**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

 
| **ý** | ** ** | **ANNUAL REPORT UNDER SECTION 13  OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                         |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **FOR THE FISCAL YEAR ENDED JUNE 30,  2005**                                                                                                                                                                                                                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                                  |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13  OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **For the transition period from                               to                        ** |

 

**CommissionFile 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’s telephonenumber)

 

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

 

Securitiesregistered under Section 12(g) of the Exchange Act:

**CommonStock, $.005 par value**

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  ý  No  o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. o

 

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

 

The issuer’s revenues forthe fiscal year ended June 30, 2005 were $6,082,238.

 

The aggregate marketvalue of the voting stock and non-voting common equity (based on the closingprice on that date) held by non-affiliates of the registrant as of September 26,2005 was approximately $4,585,000.

 

At September 23,2005, the issuer had outstanding 14,251,552 shares of Common Stock, par value$.005 per share.

 

Transitional SmallBusiness Disclosure Format:  Yes  o  No  ý

 

 

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**PART I**

 

# **Forward-LookingInformation**

 

The statements contained in thisAnnual Report on Form 10-KSB that are not historical fact areforward-looking statements (as such term is defined in the Private SecuritiesLitigation Reform Act of 1995), within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Theforward-looking statements contained herein are based on current expectationsthat involve a number of risks and uncertainties.  These statements can be identified by the useof forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,”or “anticipates,” or the negative thereof or other variations thereon orcomparable terminology, or by discussions of strategy that involve risks anduncertainties.  The Company wishes tocaution the reader that these forward-looking statements that are nothistorical facts are only predictions. No assurances can be given that the future results indicated, whetherexpressed or implied, will be achieved. While sometimes presented with numerical specificity, these projectionsand other forward-looking statements are based upon a variety of assumptionsrelating to the business of the Company, which, although considered reasonableby the Company, may not be realized. Because of the number and range of assumptions underlying the Company’sprojections and forward-looking statements, many of which are subject tosignificant uncertainties and contingencies that are beyond the reasonablecontrol of the Company, some of the assumptions inevitably will notmaterialize, and unanticipated events and circumstances may occur subsequent tothe date of this report.  Theseforward-looking statements are based on current expectations and the Companyassumes no obligation to update this information.  Therefore, the actual experience of theCompany and the results achieved during the period covered by any particularprojections or forward-looking statements may differ substantially from thoseprojected.  Consequently, the inclusionof projections and other forward-looking statements should not be regarded as arepresentation by the Company or any other person that these estimates andprojections will be realized, and actual results may vary materially.  There can be no assurance that any of theseexpectations will be realized or that any of the forward-looking statementscontained herein will prove to be accurate.

 

**Item1.  Description Of Business.**

 

# **General**

 

TimeAmerica, Inc. is a Nevada corporation. We changed our name from Vitrix, Inc.to Time America, Inc. in December 2003. We develop, manufacture andmarket a line of time and labor 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.

 

Thefollowing bullet points provide a timeline and overview of our development andcorporate history:

 

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•                                          June 6, 1988—Richard Barrie Fragrances, Inc.,a Nevada corporation, was formed on this date for the purpose of developing,manufacturing and marketing fragrances, cosmetics, skin treatment and personalcare products sold primarily through department and specialty stores anddrugstores.

 

•                                          June 30, 1996—Richard Barrie Fragrancessells substantially all of its properties and rights to Parlux Fragrances, Inc.During the period from this asset sale to April 1999, our operations werelimited to conducting administrative activities and discussions with thirdparties regarding possible business combinations.

 

•                                          July 1, 1996—Following the asset sale,Richard Barrie Fragrances changes its name to FBR Capital Corporation.

 

•                                          April 15, l999—FBR Capital Corporationacquires the outstanding capital stock of Vitrix Incorporated, a privately heldArizona corporation formed on April 26, 1996, pursuant to the terms of anExchange Agreement, dated as of such date, among FBR Capital Corporation,Vitrix Incorporated and certain of the Vitrix Incorporated shareholders. VitrixIncorporated becomes a majority owned subsidiary of FBR Capital Corporation asa result of this transaction. FBR Capital Corporation issued an aggregate of8,592,826 shares of common stock and 10,000,000 shares of preferred stock inconsideration for the purchase of Vitrix Incorporated. This transactionresulted in the shareholders of Vitrix Incorporated acquiring approximately 80%of the outstanding shares of common stock of FBR Capital Corporation, assumingconversion of the preferred stock into common stock and excluding outstandingoptions and warrants. The existing shareholders of FBR Capital Corporation heldthe remaining 20% of its outstanding common stock. This transaction wasaccounted for as a recapitalization of Vitrix Incorporated and the purchase ofFBR capital Corporation by Vitrix Incorporated, since Vitrix Incorporatedbecame the controlling company after the transaction.

 

•                                          October 7, 1999—On this date we changedour name from FBR Capital Corporation to Vitrix, Inc. in order toassociate the name of the parent corporation to our operating subsidiary, VitrixIncorporated.

 

•                                          March 28, 2001—We acquired Time America, Inc.,a private Arizona-based time and attendance software development company, in amerger transaction pursuant to which Time America was merged into ourwholly-owned subsidiary, Vitrix Incorporated. This transaction was accountedfor as a pooling of interests. As a condition to the merger, we sought andobtained the approval of our shareholders to effect a 1-for-10 reverse stocksplit, which occurred on April 5, 2001. We issued 3,147,914 shares ofVitrix, Inc. common stock, on a post reverse stock split basis, asconsideration in the merger, which represented approximately 50% of Vitrix Inc.’sthen issued and outstanding capital stock.

 

•                                          April 17, 2001—We changed the name ofour wholly-owned subsidiary from Vitrix Incorporated to Time America, Inc.in order to capitalize on Time 

 

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America’sname recognition gained from its 13 year history in the time and attendanceindustry.

 

•                                          December 9, 2003—On this date we changedthe name of our parent company, Vitrix, Inc., to Time America, Inc.,to further capitalize on the name recognition of Time America as describedabove.

 

We market our products tocompanies in the U.S. and abroad through our direct sales and supportorganization and through our Business Alliance and Reseller Program.

 

Time America, Inc. is aholding corporation.  Our operations areconducted through our wholly-owned subsidiary, which is also named Time America, Inc.  Unless the context indicates otherwise,references to the Company in this report shall include both Time America (theparent company organized in Nevada) and Time America (our wholly-ownedsubsidiary organized in Arizona).

 

# **Productsand Services**

 

### **Summary**

### ** **

We design, develop, manufacture andmarket a line of time and labor management hardware and software productstargeting small, medium, and enterprise level companies. Our solutions areoffered in a 100% web-based licensed or hosted model, client/serverconfiguration, and in a PC-based application. Our products are internally developed, proprietary software applicationsthat maintain and automate the process of collecting time and human resourcedata.  We provide automated interfaces tomost popular payroll, accounting and ERP software solutions in the marketplaceand enable users to generate a variety of reports that track and analyzeworkforce productivity. Our products also automatically accrue vacation, sickand personal time, and effectively replace the traditional punch clock with afully automated system designed to improve workforce productivity and providesignificant time and cost savings to its users.

 

### **SoftwareSolutions**

### ** **

We currently have a suite ofseven different software solutions to meet the needs of a wide variety ofclients.  Features that are common to thesoftware solutions include:

 

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

 

•                                          **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.

 

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•                                          **Workforce Scheduling**– Our software suites’scheduling features help manage payroll costs and productivity concerns byminimizing the likelihood of expensive overstaffing and the negative effects ofunderstaffing. Schedule creation is performed with the assistance of aunique visual interface, allowing administrators to view employees’ schedulesin a convenient calendar format.

 

•                                          **Customization** – Our product architectureallows for the products to be easily customized to conform to an organization’sunique set of payroll policies and concerns.

 

•                                          **Accrual Management**– Leave records forvacation, sick and personal time are maintained by our software.  Our products also track hours that arespecific to a certain accrual type (i.e. PTO, jury duty, training, etc.), andautomate benefit accruals by using a company’s policies to calculate how muchbenefit time an employee has earned.

 

•                                          **Strategic Reporting** – Our products alsofeature a multitude of standard reports. These reports allow users to transformbasic data into helpful information that enable managers and executives to gainvaluable insight and more effectively manage their organizations. Reports canalso be used to share information such as time tracking, benefit usage, jobcosting, human resource functionality and employee scheduling with third-partyapplications and/or service bureaus.

 

•                                          **Job and Task Tracking**– In addition to trackingtotal time spent on the job, our products enable employers to track the timeemployees spend on specific jobs and tasks. This powerful feature assists companies with job costing, analysis andbilling.

 

Our suite of software products include the following:

 

#### **NETtime**

#### ** **

NETtimeis a 100% web-based software application provided to customers through both alicensed and hosted model which 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 andwealth of information it provides.

 

NETtime allows customer selfservice by giving users the ability to view their account status online. Theycan even order additional Time America products, obtain system help, or contacta support representative directly from our NETtime website.

 

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With NETtime’s flexibility andscalability the product is used in all the market segments the Company sellsin.  The Company believes that web-basedsoftware and the hosted model will continue to gain acceptance in themarketplace and, because of this belief the Company considers NETtime vital toits future.

 

#### **GENESIS SQL**

#### ** **

Our****GENESIS SQL product is apowerful, client-server software system that is primarily used by medium andenterprise level companies.  It is ourmost feature-rich product in our suite of software solutions, with over 15years of product evolution.  GENESIS SQLsupports complex pay rules and has the most robust scheduling functionalityof our product suite.  GENESIS SQL alsohas access control and occurrence ratings modules that are not currently foundin any of our other products.

 

#### **GENESIS PRO**

#### ** **

GENESIS PRO is a mediumand enterprise level PC-based software application that has the same featureset of GENESIS SQL.

 

#### **HourTrack**

#### ** **

HourTrack is the predecessor toNETtime and is a client-server software system that is primarily used by mediumand enterprise level companies.

 

#### **TA100 PRO**

#### ** **

Our TA100 PRO PC-based time andattendance solution is designed for companies with fewer than 500employees.  An optional feature of theTA100 PRO solution includes a Bell Control Module that allows a client todefine bell-ringing schedules and prompt terminals to activate a user suppliedbell, alarm, or other audible signaling device.

 

#### **TA50 PRO**

#### ** **

TA50 PRO is an easy to use, yetpowerful PC-based time and attendance solution designed for companies withfewer than 200 employees.  TA50 PROenables companies to automate their timekeeping and attendance tracking witheasy to use built-in setup wizards and a simplified user interface.

 

#### **TA50XL**

#### ** **

TA50XL is a user friendlyPC-based time and attendance solution that includes the software features ofTA50 PRO and an XL data terminal and accessories in a cost-effective package.

 

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### **Data CollectionProducts**

### ** **

Our time andattendance product solutions typically include hardware devices and/or softwaredesigned 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 arewell suited for a wide variety of environments, from doctors’ offices tomanufacturing plants. Employees clock in and out by simply sliding a badgethrough a scanner.

 

•                                          **HandPunch Biometric Terminals –**Our devicesanalyze the biometric measurements of a user’s hand to verify theiridentity.  Instead of using a badge, an employeeclocks in and out by placing his or her hand onto the scanner and awaitingverification.  This method eliminateslosses due to buddy-punching (the practice of one employee clocking in or outfor another employee).

 

•                                          **Iris Technology Terminal –**Our iris technology devices use digitalvideo imaging of the unique patterns found in the iris of the eye and providehigh integrity biometric authentication of an employee without PIN numbers,passwords or ID cards.

 

•                                          **TelePunch**– Our TelePunch solution allowsemployees to clock in and out for the day, for jobs, or for departments usingany touch-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 reducesa user’s total time and attendance product investment by utilizing the Internetto collect employee clock in and out times. Employees can clock in and out by simply logging on to a web page (viathe local network or the World Wide Web).

 

•                                          **PC Time Clock**– PC Time Clock, allowsemployees to clock in and out on a Windows-based computer.  This device is generally beneficial in officeenvironments where employees each have access to their own desktop computer.

 

•                                          **Web browser** – NETtime allows clients toaccess their time 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 streamlinedversion of NETtime is available to clients accessing the service through atext-only browser, such as those operating on cell phones with wireless accessprotocol (wap) capability.  Essentialservices such as clocking in and out are available.

 

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•                                          **TCP/IP-enabled hardware** – Customers mayutilize TCP/IP-enabled hardware devices, such as badge readers, to collectclock in and out data from their employees.

 

•                                          **Wireless enabled hardware**– Our wirelessenabled hardware devices allow clients to connect their time clocks to a hostsystem without the inconvenience of wiring. The wireless units are small,reliable and easy to integrate into a user’s existing system.

 

# **Servicesand Support**

# ** **

We maintain aprofessional service and technical support organization, which provides a suiteof maintenance and professional services. These services are designed to support our customers throughout the lifecycle of our products.  Our professionalservices include implementation, training, and technical consulting.  Maintenance service options are deliveredthrough our centralized support operation or through local service personnel.  Our educational services offer a full rangeof curriculums, which are delivered through local training at our Scottsdale,Arizona headquarters via the Internet. When necessary, we also provide software customization services to meeta customer’s unique requirements.

 

# **Marketingand Sales**

# ** **

We market and sell our products to thesmall, medium and enterprise markets in the United States and foreign countriesthrough our direct sales and support organization, our Reseller Program and ourBusiness Alliance Program.  We believethe market for time and labor management products consists of the followingthree business segments:

 

•                                          *Small Businesses*.  The small business segment is comprised ofcompanies with fewer than 250 employees and one to three administrator(s) whoperform time 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.

 

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***Direct Sales***

 

We have five direct sales accountmanagers responsible for designated geographic regions.  The primary markets for direct sales are theupper mid-sized and enterprise markets. Generally, this is a horizontal market (i.e., the products are able tomeet the needs of more than one industry however, there tends to be higherconcentrations of solution adopters in retail, financial institutions,manufacturing and service industries, and in the public and privatesectors.  City, state and localgovernments are also adopters of our solutions. For the fiscal years ended June 30, 2005 and 2004, our direct salesefforts accounted for approximately 44% and 40% of our total revenues,respectively.

 

***Partner Sales***

 

Partner sales are conducted through ourBusiness Alliance and Reseller Programs. Our Business Alliance Program is aprogram that allows organizations to align with the Company through the use ofprivate label, OEM or referral programs.

 

Our Reseller Program is comprised of anetwork of approximately 250 value added resellers located throughout theUnited States and in certain foreign countries. These resellers market our products along with their complementaryproduct and service offerings and typically sell to the small and mediummarkets.  For the fiscal years ended June 30,2005 and 2004, the Company’s reseller sales efforts accounted for approximately56% and 60% of the Company’s total revenues, respectively.

 

***Growth Strategy***

 

Wehave a long history of providing high quality time and labor managementproducts to our targeted markets. Our goal is to maintain and strengthen ourmarket position. We intend to pursue the following growth strategies to attainthis goal:

 

•                                          *Expand Direct Sales Organization*.  Wehave recently added a Vice-President of Corporate Sales and plan to addadditional direct sales personnel to bolster our direct sales efforts.

 

•                                          *Leveraged Distribution*.  Weplan to continue to enter into relationships with strategic partners to enableus to do rapid and wide-scale private label distribution of our products.

 

•                                          *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.

 

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•                                          *Introduction of New Technologies*.  Weintend to continue to introduce and expand into new technologies that willdifferentiate us from our competitors by making our products more scalable,easily customized and adding new features. In July 2005, we introduced our internally developed proprietaryhardware device designed to support multiple modes of employee dataidentification, including biometrics.

 

***Market Opportunity***

 

We believe the market for timeand labor management software and hardware products is large and growing. Ourbelief is based on market data on associated markets, such as payroll, whichshow that these markets are growing and we believe there is a correlationbetween these markets and the time and labor management market.  This belief is further bolstered by thenumerous competitors that exist in the time and attendance space.  There also exists opportunities to displace acurrent provider or an in-house solution. There are currently no definitivefigures on the market size of the time and attendance market.

 

***Backlog***

 

The Company believes that thedollar amount of backlog is not material to an understanding of its businesssince substantially all of the Company’s product revenues in each quarterresult from orders received in that quarter. As of June 30,2005, we had no backlog.

