**Exhibit 10.1**

 

**SECURITY ANDPURCHASE AGREEMENT**

 

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

 

 

Dated: January 3, 2006

 

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**TABLE OF CONTENTS**

 
|   |                                                                 | **Page** |
|--------|----------------------------------------------------------------------|----------|
|   |                                                                 |     |
| 1.     | General  Definitions and Terms; Rules of Construction           | 1        |
|   |                                                                 |     |
| 2.     | Loan  Facility                                                       | 2        |
|   |                                                                 |     |
| 3.     | Repayment  of the Loans                                              | 4        |
|   |                                                                 |     |
| 4.     | Procedure  for Revolving Loans                                       | 4        |
|   |                                                                 |     |
| 5.     | Interest  and Payments                                               | 5        |
|   |                                                                 |     |
| 6.     | Security  Interest                                                   | 6        |
|   |                                                                 |     |
| 7.     | Representations,  Warranties and Covenants Concerning the Collateral | 7        |
|   |                                                                 |     |
| 8.     | Payment  of Accounts                                                 | 9        |
|   |                                                                 |     |
| 9.     | Collection  and Maintenance of Collateral                            | 10       |
|   |                                                                 |     |
| 10.    | Inspections  and Appraisals                                          | 10       |
|   |                                                                 |     |
| 11.    | Financial  Reporting                                                 | 11       |
|   |                                                                 |     |
| 12.    | Additional  Representations and Warranties                           | 12       |
|   |                                                                 |     |
| 13.    | Covenants                                                            | 23       |
|   |                                                                 |     |
| 14.    | Further  Assurances                                                  | 29       |
|   |                                                                 |     |
| 15.    | Representations,  Warranties and Covenants of Laurus                 | 31       |
|   |                                                                 |     |
| 16.    | Power of  Attorney                                                   | 32       |
|   |                                                                 |     |
| 17.    | Term of  Agreement                                                   | 32       |
|   |                                                                 |     |
| 18.    | Termination  of Lien                                                 | 32       |
|   |                                                                 |     |
| 19.    | Events of  Default                                                   | 34       |
|   |                                                                 |     |
| 20.    | Remedies                                                             | 36       |
|   |                                                                 |     |
| 21.    | Waivers                                                              | 36       |
|   |                                                                 |     |
| 22.    | Expenses                                                             | 37       |
|   |                                                                 |     |
| 23.    | Assignment  By Laurus                                                | 37       |
|   |                                                                 |     |
| 24.    | No  Waiver; Cumulative Remedies                                      | 37       |

 

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|   |                                                  | **Page(s)** |
|--------|-------------------------------------------------------|-------------|
|   |                                                  |        |
| 25.    | Application  of Payments                              | 37          |
|   |                                                  |        |
| 26.    | Indemnity                                             | 37          |
|   |                                                  |        |
| 27.    | Revival                                               | 38          |
|   |                                                  |        |
| 28.    | Borrowing  Agency Provisions                          | 38          |
|   |                                                  |        |
| 29.    | Notices                                               | 39          |
|   |                                                  |        |
| 30.    | Governing  Law, Jurisdiction and Waiver of Jury Trial | 40          |
|   |                                                  |        |
| 31.    | Limitation  of Liability                              | 41          |
|   |                                                  |        |
| 32.    | Entire  Understanding; Maximum Interest               | 41          |
|   |                                                  |        |
| 33.    | Severability                                          | 41          |
|   |                                                  |        |
| 34.    | Survival                                              | 41          |
|   |                                                  |        |
| 35.    | Captions                                              | 42          |
|   |                                                  |        |
| 36.    | Counterparts;  Telecopier Signatures                  | 42          |
|   |                                                  |        |
| 37.    | Construction                                          | 42          |
|   |                                                  |        |
| 38.    | Publicity                                             | 42          |
|   |                                                  |        |
| 39.    | Joinder                                               | 42          |
|   |                                                  |        |
| 40.    | Legends                                               | 42          |

 

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**SECURITY ANDPURCHASE AGREEMENT**

** **

This Security and Purchase Agreement is made as of January 3,2006 by and among LAURUS MASTER FUND, LTD., a Cayman Islands corporation (“Laurus”),TIME AMERICA, INC., a Nevada corporation (the “Parent”), and eachparty listed on Exhibit A attached hereto (each an “EligibleSubsidiary” and collectively, the “Eligible Subsidiaries”) theParent and each Eligible Subsidiary, each a “Company” and collectively, the “Companies”).

 

**BACKGROUND**

 

The Companies have requested that Laurus make advancesavailable to the Companies; and

 

Laurus has agreed to make such advances on the termsand conditions set forth in this Agreement.

 

**AGREEMENT**

 

NOW, THEREFORE, in consideration of the mutualcovenants and undertakings and the terms and conditions contained herein, theparties hereto agree as follows:

 

# 1.                                       GeneralDefinitions and Terms; Rules of Construction.

#  

## (a)                                  GeneralDefinitions. Capitalized terms used in this Agreement shall have themeanings assigned to them in Annex A.

##  

## (b)                                 AccountingTerms. Any accounting terms used in this Agreement that are notspecifically defined shall have the meanings customarily given them inaccordance with GAAP and all financial computations shall be computed, unlessspecifically provided herein, in accordance with GAAP consistently applied.

##  

## (c)                                  OtherTerms. All other terms used in this Agreement and defined in the UCC, shallhave the meaning given therein unless otherwise defined herein.

##  

## (d)                                 Rules ofConstruction. All Schedules, Addenda, Annexes and Exhibits hereto orexpressly identified to this Agreement are incorporated herein by reference andtaken together with this Agreement constitute but a single agreement. The words“herein”, “hereof” and “hereunder” or other words of similar import refer tothis Agreement as a whole, including the Exhibits, Addenda, Annexes andSchedules thereto, as the same may be from time to time amended, modified,restated or supplemented, and not to any particular section, subsection orclause contained in this Agreement. Wherever from the context it appearsappropriate, each term stated in either the singular or plural shall includethe singular and the plural, and pronouns stated in the masculine, feminine orneuter gender shall include the masculine, the feminine and the neuter. Theterm “or” is not exclusive. The term “including” (or any form thereof)shall not be limiting or exclusive. All references to statutes and relatedregulations shall include any amendments of same and any successor statutes andregulations. All references in this Agreement or in the Schedules, Addenda,Annexes and Exhibits to this Agreement to sections,

 

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## schedules, disclosure schedules, exhibits, and attachments shall referto the corresponding sections, schedules, disclosure schedules, exhibits, andattachments of or to this Agreement. All references to any instruments oragreements, including references to any of this Agreement or the AncillaryAgreements shall include any and all modifications or amendments thereto andany and all extensions or renewals thereof.

##  

# 2.                                       LoanFacility.

#  

## (a)                                  Loans.

##  

### (i)                           Subjectto the terms and conditions set forth herein and in the Ancillary Agreements,Laurus may make revolving loans (the “Revolving Loans”) to theCompanies from time to time during the Term which, in the aggregate at any timeoutstanding, will not exceed the lesser of (x) (I) the CapitalAvailability Amount, minus (II) such reserves as Laurus may reasonably inits good faith judgment deem proper and necessary from time to time (the “Reserves”)and (y) an amount equal to (I) the Accounts Availability, plus (II) theInventory Availability, minus (III) the Reserves. The amount derived at anytime from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus2(a)(i)(y)(III) shall be referred to as the “Formula Amount.”  The Companies shall, jointly and severally,execute and deliver to Laurus on the Closing Date the Secured Non-ConvertibleRevolving Note and the Secured Convertible Term Note. The Companies hereby eachacknowledge and agree that Laurus’ obligation to purchase the SecuredNon-Convertible Revolving Note and the Secured Convertible Term Note from theCompanies on the Closing Date shall be contingent upon the satisfaction (orwaiver by Laurus in its sole discretion) of the items and matters set forth inthe closing checklist provided by Laurus to the Companies on or prior to theClosing Date.

###  

### (ii)                        Notwithstandingthe limitations set forth above, if requested by any Company, Laurus retainsthe right to lend to such Company from time to time such amounts in excess ofsuch limitations as Laurus may determine in its sole discretion.

###  

### (iii)                     The Companies acknowledge that theexercise of Laurus’ discretionary rights hereunder may result during theTerm in one or more increases or decreases in the advance percentages used indetermining Accounts Availability and/or Inventory Availability and each of theCompanies hereby consent to any such increases or decreases which may limitor restrict advances requested by the Companies, provided that in the case ofany such decrease in the advance percentages the events giving rise to suchdecrease and Laurus’ use of such discretion are attributable to a significantchange in the assets, liabilities, condition (financial or otherwise),properties, operations, prospects or Eligible Accounts in the reasonable goodfaith judgment of Laurus.

###  

### (iv)                    Ifany interest, fees, costs or charges payable to Laurus hereunder are not paidwhen due, each of the Companies shall thereby be deemed to have requested, andLaurus is hereby authorized at its discretion to make and charge to theCompanies’ account, a Loan as of such date in an amount equal to such unpaidinterest, fees, costs or charges.

###  

### (v)                       Ifany Company at any time fails to perform or observe any of the covenantscontained in this Agreement or any Ancillary Agreement, Laurus may, but neednot,

 

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### perform or observe such covenant on behalf and in the name, placeand stead of such Company (or, at Laurus’ option, in Laurus’ name) and may, butneed not, take any and all other actions which Laurus may deem necessaryto cure or correct such failure (including the payment of taxes, thesatisfaction of Liens, the performance of obligations owed to Account Debtors,lessors or other obligors, the procurement and maintenance of insurance, theexecution of assignments, security agreements and financing statements, and theendorsement of instruments). The amount of all monies expended and all costsand expenses (including attorneys’ fees and legal expenses) incurred by Laurusin connection with or as a result of the performance or observance of suchagreements or the taking of such action by Laurus shall be charged to theCompanies’ account as a Revolving Loan and added to the Obligations. Tofacilitate Laurus’ performance or observance of such covenants by each Company,each Company hereby irrevocably appoints Laurus, or Laurus’ delegate, actingalone, as such Company’s attorney in fact (which appointment is coupled with aninterest) with the right (but not the duty) from time to time to create,prepare, complete, execute, deliver, endorse or file in the name and on behalfof such Company any and all instruments, documents, assignments, securityagreements, financing statements, applications for insurance and other agreementsand writings required to be obtained, executed, delivered or endorsed by suchCompany. This power of attorney shall only be exercisable following theoccurrence and during the continuation of an Event of Default, except withrespect to the filing of financing statements, in which case such power ofattorney shall be exercisable on and after the date hereof.

