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

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

| **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | **For the  quarterly period ended December 31, 2005**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **o**      | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | **For the  transition period from                                               to                                             ** |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | **Commission  File number 001-10320**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

| **Time America, Inc.**                                                         |
|-------------------------------------------------------------------------------------|
| (Exact name of small business issuer as specified in its charter)                   |
|                                                                                |   |   |
| **Nevada**                                                                          | ** ** | **13-3465289** |
| (State or other jurisdiction of                                                     |   | (I.R.S. Employer |
| incorporation of organization)                                                      |   | Identification No.) |
|                                                                                |   |   |
| **8840 East Chaparral 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, if changed since  last report) |

 

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

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.)  Yes  o     Noý

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date: At February 10, 2006, the issuer had outstanding15,003,904 shares of Common Stock, par value $.005 per share.

 

Transitional Small BusinessDisclosure Format:  Yes o     Noý

 

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1 –Financial Statements.**

 

**TIME AMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                            | ** ** | **2005**              | ** ** | **2005**          | ** ** |
| ** **                                                                                                            | ** ** | **(Unaudited)**       | ** ** | ** **        | ** ** |
| **ASSETS**                                                                                                            | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Current Assets:**                                                                                                   |       |                  |       |              |       |
| Cash and cash equivalents                                                                                             |       | $                     | 569,819    |              | $          | 1,361,717 |   |
| Accounts receivable – trade, net                                                                                 |       | 1,627,817             |       | 1,479,526         |       |
| Inventory                                                                                                             |       | 723,944               |       | 477,719           |       |
| Prepaid expenses and other current assets                                                                             |       | 248,417               |       | 268,373           |       |
|                                                                                                                  |       |                  |       |              |       |
| **Total Current Assets**                                                                                              |       | 3,169,997             |       | 3,587,335         |       |
|                                                                                                                  |       |                  |       |              |       |
| **Property and equipment, net**                                                                                       |       | 450,772               |       | 374,269           |       |
| **Other Assets**                                                                                                      |       | 220,065               |       | 330,882           |       |
|                                                                                                                  |       |                  |       |              |       |
| **Total Assets**                                                                                                      |       | $                     | 3,840,834  |              | $          | 4,292,486 |   |
|                                                                                                                  |       |                  |       |              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                                              | ** ** | ** **            | ** ** | ** **        | ** ** |
|                                                                                                                  |       |                  |       |              |       |
| **Current Liabilities:**                                                                                              |       |                  |       |              |       |
| Current portion of long-term debt                                                                                     |       | $                     | 1,150,431  |              | $          | 998,061 |   |
| Accounts payable                                                                                                      |       | 593,768               |       | 423,396           |       |
| Accrued liabilities                                                                                                   |       | 645,862               |       | 436,180           |       |
| Deferred revenue                                                                                                      |       | 945,909               |       | 877,782           |       |
|                                                                                                                  |       |                  |       |              |       |
| **Total Current Liabilities**                                                                                         |       | 3,335,970             |       | 2,735,419         |       |
|                                                                                                                  |       |                  |       |              |       |
| **Long-term debt, less current portion**                                                                              |       | 2,203,486             |       | 2,210,592         |       |
|                                                                                                                  |       |                  |       |              |       |
| **Total Liabilities**                                                                                                 |       | 5,539,456             |       | 4,946,011         |       |
|                                                                                                                  |       |                  |       |              |       |
| **Commitments:**                                                                                                      |       | —                |       | —            |       |
|                                                                                                                  |       |                  |       |              |       |
| **Stockholders’ Equity (Deficit):**                                                                              |       |                  |       |              |       |
| Common stock, $.005 par value, 50,000,000  shares authorized; 14,651,981 and 14,251,552 shares issued and outstanding |       | 73,261                |       | 71,258            |       |
| Contributed capital                                                                                                   |       | 9,528,440             |       | 9,269,497         |       |
| Accumulated deficit                                                                                                   |       | (11,300,323           | )          | (9,994,280        | )          |
|                                                                                                                  |       |                  |       |              |       |
| **Total Stockholders’ Equity (Deficit)**                                                                         |       | (1,698,622            | )          | (653,525          | )          |
|                                                                                                                  |       |                  |       |              |       |
| **Total Liabilities and Stockholders’ Equity  (Deficit)**                                                        |       | $                     | 3,840,834  |              | $          | 4,292,486 |   |

 

#### **SeeNotes to Consolidated Financial Statements**

 