 

# **Manufacturingand Sources of Supply**

# ** **

The duplication of our software products isperformed internally.  The printing ofdocumentation is primarily outsourced to suppliers. Historically, we havepurchased all of our data collection hardware devices from suppliers.  In July 2005, we began producing our owndata collection hardware device.  The majority of theassembly of the printed circuit boards used in our data collection terminals iscompleted by approved suppliers.  All finalassembly and testing of our data collection terminals is completed at ourScottsdale, Arizona facility.  Although most of the parts and componentsincluded within our products are available from multiple suppliers, certainparts and components are purchased from single suppliers.  We have chosen to source these items fromsingle suppliers because we believe that the supplier chosen is able toconsistently provide us with the highest quality product at a competitive priceon a timely basis.  While to date we havebeen able to obtain adequate supplies of these parts and components, theinability to transition to alternate supply sources on a timely basis ifrequired in the future, could result in delays or reductions in productshipments, which could have a material adverse effect on our business andoperating results.

 

# **ProductDevelopment**

# ** **

Our product development effortsare focused on enhancing and increasing the performance of our existingproducts and developing new products. During fiscal 2005 and 2004, research anddevelopment expenses were $1,405,477 and $890,093, respectively.  The increase in research and developmentexpenses in fiscal 2005 is attributable to increased payroll expense andcontract labor expenses attributable to our new hardware device.  We intend to 

 

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continue to commit resources to enhance and extendour product lines and develop interfaces to third party products and expect tofund such efforts our of cash flow from our operations and borrowings under ourexisting credit facilities.  Although weare continually seeking to further enhance our product offerings and to developnew products, there can be no assurance that these efforts will succeed, orthat, if successful, such product enhancements or new products will achievewidespread market acceptance, or that our competitors will not develop andmarket products that are superior to our products or achieve greater marketacceptance.  We also depend upon thereliability and viability of a variety of software development tools owned bythird parties to develop our products. If these tools prove inadequate or arenot properly supported, our ability to release competitive products in a timelymanner could be adversely impacted.

 

# **ProprietaryRights**

# ** **

We rely on a combinationof trademarks, trade secret law and contracts to protect our proprietarytechnology.  We generally providesoftware products to end-users under non-exclusive shrink-wrap licenses orunder signed licenses, both of which may be terminated by us if the end userbreaches the terms of the license.  Theselicenses generally require that the software be used only internally subject tocertain limitations, such as the number of employees, simultaneous users,computer model and serial number, features and/or terminals for which the enduser has paid the required license fee. We authorize our resellers to sublicense software products to end usersunder similar terms.  In certaincircumstances, we also make master software licenses available to end users,which permit either a specified limited number of copies or an unlimited numberof copies of the software to be made for internal use.  Some customers license software productsunder individually negotiated terms. Despite the precautions we have taken to protect our proprietarytechnology, it may be possible to copy or otherwise obtain and use our productsor technology without authorization.  Inaddition, effective copyright and******tradesecret protection may be unavailable or limited in certain foreign countries.

 

# **Competition**

# ** **

We provide time labor management and datacollection solutions that enable businesses to optimize their laborresources.  The labor management industryis highly competitive.  Competition isincreasing as businesses in related industries, such as human resourcesmanagement, payroll processing and enterprise resource planning (“ERP”), enterthe time and attendance market.  Advancesin software development tools have accelerated the software development processand, 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.

 

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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 ourcompetitors may be able to adapt more quickly to new or emerging technologiesor to devote greater resources to the promotion and sale of their products.Some of our competitors have significantly greater financial, technical andsales and marketing resources than we have, as well as more experience indelivering time and attendance solutions. Our major competitor, Kronos Corporation, is substantially larger andhas access to significantly 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, 2005, we employed 53 individuals.  None of our employees are represented by aunion or other collective bargaining agreement, and we consider our relationswith our 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.

 

**Item 2.Description of Property.**

 

Our executive offices arelocated in Scottsdale, Arizona and consist of approximately 13,000 square feetunder a lease that expires in April 2010. Our annual rental expense for this facility, and our previous facility,in fiscal 2005 was approximately $263,000.

 

We believe our presentfacilities are adequate for our current requirements and that additional spacewill be available as needed in the future.

 

**Item 3.Legal Proceedings.**

 

We are from time to timeinvolved in legal proceedings arising from the normal course of business.  As of the date of this report, we were notcurrently involved in any legal proceedings.

 

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

 

No matter was submittedto vote of our security holders during the fourth fiscal quarter covered bythis report.

 

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**PART II**

 

**Item 5.Market For Common Equity And Related Stockholder Matters.**

 

**Marketfor Common Stock**

 

Our common stock is quoted on theOver-The-Counter Bulletin 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., 1stQuarter = July 1 through September 30), were as follows.  The quotations reflect inter-dealer prices,without retail markup, mark-down or commission and may not represent actualtransactions.

 
| ** **                                   | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------------|------------|----------|------------|---------|------------|
| FISCAL YEAR ENDED:  June 30,  2003 |       |     |       |    |       |
| First Quarter                                |       | $        | 0.40       |    | $          | 0.17 |   |
| Second Quarter                               |       | 0.30     |       | 0.16    |       |
| Third Quarter                                |       | 0.23     |       | 0.15    |       |
| Fourth Quarter                               |       | 0.51     |       | 0.15    |       |
|                                         |       |     |       |    |       |
| 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    |       |

 

**Holders**

 

As of September 23,2005, there were approximately 160 holders of record of our common stock and webelieve there were approximately 1,250 beneficial owners.

 

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**DividendPolicy**

 

To date, we havenot paid any cash dividends and our present policy is to retain earnings foruse 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 ourequity compensation plans or arrangements as of the end of fiscal 2005.

 
| **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     |       | 502,485                                                                                             | (1)        | $                                                                                  | 3.04       |                                                                                                                                                    | 97,515     | (2) |
|                                                       |       |                                                                                                |       |                                                                               |       |                                                                                                                                                    |       |
| Equity  compensation plans not approved by securityholders |       | 2,798,289                                                                                           | (3)        | $                                                                                  | 0.73       |                                                                                                                                                    | —     |   |
|                                                       |       |                                                                                                |       |                                                                               |       |                                                                                                                                                    |       |
| TOTAL                                                      |       | 3,300,774                                                                                           |       | $                                                                                  | 1.08       |                                                                                                                                                    | 97,515     |   |

 

----

(1)          Represents shares ofcommon stock that may be issued pursuant to outstanding options granted underthe 1999 Equity Compensation Plan.

 

(2)          Represents shares ofcommon stock that may be issued pursuant to options available for future grantunder the 1999 Equity Compensation Plan.

 

(3)          Represents (a) anaggregate of 1,755,490 shares of common stock underlying non-statutory stockoptions approved by the Company’s board of directors and granted to directorsand employees of the Company (the “Options”) The options have vesting schedules ranging from immediate vesting tofour year vesting and have an exercise price equal to the closing bid price ofthe common stock on the date of grant and a ten year term; and (b) anaggregate of 1,042,799 shares of common stock purchasable upon exercise ofwarrants issued to various parties in connection with debt and equity offeringsand for services rendered.  See Note No. 7to our Consolidated Financial Statements for a detailed description of theterms of these warrants.

 

**RecentSales of Unregistered Securities**

 

InMarch 2004, the Company consummated a private placement pursuant to whichthe Company issued a $2,000,000 principal amount secured convertible term notedue March 22, 2007 (the “Laurus Note”), together with a common stockpurchase warrant entitling the holder to purchase 280,000 shares of commonstock (the “Laurus Note Warrant”).  The Laurus Note and the Laurus NoteWarrant were sold to Laurus Master Fund, Ltd. (“Laurus”) for a purchase priceof $2,000,000.  The principal and unpaid interest on the Laurus Note areconvertible into shares 

 

14

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ofthe Company’s common stock at an original price of $1.17 per share (the “FixedConversion Price”), which was based on the weighted average price of theCompany’s common stock for the twenty trading days immediately prior to theissuance of the Laurus Note.  Such conversion price is subject toanti-dilution adjustments based on the occurrence of certain corporate events.  In June 2005, the Company amended theconversion price of the Laurus Note. The conversion price on the first $300,000of the note was reduced to $0.50 per share and the conversion price on theremainder of the note was reduced to $0.65 per share.

 

The Laurus Note provides for monthly payments of interestat the prime rate, which is subject to reduction if the market price of theCompany’s 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.

 

TheLaurus Note Warrant entitles the holder thereof to purchase, at any timethrough March 22, 2011:  200,000 shares of the Company’s common stockat a price of $1.29 per share; 40,000 shares of the Company’s common stock at aprice of $1.35 per share; and 40,000 shares of the Company’s common stock at aprice of $1.40 per share.

 

Pursuantto a Registration Rights Agreement entered into between the Company and Laurus,the Company is obligated to: (a) file a registration statement under theAct to register the resale of the shares of the Company’s common stock issuableupon conversion of the Note and exercise of the Warrant (the “RegistrationStatement”) within 45 days of the date of the funding with respect to theLaurus Note; (b) use its best efforts to have the Registration Statementdeclared effective under the Act as promptly as possible, but in any eventprior to the 90th day following the funding of the Laurus Note; and (c) maintainthe effectiveness of the Registration Statement until the earlier date of when (i) allregistrable securities have been sold or (ii) all registrable securitiesmay be sold immediately without registration under the Act and without volumerestrictions pursuant to Rule 144(k).  Laurus, or other holders ofthe Laurus Note and the Laurus Note Warrant, are entitled to certain specifiedremedies if the Company does not timely comply with its registrationobligations.  The registration statementhas been filed.

 

The private placementof the Laurus Note and the Laurus Note Warrant was facilitated by The OberonGroup, LLC (Oberon) in consideration for which Oberon was paid an advisory feeof $150,000, and granted a warrant to purchase, at any time through March 22,2007, 136,364 shares of the Company’s common stock at a per share price of$1.10.

 

In March 2004,the Company 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, the Company issued 25,000 shares ofrestricted common stock to the holder of the subordinated note.

 

In April 2004,the Company entered into a subordinated note agreement with a 

 

15

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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, the Company issued 25,000 shares ofrestricted common stock to the holder of the subordinated note.  The fair value of the stock has been recordedas a deferred loan issue charge.

 

In June 2005, the Company entered into a SecurityAgreement (the “Laurus Credit Facility”) together with a common stock purchasewarrant entitling the holder to purchase 210,000 shares of common stock (the “LaurusCredit Facility Warrant”) with Laurus. Under the terms of the Laurus Credit Facility, the Company may borrowfrom time to 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. Theprincipal amount of all outstanding loans together with any accrued and unpaidinterest is due as of June 23, 2008.

 

Pursuant to the terms of the Agreement, the Company’sobligations are secured by a lien on all of the Company’s assets. Moreover,Laurus shall have the right at any time until the maturity date, or during anevent of default, to convert all or any portion of the outstanding principalamount into fully paid restricted shares of the Company’s common stock at afixed conversion price of $0.65.

 

The Laurus Credit Facility Warrant entitles the holderthereof to purchase, at any time through June 23, 2012:  150,000shares of the Company’s common stock at a price of $0.72 per share; 30,000shares of the Company’s common stock at a price of $0.75 per share; and 30,000shares of the Company’s common stock at a price of $0.78 per share.

 

Pursuantto a Registration Rights Agreement (the “Laurus Credit Facility RegistrationRights Agreement”) entered into between the Company and Laurus, the Company isobligated to: (a) file a registration statement under the Act to registerthe resale of the shares of the Company’s common stock issuable upon conversionof the Laurus Credit Facility and exercise of the Laurus Credit FacilityWarrant (the “Laurus Credit Facility Registration Statement”) within 30 days ofthe date of the funding with respect to the Laurus Credit Facility; (b) useits best efforts to have the Laurus Credit Facility Registration Statementdeclared effective under the Act as promptly as possible, but in any eventprior to the 90th day following the filing day; and (c) maintainthe effectiveness of the Laurus Credit Facility Registration Statement untilthe earlier date of when (i) all registrable securities have been sold or (ii) allregistrable securities may be sold immediately without registration under theAct and without volume restrictions pursuant to Rule 144(k).  Laurus,or other holders of the Laurus Credit Facility and the Laurus Credit FacilityWarrant, are entitled to certain specified remedies if the Company does nottimely comply with its registration obligations.  The registration statement has been filed butnot declared effective.

 

The private placementof the Laurus Credit Facility and the Laurus Credit Facility Warrant wasfacilitated by The Oberon Group, LLC (Oberon) in consideration for which Oberonwas paid an advisory fee of $112,500, and granted a warrant to purchase, at anytime through June 23, 2008, 173,077 shares of the Company’s common stockat a per share price of $0.65.

 

16

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All of the abovedescribed unregistered sales of securities were issued in reliance on theexemption provided under Section 4(2) of the Securities Act of 1933,as amended, and Regulation D thereunder. The proceeds from the private offering were used for general workingcapital needs.

 

**Item6.  Management’s Discussion and AnalysisOr Plan Of Operation.**

 

The following discussion andanalysis provides information that management believes is relevant to anassessment and understanding of our results of operations and financialcondition.  The following selected financial information is derived fromour historical financial statements and should be read in conjunction with suchfinancial statements and notes thereto set forth elsewhere herein and the “Forward-LookingStatements” explanation included herein.

 

**CriticalAccounting Policies**

 

The discussion and analysis ofour 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.  Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amount of revenues and expenses for eachperiod.  Critical accounting policies are defined as policies thatmanagement believes are (a) the most important to the portrayal of ourfinancial condition and results of operations; and (b) that require ourmost difficult, subjective or complex judgments, often as a result of the needto make estimates about the effects of matters that are inherently uncertain.

 

Our significant accountingpolicies are described in the audited consolidated financial statements andnotes thereto included herein.  We believe our most critical accountingpolicies are revenue recognition, software development costs and the allowancefor potentially uncollectible accounts receivable. This listing is not acomprehensive list of all of our accounting policies.  Please refer tonote 1 in the notes to our consolidated financial statements included hereinfor further information.

 

We license software andsell data collection hardware and related ancillary products to end-usercustomers through our direct sales force as well as reseller channel customersthrough independent resellers. Our software license revenue is earned fromperpetual 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, whichis typically FOB shipping point, is complete for the software (eitherphysically or electronically), data collection hardware and related ancillaryproducts;

•                  The customer’sfee is deemed to be fixed or determinable and free of contingencies orsignificant uncertainties;

 

17

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•                  Collectibilityis probable; and

•                  Objective evidenceof fair value exists for all undelivered elements, typically maintenance andprofessional 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 customers typicallypurchase maintenance contracts as well as professional services from us.  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 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 the 12-monthperiod subsequent to the balance sheet date as a current liability, and thecontractual obligations with a term beyond 12 months, if present, as anon-current liability.

 

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

 

•                  A non-cancelableagreement for the services has been signed or a customer’s purchase order hasbeen received;

•                  The professionalservices have been delivered;

•                  The customer’sfee is deemed to be fixed or determinable and free of contingencies orsignificant uncertainties; and

•                  Collectibilityis probable.

 

Customer 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 deferredprofessional services as a current liability.

 

Our arrangements with its end-user customers andreseller channel customers do not include any rights of return or priceprotection, nor do arrangements with reseller channel customers 

 

18

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include any acceptance provisions. Our arrangementswith end-user customers generally include our standard acceptance provision.Our standard acceptance provision states that the customer’s acceptance of theproducts shall be deemed to occur upon completion of running our standarddiagnostic tests.

 

At the time we enter into an arrangement, we assessthe probability of collection of the fee and the terms granted to the customer.For end-user customers, the typical payment terms include a deposit andsubsequent payments, based on specific due dates, such that all payments forthe software license, data collection hardware and related ancillary products,as well as services included in the original arrangement, are ordinarily duewithin one year of contract signing. Our payment terms for its reseller channelcustomers are typically 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 the paymentterms for the arrangement are considered extended, we defer revenue on thearrangement until the payment of the arrangement fee becomes due. The deferredamounts related to arrangements with extended payment terms are removed fromdeferred revenue and accounts receivable, as we have determined that theseamounts do not represent either receivables or deferred revenue until thepayment becomes due. We report the allocated fair value of revenues related tothe product element of arrangements as a current liability because of theexpectation that these revenues will be recognized within 12 months of thebalance sheet date.

