**U.S.SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM10-QSB**

x                QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

           For the quarterly period ended **September 30, 2006**

o                   TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition periodfrom _______________ to _______________

Commission File number **001-10320**

**Time America, Inc.**(Exact name of small business issuer as specified in itscharter)

| **Nevada**                       | ** ** | **13-3465289**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation of  organization)  |       | Identification  No.) |

 

**8840 EastChaparral Road, Suite 100, Scottsdale, AZ 85250**(Address of principal executive offices)

**(480) 296-0400**(Issuer’s telephone number)

**N/A**(Former name, former address and former fiscal year, ifchanged since last report)

Check whether the issuer:(1) filed all 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 to suchfiling requirements for the past 90 days.     Yes x         No o

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

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date: At November 8, 2006, the issuer had outstanding15,004,404 shares of Common Stock, par value $.005 per share.

Transitional SmallBusiness Disclosure Format:  Yes o  No x

 

 

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**PART I — FINANCIAL INFORMATION**

**Item1 — Financial Statements.**

**TIME AMERICA, INC.AND SUBSIDIARIES**CONSOLIDATEDBALANCE SHEETS
| ** **                                                                                                                   | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------|------------|
| ** **                                                                                                                   | ** ** | **2006**               | ** ** | **2006**     | ** ** |
| ** **                                                                                                                   | ** ** | **(Unaudited)**        | ** ** | ** **   | ** ** |
| **ASSETS**                                                                                                                   | ** ** | ** **             | ** ** | ** **   | ** ** |
| **Current Assets:**                                                                                                          |       |                   |       |         |       |
| Cash and cash  equivalents                                                                                                   |       | $                      | 425,637    |         | $          | 615,204 |   |
| Accounts  receivable — trade, net                                                                                       |       | 1,746,633              |       | 2,289,678    |       |
| Inventory                                                                                                                    |       | 751,004                |       | 653,159      |       |
| Deferred loan  costs and other current assets                                                                                |       | 338,717                |       | 315,226      |       |
|                                                                                                                         |       |                   |       |         |       |
| **Total  Current Assets**                                                                                                    |       | 3,261,991              |       | 3,873,267    |       |
|                                                                                                                         |       |                   |       |         |       |
| **Property and equipment, net**                                                                                              |       | 465,604                |       | 502,309      |       |
| **Other Assets**                                                                                                             |       | 141,392                |       | 202,952      |       |
|                                                                                                                         |       |                   |       |         |       |
| **Total  Assets**                                                                                                            |       | $                      | 3,868,987  |         | $          | 4,578,528 |   |
|                                                                                                                         |       |                   |       |         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                     | ** ** | ** **             | ** ** | ** **   | ** ** |
|                                                                                                                         |       |                   |       |         |       |
| **Current Liabilities:**                                                                                                     |       |                   |       |         |       |
| Current portion  of long-term debt                                                                                           |       | $                      | 2,162,572  |         | $          | 2,081,122 |   |
| Accounts payable                                                                                                             |       | 698,756                |       | 688,623      |       |
| Accrued  liabilities                                                                                                         |       | 732,658                |       | 739,958      |       |
| Deferred revenue                                                                                                             |       | 831,291                |       | 944,372      |       |
|                                                                                                                         |       |                   |       |         |       |
| **Total  Current Liabilities**                                                                                               |       | 4,425,277              |       | 4,454,075    |       |
|                                                                                                                         |       |                   |       |         |       |
| **Long-term debt, less current  portion**                                                                                    |       | 1,980,088              |       | 2,192,472    |       |
|                                                                                                                         |       |                   |       |         |       |
| **Total  Liabilities**                                                                                                       |       | 6,405,365              |       | 6,646,547    |       |
|                                                                                                                         |       |                   |       |         |       |
| **Common stock subject to  registration rights (351,923 shares)**                                                            |       | 207,635                |       | 207,635      |       |
|                                                                                                                         |       |                   |       |         |       |
| **Commitments:**                                                                                                             |       | —                 |       | —       |       |
|                                                                                                                         |       |                   |       |         |       |
| **Stockholders’ Equity (Deficit):**                                                                                     |       |                   |       |         |       |
| Common stock,  $.005 par value, 50,000,000 shares authorized;  14,652,481 and 14,652,481 shares issued and  outstanding |       | 73,263                 |       | 73,263       |       |
| Contributed  capital                                                                                                         |       | 9,647,883              |       | 9,591,098    |       |
| Accumulated  deficit                                                                                                         |       | (12,465,159            | )          | (11,940,015  | )          |
|                                                                                                                         |       |                   |       |         |       |
| **Total  Stockholders’ Equity (Deficit)**                                                                               |       | (2,744,013             | )          | (2,275,654   | )          |
|                                                                                                                         |       |                   |       |         |       |
| **Total Liabilities and  Stockholders’ Equity (Deficit)**                                                               |       | $                      | 3,868,987  |         | $          | 4,578,528 |   |