2

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **December 31,**            | ** ** | **December 31,**          | ** ** |
| ** **                                         | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **Revenues:**                                      |       |                             |       |                           |       |   |   |   |   |
| Product sales                                      |       | $                                | 1,049,357  |                           | $          | 1,082,207 |   | $ | 2,066,921 |   | $ | 2,081,137 |   |
| Services revenue                                   |       | 489,998                          |       | 358,105                        |       | 943,247 |   | 813,000 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Total Revenues**                                 |       | 1,539,355                        |       | 1,440,312                      |       | 3,010,168 |   | 2,894,137 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Cost of Revenues:**                              |       |                             |       |                           |       |   |   |   |   |
| Product                                            |       | 481,913                          |       | 433,572                        |       | 1,016,344 |   | 832,304 |   |
| Services                                           |       | 216,219                          |       | 185,277                        |       | 428,978 |   | 352,498 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Total Cost of Revenues**                         |       | 698,132                          |       | 618,849                        |       | 1,445,322 |   | 1,184,802 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Gross Profit**                                   |       | 841,223                          |       | 821,463                        |       | 1,564,846 |   | 1,709,335 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Costs and Expenses:**                            |       |                             |       |                           |       |   |   |   |   |
| Sales and marketing                                |       | 537,336                          |       | 461,442                        |       | 1,131,692 |   | 925,545 |   |
| Research and development                           |       | 382,534                          |       | 337,946                        |       | 747,150 |   | 625,718 |   |
| General and administrative                         |       | 382,920                          |       | 259,549                        |       | 720,801 |   | 495,128 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Total Costs and Expenses**                       |       | 1,302,790                        |       | 1,058,937                      |       | 2,599,643 |   | 2,046,391 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Net Loss from Operations**                       |       | (461,567                         | )          | (237,474                       | )          | (1,034,797 | ) | (337,056 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Other Income (Expense):**                        |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                   |       | (142,081                         | )          | (91,386                        | )          | (318,497 | ) | (189,897 | ) |
| Other                                              |       | 6,915                            |       | 25,774                         |       | 38,420 |   | 25,774 |   |
| Interest income                                    |       | 2,965                            |       | 4,418                          |       | 8,831 |   | 10,180 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
|                                               |       | (132,201                         | )          | (61,194                        | )          | (271,246 | ) | (153,943 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Net Loss**                                       |       | $                                | (593,768   | )                              | $          | (298,668 | ) | $ | (1,306,043 | ) | $ | (490,999 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Basic and Diluted Loss per Share**               |       | $                                | (0.04      | )                              | $          | (0.02 | ) | $ | (0.09 | ) | $ | (0.04 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Weighted Average Number of Shares  Outstanding** |       | 14,651,981                       |       | 13,601,052                     |       | 14,455,975 |   | 13,600,620 |   |

 

See Notes to Consolidated Financial Statements

 

3

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

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED JUNE 30, 2005 AND

THE SIX MONTH PERIOD ENDED DECEMBER 31, 2005 (Unaudited)

 
| ** **                             | ** ** | **Common St­ock** | ** ** | **Contributed** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|
| ** **                             | ** ** | **Shares**                  | ** ** | **Amount**      | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                   |       |                        |       |            |       |            |       |        |       |   |   |
| Balance at June 30, 2004          |       | 13,599,552                  |       | $               | 67,998     |            | $          | 8,027,121   |       | $ | (7,973,886 | ) | $ | 121,233 |   |
|                                   |       |                        |       |            |       |            |       |        |       |   |   |
| Conversion of debt to common stock     |       | 600,000                     |       | 3,000           |       | 297,000         |       | —      |       | 300,000 |   |
| Exercise of stock options              |       | 2,000                       |       | 10              |       | 426             |       | —      |       | 436 |   |
| Issuance of common stock warrants      |       | —                      |       | —          |       | 168,700         |       | —      |       | 168,700 |   |
| Issuance of common stock for services  |       | 50,000                      |       | 250             |       | 31,250          |       | —      |       | 31,500 |   |
| Issuance of stock options for services |       | —                      |       | —          |       | 15,500          |       | —      |       | 15,500 |   |
| Induced conversion of debt             |       | —                      |       | —          |       | 729,500         |       | —      |       | 729,500 |   |
| Net loss                               |       | —                      |       | —          |       | —          |       | (2,020,394  | )          | (2,020,394 | ) |
| Balance at June 30, 2005          |       | 14,251,552                  |       | 71,258          |       | 9,269,497       |       | (9,994,280  | )          | (653,525 | ) |
|                                   |       |                        |       |            |       |            |       |        |       |   |   |
| Exercise of stock options              |       | 4,000                       |       | 20              |       | 1,580           |       | —      |       | 1,600 |   |
| Conversion of debt to common stock     |       | 446,429                     |       | 2,233           |       | 247,767         |       | —      |       | 250,000 |   |
| Induced conversion of debt             |       | —                      |       | —          |       | 40,179          |       | —      |       | 40,179 |   |
| Reclass of warrants to liability  |       | —                      |       | —          |       | (102,900        | )          | —      |       | (102,900 | ) |
| Share-based awards compensation        |       | —                      |       | —          |       | 103,567         |       | —      |       | 103,567 |   |
| Recission of common stock for services |       | (50,000                     | )          | (250            | )          | (31,250         | )          | —      |       | (31,500 | ) |
| Net loss                               |       | —                      |       | —          |       | —          |       | (1,306,043  | )          | (1,306,043 | ) |
| Balance at December 31, 2005      |       | 14,651,981                  |       | $               | 73,261     |            | $          | 9,528,440   |       | $ | (11,300,323 | ) | $ | (1,698,622 | ) |