###  

### (vi)                    Lauruswill account to Company Agent monthly with a statement of all Loans and otheradvances, charges and payments made pursuant to this Agreement, and suchaccount rendered by Laurus shall be deemed final, binding and conclusive unlessLaurus is notified by Company Agent in writing to the contrary within thirty(30) days of the date each account was rendered specifying the item or items towhich objection is made.

###  

### (vii)                 During the Term, the Companies may borrowand prepay Revolving Loans in accordance with the terms and conditions hereof.

###  

### (viii)              If any Eligible Account is not paid bythe Account Debtor within one hundred twenty (120) days after the date thatsuch Eligible Account was invoiced or if any Account Debtor asserts adeduction, dispute, contingency, set-off, or counterclaim with respect to anyEligible Account, (a “Delinquent Account”), the Companies shall jointlyand severally (i) reimburse Laurus for the amount of the Loans made withrespect to such Delinquent Account plus an adjustment fee in an amount equal toone-half of one percent (0.35%) of the gross face amount of such EligibleAccount or (ii) immediately replace such Delinquent Account with anotherwise Eligible Account.

###  

## (b)                                 ReceivablesPurchase. Following the occurrence and during the continuance of an Eventof Default, Laurus may, at its option, elect to convert the credit facilitycontemplated hereby to an accounts receivable purchase facility. Upon suchelection by Laurus (subsequent notice of which Laurus shall provide to CompanyAgent), the Companies shall be deemed to hereby have sold, assigned,transferred, conveyed and delivered to Laurus, and Laurus shall be deemed tohave purchased and received from the Companies, all right, title and interestof the Companies in and to all Accounts which shall at any time constituteEligible Accounts (the “Receivables Purchase”). All outstanding Loanshereunder shall be deemed obligations under

 

3

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## such accounts receivable purchase facility. Following payment in fullof all Obligations Laurus shall promptly assign to Parent any remainingEligible Accounts which were deemed to be purchased by Laurus pursuant to this Section 2(b).The conversion to an accounts receivable purchase facility in accordance withthe terms hereof shall not be deemed an exercise by Laurus of its securedcreditor rights under Article 9 of the UCC. Immediately following Laurus’request, the Companies shall execute all such further documentation as may berequired by Laurus to more fully set forth the accounts receivable purchasefacility herein contemplated, including, without limitation, an accountsreceivable purchase agreement and account debtor notification letters in form andsubstance reasonably satisfactory to Laurus, but any Company’s failure to enterinto any such documentation shall not impair or affect the Receivables Purchasein any manner whatsoever.

##  

## (c)                                  **Term Loan****. Subject to theterms and conditions set forth herein and in the Ancillary Agreements, Laurusshall make a term loan (the “****Term Loan****”) to Company Agent(for the benefit of Companies) in an aggregate amount equal to Two MillionDollars ($2,000,000). The Term Loan shall be advanced on the Closing Date andshall be, with respect to principal, payable in consecutive monthlyinstallments of principal commencing on July 1, 2006 and on the first dayof each month thereafter, subject to acceleration upon the occurrence of anEvent of Default or termination of this Agreement. The Term Loan shall beevidenced by the Secured Convertible Term Note.**

##  

# 3.                                       Repaymentof the Loans. The Companies (a) may prepaythe Obligations from time to time in accordance with the terms and provisionsof the Notes (and Section 17 hereof if such prepayment is due to atermination of this Agreement); (b) shall repay the Term Loan on theMaturity Date (as defined in the Secured Convertible Term Note (i) thethen aggregate outstanding principal balance of the Term Loan together withaccrued and unpaid interest, fees and charges and; (ii) all other amountsowed Laurus under Secured Convertible Term Note, (c) shall repay theRevolving Loans on the expiration of the Term (i) the then aggregateoutstanding principal balance of the Revolving Loans together with accrued andunpaid interest, fees and charges and; (ii) all other amounts owed Laurusunder this Agreement and the Ancillary Agreements; and (d) subject to Section 2(a)(ii),shall repay on any day on which the then aggregate outstanding principalbalance of the Loans are in excess of the Formula Amount at such time, Loans inan amount equal to such excess. Any payments of principal, interest, fees orany other amounts payable hereunder or under any Ancillary Agreement shall bemade prior to 2:00 p.m. (New York time) on the due date thereof inimmediately available funds.

#  

# 4.                                       Procedurefor Revolving Loans. Company Agentmay by written notice request a borrowing of Revolving Loans prior to 2:00 p.m.(New York time) on the Business Day of its request to incur, on the nextBusiness Day, a Revolving Loan. Together with each request for a Loan (or atsuch other intervals as Laurus may request), Company Agent shall deliverto Laurus a Borrowing Base Certificate in the form of Exhibit B attachedhereto, which shall be certified as true and correct by the Chief ExecutiveOfficer or Chief Financial Officer of Parent together with all supportingdocumentation relating thereto. All Revolving Loans shall be disbursed fromwhichever office or other place Laurus may designate from time to time andshall be charged to the Companies’ account on Laurus’ books. The proceeds ofeach Revolving Loan made by Laurus shall be made available to Company Agent onthe Business Day following the Business Day so requested in accordance with theterms of this Section 4 by way of credit to the

 

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# applicable Company’soperating account maintained with such bank as Company Agent designated toLaurus. Any and all Obligations due and owing hereunder may be charged tothe Companies’ account and shall constitute Revolving Loans.

#  

# 5.                                       Interestand Payments.

#  

## (a)                                  Interest.

##  

### (i)                           Exceptas modified by Section 5(a)(iii) below, the Companies shall jointlyand severally pay interest at the Contract Rate on the unpaid principal balanceof each Loan until such time as such Loan is collected in full in good funds indollars of the United States of America.

###  

### (ii)                        Interestand payments shall be computed on the basis of actual days elapsed in a year of360 days. At Laurus’ option, Laurus may charge the Companies’ account forsaid interest.

###  

### (iii)                     Effective upon the occurrence ofany Event of Default and for so long as any Event of Default shall becontinuing, the Contract Rate shall automatically be increased as set forth inthe Notes (such increased rate, the “Default Rate”), and all outstandingObligations, excluding unpaid interest, shall continue to accrue interest fromthe date of such Event of Default at the Default Rate applicable to suchObligations.

###  

### (iv)                    Inno event shall the aggregate interest payable hereunder exceed the maximum ratepermitted under any applicable law or regulation, as in effect from time totime (the “Maximum Legal Rate”), and if any provision of this Agreementor any Ancillary Agreement is in contravention of any such law or regulation,interest payable under this Agreement and each Ancillary Agreement shall becomputed on the basis of the Maximum Legal Rate (so that such interest will notexceed the Maximum Legal Rate).

###  

### (v)                       TheCompanies shall jointly and severally pay principal, interest and all otheramounts payable hereunder, or under any Ancillary Agreement, without anydeduction whatsoever, including any deduction for any set-off or counterclaim.

###  

## (b)                                 Payments;Certain Closing Conditions.

##  

### (i)                           Closing/AnnualPayments; Grant Shares. Upon execution of this Agreement by each Companyand Laurus: (x) the Companies shall jointly and severally pay to Laurus CapitalManagement, LLC a closing payment in an amount equal to $36,000 (the “ClosingPayment”); and (y) the Parent shall issue to Laurus 351,923 fully paid andnon-assessable shares of Common Stock (the “Grant Shares”). The ClosingPayment and the Grant Shares shall be deemed fully earned on the Closing Dateand shall not be subject to rebate or proration for any reason.

###  

### (ii)                        OveradvancePayment. Without affecting Laurus’ rights hereunder in the event (x) theLoans exceed the Formula Amount (each such event, an “Overadvance”)without the written consent of Laurus, all such Overadvances shall bearadditional interest at a rate of 1.0% per annum for all times such amountsshall be in excess of the Formula Amount and

 

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### (y) an Overadvance exists following the receipt by the Companies of thewritten consent of Laurus, all such Overadvances shall bear additional interestat a rate mutually acceptable to Laurus and Parent for all times such amountsshall be in excess of the Formula Amount. All amounts that are incurredpursuant to this Section 5(b)(ii) shall be due and payable by theCompanies monthly, in arrears, on the first business day of each calendar monthand upon expiration of the Term.

###  

### (iii)                     Financial Information Default.Without affecting Laurus’ other rights and remedies, in the event any Companyfails to deliver the financial information required by Section 11 on orbefore the date required by this Agreement, the Companies shall jointly andseverally pay Laurus an aggregate fee in the amount of $500.00 per week (orportion thereof) for each such failure until such failure is cured to Laurus’satisfaction or waived in writing by Laurus. All amounts that are incurredpursuant to this Section 5(b)(iii) shall be due and payable by theCompanies monthly, in arrears, on the first business of each calendar monthupon expiration of the Term and on the Maturity Date (as defined in the SecuredConvertible Term Note).

###  

### (iv)                    Expenses.The Companies shall jointly and severally reimburse Laurus for its expenses(including reasonable legal fees and expenses) incurred in connection with thepreparation and negotiation of this Agreement and the Ancillary Agreements, andexpenses incurred in connection with Laurus’ due diligence review of eachCompany and its Subsidiaries and all related matters. Amounts required to bepaid under this Section 5(b)(iv) will be paid on the Closing Date andshall be the sum of $30,000 for such expenses referred to in this Section 5(b)(iv) plusthe cost of fees and expenses of outside counsel, the retention of whom isdeemed reasonably necessary by Laurus.

###  

# 6.                                       SecurityInterest.

#  

## (a)                                  EachCompany hereby acknowledges, confirms and agrees that Laurus has and shallcontinue to have a lien upon and security interest in all Collateral heretoforegranted to Laurus pursuant to the March 2004 Subsidiary SecurityAgreement, the March 2004 Parent Security Agreement and the June 2005Security Agreement to secure the Obligations, and, to the extent not otherwisegranted thereunder, and in order to secure the prompt payment to Laurus of theObligations, each Company hereby assigns, pledges and grants to Laurus acontinuing security interest in and Lien upon all of the Collateral. All ofeach Company’s Books and Records relating to the Collateral shall, untildelivered to or removed by Laurus, be kept by such Company in trust for Laurusuntil all Obligations have been paid in full. Each confirmatory assignment schedule orother form of assignment hereafter executed by each Company shall bedeemed to include the foregoing grant, whether or not the same appears therein.