 

See Notes toConsolidated Financial Statements

 

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**TIME AMERICA, INC.AND SUBSIDIARIES**CONSOLIDATEDSTATEMENTS OF OPERATIONS(UNAUDITED)

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **September 30,**           | ** ** |
| ** **                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(unaudited)**                  | ** ** | **(unaudited)** | ** ** |
| **Revenues:**                                      |       |                             |       |   |   |
| Product sales                                      |       | $                                | 1,056,035  |   | $ | 1,017,564 |   |
| Services revenue                                   |       | 394,557                          |       | 453,249 |   |
|                                               |       |                             |       |   |   |
| **Total  Revenues**                                |       | 1,450,592                        |       | 1,470,813 |   |
|                                               |       |                             |       |   |   |
| **Cost of  Revenues:**                             |       |                             |       |   |   |
| Product                                            |       | 521,415                          |       | 534,431 |   |
| Services                                           |       | 178,641                          |       | 212,759 |   |
|                                               |       |                             |       |   |   |
| **Total Cost of Revenues**                         |       | 700,056                          |       | 747,190 |   |
|                                               |       |                             |       |   |   |
| **Gross  Profit**                                  |       | 750,536                          |       | 723,623 |   |
|                                               |       |                             |       |   |   |
| **Costs  and Expenses:**                           |       |                             |       |   |   |
| Sales and marketing                                |       | 349,045                          |       | 594,356 |   |
| Research and development                           |       | 465,302                          |       | 364,616 |   |
| General and administrative                         |       | 376,154                          |       | 337,880 |   |
|                                               |       |                             |       |   |   |
| **Total Costs and Expenses**                       |       | 1,190,501                        |       | 1,296,852 |   |
|                                               |       |                             |       |   |   |
| **Net  Loss from Operations**                      |       | (439,965                         | )          | (573,229 | ) |
|                                               |       |                             |       |   |   |
| **Other  Income (Expense):**                       |       |                             |       |   |   |
| Interest expense                                   |       | (197,532                         | )          | (176,416 | ) |
| Other                                              |       | 109,672                          |       | 31,504 |   |
| Interest income                                    |       | 2,681                            |       | 5,866 |   |
|                                               |       |                             |       |   |   |
|                                               |       | (85,179                          | )          | (139,046 | ) |
|                                               |       |                             |       |   |   |
| **Net  Loss**                                      |       | $                                | (525,144   | ) | $ | (712,275 | ) |
|                                               |       |                             |       |   |   |
| **Basic  and Diluted Loss per Share**              |       | $                                | (0.04      | ) | $ | (0.05 | ) |
|                                               |       |                             |       |   |   |
| **Weighted  Average Number of Shares Outstanding** |       | 14,652,481                       |       | 14,262,077 |   |

 

See Notes toConsolidated Financial Statements

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**TIME AMERICIA,INC. AND SUBSIDIARIES**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)FOR THE YEAR ENDED JUNE 30, 2006 ANDTHE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2006 (Unaudited)

 
| ** **                              | ** ** | **Common Stock** | ** ** | **Contributed** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|
| ** **                              | ** ** | **Shares**            | ** ** | **Amount**      | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                    |       |                  |       |            |       |            |       |        |       |   |   |
| Balance at June  30, 2005               |       | 14,251,552            |       | $               | 71,258     |            | $          | 9,269,497   |       | $ | (9,994,280 | ) | $ | (653,525 | ) |
|                                    |       |                  |       |            |       |            |       |        |       |   |   |
| Exercise of  stock options              |       | 4,500                 |       | 22              |       | 1,653           |       | —      |       | 1,675 |   |
| Conversion of  debt to common stock     |       | 446,429               |       | 2,233           |       | 247,767         |       | —      |       | 250,000 |   |
| Induced  conversion of debt             |       | —                |       | —          |       | 40,179          |       | —      |       | 40,179 |   |
| Transfer of  warrants to liability      |       | —                |       | —          |       | (102,900        |       | —      |       | (102,900 | ) |
| Share-based  awards compensation        |       | —                |       | —          |       | 129,183         |       | —      |       | 129,183 |   |
| Recission of  common stock for services |       | (50,000               | )          | (250            | )          | (31,250         | )          | —      |       | (31,500 | ) |
| Issuance of  common stock warrants      |       | —                |       | —          |       | 36,969          |       | —      |       | 36,969 |   |
| Net loss                                |       | —                |       | —          |       | —          |       | (1,945,735  | )          | (1,945,735 | ) |
| Balance at June  30, 2006               |       | 14,652,481            |       | 73,263          |       | 9,591,098       |       | (11,940,015 | )          | (2,275,654 | ) |
|                                    |       |                  |       |            |       |            |       |        |       |   |   |
| Share-based  awards compensation        |       | —                |       | —          |       | 56,785          |       | —      |       | 56,785 |   |
| Net loss                                |       | —                |       | —          |       | —          |       | (525,144    | )          | (525,144 | ) |
| Balance at September  30, 2006          |       | 14,652,481            |       | $               | 73,263     |            | $          | 9,647,883   |       | $ | (12,465,159 | ) | $ | (2,744,013 | ) |