 

See Notes to Consolidated Financial Statements

 

4

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#### ** **

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

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**          | ** ** |
| ** **                                                                   | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| **Increase (Decrease) in Cash and Cash  Equivalents:**                       | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                    |       |                           |       |   |   |
| Net loss                                                                     |       | $                              | (1,306,043 | ) | $ | (490,999 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                           |       |   |   |
| Depreciation                                                                 |       | 54,520                         |       | 39,170 |   |
| Common stock, stock options and warrants  issued for services                |       | 72,067                         |       | 15,500 |   |
| Induced conversion of debt charge                                            |       | 40,179                         |       | — |   |
| Changes in Assets and Liabilities:                                           |       |                           |       |   |   |
| Accounts receivable-trade                                                    |       | (148,291                       | )          | (68,860 | ) |
| Inventory                                                                    |       | (246,225                       | )          | (206,310 | ) |
| Prepaid expenses and other current assets                                    |       | 19,956                         |       | 91,825 |   |
| Other assets                                                                 |       | 110,817                        |       | 53,848 |   |
| Accounts payable                                                             |       | 170,372                        |       | 25,745 |   |
| Accrued liabilities                                                          |       | 106,782                        |       | 139,186 |   |
| Deferred revenue                                                             |       | 68,127                         |       | 465,745 |   |
| **Net cash provided (used) by operating  activities**                        |       | (1,057,739                     | )          | 64,850 |   |
|                                                                         |       |                           |       |   |   |
| **Cash flows from investing activities:**                                    |       |                           |       |   |   |
| Purchase of property and equipment                                           |       | (131,023                       | )          | (136,598 | ) |
| **Net cash used by investing activities**                                    |       | (131,023                       | )          | (136,598 | ) |
|                                                                         |       |                           |       |   |   |
| **Cash flows from financing activities:**                                    |       |                           |       |   |   |
| Repayment of debt                                                            |       | (104,736                       | )          | (718,882 | ) |
| Proceeds from exercise of options and  warrants                              |       | 1,600                          |       | 361 |   |
| Proceeds from note payable                                                   |       | 500,000                        |       | — |   |
| **Net cash provided (used) by financing  activities**                        |       | 396,864                        |       | (718,521 | ) |
|                                                                         |       |                           |       |   |   |
| Net change in cash and cash equivalents                                      |       | (791,898                       | )          | (790,269 | ) |
|                                                                         |       |                           |       |   |   |
| Cash and cash equivalents at beginning of  period                            |       | 1,361,717                      |       | 2,058,929 |   |
|                                                                         |       |                           |       |   |   |
| Cash and cash equivalents at end of period                                   |       | $                              | 569,819    |   | $ | 1,268,660 |   |
|                                                                         |       |                           |       |   |   |
| **Supplemental disclosure of cash flow  information:**                       |       |                           |       |   |   |
| Interest paid                                                                |       | $                              | 168,826    |   | $ | 189,897 |   |
| Income taxes paid                                                            |       | $                              | —     |   | $ | — |   |

 

See Notes to Consolidated Financial Statements

 

5

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## **SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

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

 

The accompanyingunaudited consolidated financial statements of Time America, Inc. and subsidiary(“Time America” or the “Company”) have been prepared in accordance withgenerally accepted accounting principles (“GAAP”), pursuant to the rules andregulations of the Securities and Exchange Commission, and are unaudited.Accordingly, they do not include all the information and footnotes required byGAAP for complete financial statements. In the opinion of management, alladjustments (which include only normal recurring adjustments) necessary for afair presentation of the results for the interim periods presented have beenmade. The results for the six month period ended December 31, 2005, may notbe indicative of the results for the entire year. These financial statementsshould be read in conjunction with the Company’s Annual Report on Form 10-KSBfor the fiscal year ended June 30, 2005.

 

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 contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from these estimates.

 

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

 

Basic income (loss)per share of common stock was computed by dividing the net income (loss) by theweighted average number of shares of common stock outstanding during theperiod.

 

Diluted earnings pershare are computed based on the weighted average number of shares of commonstock and dilutive securities outstanding during the period. Dilutivesecurities are options and warrants that are freely exercisable into commonstock at less than the prevailing market price. Dilutive securities are notincluded in the weighted average number of shares when inclusion would increasethe earnings per share or decrease 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 of the underlying stock price over theexercise 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.

