a relatedparty in consideration for entering into a promissory note agreement with theCompany.  The exercise price of thewarrant is $.25 per share and is exercisable through September 2006.  As of June 30, 2006 none of the warrants havebeen exercised.

Duringthe year ended June 30, 2002 the Company issued 25,000 warrants to a relatedparty in consideration for entering into a revolving line of credit agreementwith the Company.  The exercise price ofthe warrant is $.15 per share and is exercisable through November 2006.  As of June 30, 2006 none of the warrants havebeen exercised.

InNovember 2003 the Company issued 143,400 warrants to brokers in connection witha private placement of common stock of the Company.  The exercise price of the warrants is $.90per share and is exercisable through November 2006.  As of June 30, 2006 none of the warrants havebeen exercised.

InMarch 2004, the Company consummated a private placement pursuant to which theCompany issued a $2,000,000 principal amount secured convertible term note (theLaurus Note), together with a common stock purchase warrant entitling theholder to purchase 280,000 shares of common stock (the Laurus NoteWarrant).  The Laurus Note Warrant entitles the holder thereof topurchase, at any time through March 22, 2011:  200,000 shares of theCompany’s common stock at a price of $1.29 per share; 40,000 shares of theCompany’s common stock at a price of $1.35 per share; and 40,000 shares of theCompany’s common stock at a price of $1.40 per share.  As of June 30, 2006 none of the warrants havebeen exercised.

Theprivate placement of the Laurus Note and the Laurus Warrant was facilitated byThe Oberon Group, LLC (Oberon) in consideration for which Oberon was granted awarrant to purchase, at any time through March 22, 2007, 136,364 shares of theCompany’s common stock at a price of $1.10. As of June 30, 2006 none of the warrants have been exercised.

In June 2005, theCompany entered into a Security Agreement (the “Laurus Credit Facility”)together with a common stock purchase warrant entitling the holder to purchase210,000 shares of common stock (the “Laurus Credit Facility Warrant”) withLaurus.  The Laurus Credit FacilityWarrant entitles the holder thereof to purchase, at any time through June 23,2012:  150,000 shares of the Company’scommon stock at a price of $0.72 per share; 30,000 shares of the Company’scommon stock at a price of $0.75 per share; and 30,000 shares of the Company’scommon stock at a price of $0.78 per share. As of June 30, 2006 none of the warrants have been exercised.

Theprivate placement of the Laurus Credit Facility and the Laurus Credit FacilityWarrant was facilitated by The Oberon Group, LLC (Oberon) in consideration forwhich Oberon was granted a warrant to

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purchase,at any time through June 23, 2008, 173,077 shares of the Company’s common stockat a per share price of $0.65.  As ofJune 30, 2006 none of the warrants have been exercised.

In January 2006,the Company entered into a Security and Purchase Agreement (the “LaurusNote-January 06”) together with a common stock purchase warrant entitling theholder to purchase 140,000 shares of common stock (the “Laurus Note-January 06Warrant”) with Laurus.  The LaurusNote-January 06 Warrant entitles the holder thereof to purchase, at any timethrough January 3, 2013, 140,000 shares of the Company’s common stock at aprice of $0.65 per share.  As of June 30,2006 none of the warrants have been exercised.

Theprivate placement of the Laurus Note-January 06 and the Laurus Note-January 06Warrant was facilitated by Oberon in consideration for which Oberon was granteda warrant to purchase, at any time through January 3, 2009, 108,657 shares ofthe Company’s common stock at a per share price of $0.65.  As of June 30, 2006 none of the warrants havebeen exercised.

**Note 8**

**Asset Sale:**

Effective March 31, 2006the Company closed on the sale of certain of the Company’s direct sales assetspursuant to the terms of an Asset Purchase Agreement (the “Purchase Agreement”).Under the terms of the Purchase Agreement, certain assets associated with theCompany’s direct sales business were sold, including a copy of the source codeand other intellectual property relating to the Company’s NETtime, HourTrackand GENESIS time and attendance software products, related ASP and maintenancecontracts, and certain specified direct channel sales opportunities.

The sale generated cashto the Company at closing of approximately $530,000. The purchase price underthe Purchase Agreement included cash payable to the Company at the closing inconsideration for a copy of the source code and related intellectual property.The consideration for the ASP and maintenance contracts was determined based onmultiples of the projected annualized revenues under such contracts. Atclosing, the Company received in cash 100% of the total consideration for thecustomer ASP contracts and 40% of the total consideration for the maintenancecontracts.  The remaining considerationfor the maintenance contracts is payable quarterly over the next 14 months. TheCompany will also be transitioning over additional ASP customers over the nextsix months, which the Company will be paid for at the time of suchtransfers.  Additionally, for the12-month period following the closing, the Company will receive monthly royaltypayments equal to 27.5% of the revenues in connection with direct channel salesopportunities specified at closing.

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**Note 9**

**Basis ofPresentation and Going Concern:**

ThroughJune 30, 2006, the Company had sustained recurring losses from operations, andas of August 31, 2006, the Company estimates that its working capital and fundsgenerated from operations are sufficient to fund the Company’s operations forthe next six months.  These conditionsraise substantial doubt about the ability of the Company to continue as a goingconcern.  During fiscal 2007, the Companyexpects to meet its working capital and other cash requirements with itscurrent cash reserves, cash generated from operations, its borrowing capacityunder its two credit facilities, and other financing as required.  While the Company believes that it willsucceed in attracting additional capital, there can be no assurance that theCompany’s efforts will be successful. The Company’s continued existence is dependent upon its ability toachieve and maintain profitable operations by controlling expenses.  However, there can be no assurance that theCompany’s efforts to achieve and maintain profitable operations will besuccessful.  The financial statements donot include any adjustments that might result from the outcome of theseuncertainties.