 

See Notes to Consolidated Financial Statements

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**TIME AMERICA, INC.AND SUBSIDIARIES**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**           | ** ** |
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Increase  (Decrease) in Cash and Cash Equivalents:**                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                    |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (525,144   | ) | $ | (712,275 | ) |
| Adjustments to reconcile net loss to net cash used  by operating activities: |       |                             |       |   |   |
| Depreciation                                                                 |       | 41,147                           |       | 26,684 |   |
| Amortization of discounts and deferred financing  costs                      |       | 75,618                           |       | 71,886 |   |
| Share based compensation expense                                             |       | 56,785                           |       | 53,487 |   |
| Induced conversion of debt charge                                            |       | —                           |       | 40,179 |   |
| Changes in Assets and Liabilities:                                           |       |                             |       |   |   |
| Accounts receivable-trade                                                    |       | 543,045                          |       | (48,795 | ) |
| Inventory                                                                    |       | (97,845                          | )          | (120,201 | ) |
| Deferred loan costs and other current assets                                 |       | (23,491                          | )          | (19,234 | ) |
| Accounts payable                                                             |       | 10,133                           |       | 55,358 |   |
| Accrued liabilities                                                          |       | (7,300                           | )          | 66,952 |   |
| Deferred revenue                                                             |       | (113,081                         | )          | (8,072 | ) |
| **Net cash used by operating activities**                                    |       | (40,133                          | )          | (594,031 | ) |
|                                                                         |       |                             |       |   |   |
| **Cash flows from investing activities:**                                    |       |                             |       |   |   |
| Purchase of property and equipment                                           |       | (4,442                           | )          | (62,164 | ) |
| **Net cash used by investing activities**                                    |       | (4,442                           | )          | (62,164 | ) |
|                                                                         |       |                             |       |   |   |
| **Cash flows from financing activities:**                                    |       |                             |       |   |   |
| Repayment of debt                                                            |       | (163,333                         | )          | (62,324 | ) |
| Proceeds from exercise of options and warrants                               |       | —                           |       | 1,600 |   |
| Proceeds from debt                                                           |       | 18,341                           |       | — |   |
| **Net cash used by financing activities**                                    |       | (144,992                         | )          | (60,724 | ) |
|                                                                         |       |                             |       |   |   |
| Net change in  cash and cash equivalents                                     |       | (189,567                         | )          | (716,919 | ) |
|                                                                         |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 615,204                          |       | 1,361,717 |   |
|                                                                         |       |                             |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                                | 425,637    |   | $ | 644,798 |   |
|                                                                         |       |                             |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       |       |                             |       |   |   |
| Interest paid                                                                |       | $                                | 117,968    |   | $ | 99,336 |   |
| Income taxes  paid                                                           |       | $                                | —     |   | $ | — |   |

 

See Notes toConsolidated Financial Statements

 

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## **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Note A -Basis of Presentation and Interim Consolidated Financial Statements**

Time America, Inc.is a holding corporation.  Our operationsare conducted through our wholly-owned subsidiaries, one of which is also namedTime America, Inc.  Our other subsidiaryis NetEdge Devices, LLC.  Unless thecontext indicates otherwise, references to the Company in this report shallinclude both Time America (the parent company organized in Nevada), TimeAmerica (our wholly-owned subsidiary organized in Arizona) and NetEdge DevicesLLC.