##  

## (b)                                 EachCompany hereby (i) authorizes Laurus to file any financing statements,continuation statements or amendments thereto that (x) indicate the Collateral (1) asall assets and personal property of such Company or words of similar effect,regardless of whether any particular asset comprised in the Collateral fallswithin the scope of Article 9 of the UCC of such jurisdiction, or (2) asbeing of an equal or lesser scope or with greater detail, and (y) contain anyother information required by Part 5 of Article 9 of the UCC for thesufficiency or filing office acceptance of any financing statement,continuation statement or amendment and

 

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## (ii) ratifies its authorization for Laurus to have filed anyinitial financial statements, or amendments thereto if filed prior to the datehereof. Each Company acknowledges that it is not authorized to file anyfinancing statement or amendment or termination statement with respect to anyfinancing statement without the prior written consent of Laurus and agrees thatit will not do so without the prior written consent of Laurus, subject to suchCompany’s rights under Section 9-509(d)(2) of the UCC.

##  

## (c)                                  EachCompany hereby grants to Laurus an irrevocable, non-exclusive license(exercisable upon the termination of this Agreement due to an occurrence andduring the continuance of an Event of Default without payment of royalty orother compensation to such Company) to use, transfer, license or sublicense anyIntellectual Property now owned, licensed to, or hereafter acquired by suchCompany, and wherever the same may be located, and including in suchlicense access to all media in which any of the licensed items may berecorded or stored and to all computer and automatic machinery software andprograms used for the compilation or printout thereof, and represents, promisesand agrees that any such license or sublicense is not and will not be inconflict with the contractual or commercial rights of any third Person;provided, that such license will terminate on the termination of this Agreementand the payment in full of all Obligations.

##  

# 7.                                       Representations,Warranties and Covenants Concerning the Collateral. Each Company represents, warrants (each of which suchrepresentations and warranties shall be deemed repeated upon the making of eachrequest for a Revolving Loan and made as of the time of each and everyRevolving Loan hereunder) and covenants as follows:

#  

## (a)                                  allof the Collateral (i) is owned by it free and clear of all Liens(including any claims of infringement) except those in Laurus’ favor andPermitted Liens and (ii) is not subject to any agreement prohibiting thegranting of a Lien or requiring notice of or consent to the granting of a Lien.

##  

## (b)                                 itshall not encumber, mortgage, pledge, assign or grant any Lien in anyCollateral or any other assets to anyone other than Laurus and except forPermitted Liens.

##  

## (c)                                  theLiens granted pursuant to this Agreement, upon completion of the filings andother actions listed on Schedule 7(c) (which, in the case ofall filings and other documents referred to in said Schedule, have beendelivered to Laurus in duly executed form) constitute valid perfected securityinterests in all of the Collateral in favor of Laurus as security for theprompt and complete payment and performance of the Obligations, enforceable inaccordance with the terms hereof against any and all of its creditors and purchasersand such security interest is prior to all other Liens in existence on the datehereof.

##  

## (d)                                 noeffective security agreement, mortgage, deed of trust, financing statement,equivalent security or Lien instrument or continuation statement covering allor any part of the Collateral is or will be on file or of record in anypublic office, except those relating to Permitted Liens.

##  

## (e)                                  itshall not dispose of any of the Collateral whether by sale, lease or otherwiseexcept for the sale of Inventory in the ordinary course of business and for the

 

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## disposition or transfer in the ordinary course of business during anyfiscal year of obsolete and worn-out Equipment having an aggregate fair marketvalue of not more than $25,000. and only to the extent that (i) theproceeds of any such disposition are used to acquire replacement Equipmentwhich is subject to Laurus’ first priority security interest or are used torepay Loans or to pay general corporate expenses, or (ii) following theoccurrence of an Event of Default which continues to exist the proceeds ofwhich are remitted to Laurus to be held as cash collateral for the Obligations.

##  

## (f)                                    itshall defend the right, title and interest of Laurus in and to the Collateralagainst the claims and demands of all Persons whomsoever, and take suchactions, including (i) all actions necessary to grant Laurus “control” ofany Investment Property, Deposit Accounts, Letter-of-Credit Rights orelectronic Chattel Paper owned by it, with any agreements establishing controlto be in form and substance reasonably satisfactory to Laurus, (ii) theprompt (but in no event later than five (5) Business Days following Laurus’request therefor) delivery to Laurus of all original Instruments, ChattelPaper, negotiable Documents and certificated Stock owned by it (in each case,accompanied by stock powers, allonges or other instruments of transfer executedin blank), (iii) notification of Laurus’ interest in Collateral at Laurus’request, and (iv) the institution of litigation against third parties asshall be prudent in order to protect and preserve its and/or Laurus’ respectiveand several interests in the Collateral.

##  

## (g)                                 itshall promptly, and in any event within five (5) Business Days after thesame is acquired by it, notify Laurus of any commercial tort claim (as definedin the UCC) acquired by it and unless otherwise consented by Laurus, it shallenter into a supplement to this Agreement granting to Laurus a Lien in suchcommercial tort claim.

##  

## (h)                                 itshall place notations upon its Books and Records and any of its financialstatements to disclose Laurus’ Lien in the Collateral.

##  

## (i)                                     ifit retains possession of any Chattel Paper or Instrument with Laurus’ consent,upon Laurus’ request such Chattel Paper and Instruments shall be marked withthe following legend:  “This writing andobligations evidenced or secured hereby are subject to the security interest ofLaurus Master Fund, Ltd.” Notwithstanding the foregoing, upon the reasonable requestof Laurus, such Chattel Paper and Instruments shall be delivered to Laurus.

##  

## (j)                                     itshall perform in a reasonable time all other steps requested by Laurus tocreate and maintain in Laurus’ favor a valid perfected first Lien in allCollateral subject only to Permitted Liens.

##  

## (k)                                  itshall notify Laurus promptly and in any event within three (3) BusinessDays after obtaining knowledge thereof (i) of any event or circumstancethat, to its knowledge, would cause Laurus to consider any then existing Accountand/or Inventory as no longer constituting an Eligible Account or EligibleInventory, as the case may be; (ii) of any material delay in itsperformance of any of its obligations to any Account Debtor; (iii) of anyassertion by any Account Debtor of any material claims, offsets orcounterclaims; (iv) of any allowances, credits and/or monies granted by itto any Account Debtor; (v) of all material adverse information relating tothe financial condition of an Account Debtor; (vi) of any material returnof goods; and (vii) of any loss, damage or destruction of any of theCollateral.

 

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## (l)                                     Exceptas set forth on Schedule 7(l), all Eligible Accounts (i) representcomplete bona fide transactions which require no further act, other than theCompany’s implementation, training, custom programming and maintenanceservices, under any circumstances on its part to make such Accountspayable by the Account Debtors, (ii) are not subject to any present,future contingent offsets or counterclaims, and (iii) do not representbill and hold sales, consignment sales, guaranteed sales, sale or return orother similar understandings or obligations of any Affiliate or Subsidiary ofsuch Company. It has not made, nor will it make, any agreement with any AccountDebtor for any extension of time for the payment of any Account, any compromiseor settlement for less than the full amount thereof, any release of any AccountDebtor from liability therefor, or any deduction therefrom except a discount orallowance for prompt or early payment allowed by it in the ordinary course ofits business consistent with historical practice and as previously disclosed toLaurus in writing.

##  

## (m)                               itshall keep and maintain its Equipment in good operating condition, except forordinary wear and tear, and shall make all necessary repairs and replacementsthereof so that the value and operating efficiency shall at all times bemaintained and preserved. It shall not permit any such items to become aFixture to real estate or accessions to other personal property.

##  

## (n)                                 itshall maintain and keep all of its Books and Records concerning the Collateralat its executive offices listed in Schedule 12(aa).

##  

## (o)                                 itshall maintain and keep the tangible Collateral at the addresses listed in Schedule 12(bb),provided, that it may change such locations or open a new location,provided that it provides Laurus at least thirty (30) days prior written noticeof such changes or new location and (ii) prior to such change or opening ofa new location where Collateral having a value of more than $50,000 will belocated, it executes and delivers to Laurus such agreements deemed reasonablynecessary or prudent by Laurus, including landlord agreements, mortgageeagreements and warehouse agreements, each in form and substance reasonablysatisfactory to Laurus, to adequately protect and maintain Laurus’ securityinterest in such Collateral.

##  

## (p)                                 Schedule 7(p)lists all banks and other financial institutions at which it maintains depositsand/or other accounts, and such Schedule correctly identifies the name,address and telephone number of each such depository, the name in which theaccount is held, a description of the purpose of the account, and the completeaccount number. It shall not establish any depository or other bank accountwith any financial institution (other than the accounts set forth on Schedule 7(p))without Laurus’ prior written consent.

##  

## (q)                                 AllInventory manufactured by it in the United States of America shall be producedin accordance with the requirements of the Federal Fair Labor Standards Act of1938, as amended and all rules, regulations and orders related thereto orpromulgated thereunder.

##  

# 8.                                       Paymentof Accounts.

#  

## (a)                                  EachCompany will irrevocably direct all of its Account Debtors who receive invoicesfrom any Company following the date hereof and other Persons obligated to makepayments constituting Collateral to make such payments directly to thelockboxes

 

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## maintained by such Company (the “Lockboxes”) with Wells FargoBank or such other financial institution accepted by Laurus in writing as may beselected by such Company (the “Lockbox Bank”) pursuant to the terms ofthe certain agreements among one or more Companies, Laurus and/or the LockboxBank dated as of January 3, 2006. On or prior to the Closing Date, eachCompany shall and shall cause the Lockbox Bank to enter into all suchdocumentation acceptable to Laurus pursuant to which, among other things, theLockbox Bank agrees to:  (a) sweepthe Lockbox on a daily basis and deposit all checks received therein to anaccount designated by Laurus in writing and (b) comply only with theinstructions or other directions of Laurus concerning the Lockbox. All of eachCompany’s invoices, account statements and other written or oral communicationsdirecting, instructing, demanding or requesting payment of any Account of anyCompany or any other amount constituting Collateral shall conspicuously directthat all payments be made to the Lockbox or such other address as Laurus may directin writing. If, notwithstanding the instructions to Account Debtors, anyCompany receives any payments, such Company shall immediately remit suchpayments to Laurus in their original form with all necessary endorsements.Until so remitted, such Company shall hold all such payments in trust for andas the property of Laurus and shall not commingle such payments with any of itsother funds or property.

##  

## (b)                                 AtLaurus’ election, following the occurrence of an Event of Default which iscontinuing, Laurus may notify each Company’s Account Debtors of Laurus’security interest in the Accounts, collect them directly and charge thecollection costs and expenses thereof to Company’s and the Eligible Subsidiariesjoint and several account.

##  

# 9.                                       Collectionand Maintenance of Collateral.

#  

## (a)                                  Laurusmay verify each Company’s Accounts from time to time, but not more oftenthan once every three (3) months, unless an Event of Default has occurredand is continuing, utilizing an audit control company or any other agent ofLaurus.