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**PARTIII**

**Item 9.****           Directors, ExecutiveOfficers, Promoters and Control Persons; Compliance With Section 16(a) of theExchange Act.**

Informationregarding our directors and executive officers is provided below.

THOMAS S. BEDNARIK.  Mr. Bednarik,age 56, has served as President, Chief Executive Officer and a director of theCompany since February 2000.  From April1998 to February 2000, Mr. Bednarik served as Vice President of Sales andSupport at NetPro Computing, Inc.  Mr.Bednarik has extensive executive and sales management experience in theinformation technology industry and has served in various executive managementcapacities, including Chief Executive Officer, President, Vice President andExecutive Vice President, with firms such as Idea Corporation, Decision Data,Alcatel Information Systems and ITT Corporation.

CRAIG J. SMITH, CPA.  Mr. Smith,age 36, has served as the Company’s Vice President of Finance andAdministration and Chief Financial Officer since April 1999.  From 1998 to 1999, Mr. Smith served asController of Pacific Numerix Corporation. From 1993 to 1998, he served as an Audit Manager of Semple & Cooper,LLP.  Mr. Smith earned a masters inbusiness administration from Arizona State University in 2000 and a Bachelor ofScience degree in finance and accounting from Minnesota StateUniversity-Mankato in 1992.

TODD P. BELFER.  Mr. Belfer, age39, has served as a director of the Company since March 1999 and Chairman ofthe Board of Directors since November 1999. Mr. Belfer also served as Chairman of the Board of Directors of ourwholly-owned subsidiary, Time America, Inc. (previously Vitrix Incorporated),from April 1996 until March 1999.  Mr.Belfer co-founded Employee Solutions, Inc. in May 1990, and served as itsExecutive Vice-President and as a director from 1991 to 1996.  Mr. Belfer earned a Bachelor of Science inFinance and Real Estate from the University of Arizona in 1989.

LISE M. LAMBERT.  Ms.Lambert, age 49, has served as a director of the Company since April 1999 andas director of our wholly-owned subsidiary, Time America, Inc. (previouslyVitrix Incorporated), from January 1998 to March 1999.  Since 1996, Ms. Lambert has been President ofRelevant, Inc., a consulting services organization that provides strategicmarketing and growth consulting to the healthcare and technology industries.From 2003 to 2006, Ms. Lambert served as the Sr. Vice President of Strategy andMarketing for VistaCare, Inc., a national health services provider. In 1986,Ms. Lambert co-founded Mastersoft, Inc., a software company which was sold toAdobe Corporation in 1995. Ms. Lambert earned a Bachelor of Arts degree ineducation and a Masters degree in education and deafness from Smith College.

ROBERTW. ZIMMERMAN. Mr. Zimmerman, age 54, has served as a director of the Companysince March 2001.  Mr. Zimmerman was oneof the original investors and directors of Time America, Inc. prior to itsmerger with the Company.  Mr. Zimmerman is President, co-managingshareholder and attorney for Mallery & Zimmerman, S.C., a general practicelaw firm with offices in Milwaukee, Cedarburg, Green Bay, Stevens Point andWausau, Wisconsin.  Mr. Zimmermangraduated from Marquette University in 1974 with majors in Accounting and

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Financeand from Marquette University Law School in 1977.  Following graduation from law school, Mr.Zimmerman worked in the Milwaukee office of Arthur Andersen & Co. in thetax department and received his Wisconsin CPA certificate.

ROBERT J. NOVAK.  Mr.Novak, age 61, has served as a director of the Company since September2003.  Mr. Novak has been a member ofJennings, Strouss & Salmon, P.L.C., a full service law firm, since1999.  Mr. Novak is the founder and ownerof Novak Companies, Inc., a diversified group of companies in real estatedevelopment, financing, management, equity financing and participation inprivate and public companies.  Mr. Novakalso founded and owned Robert J. Novak & Associates, Ltd., a law firm, from1987 to 1999.  Mr. Novak was also afounder, director and officer of Medical Safety Products, Inc., a medicalproduct developer, from 1987 to 2001. Mr. Novak earned Bachelor of Arts degrees in political science andeconomics from Drake University in 1967 and a Juris Doctorate from theUniversity of Arizona in 1971.

**Compliancewith Section 16(a) of the Securities Exchange Act of 1934**

Section 16(a) of the Securities Exchange Act of 1934, as amended,requires our directors and executive officers, as well as persons beneficiallyowning more than 10% of our outstanding common stock, to file reports ofownership and changes in ownership with the Securities and Exchange Commission(the “SEC”) within specified time periods. Such officers, directors and shareholders are also required to furnishus with copies of all Section 16(a) forms they file.

Based solely on its review of such forms received by us, or writtenrepresentations from certain reporting persons, we believe that all Section16(a) filing requirements applicable to our officers, directors and 10%shareholders were complied with during the fiscal year ended June 30, 2006.

**Item10.  Executive Compensation.**

**Compensationof Directors**

Our non-employee directors received no cash compensation for serving asmembers of our board of directors or any committee of our board of directorsduring the fiscal year ended June 30, 2006. During such period, we granted options to purchase 40,000 shares ofcommon stock to each of Messrs. Belfer, Novak, and Zimmerman and Ms. Lambert inconnection with their service on the board of directors.  Each of these options has a term of 10 years,vested immediately, and was granted at the fair market value of the commonstock on the grant date.

The following table summarizes all compensation paid to our ChiefExecutive Officer for each of the fiscal years ended June 30, 2006, 2005 and2004.  We did not have any otherexecutive officers whose total annual salary and bonus exceeded $100,000 forthe periods presented.