 

Effective July 1,2005, the Company adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards Board No. 123(R), “Share–Based Payment,”using the modified prospective-transition method. Under this transition method,compensation expense recognized for the six months ended of fiscal year 2006includes:  (a) compensation expensefor all share-based payments granted prior to, but not yet vested as of June 30,2005 based on the grant date fair value estimated and (b)

 

6

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compensationexpense for all share-based payments granted subsequent to June 30, 2005,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123 (R). Results for prior periods have not been 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.

 

As a result of adopting SFAS 123(R) on July 1, 2005, the Company’snet loss for the three months and six month periods ended December 31,2005 is $18,580 and $103,567, respectively, higher than if it had continued toaccount for share-based compensation under APB 25.

 

The followingtable illustrates the effect on the Company’s net loss and loss per share forthe three months and six months ended December 31, 2005 if the Company hadapplied the fair value recognition provisions of SFAS 123 to options grantedunder the Company’s stock option plans.

 
| ** **                                                                                                                                        | ** ** | **Three Months**      | ** ** | **Six Months**        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                        | ** ** | **Ended December31,** | ** ** | **Ended December31,** | ** ** |
| ** **                                                                                                                                        | ** ** | **2004**                   | ** ** | **2004**                   | ** ** |
| ** **                                                                                                                                        | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Net loss:**                                                                                                                                     |       |                       |       |                       |       |
| As reported                                                                                                                                       |       | $                          | (298,668   | )                          | $          | (490,999 | ) |
|                                                                                                                                              |       |                       |       |                       |       |
| Deduct: Total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects |       | (2,510                     | )          | (49,083                    | )          |
|                                                                                                                                              |       |                       |       |                       |       |
| Pro forma                                                                                                                                         |       | $                          | (301,178   | )                          | $          | (540,082 | ) |
|                                                                                                                                              |       |                       |       |                       |       |
| **Loss per share:**                                                                                                                               |       |                       |       |                       |       |
| As reported                                                                                                                                       |       | $                          | (0.02      | )                          | $          | (0.04 | ) |
| Pro forma                                                                                                                                         |       | $                          | (0.02      | )                          | $          | (0.04 | ) |

 

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

 

In September 2005, the Company amended the conversion price on aportion of its convertible term note with Laurus Master Funds. The conversionprice on the first $250,000 of the note was reduced to $0.56 per share. Inconnection with the amendment, the Company incurred a non-cash charge of$40,179 in the first quarter 2006.

 

In January 2006,the Company amended the terms of its debt with Laurus Master Funds as describedin Note F below.

 

7

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**Note E - New AccountingPronouncements:**

 

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 did not havea material affect on our financial position or results of operations.

 

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 forNonmonetary Assets.”  APB No. 29 wasbased on the principle that exchanges of nonmonetary assets should be measuredon the fair value of the assets exchanged. SFAS 153 amends APB No. 29to eliminate the exception for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange.SFAS 153 is effective for financial statements issued for fiscal yearsbeginning after June 15, 2005. The adoption of SFAS 153 did not havea material affect on our financial position or results of operations.

 

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. The adoption of SFAS 154 is not expectedto have a material affect on our financial position or results of operations.

 

**Note F –SubsequentEvents:**

 

Effective January 3,2006, the Company entered into a Security and Purchase Agreement with Laurus Master Fund, Ltd., a Cayman Islands company (“Laurus”).Under the Security and Purchase Agreement, Laurus purchased from the Company aSecured Convertible Term Note in the aggregate principal amount of $2,000,000,and a Secured Non-Convertible Revolving Note in the aggregate principal amountof $1,500,000. The transaction was a recapitalization of existing agreementswith Laurus. The Term Note replaced an existing secured convertible term noteissued March 22, 2004 and a principal balance of $1,058,310 that was paidin full with the proceeds of the Term Note. Gross proceeds received

 

8

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by the Company under the Term Note were$941,690. The Revolving Note replaced an existing $1,500,000 revolving facilitythat had an outstanding balance of $1,000,000 that was paid in full with proceedsfrom the Revolving Note. The Company did not receive any of the proceeds fromthe Revolving Note.

 

The Term Notehas a three-year term, and bears interest at 2% above the prime rate, with aminimum interest rate of 7.25%. The Term Note provides for principal repayment,in cash or stock, in thirty (30) equal monthly installments of $66,666.67commencing on July 1, 2006. Monthly principal and interest payments willbe converted, subject to certain volume limitations, into shares of the Company’scommon stock if the average market price of such stock for the five (5) dayspreceding the payment is 10% above the initial fixed conversion price of $0.65per share. The Company may not convert any of its repayment obligationsunder the Term Note to common stock unless either there exists an effectiveregistration statement covering the shares to be issued, or an exemption forthe resale of all of the common stock issued and issuable under the Term Noteis available under Rule 144 of the Securities Act of 1933, as amended. TheCompany may redeem the Term Note upon payment to Laurus of 115% of theoutstanding principal under the Term Note together with accrued but unpaidinterest.