The accompanying unaudited consolidated financialstatements of Time America, Inc. and subsidiaries have been prepared inaccordance with generally accepted accounting principles (“GAAP”), pursuant tothe rules and regulations of the Securities and Exchange Commission, and areunaudited.  Accordingly, they do notinclude all the information and footnotes required by GAAP for completefinancial statements.  In the opinion ofmanagement, all adjustments (which include only normal recurring adjustments)necessary for a fair presentation of the results for the interim periodspresented have been made.  The resultsfor the three month period ended September 30, 2006, may not be indicative ofthe results for the entire year.  Thesefinancial statements should be read in conjunction with the Company’s AnnualReport on Form 10-KSB for the fiscal year ended June 30, 2006.

The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from these estimates.

**Note B -Income (Loss) Per Share:**

Basicincome (loss) per share of common stock wascomputed by dividing the net income (loss) by the weighted average number ofshares of common stock outstanding during the period.

Dilutedearnings per share are computed based on the weighted average number of sharesof common stock and dilutive securities outstanding during the period.  Dilutive securities are options and warrantsthat are freely exercisable into common stock at less than the prevailingmarket price. Dilutive securities are not included in the weighted averagenumber of shares when inclusion would increase the earnings per share ordecrease the loss per share.

**Note C - Stock BasedCompensation:**

Prior to July 1, 2005,the Company accounted for stock-based compensation arrangements in accordancewith the provisions of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” (“APB 25”). Accordingly, compensation expense, if any, was measured as the excess ofthe underlying stock price over the exercise price on the date of grant.  The Company complied with the disclosureprovisions of Statement of Financial Accounting Standards Board No. 123 (“SFAS123”) “Accounting for Stock Based Compensation” as amended by SFAS 148 “Accountingfor Stock-Based Compensation-Transition and Disclosure,” which requiredpro-forma disclosure of compensation expense associated with stock optionsunder the fair value method.

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Effective July 1, 2005,the Company adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards Board No. 123(R), “Share—Based Payment,” usingthe modified prospective-transition method. Under this transition method, compensation expense recognized for thethree months ended September 30 of fiscal year 2007 includes:  (a) compensation expense for all share-basedpayments granted prior to, but not yet vested as of June 30, 2005 based on thegrant date fair value estimated and (b) compensation expense for allshare-based payments granted subsequent to June 30, 2005, based on the grantdate fair value estimated in accordance with the provisions of SFAS 123(R).  Results for prior periods have notbeen restated.  The fair value of option grants is estimatedas of the date of grant utilizing the Black-Scholes option-pricing model andamortized to expense over the options’ vesting period.

Asa result of the adoption of SFAS 123(R), the Company’s net loss for the three monthperiods ended September 30, 2006 and 2005 is $56,785 and $53,487, respectively,greater than if it had continued to account for share-based compensation underAPB 25.

**Note D - Long-term Debt:**

In August 2006, the Company amended the terms ofthe term note with Laurus Master Funds (“Laurus”) to change the monthlyprincipal payment for the period of September 2006 through February 2007 from$66,667 to $30,000.  The deferredprincipal amount has been added as a balloon payment at the end of the term.

In July 2006,the Company amended the terms of the note agreements with Frances Simek todefer the monthly principal payments for the period of July 2006 throughDecember 2006.  The amortization periodof the note was increased by six months to compensate for the deferredprincipal payments.

**Note E - New Accounting Pronouncements:**

InSeptember 2006, the Financial Accounting Standard Board issued a Statementof Financial Accounting Standards SFAS No. 157 (“SFAS 157”). TheStatement defines fair value, establishes a framework for measuring fair valuein generally accepted accounting principles (GAAP), and expands disclosuresabout fair value measurements.  ThisStatement is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. The adoption of SFAS 157 is not expected to have a material affect onour financial position or results of operations.

**Note F - Asset Sale**

Effective March 31, 2006 the Company closed on the sale of certain of theCompany’s direct sales assets pursuant to the terms of an Asset PurchaseAgreement (the “Purchase Agreement”). Under the terms of the PurchaseAgreement, certain assets associated with the Company’s direct sales businesswere sold, including a copy of the source code and other intellectual propertyrelating to the Company’s NETtime, HourTrack and GENESIS time and attendancesoftware products, related ASP and maintenance contracts, and certain specifieddirect channel sales opportunities.