 

We capitalize software development costs in accordancewith Statement of Financial Accounting Standards No. 86, “Accounting forthe Costs 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 and hardwaretechnology.  Amortization of capitalized software development costs beginswhen the products are available for general release to customers and iscomputed on a product-by-product basis using straight-line amortization withuseful lives of five years or, if less, the remaining estimated economic lifeof the product.  Amounts related to internal software development thatcould be capitalized under this statement were deemed immaterial.

 

We provide for potentiallyuncollectible accounts receivable by use of the allowance method.  The allowance is provided based upon a reviewof the individual accounts outstanding, and our prior history of uncollectibleaccounts receivable.  It is our practice to record an estimated allowancefor sales returns and adjustments based on historical experience and to recordindividual charges for sales returns and adjustments directly to revenue asincurred.

 

19

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**Results ofOperations**

 

**SELECTEDFINANCIAL INFORMATION**

 
| ** **                          | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                |       |                                 |       |   |   |   |   |
| Total Revenues                      |       | $                                    | 6,082,238  |   | $ | 4,837,121 |   | $ | 4,256,854 |   |
| Costs of Revenues                   |       | 2,575,742                            |       | 2,123,704 |   | 1,897,319 |   |
| Gross Profit                        |       | 3,506,496                            |       | 2,713,417 |   | 2,359,535 |   |
| Sales and Marketing  Expense        |       | 2,012,813                            |       | 1,903,044 |   | 1,112,762 |   |
| Research and  Development Expense   |       | 1,405,477                            |       | 890,093 |   | 641,125 |   |
| General and  Administrative Expense |       | 1,785,779                            |       | 922,495 |   | 685,675 |   |
| Other Expense                       |       | 322,821                              |       | 148,228 |   | 72,701 |   |
| Net Loss                            |       | (2,020,394                           | )          | (1,150,443 | ) | (152,728 | ) |
| Basic Loss per Share                |       | (0.15                                | )          | (0.09 | ) | (0.02 | ) |
|                                     |            |                                      |            |  |  |  |  |  |  |  |

 

*Revenues:*

 
| ** ** | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** ** | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|       |       |            |       |             |       |            |       |             |       |            |       |
| Revenues   |       | $               | 6,082,238  |             | 26         | %               | $          | 4,837,121        |       | 14              | %          | $ | 4,256,854 |   |
|            |            |                 |            |                  |            |                 |            |                  |            |                 |            |  |  |  |

 

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

 

*Product Sales:*

 
| ** **                                    | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|-----------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** **                                    | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|                                          |       |            |       |             |       |            |       |             |       |            |       |
| Product sales                                 |       | $               | 4,421,647  |             | 20         | %               | $          | 3,686,428        |       | 10              | %          | $ | 3,362,154 |   |
| Product  sales as a percent of total revenues |       | 73              | %          | —           |       | 76              | %          | —           |       | 79              | %          |
|                                               |            |                 |            |                  |            |                 |            |                  |            |                 |            |  |  |  |

 

Product revenues increased infiscal years 2005 and 2004 as a result of an increase in customer demand forour products in each fiscal period.  Theincrease in demand was primarily attributable to increased investments ofapproximately $160,000 and $170,000, respectively, in fiscal 2005 and 2004 inmarketing programs and the enhancement of our products.  In fiscal 2005 and 2004 we increased spendingin research and development by 58% and 39%, respectively.  The increase in the amount of product saleswas accomplished through an increase in sales volume as our pricing hasremained relatively flat over the last two fiscal years.

 

The decline in product sales as apercent of total revenues is principally due to our increased focus on sellingmore services with each product sale.  Webelieve that increasing the level of services in each sale leads to a betteroverall solution for our customers.

 

20

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*Service Revenue:*

 
| ** **                                      | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|-------------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** **                                      | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|                                            |       |            |       |             |       |            |       |             |       |            |       |
| Service Revenue                                 |       | $               | 1,660,591  |             | 44         | %               | $          | 1,150,693        |       | 29              | %          | $ | 894,700 |   |
| Service  revenue as a percent of total revenues |       | 27              | %          | —           |       | 24              | %          | —           |       | 21              | %          |
|                                                 |            |                 |            |                  |            |                 |            |                  |            |                 |            |  |  |  |

 

The increase in service revenuein fiscal 2005 and 2004 was primarily attributable to the increase in productsales, as services are generally sold in conjunction with product sales.  As noted above, we have focused our marketingefforts on selling more services with each product sale.  In addition, our hosted NETtime servicerevenue has increased by 84% and 64%, respectively, in fiscal 2005 and 2004.

 

*Gross Profit*:

 
| ** **           | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|----------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
|                 |       |            |       |            |       |            |       |
| Product gross margin |       | 59              | %          | 58              | %          | 59              | %          |
|                 |       |            |       |            |       |            |       |
| Service gross margin |       | 53              | %          | 49              | %          | 41              | %          |
|                 |       |            |       |            |       |            |       |
| Total gross margin   |       | 58              | %          | 56              | %          | 55              | %          |

 

The gross profit percentage onour products is within our historical range of gross profit percentages. Ourgross profit percentage on products is typically between 55% and 60% dependingupon the mix of software versus hardware sales and the makeup of hardwaresales.  Our product revenue is comprised of software and hardware sales,with hardware sales yielding a significantly lower gross profit than softwaresales.   Hardware revenue is principally comprised of two versions ofgeneral data collection terminals, badge terminals and biometric units. Our gross profit is greater on badge terminals than biometric units because themarket for our biometric units is very price sensitive and therefore constrainsthe margin on the terminals.  The marketfor badge terminals is not as price sensitive and, as a result, we are able toachieve higher margins on those units.

 

The increase in the grossprofit percentage on services revenue is due to the increase in servicesrevenue while increasing our utilization rate of our service personnel.

 

*Total Expenses*:

 
| ** **                                               | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|----------------------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** **                                               | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|                                                     |       |            |       |             |       |            |       |             |       |            |       |
| Total  costs and expenses                                |       | $               | 5,204,069  |             | 40         | %               | $          | 3,715,632        |       | 52              | %          | $ | 2,439,562 |   |
| Total  costs and expenses as a percent of total revenues |       | 86              | %          | —           |       | 77              | %          | —           |       | 57              | %          |
|                                                          |            |                 |            |                  |            |                 |            |                  |            |                 |            |  |  |  |

 

The increase in costs andexpenses in fiscal 2005 is primarily due to a 94% increase in general andadministrative expenses and a 58% increase in research and development expensesover the prior year.  The increase incosts and expenses in fiscal 2004 is primarily due to a 71% 

 

21

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increasein sales and marketing expenses over the prior year.  See the below discussion for details on thechanges within the expense categories.

 

*Sales and Marketing Expense*:

 
| ** **                                                  | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|-------------------------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** **                                                  | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|                                                        |       |            |       |             |       |            |       |             |       |            |       |
| Sales  and marketing expense                                |       | $               | 2,012,813  |             | 6          | %               | $          | 1,903,044        |       | 71              | %          | $ | 1,112,762 |   |
| Sales  and marketing expense as a percent of total revenues |       | 33              | %          | —           |       | 39              | %          | —           |       | 26              | %          |
|                                                             |            |                 |            |                  |            |                 |            |                  |            |                 |            |  |  |  |

 

Sales and marketing expensesremained relatively flat from fiscal 2004 to 2005, with the percent of revenuefigure decreasing by 6% as revenues increased by 26% over the prior year.  We experienced a decrease of approximately$95,000 in payroll and commission expenses in fiscal 2005, which was offset byan approximate increase of $160,000 in marketing programs implemented to expandmarket awareness of our products in fiscal 2005.  These marketing programs consisted of tradeshows, advertising, and lead generation programs.

 

The increase in sales andmarketing expenses from fiscal 2003 to fiscal 2004 was primarily due toincreases of approximately $400,000 in payroll and commission expenses, $90,000in travel expenses and $170,000 in marketing programs.

 

*Research and DevelopmentExpense:*

 
| ** **                                                       | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** **                                                       | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|                                                             |       |            |       |             |       |            |       |             |       |            |       |
| Research  and development expense                                |       | $               | 1,405,477  |             | 58         | %               | $          | 890,093          |       | 39              | %          | $ | 641,125 |   |
| Research  and development expense as a percent of total revenues |       | 23              | %          | —           |       | 18              | %          | —           |       | 15              | %          |
|                                                                  |            |                 |            |                  |            |                 |            |                  |            |                 |            |  |  |  |

 

The increase in research anddevelopment expenses 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.  The majority of our increase in research anddevelopment expenses from fiscal 2003 to 2004 is due to increased payrollexpense.  We have increased our payrolland contract labor over the last two years in order to make significant improvementsto our software products and develop our own proprietary hardware device.  We are also devoting resources for asignificant contract for a customized solution to a Fortune 100 company.

 

*General and AdministrativeExpense*:

 
| ** **                                                         | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|--------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** **                                                         | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|                                                               |       |            |       |             |       |            |       |             |       |            |       |
| General  and administrative expense                                |       | $               | 1,785,779  |             | 94         | %               | $          | 922,495          |       | 35              | %          | $ | 685,675 |   |
| General  and administrative expense as a percent of total revenues |       | 29              | %          | —           |       | 19              | %          | —           |       | 16              | %          |
|                                                                    |            |                 |            |                  |            |                 |            |                  |            |                 |            |  |  |  |

 

22

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The increase in general andadministrative expenses from fiscal 2004 to fiscal 2005 is primarilyattributable to an expense of $729,500 associated with the induced conversionon a convertible debt instrument. We amended the conversion price of an existingconvertible note with Laurus Master Funds. The conversion price on the first$300,000 of the note was reduced to $0.50 per share and the conversion price onthe remainder of the note was reduced to $0.65 per share.  We agreed to amend the conversion price toincrease our ability to make scheduled future debt service payments in commonstock rather than cash, thereby conserving our cash.

 

The increase in general andadministrative expenses from fiscal 2003 to fiscal 2004 is primarilyattributable to increased legal expenses of approximately $75,000, which inpart is due to the preparation of a registration statement for filing with theSecurities and Exchange Commission.  Wealso had an increase of approximately $54,000 in professional fees, which wereprimarily fees paid to an investor relations firm hired in fiscal 2004.

 

*Other Expense*:

 
| ** **                                    | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|-----------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** **                                    | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|                                          |       |            |       |             |       |            |       |             |       |            |       |
| Other Expense                                 |       | $               | 322,821    |             | 118        | %               | $          | 148,228          |       | 104             | %          | $ | 72,701 |   |
| Other  expense as a percent of total revenues |       | 5               | %          | —           |       | 3               | %          | —           |       | 2               | %          |
|                                               |            |                 |            |                  |            |                 |            |                  |            |                 |            |  |  |  |

 

Other income (expense) consistsprimarily of interest expense.  The increase in other expense is primarilydue to an increase of approximately $204,000 and $79,000, respectively, in interestexpense for fiscal 2005 and 2004. Interest expense has increased because we have added over $2,000,000 indebt since June 30, 2003.

 

**Liquidity andCapital Resources**

 

Cash Flow Highlights:

 
| ** **                                                | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** | **% Change**     | ** ** | ** **      | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|
| ** **                                                | ** ** | **Fiscal 2005** | ** ** | **2004 to 2005** | ** ** | **Fiscal 2004** | ** ** | **2004 to 2003** | ** ** | **Fiscal 2003** | ** ** |
|                                                      |       |            |       |             |       |            |       |             |       |            |       |
| Net cash from  operations                                 |       | $               | (952,830   | )                | 48         | %               | $          | (1,843,648       | )          | (923            | )%         | $ | (180,141 | ) |
| Purchase  of property and equipment                       |       | $               | (262,673   | )                | (74        | )%              | $          | (147,751         | )          | (357            | )%         | $ | (32,343 | ) |
| Proceeds from long-term  debt                             |       | $               | 1,500,000  |             | (40        | )%              | $          | 2,500,000        |       | (1,567          | )%         | $ | 150,000 |   |
| Repayment of long-term  debt                              |       | $               | (982,145   | )                | (459       | )%              | $          | (175,613         | )          | (49             | )%         | $ | (117,977 | ) |
| Proceeds  from stock and exercise of options and warrants |       | $               | 436        |             | (100       | )%              | $          | 1,492,288        |       | 497             | %          | $ | 250,000 |   |
| Net change is cash                                        |       | $               | (697,212   | )                | (138       | )%              | $          | 1,813,134        |       | 3,487           | %          | $ | 50,546 |   |
| Cash at end of year                                       |       | $               | 1,361,717  |             | (34        | )%              | $          | 2,058,929        |       | 738             | %          | $ | 245,795 |   |

 

23

----

 

As of June 30, 2005, we hadworking capital of $851,916, as compared to $2,020,628 at June 30, 2004.

 

*Operations*.  The netcash used from operations in fiscal 2005 was primarily attributable to the netloss of $2,020,394.  Included in the netloss were a total of $934,014 of non-cash charges.  Also contributing to the net cash used wereincreases in accounts receivable of $450,676 and inventory of $106,935.  Net cash used during this period waspartially offset by increases in deferred revenue of $461,268 and accruedliabilities of $248,795.

 

*InvestmentActivities*.  Our use of cash for property and equipmentincludes investments in information systems and infrastructure to supportexpanding operations.  We also relocatedour facilities during fiscal 2005.

 

*FinancingActivities.*  During fiscal 2005, we entered into two newlong-term debt agreements.  We enteredinto a $500,000, 10% interest rate, five year term note with a relatedparty.  We are making monthly principaland interest payments on this note.  Wealso entered into a credit facility with Laurus Master Funds. We may borrowrevolving loans from time to time up to $1,500,000, subject to a borrowing basecalculation based on the our eligible accounts receivable. Borrowings under thefacility accrue interest at the prime rate payable monthly.

 

We also amended the conversionprice of an existing convertible note with Laurus Master Funds. The conversionprice on the first $300,000 of the note was reduced to $0.50 per share and theconversion price on the remainder of the note was reduced to $0.65 per share.  We agreed to amend the conversion price toincrease our ability to make scheduled future debt service payments in commonstock rather than cash, thereby conserving our cash.

 

Our liquidity is affected by manyfactors, some based on the normal ongoing operations of our business and othersrelated to the uncertainties of the time and attendance industry and globaleconomies.  Although our cashrequirements will continue to fluctuate based on the timing and extent of thesefactors, we believe that our current cash reserves, cash generated fromoperations, and our borrowing capacity under our two credit facilities, will besufficient to satisfy commitments for capital expenditures and other cashrequirements for the next 12 months. We may, however, seek to obtain additionalcapital through a line of credit at a financial institution or throughadditional debt or equity offerings during this time period.  The raising of additional capital in publicor private 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.

 

# **CertainFactors That May Affect Future Operating Results**

# ** **

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 

 

24

----

 

control costs, ourability to develop and market our products and services, competitive pricingpressure, ability to attract and retain strategic partners, managing growth andcapital and general economic conditions. Our operating results will be materially and adversely affected if we donot successfully address these and other risks. Many of these factors are beyond our 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 fund more rapid expansion; todevelop new and enhanced products; to increase customer support or technicalstaff; to respond to competitive pressures; and to acquire complimentarybusinesses, technologies, or services. We cannot predict the timing and amount of any such capital requirementsat this time.  If we raise additional fundsthrough the issuance of equity or convertible securities, existing stockholdersmay experience additional dilution and such securities may have rights,preferences, or privileges senior to those of the rights of our commonstockholders.  There can be no assurancethat we will be able to obtain additional financing on acceptable terms, or atall.  If adequate funds are not availableon acceptable terms, we may not be able to fund expansion, promote ourproducts, take advantage of acquisition opportunities, develop or enhanceproducts and services, or respond to competitive pressures.

 

We may wish to acquirecomplementary businesses, products, services, or technologies in the future,although we do not currently have any agreements in place to do so.  We may not be able to identify suitableacquisition candidates or make acquisitions on commercially acceptableterms.  If we do undertake anacquisition, we may have difficulty integrating such acquired company’spersonnel, operations, products, services, or technologies into ouroperations.  These difficulties coulddisrupt our ongoing business, distract our management and employees, increaseour expenses, and adversely affect our business and results of operations.