 

The RevolvingNote has a two-year term, and bears interest at 2% above the prime rate, with aminimum interest rate of 7.25%. Availability under the Revolving Note is basedon an advance rate equal to 90% of eligible accounts receivable and 30% ofinventory subject to a $1,000,000 cap. The Revolving Note is subject to anearly termination fee of 5% of the face amount of the Revolving Note in thefirst year, and 4% thereafter. If an event of default occurs, Laurus may electto require the Company and its subsidiaries to make a default payment in theamount of 125% of the outstanding principal amount of the Revolving Note.

 

The Company’sobligations under Term Note and the Revolving Note are secured by a first lienon all assets of the Company, and Laurus may accelerate all outstandingobligations under the notes upon the occurrence and continuation of an event ofdefault. In addition to the notes, the Company issued Laurus a seven-yearwarrant to purchase 140,000 shares of the Company’s common stock at an exerciseprice of $0.65 per share, subject to adjustment based on the occurrence of certaincorporate events. The Company must file a registration statement with theSecurities and Exchange Commission to register the resale of the shares ofcommon stock underlying the warrants and the common stock issuable uponconversion of the Term Note within 60 days of funding and must use its bestefforts to have the registration statement declared effective within 180 daysof funding. On the closing of the Term Note and the Revolving Note, the Companyissued an aggregate of 351,923 shares of common stock to Laurus for payment offees due.

 

9

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**Item 2. Management’sDiscussion And Analysis of Financial Condition and Results of Operations.**

** **

### **Critical Accounting Policies**

### ** **

Oursignificant accounting policies are described in the audited consolidatedfinancial statements and notes thereto included in our Annual Report on Form 10-KSBfor the year ended June 30, 2005. We believe our most critical accountingpolicies are revenue recognition, software development costs and the allowancefor potentially uncollectible accounts receivable.

 

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

 

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

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

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

•                  Collectibilityis probable; and

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

 

The fair valueof the undelivered elements is deferred and the remaining portion of thearrangement 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 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 ofan arrangement, end-user customers typically purchase maintenance contracts aswell as professional services from us. Maintenance services include telephoneand Web-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 frommaintenance services are recognized ratably over the term of the maintenancecontract period, which is usually one year. Maintenance services are typicallystated separately in an arrangement and are also sold on a stand-alone basis inrenewal agreements. We have classified the value of revenues pertaining to thecontractual maintenance obligations that exist for the 12-month periodsubsequent 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 fromcustomer support services are recognized as the services are delivered.Revenues from

 

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professional services are generallyrecognized based on customer specific objective evidence of fair value when:

 

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

•                  Theprofessional services have been delivered;

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

•                  Collectibilityis probable.

 

Customerspecific objective evidence of fair value is based upon the price charged whenthese services are sold separately and are typically an hourly rate forprofessional services and a per-class rate for training. Based upon ourexperience in completing professional services, we have determined that theseservices are typically delivered within a 12-month period subsequent to thecontract signing and therefore classifies deferred professional services as acurrent liability.

 

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.

 

At the time weenter into an arrangement, we assess the probability of collection of the feeand the terms granted to the customer. For end-user customers, our typicalpayment terms include a deposit and subsequent payments, based on specific duedates, such that all payments for the software license, data collectionhardware and related ancillary products, as well as services included in theoriginal arrangement, are ordinarily due within one year of contract signing.Our payment terms for reseller channel customers are typically due within 30days of the invoice date.

 

If thearrangement includes a substantive acceptance provision, we defer revenue notmeeting 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 uncertainty regardingacceptance is resolved as generally evidenced by written acceptance or paymentof the arrangement fee. If the payment terms for the arrangement are consideredextended, we defer revenue on the arrangement until the payment of thearrangement fee becomes due. The deferred amounts related to arrangements withextended payment terms are removed from deferred revenue and accountsreceivable, as we have determined that these amounts do not represent eitherreceivable 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.

 

We capitalizesoftware development costs in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to beSold, Leased, or Otherwise Marketed.” Capitalization of software developmentcosts begins upon the establishment of technological feasibility of the product.The establishment of technological feasibility and the ongoing assessment ofthe recoverability of these costs require considerable judgment by managementwith respect to certain external

 

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factors including, but not limited to,anticipated future gross product revenue, estimated economic life, and changesin 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 softwaredevelopment that could be capitalized under this statement were deemedimmaterial.