The sale generated cash to the Company at closing of approximately$530,000. The purchase price under the Purchase Agreement included cash payableto the Company at the closing in consideration for a copy of 

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the source code and related intellectual property. The consideration forthe ASP and maintenance contracts was determined based on multiples of theprojected annualized revenues under such contracts. At closing, the Companyreceived in cash 100% of the total consideration for the customer ASP contractsand 40% of the total consideration for the maintenance contracts.  The remaining consideration for themaintenance contracts is payable quarterly over the next 14 months. The Companywill also be transitioning over additional ASP customers over the next sixmonths, which the Company will be paid for at the time of such transfers.  Additionally, for the 12-month periodfollowing the closing, the Company will receive monthly royalty payments equalto 27.5% of the revenues in connection with direct channel sales opportunitiesspecified at closing

**Note G - Basis of Presentation and Going Concern:**

ThroughSeptember 30, 2006, the Company had sustained recurring losses from operations,and as of September 30, 2006, the Company estimates that its working capitaland funds generated from operations are sufficient to fund the Company’soperations for the next three months. These conditions raise substantial doubt about the ability of theCompany to continue as a going concern. During fiscal 2007, the Company expects to meet its working capital andother cash requirements with its current cash reserves, cash generated fromoperations, its borrowing capacity under its two credit facilities, and otherfinancing as required.  While the Companybelieves that it will succeed in attracting additional capital, there can be noassurance that the Company’s efforts will be successful.  The Company’s continued existence isdependent upon its ability to achieve and maintain profitable operations bycontrolling expenses.  However, there canbe no assurance that the Company’s efforts to achieve and maintain profitableoperations will be successful.  Thefinancial statements do not include any adjustments that might result from theoutcome of these uncertainties.

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**Item 2.Management’s Discussion And Analysis of Financial Condition and Results ofOperations.**

### **Critical Accounting Policies**

Our significantaccounting policies are described in the audited consolidated financialstatements and notes thereto includedin our Annual Report on Form 10-KSB for the year ended June 30, 2006.  We believe our most critical accountingpolicies are revenue recognition, software development costs, allowance forpotentially uncollectible accounts receivable and valuation of stock-basedcompensation.

We license software and sell data collectionhardware and related ancillary products to end-user customers through ourdirect sales force as well as reseller channel customers through independentresellers. Our software license revenue is earned from perpetual licenses of off-the-shelfsoftware requiring no or minor modification or customization. The softwarelicense, data collection hardware and related ancillary product revenues fromour end-user customers and reseller channel customers are generally recognizedwhen:

·                  Persuasive evidence of an arrangement exists,which is typically when a non-cancelable sales and software license agreementor purchase order has been signed;

·                  Delivery, which is typically FOB shippingpoint, is complete for the software (either physically or electronically), datacollection hardware and related ancillary products;

·                  The customer’s fee is deemed to be fixed ordeterminable and free of contingencies or significant uncertainties;

·                  Collectibility is probable; and

·                  Objective evidence of fair value exists forall undelivered elements, typically maintenance and professional services.

Thefair value of the undelivered elements is deferred and the remaining portion ofthe arrangement fee is allocated to the delivered elements and is recognized asrevenue, assuming all other conditions for revenue recognition have beensatisfied. Substantially all of our sales agreements contain allocations of thepurchase price among the various elements of the arrangement.  If we cannot determine the fair value of anyundelivered element included in an arrangement, we will defer revenue until allelements are delivered, services are performed or until fair value can beobjectively determined.

Aspart of an arrangement, end-user customers typically purchase maintenancecontracts 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 are typicallyfor implementation, installation of the software and data collection hardware,training, building interfaces and custom features, and running test data.

Revenuesfrom maintenance services are recognized ratably over the term of themaintenance contract period, which is usually one year.  Maintenance services are typically statedseparately in an arrangement. We have classified the value of revenuespertaining to the contractual maintenance obligations that exist for the12-month period subsequent to the balance sheet date as a current liability,and the contractual obligations with a term beyond 12 months, if present, as anon-current liability.

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Revenuesfrom customer support services are recognized as the services aredelivered.  Revenues from professionalservices are generally recognized based on vendor-specific objective evidenceof fair value when:

·                  A non-cancelable agreement for the serviceshas been signed or a customer’s purchase order has been received;

·                  The professional services have beendelivered;

·                  The customer’s fee is deemed to be fixed ordeterminable and free of contingencies or significant uncertainties; and

·                  Collectibility is probable.

Vendor-specificobjective evidence of fair value is based upon the price charged when theseservices are sold separately and are typically an hourly rate for professionalservices and a per-class rate for training. Based upon our experience incompleting professional services, we have determined that these services aretypically delivered within a 12-month period subsequent to the contract signingand therefore we classify deferred professional services as a currentliability.

Ourarrangements with end-user customers and reseller channel customers do notinclude any rights of return or price protection, nor do arrangements withreseller channel customers 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.

Atthe time we enter into an arrangement, we assess the probability of collectionof the fee and the terms granted to the customer.  For end-user customers, the 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. Ourpayment terms for reseller channel customers are typically due within 30 daysof the invoice date.