 

*Competitive Factors***.**  The market for software solutions isconstantly evolving and extremely competitive. We expect competition to intensify in the future. We compete with majordomestic companies.  Many of thesecompetitors have greater market recognition and substantially greaterfinancial, technical, marketing, distribution, and other resources than wehave, and we may be unable to compete effectively against them. Emergingcompanies also may increase their participation in the market for softwareapplications such as that offered by the 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 thatthey will sustain market acceptance.

 

Wemay not be able to adapt to rapidly changing technologies or we may incursignificant costs in doing so.** **The software industry ischaracterized by rapidly changing technologies, evolving industry standards,frequent new product and service introductions, and changing customerdemands.  New turn key business solutionproducts and services based on new technologies or new industry standards couldrender our existing products and services obsolete and unmarketable.  To be successful, we must adapt to ourrapidly evolving market by 

 

25

----

 

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 relationships with affiliates, resellersand 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.  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.

 

# **RecentAccounting Pronouncements**

# ** **

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 151 (“SFAS 151”), “Inventory Costs.”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 recognized as current period charges regardless ofwhether they meet the criteria of “so abnormal.” In addition, SFAS 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.SFAS 151 is effective for financial statements issued for fiscal yearsbeginning after June 15, 2005. The adoption of SFAS 151 is notexpected to have a material affect on our financial position or results ofoperations.

 

In December 2004, the FASBissued Statement of Financial Accounting Standards No. 153 (“SFAS 153”),“Exchanges of Nonmonetary Assets.” SFAS 153 amends the guidance in APB No. 29, “Accounting for NonmonetaryAssets.”  APB No. 29 was based onthe principle that exchanges of nonmonetary assets should be measured on thefair value of the assets exchanged. SFAS 153 amends APB No. 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance if the future cash flows of the entityare expected to change significantly as a result of the exchange. SFAS 153is effective for financial statements issued for fiscal years beginning after June 15,2005. The adoption of SFAS 153 is not expected to have a material affecton our financial position or results of operations.

 

26

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In December 2004, the FASBissued Statement of Financial Accounting Standards No. 123 (“SFAS 123(R)”),“Share-Based Payment,” which is a revision of FASB 123, “Accounting forStock-Based Compensation.”  SFAS 123(R)supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”and amends FASB Statement No. 95, “Statement of Cash Flows.”  Generally, the approach in SFAS 123(R) issimilar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees,including the grant of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure will no longer be analternative.

 

SFAS 123(R) must be adopted bysmall business issuers for interim periods beginning after January 1,2006. Early adoption will be permitted in periods in which financial statementshave not been issued.  We will adopt FASB123(R) on July 1, 2005, the beginning of our 2006 fiscal year.

 

As permitted by SFAS 123, wecurrently apply APB Opinion No. 25 and related interpretations inaccounting for our stock-based plans. Accordingly, there is no related compensation expense recorded in ourfinancial statements for the periods presented. The adoption of SFAS 123(R)’sfair value method will have an impact on our results of operations, although itwill have no impact on our overall financial position. The impact of adoptionof SFAS 123(R) cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future. However, had we adoptedSFAS 123(R) in prior periods, the impact of that standard would haveapproximated the impact of SFAS 123 as described in the disclosure of pro formanet income and earnings per share in Note 1 to the consolidated financialstatements.

 

In June 2005, the FASBissued Statement of Financial Accounting Standards No. 154, (“SFAS 154”),“Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,“Accounting Changes” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle andchanges the requirements for accounting for and reporting a change inaccounting principle. SFAS 154 requires the retrospective application to priorperiods’ financial statements of the direct effect of a voluntary change inaccounting principle unless it is impracticable. APB No. 20 required thatmost voluntary changes in accounting principle be recognized by including innet income of the period of the change the cumulative effect of changing to thenew accounting principle. FASB stated that SFAS 154 improves financialreporting because its requirements enhance the consistency of financialinformation between periods. Unless early adoption is elected, SFAS 154 iseffective for fiscal years beginning after December 15, 2005. Earlyadoption is permitted for fiscal years beginning after June 1, 2005. SFAS154 does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of this statement.  Theadoption of SFAS 154 is not expected to have a material affect on ourfinancial position or results of operations.

 

# **Inflationand Seasonality**

# ** **

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

 

27

----

 

**Item 7. Financial Statements.**

 

The financial statements and schedules are includedherewith commencing on page F-1.

 
| Independent Auditors’ Report                                          |   |
|----------------------------------------------------------------------------|--------|
|                                                                       |   |
| 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                                |   |

 

28

----

 

**Report of Independent RegisteredPublic Accounting Firm**

 

 

Board of DirectorsTime America, Inc. and Subsidiary

 

Wehave audited the accompanying consolidated balance sheets of Time America, Inc.and Subsidiary as of June 30, 2005, and 2004 and the related consolidatedstatements of operations, stockholder’s 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 Time America, Inc.and Subsidiary at June 30, 2005 and 2004 and the results of itsconsolidated operations and its cash flows for the years then ended, inconformity with U.S. generally accepted accounting principles.

 
| /s/ Semple and Cooper, LLP |   |
|----------------------------|--------|
| Phoenix, AZ                |
| August 30, 2005       |

 

F-1

----

 

**TIME AMERICA, INC. AND SUBSIDIARY**

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                             | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                             | ** ** | **2005**          | ** ** | **2004**          | ** ** |
|                                                                                                                   |       |              |       |              |       |
| **ASSETS**                                                                                                             | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Current Assets:**                                                                                                    |       |              |       |              |       |
| Cash  and cash equivalents (Note 1)                                                                                    |       | $                 | 1,361,717  |              | $          | 2,058,929 |   |
| Accounts  receivable – trade, net (Notes 1 and 2)                                                                 |       | 1,479,526         |       | 1,028,850         |       |
| Inventory  (Note 1)                                                                                                    |       | 477,719           |       | 370,784           |       |
| Prepaid  expenses and other current assets (Note 4)                                                                    |       | 268,373           |       | 290,546           |       |
|                                                                                                                   |       |              |       |              |       |
| **Total Current Assets**                                                                                               |       | 3,587,335         |       | 3,749,109         |       |
|                                                                                                                   |       |              |       |              |       |
| **Property and equipment, net  (Notes 1 and 3)**                                                                       |       | 374,269           |       | 203,309           |       |
| **Other Assets (Note 4)**                                                                                              |       | 330,882           |       | 234,641           |       |
|                                                                                                                   |       |              |       |              |       |
| **Total Assets**                                                                                                       |       | $                 | 4,292,486  |              | $          | 4,187,059 |   |
|                                                                                                                   |       |              |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                               | ** ** | ** **        | ** ** | ** **        | ** ** |
|                                                                                                                   |       |              |       |              |       |
| **Current Liabilities:**                                                                                               |       |              |       |              |       |
| Current  portion of long-term debt (Note 4)                                                                            |       | $                 | 998,061    |              | $          | 756,353 |   |
| Accounts  payable (Note 1)                                                                                             |       | 423,396           |       | 368,230           |       |
| Accrued  liabilities                                                                                                   |       | 436,180           |       | 187,385           |       |
| Deferred  revenue (Note 1)                                                                                             |       | 877,782           |       | 416,513           |       |
|                                                                                                                   |       |              |       |              |       |
| **Total Current Liabilities**                                                                                          |       | 2,735,419         |       | 1,728,481         |       |
|                                                                                                                   |       |              |       |              |       |
| **Long-term debt, less current  portion (Note 4)**                                                                     |       | 2,210,592         |       | 2,337,345         |       |
|                                                                                                                   |       |              |       |              |       |
| **Total Liabilities**                                                                                                  |       | 4,946,011         |       | 4,065,826         |       |
|                                                                                                                   |       |              |       |              |       |
| **Commitments: (Note 6)**                                                                                              |       | —            |       | —            |       |
|                                                                                                                   |       |              |       |              |       |
| **Stockholders’ Equity (Deficit):  (Note 7)**                                                                     |       |              |       |              |       |
| Common  stock, $.005 par value, 50,000,000 shares authorized, 14,251,552 and  13,599,552 shares issued and outstanding |       | 71,258            |       | 67,998            |       |
| Contributed  capital                                                                                                   |       | 9,269,497         |       | 8,027,121         |       |
| Accumulated  deficit                                                                                                   |       | (9,994,280        | )          | (7,973,886        | )          |
|                                                                                                                   |       |              |       |              |       |
| **Total Stockholders’ Equity (Deficit)**                                                                          |       | (653,525          | )          | 121,233           |       |
|                                                                                                                   |       |              |       |              |       |
| **Total Liabilities and Stockholders’ Equity  (Deficit)**                                                         |       | $                 | 4,292,486  |              | $          | 4,187,059 |   |

 

The AccompanyingNotes are an Integral Part

of theConsolidated Financial Statements

 

F-2

----

 

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

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | ** **                    | ** ** | ** ** | ** ** |
| **Revenues:**                                      |       |                          |       |   |   |
| Product  sales                                     |       | $                             | 4,421,647  |   | $ | 3,686,428 |   |
| Services  revenue                                  |       | 1,660,591                     |       | 1,150,693 |   |
|                                               |       |                          |       |   |   |
| **Total Revenues**                                 |       | 6,082,238                     |       | 4,837,121 |   |
| ** **                                         |       |                          |       |   |   |
| **Cost of Revenues:**                              |       |                          |       |   |   |
| Product                                            |       | 1,796,574                     |       | 1,534,061 |   |
| Services                                           |       | 779,168                       |       | 589,643 |   |
|                                               |       |                          |       |   |   |
| **Total Cost of Revenues**                         |       | 2,575,742                     |       | 2,123,704 |   |
| ** **                                         |       |                          |       |   |   |
| **Gross Profit**                                   |       | 3,506,496                     |       | 2,713,417 |   |
| ** **                                         |       |                          |       |   |   |
| **Costs and Expenses:**                            |       |                          |       |   |   |
| Sales  and marketing                               |       | 2,012,813                     |       | 1,903,044 |   |
| Research  and development                          |       | 1,405,477                     |       | 890,093 |   |
| General  and administrative                        |       | 1,785,779                     |       | 922,495 |   |
|                                               |       |                          |       |   |   |
| **Total Costs and Expenses**                       |       | 5,204,069                     |       | 3,715,632 |   |
| ** **                                         |       |                          |       |   |   |
| **Net Loss from Operations**                       |       | (1,697,573                    | )          | (1,002,215 | ) |
| ** **                                         |       |                          |       |   |   |
| **Other Income (Expense):**                        |       |                          |       |   |   |
| Interest  expense                                  |       | (361,840                      | )          | (157,893 | ) |
| Other                                              |       | 25,991                        |       | (7 | ) |
| Interest  income                                   |       | 13,028                        |       | 9,672 |   |
|                                               |       | (322,821                      | )          | (148,228 | ) |
| ** **                                         |       |                          |       |   |   |
| **Net Loss**                                       |       | $                             | (2,020,394 | ) | $ | (1,150,443 | ) |
| **Basic Loss per Share (Note 1)**                  |       | $                             | (0.15      | ) | $ | (0.09 | ) |
| **Weighted Average Number of  Shares Outstanding** |       | 13,648,711                    |       | 12,853,452 |   |

 

The AccompanyingNotes are an Integral Part

of theConsolidated Financial Statements

 

F-3

----

 

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

CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARSENDED JUNE 30, 2005 AND 2004

 
| ** **                              | ** ** | **Common Stock** | ** ** | **Contributed** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-----------------------------------------|------------|------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|
| ** **                              | ** ** | **Shares**       | ** ** | **Amount**      | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                    |       |             |       |            |       |            |       |        |       |   |   |
| Balance at June 30,  2003          |       | 10,656,057       |       | $               | 53,280     |            | $          | 6,338,351   |       | $ | (6,823,443 | ) | $ | (431,812 | ) |
|                                    |       |             |       |            |       |            |       |        |       |   |   |
| Exercise of Warrants                    |       | 147,500          |       | 738             |       | 28,762          |       | —      |       | 29,500 |   |
| Exercise of stock  options              |       | 8,996            |       | 45              |       | 3,328           |       | —      |       | 3,373 |   |
| Issuance of common  stock warrants      |       | —           |       | —          |       | 156,200         |       | —      |       | 156,200 |   |
| Issuance of common  stock for services  |       | 50,000           |       | 250             |       | 54,750          |       | —      |       | 55,000 |   |
| Sale of common stock,  net of costs     |       | 2,736,999        |       | 13,685          |       | 1,445,730       |       | —      |       | 1,459,415 |   |
| Net loss                                |       | —           |       | —          |       | —          |       | (1,150,443  | )          | (1,150,443 | ) |
| 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 | ) |

 

The AccompanyingNotes are an Integral Part

of theConsolidated Financial Statements

 

F-4

----

 

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

#### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **Increase (Decrease) in Cash and  Cash Equivalents:**                       | ** ** | ** **                    | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                    |       |                          |       |   |   |
| Net  Loss                                                                    |       | $                             | (2,020,394 | ) | $ | (1,150,443 | ) |
| Adjustments  to reconcile net loss to net cash used by operating activities: |       |                          |       |   |   |
| Depreciation                                                                 |       | 91,714                        |       | 60,074 |   |
| Common  stock, stock options and warrants issued for services                |       | 112,800                       |       | 112,000 |   |
| Induced  conversion of debt charge                                           |       | 729,500                       |       |   |   |
| Changes  in Assets and Liabilities:                                          |       |                          |       |   |   |
| Accounts  receivable-trade                                                   |       | (450,676                      | )          | (477,274 | ) |
| Inventory                                                                    |       | (106,935                      | )          | (137,969 | ) |
| Prepaid  expenses and other current assets                                   |       | 22,173                        |       | (256,095 | ) |
| Other  assets                                                                |       | (96,241                       | )          | (234,641 | ) |
| Accounts  payable                                                            |       | 55,166                        |       | 96,101 |   |
| Accrued  liabilities                                                         |       | 248,795                       |       | (21,903 | ) |
| Deferred  revenue                                                            |       | 461,268                       |       | 166,502 |   |
| **Net cash used by operating activities**                                    |       | (952,830                      | )          | (1,843,648 | ) |
| ** **                                                                   |       |                          |       |   |   |
| **Cash flows from investing activities:**                                    |       |                          |       |   |   |
| Purchase  of property and equipment                                          |       | (262,673                      | )          | (147,751 | ) |
| **Net cash used by investing activities**                                    |       | (262,673                      | )          | (147,751 | ) |
| ** **                                                                   |       |                          |       |   |   |
| **Cash flows from financing activities:**                                    |       |                          |       |   |   |
| Proceeds  from long-term debt                                                |       | 1,500,000                     |       | 2,500,000 |   |
| Repayment  of long-term debt                                                 |       | (982,145                      | )          | (175,613 | ) |
| Repayment  of capital leases                                                 |       | —                        |       | (12,142 | ) |
| Proceeds  from exercise of options and warrants                              |       | 436                           |       | 32,873 |   |
| Proceeds  from issuance of stock                                             |       | —                        |       | 1,459,415 |   |
| **Net cash provided by financing activities**                                |       | 518,291                       |       | 3,804,533 |   |
|                                                                         |       |                          |       |   |   |
| Net change in cash and  cash equivalents                                     |       | (697,212                      | )          | 1,813,134 |   |
| Cash and cash  equivalents at beginning of year                              |       | 2,058,929                     |       | 245,795 |   |
| Cash and cash  equivalents at end of year                                    |       | $                             | 1,361,717  |   | $ | 2,058,929 |   |
| ** **                                                                   |       |                          |       |   |   |
| **Supplemental disclosure of cash  flow information:**                       |       |                          |       |   |   |
| Interest  paid                                                               |       | $                             | 360,320    |   | $ | 151,326 |   |
| Income  taxes paid                                                           |       | $                             | —     |   | $ | — |   |
| ** **                                                                   |       |                          |       |   |   |
| **Noncash investing and financing  activities:**                             |       |                          |       |   |   |
| Conversion  of debt to equity                                                |       | $                             | 300,000    |   | $ | — |   |

 

#### **TheAccompanying Notes are an Integral Part**

of theConsolidated Financial Statements

 

F-5

----

 

**TIMEAMERICA, INC. AND SUBSIDIARY**

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1**

**Summaryof Significant Accounting Policies, Nature of Operations and Use of Estimates:**

 

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

 

Time America, Inc., a Nevada corporation (the “Company”or “Time America”), through its wholly owned subsidiary, Time America, Inc.,an Arizona corporation, provides time and labor management solutions. TimeAmerica products 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.