 

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

 

### **Results of Operations for the Three and SixMonths Ended December 31, 2005 and 2004**

 

*Revenues:*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **Percent  Change** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Percent  Change** | ** ** |
| ** ** | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues   |       | $                                | 1,539,355  |                           | $          | 1,440,312 |   | 7 | % | $ | 3,010,168 |   | $ | 2,894,137 |   | 4 | % |
|            |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

*ProductSales:*

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **Percent  Change** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Percent  Change** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                 |       | $                                | 1,049,357  |                           | $          | 1,082,207 |   | (3 | )% | $ | 2,066,921 |   | $ | 2,081,137 |   | (1 | )% |
| Product sales as a percent of total  revenues |       | 68                               | %          | 75                             | %          | — |   | 69 | % | 72 | % | — |   |
|                                               |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Product saleshave remained relatively flat over the three and six months ended December 31,2005.

 

*ServiceRevenue:*

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **Percent  Change** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Percent  Change** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenue                                 |       | $                                | 489,998    |                           | $          | 358,105 |   | 37 | % | $ | 943,247 |   | $ | 813,000 |   | 16 | % |
| Service revenue as a percent of total  revenues |       | 32                               | %          | 25                             | %          | — |   | 31 | % | 28 | % | — |   |
|                                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increasein our service revenue in the current quarter and six-month period wasprimarily attributable to a 39% and 53%, respectively, increase in our NETtimesoftware service revenue over such

 

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periods. In addition,maintenance revenue increased by 50% in the three month period and by 42% inthe six month period.

 

*GrossProfit:*

 
| ** **           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| Product gross margin |       | 54                               | %          | 60                             | %          | 51 | % | 60 | % |
| Service gross margin |       | 56                               | %          | 48                             | %          | 55 | % | 57 | % |
| Total gross margin   |       | 55                               | %          | 57                             | %          | 52 | % | 59 | % |

 

The decreasein overall and product gross profit is primarily due to the accounting for alarge contract with a Fortune 100 company. The contract is for a $2,150,000software and hardware solution requiring successful completion of a pilotprogram followed by completion of the remainder of the contract. The pilotprogram section of the contract is for $378,000. We are accounting for thesoftware portion of the pilot program using the percentage of completion methodfor long-term contracts. The estimated costs for development of the softwareexceed our revenues for the software and the Company recorded an estimated lossof approximately $50,000 for the software portion of this contract in the firstquarter of fiscal 2006. If the revenue and costs under this contract wereremoved, our overall and product margins for the current quarter and six-monthperiod ended December 31, 2005 would be in line with our normal margins asdiscussed below. We do expect to achieve a gross profit on the contract as awhole as it is fulfilled over the next year.

 

Our grossprofit percentage on products is typically between 55% to 60% depending uponthe mix of software versus hardware sales and the makeup of hardware sales. Ourproduct revenue is comprised of software and hardware sales, with hardwaresales yielding a significantly lower gross profit than software sales. Hardwarerevenue is principally comprised of two versions of general data collectionterminals, badge terminals and biometric units. The gross profit is greater onbadge terminals than biometric units because we add value to our badgeterminals by installing software on the terminals.

 

Our grossprofit percentage on services revenue increased in the current quarter and aswe increased service revenue by 37% and limited our cost increases. The marginwas relatively flat for the current six month period compared to the prior yearsix month period.

 

*OperatingExpenses:*

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **Percent  Change** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Percent  Change** | ** ** |
| ** **                                               | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total costs and expenses                                 |       | $                                | 1,302,790  |                           | $          | 1,058,937 |   | 23 | % | $ | 2,599,643 |   | $ | 2,046,391 |   | 27 | % |
| Total costs and expenses as a percent of  total revenues |       | 85                               | %          | 74                             | %          | — |   | 86 | % | 71 | % | — |   |
|                                                          |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*Sales andMarketing Expense:*

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **Percent  Change** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Percent  Change** | ** ** |
| Sales and marketing expense                                 |       | $                                | 537,336    |                           | $          | 461,442 |   | 16 | % | $ | 1,131,692 |   | $ | 925,545 |   | 22 | % |
| Sales and marketing expense as a percent of  total revenues |       | 35                               | %          | 32                             | %          | — |   | 38 | % | 32 | % | — |   |
|                                                             |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase insales and marketing expenses in the current quarter and six-month period isprimarily attributable to higher labor and employee acquisition costs as wehave increased our sales staff, including the hiring of a vice president ofcorporate sales in the first quarter of fiscal 2006.

 

*Researchand Development Expense:*

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **Percent  Change** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Percent  Change** | ** ** |
| Research and development expense                                 |       | $                                | 382,534    |                           | $          | 337,946 |   | 13 | % | $ | 747,150 |   | $ | 625,718 |   | 19 | % |
| Research and development expense as a  percent of total revenues |       | 25                               | %          | 23                             | %          | — |   | 25 | % | 22 | % | — |   |
|                                                                  |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increasein research and development expenses is primarily attributable to labor andother costs associated with the development of our new data collection terminaland enhancement of our software offerings.