Ifthe arrangement includes a substantive acceptance provision, we defer revenuenot meeting the criterion for recognition under Statement of Position 97-2, “SoftwareRevenue Recognition,” and classify this revenue as deferred revenue, includingdeferred product revenue. This revenue is recognized, assuming all otherconditions for revenue recognition have been satisfied, when the uncertaintyregarding acceptance is resolved as generally evidenced by written acceptanceor payment of the arrangement fee. If the payment terms for the arrangement areconsidered extended, we defer revenue on the arrangement until the payment ofthe arrangement fee becomes due. The deferred amounts related to arrangementswith extended payment terms are removed from deferred revenue and accountsreceivable, as we have determined that these amounts do not represent eitherreceivables or deferred revenue until the payment becomes due. We report theallocated fair value of revenues related to the product element of arrangementsas a current liability because of the expectation that these revenues will berecognized within 12 months of the balance sheet date.

Wecapitalize software development costs in accordance with Statement of FinancialAccounting Standards No. 86, “Accounting for the Costs of Computer Software tobe Sold, Leased, or Otherwise Marketed.” Capitalization of software developmentcosts begins upon the establishment of technological feasibility of theproduct.  The establishment of technological feasibility and the ongoingassessment of the recoverability of these costs requires considerable judgmentby 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 ofcapitalized software development costs begins when the products are availablefor general release to customers and is computed on a product-by-product basisusing straight-line amortization with useful lives of five years or, if less,the remaining 

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estimated economic life ofthe product.  Amounts related to internal software development that couldbe capitalized under this statement were deemed immaterial for the periodspresented.

We provide forpotentially uncollectible accounts receivable by use of the allowancemethod.  The allowance is provided basedupon a review of the individual accounts outstanding, and our prior history ofuncollectible accounts receivable.  It is our practice to record anestimated allowance for sales returns and adjustments based on historicalexperience and to record individual charges for sales returns and adjustmentsdirectly to revenue as incurred.

  Determiningthe appropriate fair value model and calculating the fair value of share-basedpayment awards requires the input of highly subjective assumptions, includingthe expected life of the share-based payment awards and stock price volatility.The assumptions used in calculating the fair value of share-based paymentawards represent management’s best estimates, but these estimates involveinherent uncertainties and the application of management judgment. As a result,if factors change and we use different assumptions, our stock-basedcompensation expense could be materially different in the future. In addition,we are required to estimate the expected forfeiture rate and only recognizeexpense for those shares expected to vest. If our actual forfeiture rate ismaterially different from our estimate, the stock-based compensation expensecould be significantly different from what we have recorded in the currentperiod.

### **Results of Operations for the Three MonthsEnded September 30, 2006**

*Revenues:*
| ** ** | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|------------|------------|----------------------------------|------------|------------------------------|------------|
| ** ** | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** | **Percent   Change** | ** ** |
| Revenues   |       | $                                | 1,450,592  |                         | $          | 1,470,813 |   | (1 | %) |
|            |            |                                  |            |                              |            |  |  |  |  |

 

See “ProductSales” and “Service Revenue” below for a discussion regarding the change.

*ProductSales:*
| ** **                                    | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** | **Percent   Change** | ** ** |
| Product sales                                 |       | $                                | 1,056,035  |                         | $          | 1,017,564 |   | 4 | % |
| Product sales as a  percent of total revenues |       | 73                               | %          | 69                           | %          | — |   |
|                                               |            |                                  |            |                              |            |  |  |  |  |

 

Productsales have remained relatively flat over the three months ended September 30,2006.

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*ServiceRevenue:*
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** | **Percent   Change** | ** ** |
| Service revenue                                 |       | $                                | 394,557    |                         | $          | 453,249 |   | (13 | %) |
| Service revenue as a  percent of total revenues |       | 27                               | %          | 31                           | %          | — |   |
|                                                 |            |                                  |            |                              |            |  |  |  |  |

 

Thedecrease in our service revenue in the current quarter was primarilyattributable to approximately a $72,000 decrease in maintenance revenue and a$37,000 decrease in implementation and training revenue as a result of the saleof certain maintenance contracts on March 31, 2006.  This decrease was partially offset by an increaseof approximately $50,000 in our NETtime software service revenue over the prioryear period.