 

On December 9, 2003, Vitrix, Inc. (the parentcompany) changed its name to Time America, Inc.

 

***Pervasiveness of Estimates:***

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

***Cash and Major SupplierConcentrations:***

 

The Company maintains cash and cash equivalents at afinancial institution.  Deposits not toexceed $100,000 at the financial institution are insured by the Federal DepositInsurance Corporation.  At June 30,2005 and 2004, the Company had uninsured cash and cash equivalents of approximately$1,290,000 and $2,045,000, respectively.

 

For the year ended June 30,2005, the Company had two (2) major suppliers representing approximatelyeighty four percent (84%) of cost of product revenues.  At June 30, 2005, the amount due tothese suppliers included in accounts payable was $131,678.

 

For the year ended June 30,2004, the Company had three (3) major suppliers representing approximatelyninety five percent (95%) of cost of product revenues.  At June 30, 2004, the amount due tothese suppliers included in accounts payable was $133,496.

 

***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:***

 

Inventoryis stated at the lower of cost (first-in, first-out method) or market.

 

F-6

----

 

***Property and Equipment:***

 

Property and equipmentare recorded at cost. Depreciation is provided for on the straight-line methodover the estimated useful lives of the assets. The average lives range fromthree to five years. Maintenance and repairs that neither materially add to thevalue of the property nor appreciably prolong its life are charged to expenseas incurred. Betterments or renewals are capitalized when incurred.  Property and equipment are reviewed each yearto determine whether any events or circumstances indicate that the carryingamount of the assets may not be recoverable. Such review includes estimating future cash flows.  Property and equipment costs are expensedwhen determined not realizable.

 

***Software Development Costs:***

 

The Company capitalizes software development costs inaccordance with Statement of Financial Accounting Standards No. 86, “Accountingfor the Costs 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 of technological feasibility and the ongoingassessment of the recoverability of these costs requires considerable judgementby management with respect to certain external factors including, but notlimited to, anticipated future gross product revenue, estimated economic life,and changes in software and hardware technology.  Amortization of capitalized softwaredevelopment costs begins when the products are available for general release tocustomers and is computed on a product-by-product basis using straight-lineamortization with useful lives of five years or, if less, the remainingestimated economic life of the product. Amounts related to internal software development that could becapitalized under this statement were immaterial.

 

***RevenueRecognition and Deferred Revenue:***

 

The Company licensessoftware and sells data collection hardware and related ancillary products toend-user customers through its direct sales force as well as reseller channelcustomers through independent resellers. The Company’s software license revenueis earned from perpetual licenses of off-the-shelf software requiring none orminor modification or customization. The software license, data collectionhardware and related ancillary product revenues from the Company’s end-usercustomers and reseller channel 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, whichis typically FOB shipping point, is complete for the software (either physicallyor electronically), data collection hardware and related ancillary products;

•                  The customer’sfee is deemed to be fixed or determinable and free of contingencies orsignificant 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 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-7

----

 

As part of an arrangement, end-user customerstypically purchase maintenance contracts as well as professional services fromthe Company. Maintenance services include telephone and Web-based support aswell as rights to unspecified upgrades and enhancements, when and if theCompany makes them generally available. Professional services are typically forimplementation, installation of the software and data 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. The Company has classified the value ofrevenues pertaining to the contractual maintenance obligations that exist forthe 12-month period subsequent to the balance sheet date as a currentliability, and the contractual obligations with a term beyond 12 months, ifpresent, as a non-current liability.

 

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

 

•                  A non-cancelableagreement for the services has been signed or a customer’s purchase order hasbeen received;

•                  The professionalservices have been delivered;

•                  The customer’sfee is deemed to be fixed or determinable and free of contingencies orsignificant uncertainties; and

•                  Collectibilityis probable.

 

Customer 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 the Company’s experience in completing professionalservices, we have determined that these services are typically delivered withina 12-month period subsequent to the contract signing and therefore classifydeferred professional services as a current liability.

 

The Company’s arrangements with its end-user customersand reseller channel customers do not include any rights of return or priceprotection, nor do arrangements with reseller channel customers include anyacceptance provisions. The Company’s arrangements with end-user customersgenerally include the Company’s standard acceptance provision. The Company’sstandard acceptance provision states that the customer’s acceptance of theproducts shall be deemed to occur upon completion of running our standard diagnostictests.

 

At the time the Company enters into an arrangement,the Company assesses the probability of collection of the fee and the termsgranted to the customer. For end-user customers, the Company’s typical paymentterms include a deposit and subsequent payments, based on specific due dates,such that all payments for the software license, data collection hardware andrelated ancillary products, as well as services included in the originalarrangement, are ordinarily due within one year of contract signing. TheCompany’s payment terms for its reseller channel customers are typically duewithin 30 days of the invoice date.

 

If the arrangementincludes a substantive acceptance provision, the Company defers revenue notmeeting the criterion for recognition under Statement of Position 97-2, “SoftwareRevenue Recognition,” and classifies this revenue as deferred revenue,including deferred product revenue.

 

F-8

----

 

This revenue isrecognized, 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, the Company defersrevenue on the arrangement until the payment of the arrangement fee becomesdue. The deferred amounts related to arrangements with extended payment termsare removed from deferred revenue and accounts receivable, as the Company has determinedthat these amounts do not represent either receivables or deferred revenueuntil the payment becomes due. The Company reports the allocated fair value ofrevenues related to the product element of arrangements as a current liabilitybecause of the expectation that these revenues will be recognized within 12months of the balance sheet date.

 

***DeferredIncome 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 the operating losses in futureperiods. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.

 

***FairValue of Financial Instruments:***

 

The carrying values ofcash, cash equivalents, accounts receivable, accounts payable, accruedliabilities and current notes payable approximate their fair values because ofthe short maturity of these instruments. With respect to long-term debt, the amounts reported approximate thefair value of the respective financial instruments, based on the borrowingrates currently available to the Company for similar bank and equipment loans.

 

***LossPer Share:***

 

Diluted earnings per share are computed based on theweighted average number of shares of common stock and dilutive securitiesoutstanding during the period.  Dilutivesecurities are options and warrants that are freely exercisable into commonstock at less than the prevailing market price. Dilutive securities are not included in the weighted average number ofshares when inclusion would increase the earnings per share or decrease the lossper share.  At June 30, 2005 and2004, there were options and warrants outstanding to purchase 3,300,774 and2,633,197, respectively, shares of the Company’s common stock and 3,464,039 and1,606,241, respectively, shares of common stock issuable upon conversion ofconvertible debt. None of these were included in the determination of dilutedloss per share as their effect was anti-dilutive.

 

F-9

----

 

***Stock-BasedCompensation:***

 

The Company has adopted Financial Accounting StandardsBoard No. 123 (SFAS 123”), “Accounting for Stock-Based Compensation.”  Under SFAS 123, companies can, but are notrequired to, elect to recognize compensation expense for all stock-based awardsusing a fair value methodology. The Company has adopted the disclosure-onlyprovisions, as permitted by SFAS 123. The Company applies APB Opinion No. 25and related interpretations in accounting for its stock-based plans.  Accordingly, there is no related compensationexpense recorded in the Company’s financial statements for the periodspresented. Had compensation cost for stock-based compensation been determinedbased on the fair value of the options at the grant dates consistent with themethod of SFAS 123, the Company’s net loss and loss per share for the yearsended June 30, 2005 and 2004 would have been reduced to the pro formaamounts presented below:

 
| ** **                                                                                                                                         | ** ** | **Year Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| **Net loss:**                                                                                                                                      |       |                         |       |   |   |
| As reported                                                                                                                                        |       | $                            | (2,020,394 | ) | $ | (1,150,443 | ) |
| Deduct:  Total stock-based employee compensation expsense determined under the fair  value based method for all awards, net of related tax effects |       | (166,256                     | )          | (169,747 | ) |
|                                                                                                                                               |       |                         |       |   |   |
| Pro forma                                                                                                                                          |       | $                            | (2,186,650 | ) | $ | (1,320,190 | ) |
|                                                                                                                                               |       |                         |       |   |   |
| **Loss per share:**                                                                                                                                |       |                         |       |   |   |
| As reported                                                                                                                                        |       | $                            | (0.15      | ) | $ | (0.09 | ) |
| Pro forma                                                                                                                                          |       | $                            | (0.16      | ) | $ | (0.10 | ) |

 

The fair value of option grants is estimated as of thedate of grant utilizing the Black-Scholes option-pricing model with thefollowing weighted average assumptions:

 
| ** **                 | ** ** | **Year Ended June 30,** | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Expected volatility        |       | 120.0                        | %          | 76.0 | % |
| Risk-free interest rate    |       | 4.0                          | %          | 4.0 | % |
| Expected lives (in  years) |       | 3.0                          |       | 3.0 |   |

 

The weighted average fair value at date of grant foroptions granted during the years ended June 30, 2005 and 2004 approximated$.57 and $.34, respectively.

 

F-10

----

 

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

 

In November 2004,the Financial Accounting Standards Board or “FASB” issued Statement ofFinancial 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 recognized as current period charges regardless ofwhether they meet the criteria of “so abnormal.” In addition, SFAS 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.SFAS 151 is effective for financial statements issued for fiscal yearsbeginning after June 15, 2005. The adoption of SFAS 151 is notexpected to have a material affect on our financial position or results ofoperations.

 

 In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 153 (“SFAS 153”), “Exchanges ofNonmonetary Assets.” SFAS 153 amends the guidance in APB No. 29, “Accountingfor Nonmonetary Assets.” APB No. 29 was based on the principle thatexchanges of nonmonetary assets should be measured on the fair value of theassets 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 is not expected to have a material affecton our financial position or results of operations.

 

In December 2004, the FASB issued Statement ofFinancial Accounting Standards. No. 123 (“SFAS 123(R)”), “Share-BasedPayment”, which is a revision of FASB 123, “Accounting for Stock-BasedCompensation”. SFAS 123(R) supersedes APB Opinion No. 25, “Accounting forStock Issued to Employees”, and amends FASB Statement No. 95, “Statementof Cash Flows”. Generally, the approach in SFAS 123(R) is similar to theapproach described in SFAS 123. However, SFAS 123(R) requires all share-basedpayments to employees, including the grants of employee stock options, to berecognized in the income statement based on their fair values. Pro formadisclosure will no longer be an alternative.

 

SFAS 123(R) must be adopted by small business issuers forinterim periods beginning after January 1, 2006. Early adoption will bepermitted in periods in which financial statements have not been issued. TheCompany will adopt FASB 123(R) on July 1, 2005, the beginning of its 2006fiscal year.

 

As permitted by SFAS 123, the Company currently appliesAPB Opinion No. 25 and related interpretations in accounting for itsstock-based plans.  Accordingly, there isno related compensation expense recorded in the Company’s financial statementsfor the periods presented. The adoption of SFAS 123(R)’s fair value method willhave an impact on the Company’s results of operations, although it will have noimpact on its overall financial position. The impact of adoption of SFAS 123(R)cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future. However, had the Company adoptedSFAS 123(R) in prior periods, the impact of that standard would haveapproximated the impact of SFAS 123 as described in the disclosure of pro formanet income and earnings per share in Note 1 to the consolidated financialstatements.

 

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 inInterim Financial Statements.” SFAS 154 applies to all voluntary changes inaccounting principle and changes the requirements for accounting for andreporting a change in accounting principle. SFAS 154 requires the retrospectiveapplication to prior periods’ financial statements of the direct effect of avoluntary change in accounting

 

F-11

----

 

principle unless it is impracticable. APB No. 20required that most voluntary changes in accounting principle be recognized byincluding in net income of the period of the change the cumulative effect ofchanging to the new accounting principle. FASB stated that SFAS 154 improvesfinancial reporting because its requirements enhance the consistency offinancial information between periods. Unless early adoption is elected, SFAS154 is effective for fiscal years beginning after December 15, 2005. Earlyadoption is permitted for fiscal years beginning after June 1, 2005. SFAS154 does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of this statement.  Theadoption of SFAS 154 is not expected to have a material affect on ourfinancial position or results of operations.

 

**Note 2**

**AccountsReceivable - Trade:**

 

At June 30, 2005 and2004 accounts receivable – trade consists of:

 
| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Accounts receivable -  trade     |       | $        | 1,583,526  |     | $          | 1,113,850 |   |
| Less:                            |       |     |       |     |       |
| Allowance for doubtful  accounts |       | (20,000  | )          | (20,000  | )          |
| Allowance for sales  returns     |       | (84,000  | )          | (65,000  | )          |
|                             |       | $        | 1,479,526  |     | $          | 1,028,850 |   |

 

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 Company’s prior history of uncollectible accountsreceivable. It is the Company’s practice to record an estimated allowance forsales returns and adjustments based on historical experience and to recordindividual charges for sales returns and adjustments directly to revenue asincurred.

 

**Note 3**

**Propertyand Equipment:**

 

At June 30, 2005 and2004 property and equipment consists of:

 
| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Computers, software and  equipment |       | $        | 438,459    |     | $          | 436,130 |   |
| Furniture and fixtures             |       | 83,923   |       | 71,188   |       |
| Leasehold improvements             |       | 116,596  |       | 15,103   |       |
|                               |       | 638,978  |       | 522,421  |       |
| Less: accumulated  depreciation    |       | (264,709 | )          | (319,112 | )          |
|                               |       | $        | 374,269    |     | $          | 203,309 |   |

 

Depreciationexpense was $91,714 and $60,074, respectively, for the years ended June 30,2005 and 2004.

 

F-12

----

 

**Note 4**

**Long-termDebt:**

 

At June 30,2004 and 2003 long-term debt consists of the following:

 
| ** **                                                                                                                                                                                                                                                                                           | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| 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  |      | $          | 1,879,303 |   |
|                                                                                                                                                                                                                                                                                                 |       |      |       |      |       |
| Prime  rate $1,500,000 convertible credit facility, monthly interest payments,  advances on the faciltiy are based on a percentage of the Company’s  outstanding accounts recievable, due March 2007; Collateralized by all  assets of the Company. Less unamortized discount of $102,900. |       | 897,100   |       | —    |       |
|                                                                                                                                                                                                                                                                                                 |       |      |       |      |       |
| 15%  promissory note to a related party, 60 monthly principal and interest  payments of $11,821 through April 2009; Collateralized by all assets of  the Company.                                                                                                                               |       | —    |       | 479,831   |       |
|                                                                                                                                                                                                                                                                                                 |       |      |       |      |       |
| 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.                                                                                                                                |       | 327,401   |       | 394,219   |       |
|                                                                                                                                                                                                                                                                                                 |       |      |       |      |       |
| 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    |       | 190,345   |       |
|                                                                                                                                                                                                                                                                                                 |       |      |       |      |       |
| $400,000  revolving line of credit with a shareholder, expiring on December 31,  2005, 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.                                                                                                                                 |       | 484,198   |       | —    |       |
|                                                                                                                                                                                                                                                                                                 |       |      |       |      |       |
|                                                                                                                                                                                                                                                                                                 |       | 3,208,653 |       | 3,093,698 |       |
| Less: current portion                                                                                                                                                                                                                                                                                |       | (998,061  | )          | (756,353  | )          |
|                                                                                                                                                                                                                                                                                                 |       |      |       |      |       |
| Long-term debt                                                                                                                                                                                                                                                                                       |       | $         | 2,210,592  |      | $          | 2,337,345 |   |

 

In January 2004, the Company and a shareholder agreed to extend theterm of its $400,000 line of credit facility to December 31, 2005.  All other terms of the agreement remainedunchanged.