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**SUMMARYCOMPENSATION TABLE**
|                                               | ** ** | ** ** | ** ** | ** **                   | ** ** | **Long Term  Compensation** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Awards**                       | ** ** |
| **Name and  Principal Position(1)** | ** ** | **Year**   | ** ** | **Salary($)**                | ** ** | **Bonus($)**                     | ** ** | **Other Annual  Compensation($)** | ** ** | **Securities Underlying  Options/SARS (#)** | ** ** |
|                                          |       |       |       |                         |       |                             |       |   |   |   |   |
| Thomas S.                                     |       | 2006       |       | $                            | 148,400    |                             | $          | — |   | -0- |   | 50,000 | (1) |
| Bednarik(1)                                   |       | 2005       |       | $                            | 144,200    |                             | $          | 7,000 |   | -0- |   | 14,000 | (1) |
| President and Chief  Executive Officer        |       | 2004       |       | $                            | 135,000    |                             | $          | 6,750 |   | -0- |   | 100,000 | (1) |

 

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(1)                                  Mr. Bednarik was appointed President and ChiefExecutive Officer of the Company effective February 17, 2000.  Pursuant to the terms of an Incentive StockOption Agreement dated February 17, 2000, Mr. Bednarik was granted options topurchase 100,000 shares of the Company’s common stock at a per share exerciseprice of $9.40.  Pursuant to the terms ofan Incentive Stock Option Agreement dated August 22, 2000, Mr. Bednarik wasgranted options to purchase 100,000 shares of the Company’s common stock at aper share exercise price of $3.40. Pursuant to the terms of a Nonstatutory Stock Option Agreement dated April17, 2001, Mr. Bednarik was granted options to purchase 225,000 shares of theCompany’s common stock at a per share exercise price of $0.40.  Pursuant to the terms of a Nonstatutory StockOption Agreement dated December 31, 2001, Mr. Bednarik was granted options topurchase 100,000 shares of the Company’s common stock at a per share exerciseprice of $0.17.  Pursuant to the terms ofa Nonstatutory Stock Option Agreement dated December 31, 2002, Mr. Bednarik wasgranted options to purchase 50,000 shares of the Company’s common stock at aper share exercise price of $0.18. Pursuant to the terms of a Nonstatutory Stock Option Agreement datedApril 15, 2003, Mr. Bednarik was granted options to purchase 100,000 shares ofthe Company’s common stock at a per share exercise price of $0.16.  Pursuant to the terms of a Nonstatutory StockOption Agreement dated December 9, 2003, Mr. Bednarik was granted options topurchase 25,000 shares of the Company’s common stock at a per share exerciseprice of $1.17.  Pursuant to the terms ofa Nonstatutory Stock Option Agreement dated June 14, 2004, Mr. Bednarik wasgranted options to purchase 75,000 shares of the Company’s common stock at aper share exercise price of $1.00. Pursuant to the terms of a Nonstatutory Stock Option Agreement datedApril 20, 2005, Mr. Bednarik was granted options to purchase 14,000 shares ofthe Company’s common stock at a per share exercise price of $0.63.  Pursuant to the terms of a Nonstatutory StockOption Agreement dated April 20, 2006, Mr. Bednarik was granted options topurchase 50,000 shares of the Company’s common stock at a per share exerciseprice of $0.40.

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The following table sets forth information concerning individual grantsof stock options made to our Chief Executive Officer during the fiscal yearended June 30, 2006.

**OPTION GRANTS IN LAST FISCAL YEAR**
| ** **                                                  | ** ** | **Individual Grants**                                               | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **Name and  Principal Position**                  | ** ** | **Number of  Securities  Underlying  Options  Granted (#)(1)** | ** ** | **% of Total  Options  Granted to  Employees in  Fiscal Year** | ** ** | **Exercise  Price  ($/Sh)** | ** ** | **Expiration  Date** | ** ** | **Potential Realized Value  at Assumed Rates of  Annual Stock Price  Appreciation For  Option Term (2)** | ** ** |
| **5% ($)**                                             | ** ** | **10% ($)**                                                         | ** ** |
| Thomas S.  Bednarik,  President and Chief Executive Officer |       | 50,000                                                                   |       | 10 | % | $ | 0.40 |   | 4/2016 |   | $ | 12,578 |   | $ | 31,875 |   |
|                                                             |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  Pursuant to the terms of a Nonstatutory StockOption Agreement dated April 20, 2006, Mr. Bednarik was granted options topurchase 50,000 shares of the Company’s common stock at a per share exerciseprice of $0.40.  The options vest overfour years and have a term of ten years.

(2)                                  Amounts represent hypothetical gains thatcould be achieved for the options if exercised at the end of the optionterm.  These gains are based on assumedrates of stock appreciation of 5% and 10% compounded annually from the date theoptions were granted to their expiration date and are not presented to forecastpossible future appreciation, if any, in the price of our common stock.  Actual gains, if any, on stock optionexercises are dependent on the future performance of the common stock, overallstock market conditions, as well as the option holder’s continued employmentthrough the vesting period.  The amountsreflected in this table may not necessarily be achieved.

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**OptionExercise**

There were nooption exercises by our ChiefExecutive Officer during the fiscal year ended June 30, 2006.

**AggregateOption Exercises In Last Fiscal Year And Year End Option Values**
| **Name**                                                   | ** ** | **Shares  Acquired  on  Exercise  (#)** | ** ** | **Value  Realized  ($)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options at  June 30, 2006 (#)  Exercisable /  Unexercisable** | ** **       | **Value of  Unexercised  In-The-Money  Options at  June 30, 2006 ($)  Exercisable /  Unexercisable(1)** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                       |       |                                    |       |                     |       |                                                                                                                                          |             |                                                                                                                                  |       |
| Thomas S. Bednarik,  President and Chief Executive Officer |       | —0                                 | —     | $                        | —     |                                                                                                                                          | 789,000 / 50,000 |                                                                                                                                  | $          | 71,250 / $1,500 |   |
|                                                            |            |                                         |            |                          |            |                                                                                                                                               |                  |                                                                                                                                       |            |  |  |

 

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(1)           Information is based on the June 30,2006 closing price of $0.43.