##  

## (b)                                 Proceedsof Accounts received by Laurus will be deemed received on the Business Dayafter Laurus’ receipt of such proceeds in good funds in dollars of the UnitedStates of America to an account designated by Laurus. Any amount received byLaurus after 12:00 noon (New York time) on any Business Day shall bedeemed received on the next Business Day.

##  

## (c)                                  AsLaurus receives the proceeds of Accounts of any Company, it shall (i) applysuch proceeds, as required, to amounts outstanding under the Notes, and (ii) remitall such remaining proceeds (net of interest, fees and other amounts then dueand owing to Laurus hereunder) to Company Agent (for the benefit of theapplicable Companies) upon request (but no more often than twice a week). Notwithstandingthe foregoing, following the occurrence and during the continuance of an Eventof Default, Laurus, at its option, may (a) apply such proceeds to theObligations in such order as Laurus shall elect, (b) hold all suchproceeds as cash collateral for the Obligations and each Company hereby grantsto Laurus a security interest in such cash collateral amounts as security forthe Obligations and/or (c) do any combination of the foregoing.

##  

# 10.                                 Inspectionsand Appraisals. At all timesduring normal business hours, Laurus, and/or any agent of Laurus shall have theright to (a) have access to, visit, inspect,

 

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# review, evaluate and makephysical verification and appraisals of each Company’s properties and theCollateral, (b) inspect, audit and copy (or take originals if necessary)and make extracts from each Company’s Books and Records, including managementletters prepared by the Accountants, and (c) discuss with each Company’sdirectors, principal officers, and independent accountants, each Company’sbusiness, assets, liabilities, financial condition, results of operations andbusiness prospects., provided, however, such visits inspections, etc. shall notoccur more than one every three (3) months. The limitation set forth inthe immediately preceding proviso shall not apply following the occurrence andduring the continuation of an Event of Default. Each Company will deliver toLaurus any instrument necessary for Laurus to obtain records from any servicebureau maintaining records for such Company. If any internally preparedfinancial information, including that required under this Section isunsatisfactory in any manner to Laurus, Laurus may request that the Accountantsreview the same.

#  

# 11.                                 FinancialReporting. Company Agent willdeliver, or cause to be delivered, to Laurus each of the following, which shallbe in form and detail acceptable to Laurus:

#  

## (a)                                  Assoon as available, and in any event within ninety (90) days after the end ofeach fiscal year of the Parent, each Company’s audited financial statementswith a report of independent certified public accountants of recognizedstanding selected by the Parent and acceptable to Laurus (the “Accountants”),which annual financial statements shall be without qualification and shallinclude each Company’s balance sheet as at the end of such fiscal year and therelated statements of each Company’s income, retained earnings and cash flowsfor the fiscal year then ended, prepared, if Laurus so requests, on aconsolidating and consolidated basis to include all Subsidiaries and Affiliatesof each Company, all in reasonable detail and prepared in accordance with GAAP,together with (i) if and when available, copies of any management lettersprepared by the Accountants; and (ii) a certificate of the Parent’sPresident, Chief Executive Officer or Chief Financial Officer stating that suchfinancial statements have been prepared in accordance with GAAP and whether ornot such officer has knowledge of the occurrence of any Default or Event ofDefault hereunder and, if so, stating in reasonable detail the facts withrespect thereto;

##  

## (b)                                 Assoon as available and in any event within forty five (45) days after the end ofeach quarter, an unaudited/internal balance sheet and statements of income,retained earnings and cash flows of each Company as at the end of and for suchquarter and for the year to date period then ended, prepared, if Laurus sorequests, on a consolidating and consolidated basis to include all Subsidiariesand Affiliates of each Company, in reasonable detail and stating in comparativeform the figures for the corresponding date and periods in the previousyear, all prepared in accordance with GAAP, subject to year-end adjustments andaccompanied by a certificate of the Parent’s President, Chief Executive Officeror Chief Financial Officer, stating (i) that such financial statementshave been prepared in accordance with GAAP, subject to year-end auditadjustments, and (ii) whether or not such officer has knowledge of theoccurrence of any Default or Event of Default hereunder not theretoforereported and remedied and, if so, stating in reasonable detail the facts withrespect thereto;

##  

## (c)                                  Withinthirty (30) days after the end of each month (or more frequently if Laurus sorequests), agings of each Company’s Accounts, unaudited trial balances andtheir

 

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## accounts payable and a calculation of each Company’s Accounts and EligibleAccounts, Inventory and/or Eligible Inventory, provided, however, that ifLaurus shall request the foregoing information more often than as set forth inthe immediately preceding clause, each Company shall have thirty (30) days fromeach such request to comply with Laurus’ demand; and

##  

## (d)                                 Promptlyafter (i) the filing thereof, copies of the Parent’s most recentregistration statements and annual, quarterly, monthly or other regular reportswhich the Parent files with the Securities and Exchange Commission (the “SEC”),and (ii) the issuance thereof, copies of such financial statements,reports and proxy statements as the Parent shall send to its stockholders.

##  

Notwithstandingthe financial reporting requirements set forth in Sections 11(a) and (b) hereof,Company Agent shall have no obligation to deliver the financial statementinformation set forth in such subsections so long as Parent has timely filedits Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB(or Forms 10-Q and 10-K, as applicable) with the Securities and ExchangeCommission.

 

# 12.                                 AdditionalRepresentations and Warranties. EachCompany hereby represents and warrants to Laurus as follows:

#  

## (a)                                  Organization,Good Standing and Qualification. It and each of its Subsidiaries is acorporation, partnership or limited liability company, as the case may be,duly organized, validly existing and in good standing under the laws of itsjurisdiction of organization. It and each of its Subsidiaries has thecorporate, partnership or limited liability company, as the case may be,  power and authority to own and operate itsproperties and assets and, insofar as it is or shall be a party thereto, to (i) executeand deliver this Agreement and the Ancillary Agreements, (ii) to issue andsell the Notes and the shares of Common Stock issuable upon conversion of theSecured Convertible Term Note (the “Note Shares”), (iii) to issueand sell the Warrants and the shares of Common Stock issuable upon exercise ofthe Warrants (the “Warrant Shares”), (iv) to issue and sell theGrant Shares and (v) to carry out the provisions of this Agreement and theAncillary Agreements and to carry on its business as presently conducted. Itand each of its Subsidiaries is duly qualified and is authorized to do businessand is in good standing as a foreign corporation, partnership or limitedliability company, as the case may be, in all jurisdictions in which thenature or location of its activities and of its properties (both owned andleased) makes such qualification necessary, except for those jurisdictions inwhich failure to do so has not had, or could not reasonably be expected tohave, individually or in the aggregate, a Material Adverse Effect.

##  

## (b)                                 Subsidiaries.Each of its direct and indirect Subsidiaries, the direct owner of each suchSubsidiary and its percentage ownership thereof, is set forth on Schedule 12(b).

##  

## (c)                                  Capitalization;Voting Rights.

##  

### (i)                           Theauthorized capital stock of the Parent, as of the date hereof consists of50,000,000 shares, of which 50,000,000 are shares of Common Stock, par value$0.005 per share, 13,601,052 shares of which are issued and outstanding as of March 31,2005,

 

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### and 10,000,000 are shares of preferred stock, par value $0.01 per shareof which no shares of preferred stock are issued and outstanding. Theauthorized, issued and outstanding capital stock of each Subsidiary of eachCompany is set forth on Schedule 12(c).

###  

### (ii)                        Exceptas disclosed on Schedule 12(c), other than:  (i) the shares reserved for issuanceunder the Parent’s stock option plans; and (ii) shares which may beissued pursuant to this Agreement and the Ancillary Agreements, there are nooutstanding options, warrants, rights (including conversion or preemptive rightsand rights of first refusal), proxy or stockholder agreements, or arrangementsor agreements of any kind for the purchase or acquisition from the Parent ofany of its securities. Except as disclosed on Schedule 12(c),neither the offer or issuance of any of the Notes or the Warrants, or theissuance of any of the Note Shares, the Warrant Shares and/or the Grant Shares,or the consummation of any transaction contemplated hereby will result in achange in the price or number of any securities of the Parent outstanding,under anti-dilution or other similar provisions contained in or affecting anysuch securities.

###  

### (iii)                     All issued and outstanding sharesof the Parent’s Common Stock:  (i) havebeen duly authorized and validly issued and are fully paid and nonassessable;and (ii) were issued in compliance with all applicable state and federallaws concerning the issuance of securities.

###  

### (iv)                    Therights, preferences, privileges and restrictions of the shares of the CommonStock are as stated in the Parent’s Certificate of Incorporation (the “Charter”).The Note Shares, the Warrant Shares and the Grant Shares have been duly andvalidly reserved for issuance. When issued and paid for in compliance with theprovisions of this Agreement and the Parent’s Charter, the Securities will bevalidly issued, fully paid and nonassessable, and will be free of any liens orencumbrances; provided, however, that the Securities may besubject to restrictions on transfer under state and/or federal securities lawsas set forth herein or as otherwise required by such laws at the time atransfer is proposed.

###  

## (d)                                 Authorization;Binding Obligations. All corporate, partnership or limited liabilitycompany, as the case may be, action on its and its Subsidiaries’ part (includingtheir respective officers and directors) necessary for the authorization ofthis Agreement and the Ancillary Agreements, the performance of all of its andits Subsidiaries’ obligations hereunder and under the Ancillary Agreements onthe Closing Date and, the authorization, issuance and delivery of the GrantShares, the Notes and the Warrant has been taken or will be taken prior to theClosing Date. This Agreement and the Ancillary Agreements, when executed anddelivered and to the extent it is a party thereto, will be its and itsSubsidiaries’ valid and binding obligations enforceable against each suchPerson in accordance with their terms, except:

##  

### (i)                           aslimited by applicable bankruptcy, insolvency, reorganization, moratorium orother laws of general application affecting enforcement of creditors’ rights;and

###  

### (ii)                        generalprinciples of equity that restrict the availability of equitable or legalremedies.

 

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The issuance of the Notes and the subsequentconversion of the Secured Convertible Term Note into Note Shares are not andwill not be subject to any preemptive rights or rights of first refusal thathave not been properly waived or complied with. The issuance of the Warrantsand the subsequent exercise of the Warrants for Warrant Shares are not and willnot be subject to any preemptive rights or rights of first refusal that havenot been properly waived or complied with. The issuance of the Grant Shares arenot and will not be subject to any preemptive rights or rights of first refusalthat have not been properly waived or complied with.

 

## (e)                                  Liabilities.Neither it nor any of its Subsidiaries has any liabilities, except currentliabilities incurred in the ordinary course of business and liabilitiesdisclosed in any Exchange Act Filings.