 

In March 2004, theCompany consummated a private placement pursuant to which the Company issued a$2,000,000 principal amount secured convertible term note due March 22,2007 (the “Laurus Note”), together with a common stock purchase warrantentitling the holder to purchase 280,000 shares of common stock (the “LaurusNote Warrant”).  The Laurus Note and the Laurus Note Warrant were sold toa single “accredited investor” (as such term is defined in the rules promulgatedunder the Securities Act of 1933, as amended (the “Act”)), Laurus Master Fund,Ltd. (“Laurus”), for a purchase price of $2,000,000.  The principal andunpaid interest on the Laurus Note are convertible into shares of the Company’scommon stock at an original price of $1.17 per share (the “Fixed ConversionPrice”), which was based on the weighted average price of the Company’s commonstock for the twenty

 

F-13

----

 

trading days immediatelyprior to the issuance of the Laurus Note.  Such conversion price issubject to anti-dilution adjustments based on the occurrence of certaincorporate events.  In June 2005, the Companyamended the conversion price of the Laurus Note. The conversion price on thefirst $300,000 of the note was reduced to $0.50 per share and the conversionprice 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 in the current quarter.

 

The Laurus Noteprovides for monthly payments of interest at the prime rate, which is subjectto reduction if the market price of the Company’s common stock exceeds certaindesignated thresholds.  The Laurus Note also provides for monthlyamortization, commencing on June 1, 2004 through February 1, 2005, of$30,000 per month, $50,000 per month from March 1, 2005 through May 1,2005, $72,083 per month from June 1, 2005 through November 1, 2006and $94,167 per month from December 2006 through February 2007.  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. The Laurus Note is secured by a first priority lien on all of the assetsof the Company.

 

The Laurus Note Warrantentitles the holder thereof to purchase, at any time through March 22,2011:  200,000 shares of the Company’s common stock at a price of $1.29per share; 40,000 shares of the Company’s common stock at a price of $1.35 pershare; and 40,000 shares of the Company’s common stock at a price of $1.40 pershare.

 

Pursuant to aRegistration Rights Agreement (the “Registration Rights Agreement”) enteredinto between the Company and Laurus, the Company is obligated to: (a) filea registration statement under the Act to register the resale of the shares ofthe Company’s common stock issuable upon conversion of the Note and exercise ofthe Warrant (the “Registration Statement”) within 45 days of the date of thefunding with respect to the Laurus Note; (b) use its best efforts to havethe Registration Statement declared effective under the Act as promptly aspossible, but in any event prior to the 90th day following thefunding of the Laurus Note; and (c) maintain the effectiveness of theRegistration Statement until the earlier date of when (i) all registrablesecurities have been sold or (ii) all registrable securities may be soldimmediately without registration under the Act and without volume restrictionspursuant to Rule 144(k).  Laurus, or other holders of the Laurus Noteand the Laurus Note Warrant, are entitled to certain specified remedies if theCompany does not timely comply with its registration obligations.  The registration statement has been filed.

 

The private placement of the Laurus Noteand the Laurus Note Warrant was facilitated by The Oberon Group, LLC (Oberon)in consideration for which Oberon was paid an advisory fee of $150,000, andgranted a warrant to purchase, at any time through March 22, 2007, 136,364shares of the Company’s common stock at a per share price of $1.10.  The cash fee and fair value of the warranthas been recorded as a deferred loan issue charge.

 

In March 2004, the Company enteredinto a subordinated note agreement with a shareholder and existing debtholder.  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, the Company issued 25,000 shares of restricted common stock tothe holder of the subordinated note.  Thefair value of the stock has been recorded as a deferred loan issue charge.

 

In April 2004, the Company enteredinto a subordinated note agreement with a shareholder and existing debtholder.  The note has a five year termnote with monthly principal and interest payments at 15%.  In consideration for agreeing to subordinaterepayment of the note to the Laurus Note, the Company issued

 

F-14

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25,000 shares of restricted common stockto the holder of the subordinated note. The fair value of the stock has been recorded as a deferred loan issuecharge.

 

In June 2005, the Company entered into a SecurityAgreement (the “Laurus Credit Facility”) pursuant to which the Company mayborrow from time to time revolving loans up to $1,500,000, subject to aborrowing base calculation based on the Company’s eligible accounts receivable.Borrowings under the facility accrue interest at the prime rate and are payablemonthly. The principal amount of all outstanding loans together with anyaccrued and unpaid interest is due as of June 23, 2008.  The Company issued a common stock purchasewarrant to Laurus in consideration for providing the Laurus Credit Facility(the “Laurus Credit Facility Warrant”).

 

Pursuant to the terms of the Agreement, the Company’sobligations are secured by a lien on all of the Company’s assets. Moreover,Laurus has the right at any time until the maturity date, or during an event ofdefault, to convert all or any portion of the outstanding principal amount intofully paid restricted shares of the Company’s common stock at a fixedconversion price of $0.65.

 

The Laurus Credit Facility Warrant entitles the holderthereof to purchase, at any time through June 23, 2012, an aggregate of210,000 shares of common stock as follows:  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.

 

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 registerthe resale of the shares of the Company’s common stock issuable upon conversionof the Laurus Credit Facility and exercise of the Laurus Credit FacilityWarrant (the “Laurus Credit Facility Registration Statement”) within 30 days ofthe date of the funding with respect to the Laurus Credit Facility; (b) useits best efforts to have the Laurus Credit Facility Registration Statementdeclared effective under the Act as promptly as possible, but in any event priorto the 90th day following the filing day; and (c) maintain theeffectiveness of the Laurus Credit Facility Registration Statement until theearlier date of when (i) all registrable securities have been sold or (ii) allregistrable securities may be sold immediately without registration under theAct and without volume restrictions pursuant to Rule 144(k).  Laurus,or other holders of the Laurus Credit Facility and the Laurus Credit FacilityWarrant, are entitled to certain specified remedies if the Company does nottimely comply with its registration obligations.  The registration statement has been filed butnot declared effective.

 

The private placement ofthe Laurus Credit Facility and the Laurus Credit Facility Warrant wasfacilitated by The Oberon Group, LLC (Oberon) in consideration for which Oberonwas paid an advisory fee of $112,500, and granted a warrant to purchase, at anytime 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.

 

F-15

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As of June 30, 2005 futureminimum payments due under the debt agreements are as follows:

 

| **Year Ending**   | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|
| **June 30,** | ** ** | ** ** | ** ** |
|              |       |       |       |
| 2006              |       | $          | 998,061    |   |
| 2007              |       | 761,726    |       |
| 2008              |       | 1,159,891  |       |
| 2009              |       | 178,401    |       |
| 2010              |       | 110,574    |       |
|              |       |       |       |
| Total             |       | $          | 3,208,653  |   |

 

The Company incurred loan issuecosts associated with the issuance of the Laurus Note, Laurus Credit Facilityand shareholder notes.  The costs arebeing amortized over the term of the notes. Included in other assets at June 30,2005 and 2004 are deferred costs in the amount of $528,111 and $371,345,respectively, net of accumulated amortization of $158,793 and $31,759,respectively.  Amortization expensecharged to interest expense was $127,034 and $31,759, respectively, for theyears ended June 30, 2005 and 2004.

 

The Laurus Note Warrants werevalued at $99,200 and recorded as a discount to the Laurus Note. The LaurusCredit Facility Warrants were valued at $102,900 and recorded as a discount tothe Laurus Credit Facility.  Thediscounts are being amortized over the terms of the debt.  Amortization charged to interest expense was$34,011 and $8,503, respectively, for the years ended June 30, 2005 and2004.

 

**Note 5**

**IncomeTaxes:**

 

As of June 30, 2005 and 2004 deferred tax assets consist of thefollowing:

 
| ** **                  | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
|                        |       |       |       |       |       |
| Federal loss  carryforwards |       | $          | 1,970,000  |       | $          | 1,570,000 |   |
| State loss  carryforwards   |       | 490,000    |       | 390,000    |       |
| Other                       |       | 69,000     |       | 50,000     |       |
|                        |       | 2,529,000  |       | 2,010,000  |       |
| Less:  valuation allowances |       | (2,529,000 | )          | (2,010,000 | )          |
|                        |       |       |       |       |       |
|                        |       | $          | —     |       | $          | — |   |

 

The Company has established avaluation allowance equal to the full amount of the deferred tax assetsprimarily because of uncertainty in the utilization of net operating losscarryforwards.

 

F-16

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As a result of stock ownershipchanges, the Company’s ability to utilize net operating losses in the futurecould be limited, in whole or part, under Internal Revenue CodeSection 382.  The Company wastreated as an S-Corporation for income tax purposes through May 13, 1997.  As of June 30, 2005 the Company’sfederal net operating loss carryforwards were approximately $6,150,000 andbegin expiring in 2012 through 2022.

 

The Company’s tax expense(benefit) differed from the statutory rate primarily due to the $519,000 changein the deferred tax asset valuation allowance from June 30, 2004.

 

**Note 6**

**Commitments:**

 

The Company currently leases a facility inScottsdale, Arizona under non-cancelable operating lease agreement whichexpires in April 2010. For the years ended June 30, 2005 and 2004,expense under non-cancelable operating lease agreements was approximately$263,000 and $225,000, respectively.

 

Future minimum lease payments due under theoperating lease agreement are as follows:

 

| **Year Ending**   | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|
| **June 30,** | ** ** | ** ** | ** ** |
| 2006              |       | $          | 292,883    |   |
| 2007              |       | 268,476    |       |
| 2008              |       | 268,476    |       |
| 2009              |       | 268,476    |       |
| 2010              |       | 244,069    |       |
|              |       |       |       |
|              |       | $          | 1,342,380  |   |

 

**Note 7**

**Stockholders’Equity:**

 

***Stock Options:***

 

On July 13, 1999, theBoard of Directors authorized the implementation of the 1999 EquityCompensation Plan.  The plan allows forthe award of incentive stock options, non-statutory stock options or restrictedstock awards to certain employees, directors, consultants and independentcontractors.  The Company has reserved anaggregate of 600,000 shares of common stock for distribution under theplan.  Incentive stock options grantedunder the plan may be granted to employees only, and may not have an exerciseprice less than the fair market value of the common stock on the date of grant.Options may be exercised on a one-for-one basis, with a maximum term of ten(10) years from the date of grant.

 

A summary of the activity ofoptions under the plan and non-statutory options granted outside the planfollows:

 

F-17

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| ** **                         | ** ** | **Number of** | ** ** | **Weighted Average** | ** ** |
|------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                         | ** ** | **Options**   | ** ** | **Exercise Price**   | ** ** |
| ** **                         | ** ** | ** **    | ** ** | ** **           | ** ** |
| Outstanding  at June 30, 2003 |       | 1,244,252     |       | $                    | 1.49       |   |
|                               |       |          |       |                 |       |
| Granted                            |       | 830,020       |       | 0.82                 |       |
| Exercised                          |       | (8,996        | )          | 0.37                 |       |
| Forfeited                          |       | (91,800       | )          | 1.46                 |       |
|                               |       |          |       |                 |       |
| Outstanding  at June 30, 2004 |       | 1,973,476     |       | 1.02                 |       |
|                               |       |          |       |                 |       |
| Granted                            |       | 312,500       |       | 0.79                 |       |
| Exercised                          |       | (2,000        | )          | 0.22                 |       |
| Forfeited                          |       | (26,000       | )          | 0.62                 |       |
|                               |       |          |       |                 |       |
| Outstanding  at June 30, 2005 |       | 2,257,976     |       | $                    | 0.89       |   |

 

Additional information about outstanding options to purchase theCompany’s common stock as of June 30, 2005 is as follows:

 
| ** **         | ** ** | ** **    | ** ** | **Weighted Avg.**   | ** ** | ** **         | ** ** | ** **    | ** ** | ** **         | ** ** |
|--------------------|------------|---------------|------------|---------------------|------------|--------------------|------------|---------------|------------|--------------------|------------|
| ** **         | ** ** | ** **    | ** ** | **Remaining**       | ** ** | ** **         | ** ** | ** **    | ** ** | ** **         | ** ** |
| ** **         | ** ** | **Number of** | ** ** | **Contractural**    | ** ** | **Weighted Avg.**  | ** ** | **Number of** | ** ** | **Weighted Avg.**  | ** ** |
| **Exercise Price** | ** ** | **Shares**    | ** ** | **Life (In Years)** | ** ** | **Exercise Price** | ** ** | **Shares**    | ** ** | **Exercise Price** | ** ** |
|               |       |          |       |                |       |               |       |          |       |               |       |
| $13.10             |       | 4,000         |       | 4.74                |       | $                  | 13.10      |          | 4,000      |               | $          | 13.10 |   |
| $9.40              |       | 100,000       |       | 4.63                |       | $                  | 9.40       |          | 100,000    |               | $          | 9.40 |   |
| $3.40 - $2.20      |       | 137,023       |       | 5.01                |       | $                  | 3.18       |          | 137,023    |               | $          | 3.18 |   |
| $1.40 - $1.00      |       | 296,437       |       | 8.02                |       | $                  | 1.05       |          | 182,811    |               | $          | 1.05 |   |
| $0.92 - $0.60      |       | 816,020       |       | 8.57                |       | $                  | 0.75       |          | 460,770    |               | $          | 0.76 |   |
| $0.57 - $0.40      |       | 428,496       |       | 5.88                |       | $                  | 0.40       |          | 418,496    |               | $          | 0.40 |   |
| $0.32 - $0.14      |       | 476,000       |       | 7.20                |       | $                  | 0.22       |          | 444,000    |               | $          | 0.22 |   |

 

In October 2003 the Company entered into aconsulting services agreement with a member of the Company’s Board of Directorsfor four years.  In exchange for theconsulting services, the Board Member was granted a non-statutory option topurchase 200,000 shares of the Company’s common stock at $0.75 per share.  The options vest over four years and have aterm of four years.  The fair value ofthe options issued was $62,000 and will be recognized over the term of theagreement as the options vest.

 

F-18

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***Non-Employee Stock Optionsand Warrants:***

 

The Company issued 366,625 commonstock warrants in connection with its private placements of common stock duringthe year ended June 30, 2000.  Eachwarrant entitles the holder to purchase one share of common stock at varying exerciseprices depending on the round of funding. The exercise price for the first round of funding was $3.50 per shareand were exercisable until October 2002. The exercise price for the second round of funding was $2.80 per shareand were exercisable until February 2003. The warrant agreement contains a price adjustment provision that statedif the Company sells common stock at a price below the exercise price of thewarrants, the warrant exercise price would be adjusted to the price that thecommon stock was sold for.  As a resultof the sale of common stock during the year ended June 30, 2002 at $.20per share, the warrants exercise price has been adjusted to $.20.  In October, 2000, the Company entered into aWarrant Exercise Agreement with certain of its warrant holders under whichparticipating holders of the Company’s $3.50 per share and $2.80 per sharewarrants could exercise their warrants for one-half of the exercise price setforth in such warrants.  In addition tothe reduction in exercise price, each holder who participated in the WarrantExchange Agreement also received a new warrant agreement under the same termsas the warrant agreement just exercised. In connection with this Warrant Exchange Agreement, the Company receivedapproximately $122,000 from the exercise of warrants to purchase 84,790 sharesof common stock.  In connection with aFebruary 2002 private placement of common stock, the Company agreed toextend the term of 147,500 of the above warrants for one year to a shareholderif the Company did not file a registration statement with the Securities andExchange Commission to register the resale of the common stock purchased in theFebruary 2002 private placement by August 2002.  The Company did not file a registrationstatement therefore the term of the warrants had been extended by oneyear.  In September 2003 the 147,500warrants were exercised in full.  Theremaining 219,125 warrants expired unexercised.

 

During the year endedJune 30, 2001, the Company issued 12,000 warrants to an entity forconsulting services.  The exercise priceof the warrants ranges from $1.25 per share to $4.30 per share and areexercisable through March 2006.  Thefair value was $21,000 at the date of grant, determined based on the value ofservices performed.  As of June 30,2005 none of the warrants have been exercised.

 

During the year ended June 30, 2002, theCompany issued 62,958 warrants to a related party in consideration for enteringinto a promissory note agreement with the Company.  The exercise price of the warrant is $.25 pershare and is exercisable through September 2006.  As of June 30, 2005 none of the warrantshave been exercised.