*GrossProfit:*

|                       | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** |
| Product gross  margin |       | 51                               | %          | 47 | % |
| Service gross  margin |       | 55                               | %          | 53 | % |
| Total gross margin    |       | 52                               | %          | 49 | % |

 

Ourgross profit percentage on products is typically between 50% to 60% dependingupon the mix of software versus hardware sales and the makeup of hardwaresales.  Our product revenue is comprisedof software and hardware sales, with hardware sales yielding a significantlylower gross profit than software sales.  Hardware revenue is primarily derived from the sale of two versions ofgeneral data collection terminals, badge terminals and biometric units.  The gross profit is greater on badgeterminals than biometric units because we add value to our badge terminals byinstalling software on the terminals.

Ourgross profit percentage on services revenue was relatively flat for bothperiods presented.

*OperatingExpenses:*
| ** **                                               | ** ** | **Three Months Ended**   | ** ** | ** **                         | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **September 30,   2006** | ** ** | **September 30,   2005** | ** ** | **Percent   Change** | ** ** |
| Total costs and  expenses                                |       | $                                  | 1,190,501  |                               | $          | 1,296,852 |   | (8 | %) |
| Total costs and  expenses as a percent of total revenues |       | 82                                 | %          | 88                                 | %          | — |   |
|                                                          |            |                                    |            |                                    |            |  |  |  |  |

 

*Sales and Marketing Expense:*
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** | **Percent   Change** | ** ** |
| Sales and  marketing expense                                |       | $                                | 349,045    |                         | $          | 594,356 |   | (41 | %) |
| Sales and marketing  expense as a percent of total revenues |       | 24                               | %          | 40                           | %          | — |   |
|                                                             |            |                                  |            |                              |            |  |  |  |  |

 

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The decrease insales and marketing expenses in the current quarter is primarily attributableto lower costs as the result of the sale of the majority of our direct salesoperations on March 31, 2006.  As aresult of this sale, our sales and marketing labor expense decreased byapproximately $143,000 and our advertising and promotion expenses decreased byapproximately $100,000.

*Research and Development Expense:*
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                                       | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** | **Percent   Change** | ** ** |
| Research and  development expense                                |       | $                                | 465,302    |                         | $          | 364,616 |   | 28 | % |
| Research and  development expense as a percent of total revenues |       | 32                               | %          | 25                           | %          | — |   |
|                                                                  |            |                                  |            |                              |            |  |  |  |  |

 

Theincrease in research and development expenses is primarily attributable tolabor and other costs associated with the development of our custom solution toa Fortune 100 company, development in our data collection terminal andenhancement of our software offerings.

*Generaland Administrative Expense:*
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                                         | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** | **Percent   Change** | ** ** |
| General and  administrative expense                                |       | $                                | 376,154    |                         | $          | 337,880 |   | 11 | % |
| General and  administrative expense as a percent of total revenues |       | 26                               | %          | 23                           | %          | — |   |
|                                                                    |            |                                  |            |                              |            |  |  |  |  |

 

The increase ingeneral and administrative expenses is primarily due to increased accountingfees and expenses associated with the preparation and filing of a registrationstatement in the current quarter.

Other Expense:
| ** **                                    | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** | **Percent   Change** | ** ** |
| Other expense                                 |       | $                                | 85,179     |                         | $          | 139,046 |   | (39 | %) |
| Other expense as a  percent of total revenues |       | 6                                | %          | 10                           | %          | — |   |
|                                               |            |                                  |            |                              |            |  |  |  |  |

 

Otherincome (expense) consists primarily of interest expense and other income on thegainon sale of assets.  The decrease in other expense isprimarily due an to increase in other income from the gain on sale of assetsthat occurred on March 31, 2006.  We arerecognizing the gain on the sale of certain of those assets over a 12-monthperiod and are also recording a gain based on maintenance contract renewalsduring the period.

 

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# **Liquidity and Capital Resources**

Cash Flow Highlights:
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **2006**                                                 | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Net cash from  operations           |       | $                                                        | (40,133    | )              | $          | (594,031 | ) | 93 | % |
| Purchase of property  and equipment |       | $                                                        | (4,442     | )              | $          | (62,164 | ) | 93 | % |
| Repayment of debt                   |       | $                                                        | (163,333   | )              | $          | (62,324 | ) | (162 | %) |
| Proceeds from debt                  |       | $                                                        | 18,341     |           | $          | — |   | n/a |   |
| Net change is cash                  |       | $                                                        | (189,567   | )              | $          | (716,919 | ) | 74 | % |
| Cash at end of period               |       | $                                                        | 425,637    |           | $          | 644,798 |   | (34 | %) |

 

AtSeptember 30, 2006, we had a working capital deficit of $1,163,286, compared toworking capital of $580,808 at June 30, 2006. Cash and cash equivalents at those dates amounted to $425,637 and$615,204, respectively.  We have fundedour operations for the past six years primarily through a combination of salesof equity securities and debt financing.