**EmploymentAgreements**

As of February 15,2000, the Board of Directors approved the terms of Mr. Bednarik’s at-willemployment with the Company for services as its President and Chief ExecutiveOfficer.  Under the terms of a letteragreement, dated as of February 17, 2000, the Company agreed to pay Mr.Bednarik a base salary of $115,000, which was increased to $130,000 effectiveApril 2001, to $140,000 effective January 1, 2004, and to $148,400 effectiveJanuary 1, 2005.

Effective January1, 2005, the Board of Directors approved an incentive compensation plan withMr. Bednarik.  Under the terms of theplan, Mr. Bednarik was eligible to earn up to $20,000 in cash bonuses and up to40,000 options to purchase common stock if forecasted quarterly sales andoperating income objectives were met in the quarters ended March 31, 2005 andJune 30, 2005.  Mr. Bednarik earned acash bonus of $7,000 and 14,000 stock options under this plan.  The plan expired at June 30, 2005.

Mr. Bednarik isalso entitled to participate in the Company’s medical and dental plans, withthe Company paying 80% of the cost of Mr. Bednarik’s coverage and 50% of thecost of the medical coverage for Mr. Bednarik’s family.  Under the terms of the letter agreement, aportion of Mr. Bednarik’s unvested options become immediately vested in theevent he is terminated without cause (as such term is defined in his OptionAgreements with the Company).  In theevent the Company is acquired or merged into another company, any unvestedoptions will become automatically vested.

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**Item 11.  Security Ownership Of Certain BeneficialOwners And Management and Related Stockholder Matters.**

Thefollowing table sets forth certain information, as of September 15, 2006,concerning the beneficial ownership of shares of Common Stock of the Company by(i) each person known by the Company to beneficially own more than 5% of theCompany’s Common Stock; (ii) each Director; (iii) the Company’s Chief ExecutiveOfficer; and (iv) all directors and executive officers of the Company as agroup.  To the knowledge of the Company,all persons listed in the table have sole voting and investment power withrespect to their shares, except to the extent that authority is shared withtheir respective spouse under applicable law.
| **Name and Address of Beneficial**               | ** ** | **Shares Beneficially Owned (1)** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| **Owner (2)**                                    | ** ** | **Number**                        | ** ** | **Percent** | ** ** |
| Thomas S. Bednarik                               |       | 927,750                           | (3)        | 5.9 | % |
| Todd P. Belfer                                   |       | 1,673,127                         | (4)        | 11.1 | % |
| Lise M. Lambert                                  |       | 285,163                           | (5)        | 1.9 | % |
| Robert W. Zimmerman                              |       | 365,175                           | (6)        | 2.4 | % |
| Robert J. Novak                                  |       | 384,520                           | (7)        | 2.5 | % |
| Craig J. Smith                                   |       | 178,751                           | (8)        | 1.2 | % |
| All directors and  executive officers as a group |       | 3,814,486                         |       | 22.6 | % |
| Joseph L. Simek                                  |       | 3,888,585                         | (9)        | 25.8 | % |
| Circle F. Ventures LLC                           |       | 981,111                           |       | 6.5 | % |
| Laurus Capital  Management, LLC                  |       | 981,923                           | (10)       | 6.3 | % |

 

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(1)                                  A person is deemed to be the beneficial ownerof securities that can be acquired within 60 days from the date set forth abovethrough the exercise of any option, warrant or right.  Shares of common stock subject to options,warrants or rights that are currently exercisable or exercisable within 60 daysare deemed outstanding for computing the percentage of the person holding suchoptions, warrants or rights, but are not deemed outstanding for computing thepercentage of any other person.  Theamounts and percentages are based upon 15,004,404 shares of common stock andmezzanine financing outstanding as of September 15, 2006.

(2)                                  The address of each of the beneficial ownersis c/o Time America, Inc., 8840 East Chaparral Road, Suite 100, Scottsdale,Arizona 85250, except for Circle F. Ventures LLC whose address is 17797 NorthPerimeter Drive, Suite 105, Scottsdale, Arizona 85255 and Joseph L. Simek whoseaddress is 611 North Road, Medford, Wisconsin 54461.

(3)                                  Includes 789,000 shares of common stockunderlying unexercised options that were exercisable on September 15, 2006, orwithin 60 days thereafter.

(4)                                  Includes 335,000 shares of common stockunderlying unexercised options that were exercisable on September 15, 2006, orwithin 60 days thereafter.

(5)                                  Includes 250,969 shares of common stockunderlying unexercised options that were exercisable on September 15, 2006, orwithin 60 days thereafter.

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(6)                                  Includes 215,000 shares of common stockunderlying unexercised options that were exercisable on September 15, 2006, orwithin 60 days thereafter.

(7)                                  Includes 154,520 shares of common stockunderlying unexercised options that were exercisable on September 15, 2006, orwithin 60 days thereafter.

(8)                                  Includes 151,751 shares of common stockunderlying unexercised options that were exercisable September 15, 2006, orwithin 60 days thereafter.

(9)                                  Includes 87,958 shares of common stockissuable upon exercise of warrants issued in consideration for entering intodebt agreements during the fiscal year ended June 30, 2002.

(10)                            Includes 630,000 shares of common stockunderlying warrants that were exercisable on September 15, 2006, or within 60days thereafter.

**Item12.  Certain Relationships And RelatedTransactions.**

Except as setforth below, the Company did not have any transactions during fiscal years 2006and 2005 with any director, director nominee, executive officer, securityholder known to the Company to own of record or beneficially more than 5% ofthe Company’s common stock, or any member of the immediate family of any of theforegoing persons, in which the amount involved exceeded $60,000.