 

*General andAdministrative Expense:*

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **Percent  Change** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Percent  Change** | ** ** |
| General and administrative expense                                 |       | $                                | 382,920    |                           | $          | 259,549 |   | 48 | % | $ | 720,801 |   | $ | 495,128 |   | 46 | % |
| General and administrative expense as a  percent of total revenues |       | 25                               | %          | 18                             | %          | — |   | 24 | % | 17 | % | — |   |
|                                                                    |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increasein general and administrative expenses is primarily due to $19,000 in costs inthe current quarter and $104,000 in costs in the current six month period as aresult of the adoption of FASB Statement No. 123(R) in the first quarterof fiscal 2006. We also incurred approximately $60,000 in expenses associatedwith the preparation and filing of a registration statement in the currentquarter.

 

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Other Expense:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **December 31,  2005**      | ** ** | **December 31,  2004**    | ** ** | **Percent  Change** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **Percent  Change** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other expense                                 |       | $                                | 132,201    |                           | $          | 61,194 |   | 116 | % | $ | 271,246 |   | $ | 153,943 |   | 76 | % |
| Other expense as a percent of total  revenues |       | 9                                | %          | 4                              | %          | — |   | 9 | % | 5 | % | — |   |
|                                               |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Other income(expense) consists primarily of interest expense. The increase in other expenseis primarily due to an increase of approximately $51,000 and $129,000,respectively, in interest expense for the current quarter and six month period.Interest expense has increased because we incurred over $1,000,000 inadditional debt in June 2005.

 

# **Liquidity and CapitalResources**

 

Cash Flow Highlights:

 
| ** **                         | ** ** | **Six Months Ended December 31,** | ** ** | **Percentage** | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|----------------|------------|
| ** **                         | ** ** | **2005**                                              | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Net cash from operations           |       | $                                                     | (1,057,739 | )              | $          | 64,850 |   | (1,731 | )% |
|                               |       |                                                  |       |           |       |   |   |
| Purchase of property and equipment |       | $                                                     | (131,023   | )              | $          | (136,598 | ) | 4 | % |
| Repayment of debt                  |       | $                                                     | (104,736   | )              | $          | (718,882 | ) | 85 | % |
|                               |       |                                                  |       |           |       |   |   |
| Proceeds from debt                 |       | $                                                     | 500,000    |           | $          | — |   | n/a |   |
| Net change is cash                 |       | $                                                     | (791,898   | )              | $          | (790,269 | ) | 0 | % |
| Cash at end of period              |       | $                                                     | 569,819    |           | $          | 1,268,660 |   | (55 | )% |

 

At December 31,2005, we had a working capital deficit of $(165,973), compared to workingcapital of $851,916 at June 30, 2005. Cash and cash equivalents at thosedates amounted to $569,819 and $1,361,717, respectively. We have funded ouroperations for the past six years primarily through a combination of sales ofequity securities and debt financing.

 

*Operations*.The net cash used from operations in the current period was primarilyattributable to the net loss of $1,343,203. Included in the net loss was atotal of $203,926 of non-cash charges. Also contributing to the net cash usedwere increases in accounts receivable of $148,291 and inventory of $246,225.Net cash used during this period was partially offset by increases in accountspayable of $170,372 and accrued liabilities of $106,782.

 

*InvestmentActivities*. Our use of cash for property and equipmentincludes investments in information systems and infrastructure to supportexpanding operations.

 

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*FinancingActivities* Our repayment of debt in the current perioddecreased from the prior year period as we were able to make debt payments inthe current period by converting the amounts due to common stock rather thanpay with cash as was done in the prior year period.

 

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 cash requirements will continue to fluctuate based onthe timing and extent of these factors, we believe that our current cashreserves, cash generated from operations, recent financings, and our borrowingcapacity under our two credit facilities, will be sufficient to satisfycommitments for capital expenditures and other cash requirements for the next12 months. In January 2006, we secured additional financing for theCompany (see footnotes to the financial statements for details).The raising ofadditional capital in public or private markets will primarily be dependentupon prevailing market conditions and the demand for our products and services.No assurance can be given that we will be able to raise additional capital,when needed or at all, or that such capital, if available, will be onacceptable terms. In the absence of obtaining additional financing, the Companymay be unable to fund its operations and may experience defaultsunder certain of its contractual agreements, including its lease agreements forits corporate headquarters. These agreements are subject to termination in theevent of default. Certain of the parties to these agreements could take legalaction against the Company to collect amounts owed to them. Accordingly, theCompany’s financial condition could require that the Company seek theprotection of applicable reorganization laws in order to avoid or delay actionsby third parties, which could materially adversely affect, interrupt or causethe cessation of the Company’s operations.

 

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**Item3. Controls and Procedures.**

 

As ofthe end of the period covered by this report, the Company carried out anevaluation, under the supervision and with the participation of its ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of theCompany’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 internal control over financial reporting occurredduring the last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the internal control over financial reporting.