##  

## (f)                                    Agreements;Action. Except as set forth on Schedule 12(f) or asdisclosed in any Exchange Act Filings:

##  

### (i)                           Thereare no agreements, understandings, instruments, contracts, proposedtransactions, judgments, orders, writs or decrees to which it or any of itsSubsidiaries is a party or to its knowledge by which it is bound which may involve:  (i) obligations (contingent orotherwise) of, or payments to, it or any of its Subsidiaries in excess of$50,000 (other than obligations of, or payments to, it or any of itsSubsidiaries arising from purchase or sale agreements entered into in theordinary course of business); or (ii) the transfer or license of anypatent, copyright, trade secret or other proprietary right to or from it (otherthan licenses arising from the purchase of “off the shelf” or other standardproducts); or (iii) provisions restricting the development, manufacture ordistribution of its or any of its Subsidiaries’ products or services; or (iv) indemnificationby it or any of its Subsidiaries with respect to infringements of proprietaryrights.

###  

### (ii)                        SinceJune 30, 2005 (the “Balance Sheet Date”) neither it nor any of itsSubsidiaries has:  (i) declared orpaid any dividends, or authorized or made any distribution upon or with respectto any class or series of its capital stock; (ii) incurred anyindebtedness for money borrowed or any other liabilities (other than ordinarycourse obligations) individually in excess of $50,000 or, in the case ofindebtedness and/or liabilities individually less than $50,000, in excess of$100,000 in the aggregate; (iii) made any loans or advances to any Personnot in excess, individually or in the aggregate, of $100,000, other thanordinary advances for travel expenses; or (iv) sold, exchanged orotherwise disposed of any of its assets or rights, other than the sale of itsInventory in the ordinary course of business.

###  

### (iii)                     For the purposes of subsections (i) and(ii) of this Section 12(f), all indebtedness, liabilities,agreements, understandings, instruments, contracts and proposed transactionsinvolving the same Person (including Persons it or any of its applicableSubsidiaries has reason to believe are affiliated therewith or with anySubsidiary thereof) shall be aggregated for the purpose of meeting theindividual minimum dollar amounts of such subsections.

###  

### (iv)                    theParent maintains disclosure controls and procedures (“Disclosure Controls”)designed to ensure that information required to be disclosed by the Parent inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized, and reported, within the time periods specified in the rules andforms of the SEC.

 

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### (v)                       TheParent makes and keeps books, records, and accounts, that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of itsassets. It maintains internal control over financial reporting (“FinancialReporting Controls”) designed by, or under the supervision of, its principalexecutive and principal financial officers, and effected by its management, andother personnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with GAAP, including that:

###  

#### (1)                                  transactionsare executed in accordance with management’s general or specific authorization;

####  

#### (2)                                  unauthorizedacquisition, use, or disposition of the Parent’s assets that could have amaterial effect on the financial statements are prevented or timely detected;

####  

#### (3)                                  transactionsare recorded as necessary to permit preparation of financial statements inaccordance with GAAP, and that its receipts and expenditures are being madeonly in accordance with authorizations of the Parent’s management and board ofdirectors;

####  

#### (4)                                  transactionsare recorded as necessary to maintain accountability for assets; and

####  

#### (5)                                  therecorded accountability for assets is compared with the existing assets atreasonable intervals, and appropriate action is taken with respect to anydifferences.

####  

### (vi)                    Thereis no weakness in any of its Disclosure Controls or Financial ReportingControls that is required to be disclosed in any of the Exchange Act Filings,except as so disclosed.

###  

## (g)                                 Obligationsto Related Parties. Except as set forth on Schedule 12(g),neither it nor any of its Subsidiaries has any obligations to their respectiveofficers, directors, stockholders or employees other than:

##  

### (i)                           forpayment of salary for services rendered and for bonus payments;

###  

### (ii)                        reimbursementfor reasonable expenses incurred on its or its Subsidiaries’ behalf;

###  

### (iii)                     for other standard employeebenefits made generally available to all employees (including stock optionagreements outstanding under any stock option plan approved by its and itsSubsidiaries’ Board of Directors, as applicable); and

###  

### (iv)                    obligationslisted in its and each of its Subsidiary’s financial statements or disclosed inany of the Parent’s Exchange Act Filings.

 

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Except as described above or set forth on Schedule 12(g),none of its officers, directors or, to its knowledge, key employees orstockholders, any of its Subsidiaries or any members of their immediatefamilies, are indebted to it or any of its Subsidiaries, individually or in theaggregate, in excess of $50,000 or have any direct or indirect ownershipinterest in any Person with which it or any of its Subsidiaries is affiliatedor with which it or any of its Subsidiaries has a business relationship, or anyPerson which competes with it or any of its Subsidiaries, other than passiveinvestments in publicly traded companies (representing less than one percent(1%) of such company) which may compete with it or any of itsSubsidiaries. Except as described above, none of its officers, directors orstockholders, or any member of their immediate families, is, directly orindirectly, interested in any material contract with it or any of itsSubsidiaries and no agreements, understandings or proposed transactions arecontemplated between it or any of its Subsidiaries and any such Person. Exceptas set forth on Schedule 12(g), neither it nor any of itsSubsidiaries is a guarantor or indemnitor of any indebtedness of any otherPerson.

 

## (h)                                 Changes.Since the Balance Sheet Date, except as disclosed in any Exchange Act Filing orin any Schedule to this Agreement or to any of the Ancillary Agreements,there has not been:

##  

### (i)                           anychange in its or any of its Subsidiaries’ business, assets, liabilities,condition (financial or otherwise), properties, operations or prospects, which,individually or in the aggregate, has had, or could reasonably be expected tohave, a Material Adverse Effect;

###  

### (ii)                        anyresignation or termination of any of its or its Subsidiaries’ officers, keyemployees or groups of employees;

###  

### (iii)                     any material change, except in theordinary course of business, in its or any of its Subsidiaries’ contingentobligations by way of guaranty, endorsement, indemnity, warranty or otherwise;

###  

### (iv)                    anydamage, destruction or loss, whether or not covered by insurance, which hashad, or could reasonably be expected to have, individually or in the aggregate,a Material Adverse Effect;

###  

### (v)                       anywaiver by it or any of its Subsidiaries of a valuable right or of a materialdebt owed to it;

###  

### (vi)                    anydirect or indirect material loans made by it or any of its Subsidiaries to anyof its or any of its Subsidiaries’ stockholders, employees, officers ordirectors, other than advances made in the ordinary course of business;

###  

### (vii)                 any material change in anycompensation arrangement or agreement with any employee, officer, director orstockholder;

###  

### (viii)              any declaration or payment of anydividend or other distribution of its or any of its Subsidiaries’ assets;

 

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### (ix)                      anylabor organization activity related to it or any of its Subsidiaries;

###  

### (x)                         anydebt, obligation or liability incurred, assumed or guaranteed by it or any ofits Subsidiaries, except those for immaterial amounts and for currentliabilities incurred in the ordinary course of business;

###  

### (xi)                      anysale, assignment or transfer of any Intellectual Property or other intangibleassets;

###  

### (xii)                   any change in any material agreementto which it or any of its Subsidiaries is a party or by which either it or anyof its Subsidiaries is bound which, either individually or in the aggregate,has had, or could reasonably be expected to have, individually or in theaggregate, a Material Adverse Effect;

###  

### (xiii)                any other event or condition of anycharacter that, either individually or in the aggregate, has had, or couldreasonably be expected to have, individually or in the aggregate, a MaterialAdverse Effect; or

###  

### (xiv)               any arrangement or commitment by it orany of its Subsidiaries to do any of the acts described in subsection (i) through(xiii) of this Section 12(h).

###  

## (i)                                     Titleto Properties and Assets; Liens, Etc. Except as set forth on Schedule 12(i),it and each of its Subsidiaries has good and marketable title to theirrespective properties and assets, and good title to its leasehold interests, ineach case subject to no Lien, other than Permitted Liens.

##  

### All facilities, Equipment, Fixtures, vehicles and other propertiesowned, leased or used by it or any of its Subsidiaries are in good operatingcondition and repair and are reasonably fit and usable for the purposes forwhich they are being used. Except as set forth on Schedule 12(i),it and each of its Subsidiaries is in compliance with all material terms ofeach lease to which it is a party or is otherwise bound.

###  

## (j)                                     IntellectualProperty.

##  

### (i)                           Itand each of its Subsidiaries owns or possesses sufficient legal rights to allIntellectual Property necessary for their respective businesses as nowconducted and, to its knowledge as presently proposed to be conducted, withoutany known infringement of the rights of others. There are no outstandingoptions, licenses or agreements of any kind relating to its or any of itsSubsidiary’s Intellectual Property, nor is it or any of its Subsidiaries boundby or a party to any options, licenses or agreements of any kind with respectto the Intellectual Property of any other Person other than such licenses oragreements arising from the purchase of “off the shelf” or standard products.

###  

### (ii)                        Neitherit nor any of its Subsidiaries has received any communications alleging that itor any of its Subsidiaries has violated any of the Intellectual Property orother proprietary rights of any other Person, nor is it or any of itsSubsidiaries aware of any basis therefor.

 

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### (iii)                     Neither it nor any of itsSubsidiaries believes it is or will be necessary to utilize any inventions,trade secrets or proprietary information of any of its employees made prior totheir employment by it or any of its Subsidiaries, except for inventions, tradesecrets or proprietary information that have been rightfully assigned to it orany of its Subsidiaries.

###  

## (k)                                  Compliancewith Other Instruments. Neither it nor any of its Subsidiaries is inviolation or default of (x) any term of its Charter or Bylaws, or (y) anyprovision of any indebtedness, mortgage, indenture, contract, agreement orinstrument to which it is party or by which it is bound or of any judgment, decree,order or writ applicable to it or any of its Subsidiaries, which violation ordefault, in the case of this clause (y), has had, or could reasonably beexpected to have, either individually or in the aggregate, a Material AdverseEffect. The execution, delivery and performance of and compliance with thisAgreement and the Ancillary Agreements to which it is a party, and the issuanceof the Notes and the other Securities each pursuant hereto and thereto, willnot, with or without the passage of time or giving of notice, result in anysuch material violation, or be in conflict with or constitute a default underany such term or provision, or result in the creation of any Lien upon any ofits or any of its Subsidiary’s properties or assets or the suspension,revocation, impairment, forfeiture or nonrenewal of any permit, license,authorization or approval applicable to it or any of its Subsidiaries, theirbusinesses or operations or any of their assets or properties.