On March 31, 2001,the Company borrowed $400,000 from Joseph L. Simek, a significant stockholderof the Company.  The loan accruesinterest at an annual rate of prime plus one percent (1%) and is secured by asubordinated lien on all of the Company’s assets.  Principal and interest payments ofapproximately $8,500 are due monthly, with the outstanding principal balancedue on October 1, 2004.  On November 2,2001, Mr. Simek agreed to provide the Company with a $200,000 line of credit,which is also secured by all of the Company’s assets.  On September 24, 2002, Mr. Simek agreed toprovide the Company with an additional $200,000 revolving line of credit, whichis also secured by all of the Company’s assets. Borrowings under the lines of credit accrue interest at an annual rateof 10%.  In January 2004, Mr. Simek andthe Company agreed to extend the maturity date of the line of credit facilityto December 31, 2005.  In September 2004, the Company and Mr. Simekagreed to extend the balloon payment on the promissory note from October 1,2004 to October 1, 2005. In November 2005, the Company and Mr. Simekagreed to extend the term of its $400,000 line of credit facility to December31, 2007.   At June 30, 2006, the$400,000 loan has been repaid in full and $150,000 was outstanding under theline of credit.

On September 4,2001, the Company borrowed $500,000 from Francis Simek, the spouse of Mr.Simek, under a five year term note.  OnMarch 22, 2004, the Company and Mrs. Simek entered into a subordinated noteagreement pursuant to which the obligations outstanding under this note weresubordinated to the obligations under our credit facilities with Laurus MasterFund.  Under the terms of the agreement,the existing term note was refinanced as a five year term note with monthlyprincipal and interest payments at 15%. The Company issued 25,000 shares ofrestricted common stock to Mrs. Simek in consideration for her agreement tosubordinate the note.  In November 2004,the Company and Mrs. Simek amended the terms of the note to change the interestrate to 10%. The loan is secured by a junior lien on all of the

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Company’s assets.  Principal and interest payments of $8,918 aredue and payable monthly over a 60-month period. At June 30, 2006, $256,395 was outstanding under this loan.

In October2003, the Company entered into a four year consulting services agreement withMr. Belfer pursuant to which Mr. Belfer agreed to introduce the Company toinvestment banking and investor relations firms and persons/entities interestedin doing business with the Company.  Inexchange for Mr. Belfer’s agreement to provide such consulting services, Mr.Belfer was granted a non-statutory option to purchase 200,000 shares of theCompany’s common stock at $0.75 per share. The options vest over four years and have a term of four years.

On April 16, 2004, the Company borrowed $500,000 fromMrs. Simek.  The note is a five year termnote with monthly principal and interest payments at 15%.  In consideration for agreeing to subordinatethe note, the Company issued 25,000 shares of restricted common stock to Mrs.Simek.  The loan is secured by a subordinatedlien on all of the Company’s assets.  In November 2004, the Company paid $456,100to retire the remaining balance on the note. The Company and Mrs. Simek then entered into a $500,000 revolving creditnote agreement.  Borrowings under thenote accrue interest at the rate of 10% per annum with interest duemonthly.  Unused borrowings are subjectto a 2% per annum commitment fee payable quarterly.  In May 2005, the Company borrowed $500,000under this agreement.  Subsequently, theCompany and Mrs. Simek amended the agreement to provide for a 60-monthrepayment period.  Principal andinterest payments of $10,562 are due and payable monthly. At June 30, 2006,$409,337 was outstanding under this loan.

On December 8, 2005, the Company borrowed $500,000 fromFrancis Simek under a three year term note at an annual interest rate of15%.  The loan is secured by asubordinated lien on all of the Company’s assets.  Principal and interest payments of $17,288are due and payable monthly over a 36-month period.  At June 30, 2006, $430,268 was outstandingunder this loan.

**Item 13.Exhibits.**

The exhibits asindexed immediately following the signature page of this Report are included aspart of this Form 10-KSB.

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

The following table sets forth fees billed to us byour auditors during the fiscal years ended June 30, 2006 and 2005 for: (i)services rendered for the audit of our annual financial statements and thereview of our quarterly financial statements, (ii) services by our auditorsthat are reasonably related to the performance of the audit or review of ourfinancial statements and that are not reported as Audit Fees, (iii) servicesrendered in connection with tax compliance, tax advice and tax planning, and(iv) all other fees for services rendered. All other fees consists primarily of fees incurred to review ourregistration statement filings.
|       | ** ** | ** **          | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|-------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|
| (i)   |       | Audit  Fees         |       | $                           | 45,000     |                        | $          | 37,000 |   |
| (ii)  |       | Audit  Related Fees |       | —                      |       | —                      |       |
| (iii) |       | Tax  Fees           |       | $                           | 4,500      |                        | $          | 4,500 |   |
| (iv)  |       | All  Other Fees     |       | $                           | 18,294     |                        | $          | 2,800 |   |

** **

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

All audit and non-audit servicesare pre-approved by the Audit Committee, which considers, among other things,the possible effect of the performance of such services on the auditors’independence.  The Audit Committeepre-approves the annual engagement of the principal independent registeredpublic accounting firm, including the performance of the annual audit and quarterlyreviews for the subsequent fiscal year, and pre-approves specific engagementsfor tax services performed by such firm. The Audit Committee has also established pre-approval policies andprocedures for certain enumerated audit and audit related services performedpursuant to the annual engagement agreement, including such firm’s attendanceat and participation at Board and committee meetings; services associated withSEC registration statements approvedby the Board of Directors; review of periodic reports and otherdocuments filed with the SEC or other documents issued in connection withsecurities offerings, such as comfort letters and consents; assistance inresponding to any SEC comments letters; and consultations with such firm as tothe accounting or disclosure treatment of transactions or events and the actualor potential impact of final or proposed rules, standards or interpretations bythe SEC, Public Company Accounting Oversight Board (PCAOB), FinancialAccounting Standards Board (FASB), or other regulatory or standard-settingbodies.  The Audit Committee is informedof each service performed pursuant to its pre-approval policies andprocedures.  The Audit Committee hasconsidered the role of Semple & Cooper, LLP in providing services to us forthe fiscal year ended June 30, 2006 and has concluded that such services arecompatible with such firm’s independence.