*Operations*.  The net cash used from operations in thecurrent period was primarily attributable to the net loss of $525,144.  Included in the net loss was a total of$173,550 of non-cash charges.  Alsocontributing to the net cash used was a decrease in deferred revenue of$113,081.  Net cash used during thisperiod was partially offset by a decrease in accounts receivable of $543,045.

*Investment Activities*. Our use ofcash for property and equipment includes investments in information systems andinfrastructure to support operations.

*Financing Activities*   Our repayment of debt in the current periodincreased from the prior year period as we are carrying over $1,000,000 inadditional debt compared to the prior year quarter.

Ourliquidity is affected by many factors, some based on the normal ongoingoperations of our business and others related to the uncertainties of the timeand attendance industry and global economies. Although our cash requirements will continue to fluctuate based on thetiming and extent of these factors, we believe that our current cash reserves,cash generated from operations, recent financings, and our borrowing capacityunder our two credit facilities, will be sufficient to satisfy commitments for capitalexpenditures and other cash requirements for the next three months. AtSeptember 30, 2006 we had 

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approximately$1,170,000 outstanding under our $1,500,000 revolving note.  Wecan borrow up to the $1,500,000 limit assuming we have sufficient eligibleaccounts receivable and inventory balances. We also have $250,000 in unused capacity under a line of credit with ashareholder of the Company.

The ability toraise additional capital in public or private markets will primarily bedependent upon prevailing market conditions and the demand for our products andservices.  No assurance can be given thatwe will be able to raise additional capital, when needed or at all, or thatsuch capital, if available, will be on acceptable terms. In the absence of obtainingadditional financing, the Company may be unable to fund its operations and mayexperience defaults under certain of its contractual agreements, including ourcredit facilities and lease agreements for our corporate headquarters.  Our lease agreements are subject totermination in the event of a default. Certain of the parties to these agreements could take legal actionagainst the Company to collect amounts owed to them.  Accordingly, the Company’s financialcondition could require that the Company seek the protection of applicablereorganization laws in order to avoid or delay actions by third parties, whichcould materially adversely affect, interrupt or cause the cessation of theCompany’s operations. As a result, the Company’s independent certified publicaccountants have issued a going concern opinion on the consolidated financialstatements of the Company for the fiscal year ended June 30, 2006.

**Item3. Controls and Procedures.**

As of the end of the period covered by this report, the Company carriedout an evaluation, under the supervision and with the participation of itsChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe Company’s disclosure controls and procedures. Disclosure controls andprocedures are designed to ensure that information required to be disclosed inthe periodic reports filed or submitted under the Securities Exchange Act of1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of the end of the quarterly period covered by thisreport.  No change in the internalcontrol over financial reporting occurred during the last fiscal quarter thathas materially affected, or is reasonably likely to materially affect, theinternal control over financial reporting.

# **FORWARD-LOOKING INFORMATION**

The statementscontained in this Quarterly Report on Form 10-QSB that are not historical factare forward-looking statements (as such term is defined in the PrivateSecurities Litigation Reform Act of 1995), within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act 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 and uncertainties.  The Company wishes to caution the reader thatthese forward-looking statements that are not historical facts are onlypredictions.  No assurances can be giventhat the future results indicated, whether expressed or implied, will beachieved.  While sometimes presented withnumerical specificity, these projections and other forward-looking statementsare based upon a variety of assumptions relating to the business of theCompany, which, although considered reasonable by the Company, may not berealized.  Because of the number andrange of assumptions 

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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.

##### **PART II — OTHER INFORMATION**

**Item 1.Legal Proceedings.**

The Company is from timeto time involved in legal proceedings arising from the normal course ofbusiness.   As of the date of thisreport, the Company is not currently involved in any legal proceedings.

**Item 6.Exhibits and Reports.**

(a)       The following exhibits are filed herewithpursuant to Regulation S-B.

| 31.1 |   | Section 302 Certification of Chief Executive Officer |
|------|--------|------------------------------------------------------|
| 31.2 |   | Section 302 Certification of Chief Financial Officer |
| 32   |   | Section 906  Certifications                          |

 

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**SIGNATURES**

In accordance with the requirements 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.           |
|--------------------------|--------|------------------------------|
|                     |   |                         |
| Dated: November 14, 2006 |   |                         |
|                     |   |                         |
|                     | By     |  /s/ Thomas J. Klitzke  |
|                     |   | Thomas J. Klitzke            |
|                     |   | Principal Accounting Officer |

 

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