##  

## (l)                                     Litigation.Except as set forth on Schedule 12(l), there is no action, suit,proceeding or investigation pending or, to its knowledge, currently threatenedagainst it or any of its Subsidiaries that prevents it or any of itsSubsidiaries from entering into this Agreement or the Ancillary Agreements, orfrom consummating the transactions contemplated hereby or thereby, or which hashad, or could reasonably be expected to have, either individually or in theaggregate, a Material Adverse Effect, or could result in any change in its orany of its Subsidiaries’ current equity ownership, nor is it aware that thereis any basis to assert any of the foregoing. Neither it nor any of itsSubsidiaries is a party to or subject to the provisions of any order, writ,injunction, judgment or decree of any court or government agency orinstrumentality. There is no action, suit, proceeding or investigation by it orany of its Subsidiaries currently pending or which it or any of itsSubsidiaries intends to initiate.

##  

## (m)                               TaxReturns and Payments. It and each of its Subsidiaries has timely filed alltax returns (federal, state and local) required to be filed by it. All taxesshown to be due and payable on such returns, any assessments imposed, and allother taxes due and payable by it and each of its Subsidiaries on or before theClosing Date, have been paid or will be paid prior to the time they becomedelinquent. Except as set forth on Schedule 12(m), neither it norany of its Subsidiaries has been advised:

##  

### (i)                           thatany of its returns, federal, state or other, have been or are being audited asof the date hereof; or

###  

### (ii)                        ofany adjustment, deficiency, assessment or court decision in respect of itsfederal, state or other taxes.

 

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Neither it nor any of its Subsidiaries has anyknowledge of any liability of any tax to be imposed upon its properties orassets as of the date of this Agreement that is not adequately provided for.

 

## (n)                                 Employees.Except as set forth on Schedule 12(n), neither it nor any of itsSubsidiaries has any collective bargaining agreements with any of its employees.There is no labor union organizing activity pending or, to its knowledge,threatened with respect to it or any of its Subsidiaries. Except as disclosedin the Exchange Act Filings or on Schedule 12(n), neither it norany of its Subsidiaries is a party to or bound by any currently effectiveemployment contract, deferred compensation arrangement, bonus plan, incentiveplan, profit sharing plan, retirement agreement or other employee compensationplan or agreement. To its knowledge, none of its or any of its Subsidiaries’employees, nor any consultant with whom it or any of its Subsidiaries hascontracted, is in violation of any term of any employment contract, proprietaryinformation agreement or any other agreement relating to the right of any suchindividual to be employed by, or to contract with, it or any of itsSubsidiaries because of the nature of the business to be conducted by it or anyof its Subsidiaries; and to its knowledge the continued employment by it andits Subsidiaries of their present employees, and the performance of its and itsSubsidiaries contracts with its independent contractors, will not result in anysuch violation. Neither it nor any of its Subsidiaries is aware that any of itsor any of its Subsidiaries’ employees is obligated under any contract(including licenses, covenants or commitments of any nature) or otheragreement, or subject to any judgment, decree or order of any court oradministrative agency that would interfere with their duties to it or any ofits Subsidiaries. Neither it nor any of its Subsidiaries has received anynotice alleging that any such violation has occurred. Except for employees whohave a current effective employment agreement with it or any of itsSubsidiaries, none of its or any of its Subsidiaries’ employees has beengranted the right to continued employment by it or any of its Subsidiaries orto any material compensation following termination of employment with it or anyof its Subsidiaries. Except as set forth on Schedule 12(n), neitherit nor any of its Subsidiaries is aware that any officer, key employee or groupof employees intends to terminate his, her or their employment with it or anyof its Subsidiaries, as applicable, nor does it or any of its Subsidiaries havea present intention to terminate the employment of any officer, key employee orgroup of employees.

##  

## (o)                                 RegistrationRights and Voting Rights. Except as set forth on Schedule 12(o)and except as disclosed in Exchange Act Filings, neither it nor any of itsSubsidiaries is presently under any obligation, and neither it nor any of itsSubsidiaries has granted any rights, to register any of its or any of itsSubsidiaries’ presently outstanding securities or any of its securities that may hereafterbe issued. Except as set forth on Schedule 12(o) and except asdisclosed in Exchange Act Filings, neither it nor any of its Subsidiaries hasentered into any agreement with respect to its or any of its Subsidiaries’voting of equity securities.

##  

## (p)                                 Compliancewith Laws; Permits. Neither it nor any of its Subsidiaries is in violationof the Sarbanes-Oxley Act of 2002 or any SEC related regulation or rule orany rule of the Principal Market promulgated thereunder or any otherapplicable statute, rule, regulation, order or restriction of any domestic orforeign government or any instrumentality or agency thereof in respect of theconduct of its business or the ownership of its properties which has had, orcould reasonably be expected to have, either individually or in the aggregate,a Material Adverse Effect. No governmental orders, permissions, consents,approvals or authorizations are

 

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## required to be obtained and no registrations or declarations arerequired to be filed in connection with the execution and delivery of thisAgreement or any Ancillary Agreement and the issuance of any of the Securities,except such as have been duly and validly obtained or filed, or with respect toany filings that must be made after the Closing Date, as will be filed in atimely manner. It and each of its Subsidiaries has all material franchises,permits, licenses and any similar authority necessary for the conduct of itsbusiness as now being conducted by it, the lack of which could, eitherindividually or in the aggregate, reasonably be expected to have a MaterialAdverse Effect.

##  

## (q)                                 Environmentaland Safety Laws. Neither it nor any of its Subsidiaries is in violation ofany applicable statute, law or regulation relating to the environment oroccupational health and safety, and to its knowledge, no material expendituresare or will be required in order to comply with any such existing statute, lawor regulation. Except as set forth on Schedule 12(q), no HazardousMaterials (as defined below) are used or have been used, stored, or disposed ofby it or any of its Subsidiaries or, to its knowledge, by any other Person onany property owned, leased or used by it or any of its Subsidiaries. For thepurposes of the preceding sentence, “Hazardous Materials” shall mean:

##  

### (i)                           materialswhich are listed or otherwise defined as “hazardous” or “toxic” under anyapplicable local, state, federal and/or foreign laws and regulations thatgovern the existence and/or remedy of contamination on property, the protectionof the environment from contamination, the control of hazardous wastes, orother activities involving hazardous substances, including building materials;and

###  

### (ii)                        anypetroleum products or nuclear materials.

###  

## (r)                                    ValidOffering. Assuming the accuracy of the representations and warranties ofLaurus contained in this Agreement, the offer and issuance of the Securitieswill be exempt from the registration requirements of the Securities Act of1933, as amended (the “Securities Act”), and will have been registeredor qualified (or are exempt from registration and qualification) under theregistration, permit or qualification requirements of all applicable statesecurities laws.

##  

## (s)                                  FullDisclosure. It and each of its Subsidiaries has provided Laurus with allinformation requested by Laurus in connection with Laurus’ decision to enterinto this Agreement. Neither this Agreement, the Ancillary Agreements nor theexhibits and schedules hereto and thereto nor any other document delivered byit or any of its Subsidiaries to Laurus or its attorneys or agents inconnection herewith or therewith or with the transactions contemplated herebyor thereby, contain any untrue statement of a material fact nor omit to state amaterial fact necessary in order to make the statements contained herein ortherein, in light of the circumstances in which they are made, not misleading. Anyfinancial projections and other estimates provided to Laurus by it or any ofits Subsidiaries were based on its and its Subsidiaries’ experience in theindustry and on assumptions of fact and opinion as to future events which it orany of its Subsidiaries, at the date of the issuance of such projections orestimates, believed to be reasonable.

 

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## (t)                                    Insurance.It and each of its Subsidiaries has general commercial, product liability, fireand casualty insurance policies with coverages which it believes are customaryfor companies similarly situated to it and its Subsidiaries in the same orsimilar business.

##  

## (u)                                 SECReports and Financial Statements. Except as set forth on Schedule 12(u),it and each of its Subsidiaries has filed all proxy statements, reports andother documents required to be filed by it under the Exchange Act. The Parenthas furnished Laurus with copies of:  (i) itsAnnual Report on Form 10-KSB for its fiscal year ended June 30, 2005;and (ii) its Quarterly Report on Form 10-QSB for its fiscal quarterended September 30, 2005 and the Form 8-K filings which it has madeduring its fiscal year 2005 to date (collectively, the “SEC Reports”). Exceptas set forth on Schedule 12(u), each SEC Report was, at the time ofits filing, in substantial compliance with the requirements of its respective form andnone of the SEC Reports, nor the financial statements (and the notes thereto)included in the SEC Reports, as of their respective filing dates, contained anyuntrue statement of a material fact or omitted to state a material factrequired to be stated therein or necessary to make the statements therein, inlight of the circumstances under which they were made, not misleading. Suchfinancial statements have been prepared in accordance with GAAP applied on aconsistent basis during the periods involved (except (i) as may beotherwise indicated in such financial statements or the notes thereto or (ii) inthe case of unaudited interim statements, to the extent they may notinclude footnotes or may be condensed) and fairly present in all materialrespects the financial condition, the results of operations and cash flows ofthe Parent and its Subsidiaries, on a consolidated basis, as of, and for, theperiods presented in each such SEC Report.

##  

## (v)                                 Listing.The Parent’s Common Stock is listed or quoted, as applicable, on the PrincipalMarket and satisfies all requirements for the continuation of such listing orquotation, as applicable, and the Parent shall do all things necessary for thecontinuation of such listing or quotation, as applicable. The Parent has notreceived any notice that its Common Stock will be delisted from, or no longerquoted on, as applicable, the Principal Market or that its Common Stock doesnot meet all requirements for such listing or quotation, as applicable.

##  

## (w)                               NoIntegrated Offering. Neither it, nor any of its Subsidiaries nor any of itsAffiliates, nor any Person acting on its or their behalf, has directly orindirectly made any offers or sales of any security or solicited any offers tobuy any security under circumstances that would cause the offering of theSecurities pursuant to this Agreement or any Ancillary Agreement to beintegrated with prior offerings by it for purposes of the Securities Act whichwould prevent it from issuing the Securities pursuant to Rule 506 underthe Securities Act, or any applicable exchange-related stockholder approvalprovisions, nor will it or any of its Affiliates or Subsidiaries take anyaction or steps that would cause the offering of the Securities to beintegrated with other offerings.

##  

## (x)                                   StopTransfer. The Securities are restricted securities as of the date of thisAgreement. Neither it nor any of its Subsidiaries will issue any stop transferorder or other order impeding the sale and delivery of any of the Securities atsuch time as the Securities are registered for public sale or an exemption fromregistration is available, except as required by state and federal securitieslaws.

 

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## (y)                                 Dilution.It specifically acknowledges that the Parent’s issuance of the Grant Shares andthe Parent’s obligation to issue the shares of Common Stock upon conversion ofthe Secured Convertible Term Note and exercise of the Warrants is binding uponthe Parent and enforceable regardless of the dilution such issuance may haveon the ownership interests of other shareholders of the Parent.