 

During the year ended June 30, 2002, theCompany issued 25,000 warrants to a related party in consideration for enteringinto a revolving line of credit agreement with the Company.  The exercise price of the warrant is $.15 pershare and is exercisable through November 2006.  As of June 30, 2005 none of the warrantshave been exercised.

 

In November 2003, the Company issued 143,400warrants to brokers in connection with a private placement of common stock ofthe Company.  The exercise price of thewarrants is $.90 per share and is exercisable through November 2006.  As of June 30, 2005 none of the warrantshave been exercised.

 

F-19

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In March 2004, the Company consummated aprivate placement pursuant to which the Company issued a $2,000,000 principalamount secured convertible term note (the Laurus Note), together with a commonstock purchase warrant entitling the holder to purchase 280,000 shares ofcommon stock (the Laurus Note Warrant).  The Laurus Note Warrant entitlesthe holder thereof to purchase, at any time through March 22, 2011: 200,000 shares of the Company’s common stock at a price of $1.29 per share; 40,000shares of the Company’s common stock at a price of $1.35 per share; and 40,000shares of the Company’s common stock at a price of $1.40 per share.  As of June 30, 2005 none of the warrantshave been exercised.

 

The private placement of the Laurus Note and theLaurus Warrant was facilitated by The Oberon Group, LLC (Oberon) inconsideration for which Oberon was granted a warrant to purchase, at any timethrough March 22, 2007, 136,364 shares of the Company’s common stock at aprice of $1.10.  As of June 30, 2005none of the warrants have been exercised.

 

InJune 2005, the Company entered into a Security Agreement (the “LaurusCredit Facility”) together with a common stock purchase warrantentitling the holder to purchase 210,000 shares of common stock (the “LaurusCredit Facility Warrant”) withLaurus.  The Laurus CreditFacility Warrant entitles the holder thereof to purchase, at any time throughJune 23, 2012:  150,000 shares of the Company’s common stock at aprice 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.  As ofJune 30, 2005 none of the warrants have been exercised.

 

The private placement of theLaurus Credit Facility and the Laurus Credit Facility Warrant was facilitatedby The Oberon Group, LLC (Oberon) in consideration for which Oberon was granteda warrant to purchase, at any time through June 23, 2008, 173,077 sharesof the Company’s common stock at a per share price of $0.65.  As of June 30, 2005 none of the warrantshave been exercised.

 

***Redeemable FinancialInstruments:***

 

The private placement of theLaurus Credit Facility was facilitated by The Oberon Group, LLC (Oberon) inconsideration for which Oberon was granted a common stock award valued at$56,250.  The number of shares to beissued to satisfy the award is determined based on the closing price of ourcommon stock once the registration statement for the shares is declaredeffective.  As of the date of this report,the registration statement covering the share issuable has not been declaredeffective and the amount is represented in accrued liabilities in theaccompanying financial statements.

 

The number of shares that wouldhave been issued at June 30, 2005 if the settlement had occurred on thatdate is 100,446 shares.  The agreementwith Oberon does not limit the number of shares that will be issued to settlethe obligation.  The Company is planningto have the registration statement covering the shares issuable under thisagreement declared effective in the quarter ending December 31, 2005.

 

F-20

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**Item 8. Changes In And Disagreements With Accountants On Accounting AndFinancial Disclosure.**

 

Not applicable.

 

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

 

Based on anevaluation of the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) or 15d-15(e) under the SecuritiesExchange Act of 1934, as amended), our Chief Executive Officer and Chief FinancialOfficer have concluded that such controls and procedures were effective as ofthe end of the period covered by this report.

 

In connection with such evaluation, no changein our internal control over financial reporting occurred during the fourthfiscal quarter of the period covered by this report that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART III**

 

**Item 9.****    Directors, Executive Officers, Promoters andControl Persons; Compliance With Section 16(a) of the Exchange Act.**

 

Information regarding our directors and executive officers is providedbelow.

 

THOMASS. BEDNARIK.  Mr. Bednarik, age 55,has served as President, Chief Executive Officer and a director of the Companysince February 2000.  FromApril 1998 to February 2000, Mr. Bednarik served as VicePresident of Sales and Support at NetPro Computing, Inc.  Mr. Bednarik has extensive executive andsales management experience in the information technology industry and has servedin various executive management capacities, including Chief Executive Officer,President, Vice President and Executive Vice President, with firms such as IdeaCorporation, Decision Data, Alcatel Information Systems and ITT Corporation.

 

CRAIGJ. SMITH, CPA.  Mr. Smith, age 35,has served as the Company’s Vice President of Finance and Administration andChief Financial Officer since April 1999. From 1998 to 1999, Mr. Smith served as Controller of PacificNumerix Corporation.  From 1993 to 1998,he served as an Audit Manager of Semple & Cooper LLP.  Mr. Smith earned a masters in businessadministration from Arizona State University in 2000 and a Bachelor of Sciencedegree in finance and accounting from Minnesota State University-Mankato in1992.

 

TODDP. BELFER.  Mr. Belfer, age 37, hasserved as a director of the Company since March 1999 and Chairman of theBoard of Directors since November 1999. Mr. Belfer also served as Chairman of the Board of Directors of ourwholly-owned subsidiary, Time America, Inc. (previously VitrixIncorporated), from April 1996 until March 1999.  Mr. Belfer co-founded EmployeeSolutions, Inc. in May 1990, and served as its ExecutiveVice-President and as a 

 

29

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director from 1991 to1996.  Mr. Belfer earned a Bachelorof Science in Finance and Real Estate from the University of Arizona in 1989.

 

LISE M. LAMBERT.  Ms. Lambert, age 48, has served as adirector of the Company since April 1999 and as director of ourwholly-owned subsidiary, Time America, Inc. (previously VitrixIncorporated), from January 1998 to March 1999.  In 2003, Ms. Lambert joinedVistaCare, Inc., a Scottsdale-based health services company, where sheserves as the Sr. Vice President of Strategic Planning and BusinessFormation.  Since 1996, Ms. Lamberthas also served as President of Relevant, Inc., a consulting company forthe computer software industry.  In 1986,Ms. Lambert co-founded Mastersoft, Inc., where she served asVice-President of Marketing from 1986 to 1990 and Senior Vice-President ofSales from 1990 to 1995. Ms. Lambert also serves as director for InvolveTechnology, Inc.  Ms. Lambertearned a Bachelor of Arts degree in education and a Masters degree in deafnessand audiology from Smith College.

 

ROBERTW. ZIMMERMAN. Mr. Zimmerman, age 53, has served as a director of theCompany since March 2001. Mr. Zimmerman was one of the original investors and directors ofTime America, Inc. prior to its merger with the Company.  Mr. Zimmerman is President, co-managing shareholder and attorney forMallery & Zimmerman, S.C., a general practice law firm with offices inMilwaukee, Cedarburg, Green Bay, Stevens Point and Wausau, Wisconsin.  Mr. Zimmerman graduated from MarquetteUniversity in 1974 with majors in Accounting and Finance and from MarquetteUniversity Law School in 1977.  Followinggraduation from law school, Mr. Zimmerman worked in the Milwaukee officeof Arthur Andersen & Co. in the tax department and received hisWisconsin CPA certificate.

 

ROBERT J. NOVAK. Mr. Novak, age 60, has served as a director of the Company sinceSeptember 2003.  Mr. Novak hasbeen a member of Jennings, Strouss & Salmon, P.L.C., a full servicelaw firm, since 1999.  Mr. Novak isthe founder and owner of Novak Companies, Inc., a diversified group ofcompanies in real estate development, financing, management, equity financingand participation in private and public companies.  Mr. Novak also founded and owned RobertJ. Novak & Associates, Ltd., a law firm, from 1987 to 1999.  Mr. Novak was also a founder, directorand officer of Medical Safety Products, Inc., a medical product developer,from 1987 to 2001.  Mr. Novak earnedBachelor of Arts degrees in political science and economics from DrakeUniversity in 1967 and a Juris Doctorate from the University of Arizona in1971.

 

**Compliance with Section 16(a) ofthe Securities Exchange Act of 1934**

 

Section 16(a) ofthe Securities Exchange Act of 1934, as amended, requires our directors andexecutive officers, as well as persons beneficially owning more than 10% of ouroutstanding common stock, to file reports of ownership and changes in ownershipwith the Securities and Exchange Commission (the “SEC”) within specified timeperiods.  Such officers, directors andshareholders are also required to furnish us with copies of allSection 16(a) forms they file.

 

Basedsolely on its review of such forms received by us, or written representationsfrom certain reporting persons, we believe that allSection 16(a) filing requirements applicable to our officers,directors and 10% shareholders were complied with during the fiscal year endedJune 30, 2005.

 

CODE OF ETHICS

 

We haveadopted a “Code of Business Conduct and Ethics,” a code of ethics that appliesto all employees, including our executive officers. A copy of the Code ofBusiness Conduct and Ethics is posted on our Internet site atwww.timeamerica.com. In the event we make any amendments to, or grant anywaiver of, a provision of the Code of Business Conduct and Ethics that appliesto the principal executive officer, principal financial officer, or principalaccounting officer that requires disclosure under applicable SEC rules, weintend to disclose such amendment or waiver and the reasons therefore on a Form 8-Kor on our next periodic report.

 

AUDIT COMMITTEE

 

The Board ofDirectors has a separately designated standing audit committee established inaccordance with Section 3(a)(58)(A) of the Exchange Act. The auditcommittee, as of the end of fiscal 2005, was composed of Robert J. Novak, LiseM. Lambert and Robert W. Zimmerman.

 

AUDIT COMMITTEE FINANCIAL EXPERT

 

The Board ofDirectors has determined that Robert W. Zimmerman is an “audit committeefinancial expert” as defined by Item 401(e) of Regulation S-B of theSecurities Exchange Act of 1934. The Board of Directors made this affirmativedetermination based upon his experience, training and education. The Board ofDirectors further determined that Mr. Zimmerman is “independent” as thatterm is used in Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

 

30

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**Item 10. Executive Compensation.**

 

COMPENSATION OF DIRECTORS

 

Ournon-employee directors received no cash compensation for serving as members ofour board of directors or any committee of our board of directors during thefiscal year ended June 30, 2005.  During such period, we granted optionsto purchase 40,000 shares of common stock to each of Messrs. Belfer, Novak andZimmerman and Ms. Lambert in connection with their service on the board ofdirectors.  Each of these options has a term of 10 years, vestedimmediately, and was granted at the fair market value of the common stock onthe grant date.

 

Thefollowing table summarizes all compensation paid to our Chief Executive Officerfor each of the fiscal years ended June 30, 2005, 2004 and 2003.  We did not have any other executive officerswhose total annual salary and bonus exceeded $100,000 for the periodspresented.

 

**SUMMARY COMPENSATION TABLE**

 
| ** **                                           | ** ** | ** ** | ** ** | ** **              | ** ** | **Long Term  Compensation** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Awards**                  | ** ** |
| **Name and  Principal Position(1)**                  | ** ** | **Year**   | ** ** | **Salary($)**           | ** ** | **Bonus($)**                | ** ** | **Other Annual  Compensation($)** | ** ** | **Securities Underlying  Options/SARS (#)** | ** ** |
|                                                 |       |       |       |                    |       |                        |       |   |   |   |   |
| Thomas S.                                            |       | 2005       |       | $                       | 144,200    |                        | $          | 7,000 |   | -0 | -  | 14,000 | (1) |
| Bednarik(1)  President and  Chief Executive  Officer |       | 2004       |       | $                       | 135,000    |                        | $          | 6,750 |   | -0 | - | 100,000 | (1) |
|                                                 |       | 2003       |       | $                       | 130,000    |                        | -0         | - | -0 | - | 150,000 | (1) |

 

----

(1)           Mr. Bednarik was appointed President andChief Executive Officer of the Company effective February 17, 2000.  Pursuant to the terms of an Incentive StockOption Agreement dated August 22, 2000, Mr. Bednarik was grantedoptions to purchase 100,000 shares of the Company’s common stock at a per shareexercise price of $3.40.  Pursuant to theterms of a Nonstatutory Stock Option Agreement dated April 17, 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 grantedoptions to purchase 100,000 shares of the Company’s common stock at a per shareexercise price of $0.17.  Pursuant to theterms of a Nonstatutory Stock Option Agreement dated December 31, 2002, Mr. Bednarikwas granted options to purchase 50,000 shares of the Company’s common stock ata per 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 100,000shares of the Company’s common stock at a per share exercise price of$0.16.  Pursuant to the terms of aNonstatutory Stock Option Agreement dated December 9, 2003,Mr. Bednarik was granted options to purchase 25,000 shares of theCompany’s common stock at a per share exercise price of $1.17.  Pursuant to the terms of a Nonstatutory StockOption Agreement dated June 14, 2004, Mr. Bednarik was grantedoptions to purchase 75,000 shares of the Company’s common stock at a per shareexercise price of $1.00.  Pursuant to theterms of a Nonstatutory Stock Option Agreement dated April 20, 2005,Mr. Bednarik was granted options to purchase 14,000 shares of theCompany’s common stock at a per share exercise price of $0.63.

 

31

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Thefollowing table sets forth information concerning individual grants of stockoptions made to our Chief Executive Officer during the fiscal year endedJune 30, 2005.

 

**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 |       | 14,000                                                         |       | 4 | % | $ | 0.63 |   | 4/2015 |   | $ | 5,547 |   | $ | 14,057 |   |
|                                                            |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Pursuant to the terms of a Nonstatutory StockOption Agreement dated April 20, 2005, Mr. Bednarik was grantedoptions to purchase 14,000 shares of the Company’s common stock at a per shareexercise price of $0.63. The options vested immediately and have a term of tenyears.

 

(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.

 

**Option Exercise**

 

There were no option exercises by our Chief Executive Officer during thefiscal year ended June 30, 2005.

 

**Aggregate Option Exercises In Last Fiscal Year And Year End OptionValues**

 
| **Name**                                                    | ** ** | **Shares  Acquired  on  Exercise  (#)** | ** ** | **Value  Realized  ($)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options at  June 30, 2005 (#)  Exercisable /  Unexercisable** | ** ** | **Value of Unexercised  In-The-Money  Options at  June 30, 2005 ($)  Exercisable /  Unexercisable(1)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                    |       |                     |       |                                                                                                                 |       |                                                                                                        |       |
| Thomas S. Bednarik,  President and Chief  Executive Officer |       | -0                                      | -          | $                        | —     |                                                                                                                 | 789,000    |                                                                                                        | $          | 133,000 |   |
|                                                             |            |                                         |            |                          |            |                                                                                                                      |            |                                                                                                             |            |  |  |

 

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(1)           Information is based onthe June 30, 2005 closing price of $0.56.

 

32

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**Employment Agreements**

 

As of February 15, 2000, the Board of Directors approved the termsof Mr. Bednarik’s at-will employment with the Company for services as itsPresident and Chief Executive Officer. Under the terms of a letter agreement, 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 effective April 2001, to $140,000effective January 1, 2004 and to $148,400 effective January 1, 2005.

 

Effective January 1, 2005 the Board of Directors approved anincentive compensation plan with Mr. Bednarik.  Under the terms of the plan,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, 2005and June 30, 2005. Mr. Bednarik earned a cash bonus of $7,000 and 14,000 stock optionsunder this plan.  The plan expired atJune 30, 2005.

 

Mr. Bednarik is also entitled to participate in the Company’smedical and dental plans, with the Company paying 80% of the cost ofMr. Bednarik’s coverage and 50% of the cost of the medical coverage forMr. Bednarik’s family.  Under theterms of the letter agreement, a portion of Mr. Bednarik’s unvested optionsbecome immediately vested in the event he is terminated without cause (as suchterm is defined in his Option Agreements with the Company).  In the event the Company is acquired ormerged into another company, any unvested options will become automaticallyvested.

 

**Item 11. Security Ownership Of Certain Beneficial Owners And Management.**

 

Thefollowing table sets forth certain information, as of September 15, 2005,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% ofthe Company’s Common Stock; (ii) each Director; (iii) the Company’sChief Executive Officer; and (iv) all directors and executive officers ofthe Company as a group.  To the knowledgeof the Company, all persons listed in the table have sole voting and investmentpower with respect to their shares, except to the extent that authority isshared with their respective spouse under applicable law.