 

# **FORWARD-LOOKINGINFORMATION**

# ** **

The statements contained in thisQuarterly Report on Form 10-QSB 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 ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. The forward-looking statements containedherein are based on current expectations that involve a number of risks anduncertainties. These statements can be identified by the use of forward-lookingterminology such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates,”or the negative thereof or other variations thereon or comparable terminology,or by discussions of strategy that involve risks and uncertainties. The Companywishes to caution the reader that these forward-looking statements that are nothistorical facts are only predictions. No assurances can be given that thefuture results indicated, whether expressed or implied, will be achieved. Whilesometimes presented with numerical specificity, these projections and other forward-lookingstatements are based upon a variety of assumptions relating to the business ofthe Company, which, although considered reasonable by the Company, may notbe realized. Because of the number and range of assumptions underlying theCompany’s projections and forward-looking statements, many of which are subjectto significant uncertainties and contingencies that are beyond the reasonablecontrol of the Company, some of the assumptions inevitably will notmaterialize, and unanticipated events and circumstances may occursubsequent to the date of this report. These forward-looking statements arebased on current expectations and the Company assumes no obligation to updatethis information. Therefore, the actual experience of the Company and the resultsachieved during the period covered by any particular projections orforward-looking statements may differ substantially from those projected.Consequently, the inclusion of projections and other forward-looking statementsshould not be regarded as a representation by the Company or any other personthat these estimates and projections will be realized, and actual results may varymaterially. There can be no assurance that any of these expectations will berealized or that any of the forward-looking statements contained herein willprove to be accurate.

 

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##### **PART II – OTHERINFORMATION**

##### ** **

**Item 1. LegalProceedings.**

** **

The Company isfrom time to time involved in legal proceedings arising from the normal course ofbusiness. As of the date of this report, the Company is not currently involvedin any legal proceedings.

 

**Item 6. Exhibits andReports on Form 8-K.**

 
|   | (a)    | The following exhibits are filed herewith pursuant to Regulation S-B. |
|--------|--------|-----------------------------------------------------------------------|
|   |   |                                                                  |
|   |   | 10.1                                                                  | Security and  Purchase Agreement, dated January 3, 2006, by and among Laurus Master Fund,  Ltd., Time America, Inc., a Nevada corporation, Time America, Inc., an  Arizona corporation, and NetEdge Devices, LLC, an Arizona limited liability  company. |
|   |   |                                                                  |   |
|   |   | 10.2                                                                  | Secured  Convertible Term Note, dated January 3, 2006, made by Time America, Inc., a  Nevada corporation, Time America, Inc., an Arizona corporation, and NetEdge  Devices, LLC, an Arizona limited liability company, in favor of Laurus Master  Fund, Ltd. |
|   |   |                                                                  |   |
|   |   | 10.3                                                                  | Secured Non-Convertible  Revolving Note, dated January 3, 2006, made by Time America, Inc., a Nevada  corporation, Time America, Inc., an Arizona corporation, and NetEdge Devices,  LLC, an Arizona limited liability company, in favor of Laurus Master Fund,  Ltd. |
|   |   |                                                                  |   |
|   |   | 10.4                                                                  | Common Stock  Purchase Warrant, dated January 3, 2006, issued to Laurus Master Fund,  Ltd. |
|   |   |                                                                  |   |
|   |   | 10.5                                                                  | Registration  Rights Agreement, dated January 3, 2006, between Time America, Inc.,  a Nevada corporation, and Laurus Master Fund, Ltd. |
|   |   |                                                                  |   |
|   |   | 10.6                                                                  | Amended and  Restated Subordination Agreement, dated January 3, 2006, among Time  America, Inc., a Nevada corporation, Time America, Inc., an Arizona  corporation, and NetEdge Devices, LLC, an Arizona limited liability company,  Laurus Master Fund, Ltd. and Joseph and Frances Simek. |
|   |   |                                                                  |   |
|   |   | 10.7                                                                  | Reaffirmation  and Ratification Agreement, dated January 3, 2006, by and among Laurus  Master Fund, Ltd., Time America, Inc., a Nevada corporation, Time  America, Inc., an Arizona corporation, and NetEdge Devices, LLC, an Arizona  limited liability company. |
|   |   |                                                                  |   |
|   |   | 10.8                                                                  | Letter  Agreement with Oberon Securities, LLC, dated January 13, 2006 |
|   |   |                                                                  |   |
|   |   | 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 theSecurities Exchange Act of 1934, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                           | TIME AMERICA, INC.         |
|--------------------------------|---------------------------------|
|                           |                            |
|                           |                            |
| Dated: February 14,  2006 |                            |
|                           |                            |
|                           | By                              | /s/ Craig J.  Smith |   |
|                           | Craig J.  Smith                 |
|                           | Chief  Financial Officer        |
|                           | (Principal  Accounting Officer) |

 

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