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**SIGNATURES**

In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantcaused this Report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|   | TIME AMERICA, INC.                                                                       |
|--------|------------------------------------------------------------------------------------------|
|   |                                                                                     |
|   | /s/ Thomas S.  Bednarik                                                                  |   |
|   | Thomas S.  Bednarik, President and Chief Executive Officer (Principal Executive Officer) |

 

Dated: September28, 2006

In accordance withthe Securities Exchange Act of 1934, this Report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

**POWER OFATTORNEY**

KNOWN ALL MEN BYTHESE PRESENTS, that each person whose signature appears below constitutes andappoints Thomas S. Bednarik and Craig J. Smith, and each of them, his true andlawful attorneys-in-fact and agents, with full power of substitution andresubstititon for him or her and in his or her name, place and stead, in anyand all capacities, to sign any and all amendments to this Annual Report onForm 10-KSB, and to file the same, with all exhibits thereto, and otherdocuments in connection therewith with the Securities and Exchange Commission,granting unto said attorneys-in-fact and agents, and each of them, full powerand authority to do and perform each and every act and thing requisite andnecessary to be done in and about the premises, as fully and to all intents andpurposes as he might or could do in person hereby ratifying and confirming allthat said attorneys-in-fact and agents, or his substitute or substitutes, maylawfully do or cause to be done by virtue hereof.
| **Signatures**           | ** ** | **Title** | ** **                    | **Date** |
|--------------------------|------------|-----------|-------------------------------|----------|
|                     |       |      |                          |     |   |
| /s/ Thomas S.  Bednarik  |       |      | President, CEO and Director   |     | September 28,  2006 |
| Thomas S.  Bednarik      |       |      | (Principal Executive Officer) |     |   |
|                     |       |      |                          |     |   |
| /s/ Craig J.  Smith      |       |      | Chief Financial Officer       |     | September 28,  2006 |
| Craig J. Smith           |       |      | (Principal Financial Officer) |     |   |
|                     |       |      |                          |     |   |
| /s/ Todd P.  Belfer      |       |      | Chairman of the Board         |     | September 28,  2006 |
| Todd P. Belfer           |       |      |                          |     |   |
|                     |       |      |                          |     |   |
| /s/ Lise M.  Lambert     |       |      | Director                      |     | September 28,  2006 |
| Lise M. Lambert          |       |      |                          |     |   |
|                     |       |      |                          |     |   |
| /s/ Robert W.  Zimmerman |       |      | Director                      |     | September 28,  2006 |
| Robert W.  Zimmerman     |       |      |                          |     |   |
|                     |       |      |                          |     |   |
| /s/ Robert J.  Novak     |       |      | Director                      |     | September 28,  2006 |
| Robert J. Novak          |       |      |                          |     |   |

 

40

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                         | ** ** | **By Reference  from  Document** | ** ** | **No. in   Document** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|
| 3.1             |       | Registrant’s Articles of Incorporation                                                                                             |       | A                                |       | 3.1                   |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.1.1           |       | Registrant’s Amendment to its Articles of  Incorporation, dated November 7, 1988                                                   |       | A                                |       | 3.1.1                 |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.1.2           |       | Registrant’s Amendment to its Articles of  Incorporation, dated June 25, 1991                                                      |       | B                                |       | 3.1.2                 |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.1.3           |       | Registrant’s Certificate of Reverse Stock Split,  dated February 15, 1994                                                          |       | C                                |       | 3.1.3                 |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.1.4           |       | Registrant’s Certificate of Designation of Series A  Preferred Stock, dated June 27, 1996                                          |       | D                                |       | 3.1.4                 |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.1.5           |       | Registrant’s Amendment to Articles of Incorporation,  dated June 25, 1996                                                          |       | D                                |       | 3.15                  |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.1.6           |       | Registrant’s Certificate of Designation of Series B  Preferred Stock, dated March 31, 1999                                         |       | E                                |       | 3.1.6                 |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.1.7           |       | Registrant’s Amendment to Articles of Incorporation,  dated October 7, 1999.                                                       |       | F                                |       | 3.1                   |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.1.8           |       | Certificate of Correction to Certificate of  Amendment to Articles of Incorporation of Vitrix, Inc., dated June 16, 2005                |       | O                                |       | 3.1.8                 |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 3.2             |       | Amended Bylaws of the Registrant                                                                                                        |       | C                                |       | 3.2                   |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 4.1             |       | Registrant’s Form of Common Stock Certificate                                                                                      |       | A                                |       | 4.1                   |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 10.6            |       | 1999 Equity Compensation Plan                                                                                                           |       | E                                |       | 10.7                  |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 10.7.1          |       | Lease Agreement, dated September 3, 1999, between  LAFP Phoenix, Inc., as lessor, and the Registrant, as lessee.                        |       | F                                |       | 10.1                  |
|            |       |                                                                                                                                    |       |                             |       |                  |
| 10.7.2          |       | First Amendment to Office Lease Agreement, dated  March 28, 2000, between LAFP Phoenix, Inc., as lessor and the Registrant, as  lessee. |       | G                                |       | 10.1                  |

 