 

33

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| **Name and Address of**                          | ** ** | **Shares Beneficially Owned (1)** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| **Beneficial Owner (2)**                         | ** ** | **Number**                        | ** ** | **Percent** | ** ** |
|                                             |       |                              |       |   |   |
| Thomas S.  Bednarik                              |       | 922,750                           | (3)        | 6.1 | % |
| Todd P.  Belfer                                  |       | 1,498,127                         | (4)        | 10.4 |   |
| Lise M.  Lambert                                 |       | 245,163                           | (5)        | 1.7 |   |
| Robert W. Zimmerman                              |       | 325,175                           | (6)        | 2.2 |   |
| Robert J.  Novak                                 |       | 344,520                           | (7)        | 2.4 |   |
| Craig J.  Smith                                  |       | 161,251                           | (8)        | 1.1 |   |
| All  directors and executive officers as a group |       | 3,496,986                         |       | 22.0 |   |
| Joseph L.  Simek                                 |       | 3,888,585                         | (9)        | 27.1 |   |
| Circle F.  Ventures LLC                          |       | 981,111                           |       | 6.9 |   |

 

----

(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.  The amountsand percentages are based upon 14,251,552 shares of common stock outstanding asof September 15, 2005.

 

(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 is17797 North Perimeter Drive, Suite 105, Scottsdale, Arizona 85255 andJoseph L. Simek whose address is 611 North Road, Medford, Wisconsin 54461.

 

(3)           Includes 789,000 shares of common stockunderlying unexercised options that were exercisable on September 15,2005, or within 60 days thereafter.

 

(4)           Includes 245,000 shares of common stockunderlying unexercised options that were exercisable on September 15,2005, or within 60 days thereafter.

 

(5)           Includes 210,969 shares of common stockunderlying unexercised options that were exercisable on September 15,2005, or within 60 days thereafter.

 

(6)           Includes 175,000 shares of common stockunderlying unexercised options that were exercisable on September 15,2005, or within 60 days thereafter.

 

(7)           Includes 114,520 shares of common stockunderlying unexercised options that were exercisable on September 15,2005, or within 60 days thereafter.

 

(8)           Includes 134,251 shares of common stockunderlying unexercised options that were exercisable September 15, 2005,or within 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.

 

34

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**Item 12. Certain Relationships And Related Transactions.**

 

Except as set forth below, the Company did not have any transactionsduring fiscal years 2005 and 2004 with any director, director nominee,executive officer, security holder known to the Company to own of record orbeneficially more than 5% of the Company’s common stock, or any member of theimmediate family of any of the foregoing persons, in which the amount involvedexceeded $60,000.

 

On March 31, 2001, the Company borrowed $400,000 from Joseph L.Simek, a significant stockholder of the Company.  The loan accrues interest at an annual rateof prime plus one percent (1%) and is secured by all of the Company’sassets.  Principal and interest paymentsof approximately $8,500 are due monthly, with the outstanding principal balancedue on October 1, 2004.  OnNovember 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’sassets.  On September 24, 2002,Mr. Simek agreed to provide the Company with an additional $200,000revolving line of credit, which is also secured by all of the Company’sassets.  Borrowings under the lines ofcredit accrue interest at an annual rate of 10%.  In January 2004, Mr. Simek and theCompany agreed to extend the maturity date of the line of credit facility toDecember 31, 2005.  In September 2004, the Company andMr. Simek agreed to extend the balloon payment on the promissory note fromOctober 1, 2004 to October 1, 2005. At June 30, 2005, $98,329 was outstanding under the $400,000loan and $150,000 was outstanding under the line of credit.

 

On September 4, 2001, the Company borrowed $500,000 from FrancisSimek, the spouse of Mr. Simek, under a five year term note.  On March 22, 2004, the Company andMrs. Simek entered into a subordinated note agreement pursuant to whichthe obligations outstanding under this note were subordinated to theobligations under our credit facilities with Laurus Master Fund Under the termsof the agreement, the existing term note was refinanced as a five year termnote with monthly principal and interest payments at 15%. The Company issued25,000 shares of restricted common stock to Mrs. Simek in considerationfor her agreement to subordinate the note. In November 2004, the Company and Mrs. Simek amended the termsof the note to change the interest rate to 10%. The loan is secured by a juniorlien on all of the Company’s assets. Principal and interest payments of $8,918 are due and payable monthlyover a 60-month period.  At June 30,2005, $327,401 was outstanding under this loan.

 

In October 2003, theCompany entered into a four year consulting services agreement withMr. Belfer pursuant to which Mr. Belfer agreed to introduce theCompany to investment banking and investor relations firms and persons/entitiesinterested in doing business with the Company. In exchange for Mr. Belfer’s agreement to provide such consultingservices, Mr. Belfer was granted a non-statutory option to purchase200,000 shares of the Company’s common stock at $0.75 per share.  The options vest over four years and have aterm of four years

 

On April 16, 2004, theCompany borrowed $500,000 from Mrs. Simek. The note is a five year term note with monthly principal and interestpayments at 15%.  In consideration foragreeing to subordinate the note, the Company issued 25,000 shares ofrestricted common stock to Mrs. Simek. The loan is secured by all of the Company’s assets.  InNovember 2004, the Company paid $456,100 to retire the remaining balanceon the note.  The Company andMrs. Simek then entered into a $500,000 revolving credit noteagreement.  Borrowings under the note

 

35

----

 

accrue interest at the rate of 10% per annum withinterest due monthly.  Unused borrowingsare subject to a 2% per annum commitment fee payable quarterly.  In May 2005, the Company borrowed$500,000 under this agreement. Subsequently, the Company and Mrs. Simek amended the agreement toprovide for a 60-month repayment period. Principal and interest payments of $10,562 are due and payable monthly. AtJune 30, 2005, $484,198 was outstanding under this loan.

 

**Item 13. Exhibits And Reports onForm 8-K.**

 

(a)           Exhibits. The exhibitsas indexed immediately following the signature page of this Report areincluded as part of this Form 10-KSB.

 

(b)           Reports onForm 8-K.

 

On May 6, 2005, the Company furnished a Current Report onForm 8-K under Item 12 thereof, containing a copy of its earnings release,dated May 5, 2005, for the period ended March 31, 2005.

 

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

 

The following table sets forthfees billed to us by our auditors during the fiscal years ended June 30,2005 and June 30, 2004 for: (i) services rendered for the audit ofour annual financial statements and the review of our quarterly financialstatements, (ii) services by our auditors that are reasonably related tothe performance of the audit or review of our financial statements and that arenot reported as Audit Fees, (iii) services rendered in connection with taxcompliance, tax advice and tax planning, and (iv) all other fees forservices rendered.

 
| ** ** | ** ** | ** **          | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|------------|------------|---------------------|------------|------------------------|------------|------------------------|------------|
| (i)        |       | Audit Fees          |       | $                      | 37,000     |                   | $          | 30,500 |   |
| (ii)       |       | Audit  Related Fees |       | —                 |       | —                 |       |
| (iii)      |       | Tax Fees            |       | $                      | 4,500      |                   | $          | 4,500 |   |
| (iv)       |       | All Other  Fees     |       | $                      | 2,800      |                   | $          | 10,000 |   |

 

AUDIT COMMITTEEPRE-APPROVAL POLICIES AND PROCEDURES 

 

Allaudit and non-audit services are pre-approved by the Audit Committee, whichconsiders, among other things, the possible effect of the performance of suchservices on the auditors’ independence. The Audit Committee pre-approves theannual engagement of the principal independent registered public accountingfirm, including the performance of the annual audit and quarterly reviews forthe subsequent fiscal year, and pre-approves specific engagements for taxservices performed by such firm. The Audit Committee has also establishedpre-approval policies and procedures for certain enumerated audit and auditrelated services performed pursuant to the annual engagement agreement,including such firm’s attendance at and participation at Board and committeemeetings; services associated with SEC registration statements approved by theBoard of Directors; review of periodic reports and other documents filed withthe SEC or other documents issued in connection with securities offerings, suchas comfort letters and consents; assistance in responding to any SEC commentsletters; and consultations with such firm as to the accounting or disclosuretreatment of transactions or events and the actual or potential impact of finalor proposed rules, standards or interpretations by the SEC, Public CompanyAccounting Oversight Board (PCAOB), Financial Accounting Standards Board(FASB), or other regulatory or standard-setting bodies. The Audit Committee isinformed of each service performed pursuant to its pre-approval policies andprocedures. The Audit Committee has considered the role of Semple & Cooperin providing services to us for the fiscal year ended June 30, 2005 and hasconcluded that such services are compatible with such firm’s independence.

 

36

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                           | TIME AMERICA, INC.                                                                       |
|--------------------------------|------------------------------------------------------------------------------------------|
|                           |                                                                                     |
|                           | /s/ Thomas S. Bednarik                                                                   |   |
|                           | Thomas S. Bednarik, President and Chief Executive  Officer (Principal Executive Officer) |
|                           |                                                                                     |
| Dated: September 28, 2005 |                                                                                     |

 

In accordance with the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 

**POWER OF ATTORNEY**

 

KNOWN ALL MEN BY THESE PRESENTS, that each person whose signatureappears below constitutes and appoints Thomas S. Bednarik and Craig J. Smith,and each of them, his true and lawful attorneys-in-fact and agents, with fullpower of substitution and resubstititon for him or her and in his or her name,place and stead, in any and all capacities, to sign any and all amendments tothis Annual Report on Form 10-KSB, and to file the same, with all exhibitsthereto, and other documents in connection therewith with the Securities andExchange Commission, granting unto said attorneys-in-fact and agents, and eachof them, full power and authority to do and perform each and every act andthing requisite and necessary to be done in and about the premises, as fullyand to all intents and purposes as he might or could do in person herebyratifying and confirming all that said attorneys-in-fact and agents, or hissubstitute or substitutes, may lawfully do or cause to be done by virtuehereof.

 
| **Signatures**          | ** ** | **Title**                     | ** **                  | **Date** |
|-------------------------|------------|-------------------------------|-----------------------------|----------|
|                    |       |                          |                        |     |
| /s/ Thomas S. Bednarik  |       |                          | President, CEO and Director |     | September 28, 2005 |
| Thomas S. Bednarik      |       | (Principal Executive Officer) |                        |     |
|                    |       |                          |                        |     |
| /s/ Craig J. Smith      |       |                          | Chief Financial Officer     |     | September 28, 2005 |
| Craig J. Smith          |       | (Principal Financial Officer) |                        |     |
|                    |       |                          |                        |     |
| /s/ Todd P. Belfer      |       |                          | Chairman of the Board       |     | September 28, 2005 |
| Todd P. Belfer          |       |                          |                        |     |
|                    |       |                          |                        |     |
| /s/ Lise M. Lambert     |       |                          | Director                    |     | September 28, 2005 |
| Lise M. Lambert         |       |                          |                        |     |
|                    |       |                          |                        |     |
| /s/ Robert W. Zimmerman |       |                          | Director                    |     | September 28, 2005 |
| Robert W. Zimmerman     |       |                          |                        |     |
|                         |            |                               |                             |          |  |  |  |  |  |

 

37

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| /s/ Robert J. Novak |   |   | Director |   | September 28, 2005 |
|---------------------|--------|--------|----------|--------|-------------------------|
| Robert J. Novak     |   |   |     |   |

 

38

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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               |       | *                                |       | —                    |
|                      |       |                                                                                                                                             |       |                             |       |                      |
| 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                      |

 

39

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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                                |       | —                    |
|                      |       |                                                                                                                                                                                                                                                        |       |                             |       |                      |
| 10.14                     |       | Security Agreement dated September 4, 2001 between  Vitrix, Inc. and Frances L. Simek                                                                                                                                                             |       | J                                |       | —                    |
|                      |       |                                                                                                                                                                                                                                                        |       |                             |       |                      |
| 10.15                     |       | Warrant to purchase common stock agreement dated September 4,  2001 between Vitrix, Inc. and Frances L. Simek                                                                                                                                     |       | J                                |       | —                    |
|                      |       |                                                                                                                                                                                                                                                        |       |                             |       |                      |
| 10.16                     |       | Promissory Note Agreement, dated March 31, 2001 between Time  America, Inc and Joseph L. Simek                                                                                                                                                         |       | K                                |       | —                    |
|                      |       |                                                                                                                                                                                                                                                        |       |                             |       |                      |
| 10.17                     |       | Revolving Credit Agreement, dated November 2, 2001 between  Vitrix, Inc and Joseph L. Simek                                                                                                                                                            |       | K                                |       | —                    |
|                      |       |                                                                                                                                                                                                                                                        |       |                             |       |                      |
| 10.18                     |       | Securities Purchase Agreement, dated March 22, 2004, among Time  America, Inc. and Laurus Master Fund, Ltd.                                                                                                                                       |       | L                                |       | —                    |
|                      |       |                                                                                                                                                                                                                                                        |       |                             |       |                      |
| 10.19                     |       | Secured Convertible Term Note, dated March 22, 2004, among Time  America, Inc. and Laurus Master Fund, Ltd.                                                                                                                                       |       | L                                |       | —                    |
|                      |       |                                                                                                                                                                                                                                                        |       |                             |       |                      |
| 10.20                     |       | Common Stock Purchase Warrant, dated March 22, 2004, issued to  Laurus Master Fund, Ltd.                                                                                                                                                               |       | L                                |       | —                    |

 

40

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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                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.22                     |       | Subordination Agreement, dated March 22, 2004, among Time  America, Inc., Laurus Master Fund, Ltd and Joseph and Frances Simek                                                                                       |       | L                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.23                     |       | Registration Rights Agreement, dated March 22, 2004, among Time  America, Inc. and Laurus Master Fund, Ltd.                                                                                                          |       | L                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.24                     |       | Guarantee, dated March 22, 2004, issued by Time  America, Inc. in favor of Laurus Master Fund, Ltd.                                                                                                                  |       | L                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.25                     |       | Stock Pledge Agreement, dated March 22, 2004, among Time  America, Inc. and Laurus Master Fund, Ltd.                                                                                                                 |       | L                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.26                     |       | Note Purchase Agreement, dated April 16, 2004 between Time  America, Inc. and Frances L. Simek                                                                                                                       |       | M                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.27                     |       | Promissory Note Agreement, dated April 16, 2004 between Time  America, Inc. and Frances L. Simek                                                                                                                     |       | M                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.28                     |       | Security Agreement, dated April 16, 2004 between Time  America, Inc. and Frances L. Simek                                                                                                                            |       | M                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.29                     |       | Consulting Services Agreement, dated October 15, 2003, between  Vitrix, Inc. and Todd P. Belfer                                                                                                                      |       | *                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 10.30                     |       | Bonus Plan Document with Tom Bednarik, effective as of  January 1, 2005                                                                                                                                                   |       | *                                |       | —                    |
|                      |       |                                                                                                                                                                                                                           |       |                             |       |                      |
| 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) |       | *N                               |       | —                    |

 

41

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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)                               |       | *N                               |       | —                    |
|                      |       |                                                                                                                                                                                                       |       |                             |       |                      |
| 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) |       | *N                               |       | —                    |
|                      |       |                                                                                                                                                                                                       |       |                             |       |                      |
| 10.34                     |       | Amendment, dated as of August 29, 2005, between Federal Express  Corporation and Time America, Inc. (certain portions deleted pursuant to  confidential treatment)                               |       | *N                               |       | —                    |
|                      |       |                                                                                                                                                                                                       |       |                             |       |                      |
| 10.35                     |       | Letter Agreement, dated February 17, 2000, between Vitrix  Incorporated and Thomas S. Bednarik                                                                                                        |       | *                                |       | —                    |
|                      |       |                                                                                                                                                                                                       |       |                             |       |                      |
| 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 StatementNo. 33-25704-NY.

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

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

D.    Form 8-K Current Report reporting eventon June 28, 1996.

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

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

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

H.    Form 8-K Current Report reporting eventon April 13, 2001.

I.      Form 8-K Current Report reporting eventon June 6, 2001.

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

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

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

 

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

N.    The Company has sought confidential treatmentof portions of the referenced exhibits.

 

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