##  

## (z)                                   PatriotAct. It certifies that, to its knowledge, neither it nor any of itsSubsidiaries has been designated, nor is or shall be owned or controlled, by a “suspectedterrorist” as defined in Executive Order 13224. It hereby acknowledges thatLaurus seeks to comply with all applicable laws concerning money laundering andrelated activities. In furtherance of those efforts, it hereby represents,warrants and covenants that:  (i) noneof the cash or property that it or any of its Subsidiaries will pay or willcontribute to Laurus has been or shall be derived from, or related to, anyactivity that is deemed criminal under United States law; and (ii) nocontribution or payment by it or any of its Subsidiaries to Laurus, to theextent that they are within its or any such Subsidiary’s control shall causeLaurus to be in violation of the United States Bank Secrecy Act, the UnitedStates International Money Laundering Control Act of 1986 or the United StatesInternational Money Laundering Abatement and Anti-Terrorist Financing Act of2001. It shall promptly notify Laurus if any of these representations,warranties and covenants ceases to be true and accurate regarding it or any ofits Subsidiaries. It shall provide Laurus with any additional informationregarding it and each Subsidiary thereof that Laurus deems necessary orconvenient to ensure compliance with all applicable laws concerning moneylaundering and similar activities. It understands and agrees that if at anytime it is discovered that any of the foregoing representations, warranties andcovenants are incorrect, or if otherwise required by applicable law orregulation related to money laundering or similar activities, Laurus may undertakeappropriate actions to ensure compliance with applicable law or regulation,including but not limited to segregation and/or redemption of Laurus’investment in it. It further understands that Laurus may releaseconfidential information about it and its Subsidiaries and, if applicable, anyunderlying beneficial owners, to proper authorities if Laurus, in its solediscretion, determines that it is in the best interests of Laurus in light ofrelevant rules and regulations under the laws set forth in subsection (ii) above.

##  

## (aa)                            CompanyName; Locations of Offices, Records and Collateral. Schedule 12(aa)sets forth each Company’s name as it appears in official filings in the stateof its organization, the type of entity of each Company, the organizationalidentification number issued by each Company’s state of organization or astatement that no such number has been issued, each Company’s state oforganization, and the location of each Company’s chief executive office,corporate offices, warehouses, other locations of Collateral and locationswhere records with respect to Collateral are kept (including in each case thecounty of such locations) and, except as set forth in such Schedule 12(aa),such locations have not changed during the preceding twelve months. As of theClosing Date, during the prior five years, except as set forth in Schedule 12(aa),no Company has been known as or conducted business in any other name (includingtrade names). Each Company has only one state of organization.

##  

## (bb)                          ERISA.Based upon the Employee Retirement Income Security Act of 1974 (“ERISA”),and the regulations and published interpretations thereunder:  (i) neither it nor any of itsSubsidiaries has engaged in any Prohibited Transactions (as defined in Section 406of ERISA and Section 4975 of the Code); (ii) it and each of itsSubsidiaries has met all applicable

 

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## minimum funding requirements under Section 302 of ERISA in respectof its plans; (iii) neither it nor any of its Subsidiaries has anyknowledge of any event or occurrence which would cause the Pension BenefitGuaranty Corporation to institute proceedings under Title IV of ERISA toterminate any employee benefit plan(s); (iv) neither it nor any of itsSubsidiaries has any fiduciary responsibility for investments with respect toany plan existing for the benefit of persons other than its or such Subsidiary’semployees; and (v) neither it nor any of its Subsidiaries has withdrawn,completely or partially, from any multi-employer pension plan so as to incurliability under the Multiemployer Pension Plan Amendments Act of 1980.

##  

# 13.                                 Covenants. Each Company, as applicable, covenants andagrees with Laurus as follows:

#  

## (a)                                  Stop-Orders.It shall advise Laurus, promptly after it receives notice of issuance by theSEC, any state securities commission or any other regulatory authority of anystop order or of any order preventing or suspending any offering of anysecurities of the Parent, or of the suspension of the qualification of theCommon Stock of the Parent for offering or sale in any jurisdiction, or theinitiation of any proceeding for any such purpose.

##  

## (b)                                 Listing.It shall promptly secure the listing or quotation, as applicable, of the GrantShares and the shares of Common Stock issuable upon conversion of the SecuredConvertible Term Note and exercise of the Warrants on the Principal Market uponwhich shares of Common Stock are listed or quoted, as applicable, (subject toofficial notice of issuance) and shall maintain such listing or quotation, asapplicable, so long as any other shares of Common Stock shall be so listed orquoted, as applicable. The Parent shall maintain the listing or quotation, asapplicable, of its Common Stock on the Principal Market, and will comply in allmaterial respects with the Parent’s reporting, filing and other obligationsunder the bylaws or rules of the National Association of SecuritiesDealers (“NASD”) and such exchanges, as applicable.

##  

## (c)                                  MarketRegulations. It shall notify the SEC, NASD and applicable stateauthorities, in accordance with their requirements, of the transactionscontemplated by this Agreement, and shall take all other necessary action andproceedings as may be required and permitted by applicable law, rule andregulation, for the legal and valid issuance of the Securities to Laurus andpromptly provide copies thereof to Laurus.

##  

## (d)                                 ReportingRequirements. It shall timely file with the SEC all reports required to befiled pursuant to the Exchange Act and refrain from terminating its status asan issuer required by the Exchange Act to file reports thereunder even if theExchange Act or the rules or regulations thereunder would permit suchtermination.

##  

## (e)                                  Useof Funds. It shall use the proceeds of the Loans (i) to repay in fullthe Existing Indebtedness and (ii) for general working capital purposesonly.

##  

## (f)                                    Accessto Facilities. It shall, and shall cause each of its Subsidiaries to,permit any representatives designated by Laurus (or any successor of Laurus),upon reasonable notice and during normal business hours, at Company’s expenseand accompanied by a representative of Company Agent (provided that no suchprior notice shall be required to be

 

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## given and no such representative shall be required to accompany Laurusin the event Laurus believes such access is necessary to preserve or protectthe Collateral or following the occurrence and during the continuance of anEvent of Default), to:

##  

### (i)                           visitand inspect any of its or any such Subsidiary’s properties;

###  

### (ii)                        examineits or any such Subsidiary’s corporate and financial records (unless suchexamination is not permitted by federal, state or local law or by contract) andmake copies thereof or extracts therefrom; and

###  

### (iii)                     discuss its or any such Subsidiary’saffairs, finances and accounts with its or any such Subsidiary’s directors,officers and Accountants.

###  

Notwithstanding the foregoing, neither it nor any ofits Subsidiaries shall provide any material, non-public information to Laurusunless Laurus signs a confidentiality agreement and otherwise complies withRegulation FD, under the federal securities laws.

 

## (g)                                 Taxes.It shall, and shall cause each of its Subsidiaries to, promptly pay anddischarge, or cause to be paid and discharged, when due and payable, all lawfultaxes, assessments and governmental charges or levies imposed upon it and itsSubsidiaries’ income, profits, property or business, as the case may be;provided, however, that any such tax, assessment, charge or levy need not bepaid currently if (i) the validity thereof shall currently and diligentlybe contested in good faith by appropriate proceedings, (ii) such tax,assessment, charge or levy shall have no effect on the Lien priority of Laurusin the Collateral, and (iii) if it and/or such Subsidiary, as applicable,shall have set aside on its and/or such Subsidiary’s books adequate reserveswith respect thereto in accordance with GAAP; and provided, further, that itshall, and shall cause each of its Subsidiaries to, pay all such taxes,assessments, charges or levies forthwith upon the commencement of proceedingsto foreclose any lien which may have attached as security therefor.

##  

## (h)                                 Insurance.It shall bear the full risk of loss from any loss of any nature whatsoever withrespect to the Collateral. It and each of its Subsidiaries shall keep itsassets which are of an insurable character insured by financially sound andreputable insurers against loss or damage by fire, explosion and other riskscustomarily insured against by companies in similar business similarly situatedas it and its Subsidiaries; and it and its Subsidiaries shall maintain, withfinancially sound and reputable insurers, insurance against other hazards andrisks and liability to persons and property to the extent and in the mannerwhich it and/or such Subsidiary thereof reasonably believes is customary forcompanies in similar business similarly situated as it and its Subsidiaries andto the extent available on commercially reasonable terms. It and each of itsSubsidiaries will jointly and severally bear the full risk of loss from anyloss of any nature whatsoever with respect to the assets pledged to Laurus assecurity for its obligations hereunder and under the Ancillary Agreements. Atits own cost and expense in amounts and with carriers reasonably acceptable toLaurus, it and each of its Subsidiaries shall (i) keep all their insurableproperties and properties in which they have an interest insured against thehazards of fire, flood, sprinkler leakage, those hazards covered by extendedcoverage insurance and such other hazards, and for such amounts, as iscustomary in the case of companies engaged in businesses similar to it or therespective Subsidiary’s including business interruption

 

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## insurance; (ii) maintain a bond in such amounts as is customary inthe case of companies engaged in businesses similar to it and its Subsidiaries’insuring against larceny, embezzlement or other criminal misappropriation ofinsured’s officers and employees who may either singly or jointly withothers at any time have access to its or any of its Subsidiaries assets orfunds either directly or through governmental authority to draw upon such fundsor to direct generally the disposition of such assets; (iii) maintainpublic and product liability insurance against claims for personal injury,death or property damage suffered by others; (iv) maintain all such worker’scompensation or similar insurance as may be required under the laws of anystate or jurisdiction in which it or any of its Subsidiaries is engaged inbusiness; and (v) furnish Laurus with (x) copies of all policies andevidence of the maintenance of such policies at least thirty (30) days beforeany expiration date, (y) excepting its and its Subsidiaries’ workers’compensation policy, endorsements to such policies naming Laurus as “co-insured”or “additional insured” and appropriate loss payable endorsements in form andsubstance reasonably satisfactory to Laurus, naming Laurus as lenders losspayee, and (z) evidence that as to Laurus the insurance coverage shall not beimpaired or invalidated by any act or neglect of any Company or any of itsSubsidiaries and the insurer will provide Laurus with at least thirty (30) daysnotice prior to cancellation. It shall instruct the insurance carriers that inthe event of any loss thereunder, the carriers shall make payment for such lossto Laurus and not to any Company or any of its Subsidiaries and Laurus jointly.If any insurance losses are paid by check, draft or other instrument payable toany Company and/or any of its Subsidiaries and Laurus jointly, Laurus may endorse,as applicable, such Company’s and/or any of its Subsidiaries’ name thereon anddo such other things as Laurus may deem advisable to reduce the same tocash. Laurus is hereby authorized to adjust and compromise claims. All lossrecoveries received by Laurus upon any such insurance may be applied tothe Obligations, in such order as Laurus in its sole discretion shall determineor shall otherwise be delivered to Company Agent for the benefit of theapplicable Company and/or its Subsidiaries. Any surplus shall be paid by Laurusto Company Agent for the benefit of the applicable Company and/or itsSubsidiaries, or applied as may be otherwise required by law. Anydeficiency thereon shall be paid, as applicable, by Companies and theirSubsidiaries to Laurus, on demand.