41

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                        | ** ** | **By Reference  from  Document** | ** ** | **No. in   Document** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|
| 10.8            |       | Securities Purchase Agreement, dated September 21,  1999, between Circle F Ventures, LLC and the Registrant.                                                                                                                                           |       | F                                |       | 10.2                  |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.10           |       | Merger Agreement, dated March 28, 2001 by and among  Vitrix, Inc., Vitrix Incorporated, and Time America, Inc.                                                                                                                                         |       | H                                |       | 2.1                   |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.12           |       | Letter from BDO Seidman, LLP, dated June 4, 2001,  regarding its concurrence or disagreement with the statements made by the  registrant in the current report concerning the resignation or dismissal as  the registrants’ principal accountant. |       | I                                |       | 16                    |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.13           |       | Promissory Note Agreement, dated September 4, 2001  between Vitrix, Inc. and Frances L. Simek                                                                                                                                                          |       | J                                |       | 10.13                 |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.14           |       | Security Agreement dated September 4, 2001 between  Vitrix, Inc. and Frances L. Simek                                                                                                                                                                  |       | J                                |       | 10.14                 |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.15           |       | Warrant to purchase common stock agreement dated  September 4, 2001 between Vitrix, Inc. and Frances L. Simek                                                                                                                                          |       | J                                |       | 10.15                 |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.16           |       | Promissory Note Agreement, dated March 31, 2001  between Time America, Inc and Joseph L. Simek                                                                                                                                                         |       | K                                |       | 10.16                 |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.17           |       | Revolving Credit Agreement, dated November 2, 2001  between Vitrix, Inc and Joseph L. Simek                                                                                                                                                            |       | K                                |       | 10.17                 |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.18           |       | Securities Purchase Agreement, dated March 22, 2004,  among Time America, Inc. and Laurus Master Fund, Ltd.                                                                                                                                            |       | L                                |       | 10.1                  |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.19           |       | Secured Convertible Term Note, dated March 22, 2004,  among Time America, Inc. and Laurus Master Fund, Ltd.                                                                                                                                            |       | L                                |       | 10.2                  |
|            |       |                                                                                                                                                                                                                                                   |       |                             |       |                  |
| 10.20           |       | Common Stock Purchase Warrant, dated March 22, 2004,  issued to Laurus Master Fund, Ltd.                                                                                                                                                               |       | L                                |       | 10.3                  |

 

42

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                | ** ** | **By Reference  from  Document** | ** ** | **No. in   Document** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|
| 10.21           |       | Security Agreement, dated March 22, 2004, among Time  America, Inc. and Laurus Master Fund, Ltd.                                                                                                               |       | L                                |       | 10.4                  |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.22           |       | Subordination Agreement, dated March 22, 2004, among  Time America, Inc., Laurus Master Fund, Ltd and Joseph and Frances Simek                                                                                 |       | L                                |       | 10.5                  |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.23           |       | Registration Rights Agreement, dated March 22, 2004,  among Time America, Inc. and Laurus Master Fund, Ltd.                                                                                                    |       | L                                |       | 10.6                  |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.24           |       | Guarantee, dated March 22, 2004, issued by Time  America, Inc. in favor of Laurus Master Fund, Ltd.                                                                                                            |       | L                                |       | 10.7                  |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.25           |       | Stock Pledge Agreement, dated March 22, 2004, among  Time America, Inc. and Laurus Master Fund, Ltd.                                                                                                           |       | L                                |       | 10.8                  |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.26           |       | Note Purchase Agreement, dated April 16, 2004  between Time America, Inc. and Frances L. Simek                                                                                                                 |       | M                                |       | 10.26                 |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.27           |       | Promissory Note Agreement, dated April 16, 2004  between Time America, Inc. and Frances L. Simek                                                                                                               |       | M                                |       | 10.27                 |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.28           |       | Security Agreement, dated April 16, 2004 between  Time America, Inc. and Frances L. Simek                                                                                                                      |       | M                                |       | 10.28                 |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.29           |       | Consulting Services Agreement, dated October 15,  2003, between Vitrix, Inc. and Todd P. Belfer                                                                                                                |       | O                                |       | 10.29                 |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.30           |       | Bonus Plan Document with Tom Bednarik, effective as  of January 1, 2005                                                                                                                                        |       | O                                |       | 10.30                 |
|            |       |                                                                                                                                                                                                           |       |                             |       |                  |
| 10.31           |       | Equipment Purchase, License and Services Agreement,  dated as of August 29, 2005, between FedEx Corporate Services, Inc. and Time  America, Inc. (certain portions deleted pursuant to confidential treatment) |       | ON                               |       | 10.31                 |

 

43

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                      | ** ** | **By Reference  from  Document** | ** ** | **No. in   Document** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|
| 10.32           |       | Amendment, dated as of August 29, 2005, between Federal  Express Corporation and Time America, Inc. (certain portions deleted pursuant  to confidential treatment)                                                                                                   |       | ON                               |       | 10.32                 |
|            |       |                                                                                                                                                                                                                                                                 |       |                             |       |                  |
| 10.33           |       | Professional Services Agreement, dated as of August  29, 2005, between FedEx Corporate Services, Inc. and Time America, Inc.  (certain portions deleted pursuant to confidential treatment)                                                                          |       | ON                               |       | 10.33                 |
|            |       |                                                                                                                                                                                                                                                                 |       |                             |       |                  |
| 10.34           |       | Amendment, dated as of August 29, 2005, between  Federal Express Corporation and Time America, Inc. (certain portions deleted  pursuant to confidential treatment)                                                                                                   |       | ON                               |       | 10.34                 |
|            |       |                                                                                                                                                                                                                                                                 |       |                             |       |                  |
| 10.35           |       | Letter Agreement, dated February 17, 2000, between  Vitrix Incorporated and Thomas S. Bednarik                                                                                                                                                                       |       | O                                |       | 10.35                 |
|            |       |                                                                                                                                                                                                                                                                 |       |                             |       |                  |
| 10.36           |       | Security and Purchase Agreement, dated January 3,  2006, by and among Laurus Master Fund, Ltd., Time America, Inc., a Nevada  corporation, Time America, Inc, an Arizona corporation, and NetEdge Devices,  LLC, an Arizona limited liability company.               |       | P                                |       | 10.1                  |
|            |       |                                                                                                                                                                                                                                                                 |       |                             |       |                  |
| 10.37           |       | Secured Convertible Term Note, dated January 3,  2006, made by Time America, Inc., a Nevada corporation, Time America, Inc.,  an Arizona corporation and NetEdge Devices, LLC, an Arizona limited liability  company, in favor of Laurus Master Fund, Ltd.           |       | P                                |       | 10.2                  |
|            |       |                                                                                                                                                                                                                                                                 |       |                             |       |                  |
| 10.38           |       | Secured Non-Convertible Revolving Note, dated  January 3, 2006, made by Time America, Inc., a Nevada corporation, Time  America, Inc., an Arizona corporation, and NetEdge Devices, LLC, an Arizona  limited liability company, in favor of Laurus Master Fund, Ltd. |       | P                                |       | 10.3                  |
|            |       |                                                                                                                                                                                                                                                                 |       |                             |       |                  |
| 10.39           |       | Common Stock Purchase Warrant, dated January 3,  2006, issued to Laurus Master Fund, Ltd.                                                                                                                                                                            |       | P                                |       | 10.4                  |

 

44

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                             | ** ** | **By Reference  from  Document** | ** ** | **No. in   Document** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|
|            |       |                                                                                                                                                                                                                                                                                        |       |                             |       |                  |
| 10.40           |       | Registration Rights Agreement, dated January 3,  2006, between Time America, Inc., a Nevada corporation, and Laurus Master  Fund, Ltd.                                                                                                                                                      |       | P                                |       | 10.5                  |
|            |       |                                                                                                                                                                                                                                                                                        |       |                             |       |                  |
| 10.41           |       | Amended and Restated Subordination Agreement, dated  January 3, 2006, among Time America, Inc., a Nevada corporation, Time  America, Inc., an Arizona corporation, and NetEdge Devices, LLC, an Arizona  limited liability company, Laurus Master Fund, Ltd. and Joseph and Frances  Simek. |       | P                                |       | 10.6                  |
|            |       |                                                                                                                                                                                                                                                                                        |       |                             |       |                  |
| 10.42           |       | Reaffirmation and Ratification Agreement, dated  January 3, 2006, among Laurus Master Fund, Ltd., Time America, Inc., a Nevada  corporation, Time America, Inc., an Arizona corporation, and NetEdge Devices,  LLC, an Arizona limited liability company.                                   |       | P                                |       | 10.7                  |
|            |       |                                                                                                                                                                                                                                                                                        |       |                             |       |                  |
| 10.43           |       | Letter Agreement with Oberon Securities, LLC, dated  January 13, 2006.                                                                                                                                                                                                                      |       | P                                |       | 10.8                  |
|            |       |                                                                                                                                                                                                                                                                                        |       |                             |       |                  |
| 10.44           |       | Asset Purchase Agreement, dated April 12, 2006  between Time America, Inc. and Unitime Systems, Inc.                                                                                                                                                                                        |       | Q                                |       | 10.1                  |
|            |       |                                                                                                                                                                                                                                                                                        |       |                             |       |                  |
| 31.1            |       | Certification pursuant to Rules 13a-14(a) and  15d-14(a)(5) of the Securities Exchange Act of 1934                                                                                                                                                                                          |       | *                                |       | —                |
|            |       |                                                                                                                                                                                                                                                                                        |       |                             |       |                  |
| 31.2            |       | Certification pursuant to Rules 13a-14(a) and  15d-14(a)(5) of the Securities Exchange Act of 1934                                                                                                                                                                                          |       | *                                |       | —                |
|            |       |                                                                                                                                                                                                                                                                                        |       |                             |       |                  |
| 32              |       | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                     |       | *                                |       | —                |

 

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*      Filed herewith.

A.    Form S-18 Registration Statement No.33-25704-NY.

B.    Form 10-K Annual Report of the Registrant forthe fiscal year ended June 30, 1991.

C.    Form 10-KSB Annual Report of the Registrantfor the fiscal year ended June 30, 1994.

D.    Form 8-K Current Report reporting event onJune 28, 1996.

E.     Form 10-KSB Annual Report of the Registrantfor the fiscal year ended June 30, 1999.

F.     Form 10-QSB Quarterly Report of theRegistrant for the fiscal quarter ended September 30, 1999.

45

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G.    Form 10-QSB Quarterly Report of theRegistrant for the fiscal quarter ended March 31, 2000.

H.    Form 8-K Current Report reporting event onApril 13, 2001.

I.      Form 8-K Current Report reporting event onJune 6, 2001.

J.     Form 10-KSB Annual Report of the Registrantfor the fiscal year ended June 30, 2001.

K.    Form 10-KSB Annual Report of the Registrantfor the fiscal year ended June 30, 2002.

L.     Form 8-K Current Report reporting event onMarch 22, 2004.

M.   Form 10-KSB Annual Report of the Registrantfor the fiscal year ended June 30, 2004.

N.    Portions of the referenced exhibit have beenomitted pursuant to a request for confidential treatment filed with the Securitiesand Exchange Commission.

P.     Form 10-QSB Quarterly Report of theRegistrant for the quarter ended December 31, 2005.

Q.    Form 10-QSB Quarterly Report of the Registrant for the quarter endedMarch 31, 2006.

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