##  

## (i)                                     IntellectualProperty. It shall, and shall cause each of its Subsidiaries to, maintainin full force and effect its corporate existence, rights and franchises and alllicenses and other rights to use Intellectual Property owned or possessed by itand reasonably deemed to be necessary to the conduct of its business.

##  

## (j)                                     Properties.It shall, and shall cause each of its Subsidiaries to, keep its properties ingood repair, working order and condition, reasonable wear and tear excepted,and from time to time make all needful and proper repairs, renewals,replacements, additions and improvements thereto; and it shall, and shall causeeach of its Subsidiaries to, at all times comply with each provision of allleases to which it is a party or under which it occupies property if the breachof such provision could reasonably be expected to have a Material AdverseEffect.

##  

## (k)                                  Confidentiality.It shall not, and shall not permit any of its Subsidiaries to, disclose, andwill not include in any public announcement, the name of Laurus, unlessexpressly agreed to by Laurus or unless and until such disclosure is requiredby the terms of this Agreement, law or applicable regulation, and then only tothe extent of such requirement.

 

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## Notwithstanding the foregoing, each Company and its Subsidiaries may discloseLaurus’ identity and the terms of this Agreement to its current and prospectivedebt and equity financing sources.

##  

## (l)                                     RequiredApprovals. It shall not, and shall not permit any of its Subsidiaries to,without the prior written consent of Laurus, (i) create, incur, assume orsuffer to exist any indebtedness (exclusive of trade debt) whether secured orunsecured other than each Company’s indebtedness to Laurus and as set forth on Schedule 13(l)(i) attachedhereto and made a part hereof; (ii) cancel any debt owing to it inexcess of $50,000 in the aggregate during any 12 month period; (iii) assume,guarantee, endorse or otherwise become directly or contingently liable inconnection with any obligations of any other Person, except the endorsement ofnegotiable instruments by it or its Subsidiaries for deposit or collection orsimilar transactions in the ordinary course of business; (iv) directly orindirectly declare, pay or make any dividend or distribution on any class ofits Stock or apply any of its funds, property or assets to the purchase,redemption or other retirement of any of its or its Subsidiaries’ Stockoutstanding on the date hereof, or issue any preferred stock; (v) purchaseor hold beneficially any Stock or other securities or evidences of indebtednessof, make or permit to exist any loans or advances to, or make any investment oracquire any interest whatsoever in, any other Person, including any partnershipor joint venture, except (x) travel advances, (y) loans to its and its Subsidiaries’officers and employees not exceeding at any one time an aggregate of $10,000,and (z) loans to its existing Subsidiaries so long as such Subsidiaries aredesignated as either a co-borrower hereunder or has entered into such guarantyand security documentation required by Laurus, including, without limitation,to grant to Laurus a first priority perfected security interest insubstantially all of such Subsidiary’s assets to secure the Obligations; (vi) createor permit to exist any Subsidiary, other than any Subsidiary in existence onthe date hereof and listed in Schedule 12(b) unless such newSubsidiary is a wholly-owned Subsidiary and is designated by Laurus as either aco-borrower or guarantor hereunder and such Subsidiary shall have entered intoall such documentation required by Laurus, including, without limitation, togrant to Laurus a first priority perfected security interest in substantiallyall of such Subsidiary’s assets to secure the Obligations; (vii) directlyor indirectly, prepay any indebtedness (other than to Laurus and in theordinary course of business), or repurchase, redeem, retire or otherwiseacquire any indebtedness (other than to Laurus and in the ordinary course ofbusiness) except to make scheduled payments of principal and interest thereof; (viii) enterinto any merger, consolidation or other reorganization with or into any otherPerson or acquire all or a portion of the assets or Stock of any Person orpermit any other Person to consolidate with or merge with it, unless (1) suchCompany is the surviving entity of such merger or consolidation, (2) noEvent of Default shall exist immediately prior to and after giving effect tosuch merger or consolidation, (3) such Company shall have provided Lauruscopies of all documentation relating to such merger or consolidation and (4) suchCompany shall have provided Laurus with at least thirty (30) days’ priorwritten notice of such merger or consolidation; (ix) materially change thenature of the business in which it is presently engaged; (x) become subject to(including, without limitation, by way of amendment to or modification of) anyagreement or instrument which by its terms would (under any circumstances)restrict its or any of its Subsidiaries’ right to perform the provisionsof this Agreement or any of the Ancillary Agreements; (xi) change its fiscalyear or make any changes in accounting treatment and reporting practiceswithout prior written notice to Laurus except as required by GAAP or in the taxreporting treatment or except as required by law; (xii) enter into anytransaction with any employee, director or Affiliate, except in the ordinarycourse on arms-length terms; (xiii) bill Accounts under any name except thepresent

 

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## name of such Company; or (xiv) sell, lease, transfer or otherwisedispose of any of its properties or assets, or any of the properties or assetsof its Subsidiaries, except for (1) the sale of Inventory in the ordinarycourse of business and (2) the disposition or transfer in the ordinarycourse of business during any fiscal year of obsolete and worn-out Equipmentand only to the extent that (x) the proceeds of any such disposition are usedto acquire replacement Equipment which is subject to Laurus’ first prioritysecurity interest or are used to repay Loans or to pay general corporateexpenses, or (y) following the occurrence of an Event of Default whichcontinues to exist, the proceeds of which are remitted to Laurus to be held ascash collateral for the Obligations.

##  

## (m)                               Reissuanceof Securities. The Parent shall reissue certificates representing theSecurities without the legends set forth in Section 39 below at such timeas:

##  

### (i)                           theholder thereof is permitted to dispose of such Securities pursuant to Rule 144(k)under the Securities Act; or

###  

### (ii)                        uponresale subject to an effective registration statement after such Securities areregistered under the Securities Act.

###  

The Parent agrees to cooperate with Laurus inconnection with all resales pursuant to Rule 144(d) and Rule 144(k)and to cause its counsel to provide such legal opinions as are necessary toallow such resales provided the Parent and its counsel receive reasonablyrequested representations from Laurus and broker, if any.

 

## (n)                                 Opinion.On the Closing Date, it shall deliver to Laurus an opinion acceptable to Laurusfrom each Company’s legal counsel. Each Company will provide, at the Companies’joint and several expense, such other legal opinions in the future as arereasonably necessary for the resale of the Grant Shares, the conversion of theSecured Convertible Term Note and the exercise of the Warrants.

##  

## (o)                                 LegalName, etc. It shall not, without providing Laurus with 30 days priorwritten notice, change (i) its name as it appears in the official filingsin the state of its organization, (ii) the type of legal entity it is, (iii) itsorganization identification number, if any, issued by its state oforganization, (iv) its state of organization or (v) amend itscertificate of incorporation, by-laws or other organizational document.

##  

## (p)                                 Compliancewith Laws. The operation of each of its and each of its Subsidiaries’business is and shall continue to be in compliance in all material respectswith all applicable federal, state and local laws, rules and ordinances,including to all laws, rules, regulations and orders relating to taxes, paymentand withholding of payroll taxes, employer and employee contributions andsimilar items, securities, employee retirement and welfare benefits, employee healthand safety and environmental matters.

##  

## (q)                                 Notices.It and each of its Subsidiaries shall promptly inform Laurus in writingof:  (i) the commencement of allproceedings and investigations by or before and/or the receipt of any noticesfrom, any governmental or nongovernmental body and all actions and proceedingsin any court or before any arbitrator against or in any way concerning anyevent which could reasonably be expected to have singly or in the aggregate, aMaterial Adverse

 

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## Effect; (ii) any change which has had, or could reasonably beexpected to have, a Material Adverse Effect; (iii) any Event of Default orDefault; and (iv) any default or any event which with the passage of timeor giving of notice or both would constitute a default under any agreement forthe payment of money to which it or any of its Subsidiaries is a party or bywhich it or any of its Subsidiaries or any of its or any such Subsidiary’sproperties may be bound the breach of which would have a Material AdverseEffect.

##  

## (r)                                    MarginStock. It shall not permit any of the proceeds of the Loans made hereunderto be used directly or indirectly to “purchase” or “carry” “margin stock” or torepay indebtedness incurred to “purchase” or “carry” “margin stock” within therespective meanings of each of the quoted terms under Regulation U of the Boardof Governors of the Federal Reserve System as now and from time to timehereafter in effect.

##  

## (s)                                  OfferingRestrictions. Except as previously disclosed in the SEC Reports or in theExchange Act Filings, or stock or stock options granted to its employees ordirectors, neither it nor any of its Subsidiaries shall, prior to the fullrepayment or conversion of the Secured Convertible Term Note (together with allaccrued and unpaid interest and fees related thereto), (x) enter into anyequity line of credit agreement or similar agreement or (y) issue, or enterinto any agreement to issue, any securities with a variable/floating conversionand/or pricing feature which are or could be (by conversion or registration)free-trading securities (i.e. common stock subject to a registrationstatement).

##  

## (t)                                    Authorizationand Reservation of Shares. The Parent shall at all times have authorizedand reserved a sufficient number of shares of Common Stock to provide for theissuance of the Grant Shares, the conversion of the Secured Convertible TermNote and exercise of the Warrants.

##  

## (u)                                 FinancingRight of First Refusal.

##  

### (i)                           Ithereby grants to Laurus a right of first refusal to provide any AdditionalFinancing (as defined below) to be issued by any Company and/or any of itsSubsidiaries (the “Additional Financing Parties”), subject to thefollowing terms and conditions. From and after the date hereof, prior to theincurrence of any additional convertible indebtedness by the AdditionalFinancing Parties (an “Additional Financing”), Company Agent shallnotify Laurus of such Additional Financing. In connection therewith, CompanyAgent shall submit a fully executed term sheet (a “Proposed Term Sheet”)to Laurus setting forth the terms, conditions and pricing of any suchAdditional Financing (such financing to be negotiated on “arm’s length” termsand the terms thereof to be negotiated in good faith) proposed to be enteredinto by the Additional Financing Parties. Laurus shall have the right, but notthe obligation, to deliver to Company Agent its own proposed term sheet (the “LaurusTerm Sheet”) setting forth the terms and conditions upon which Laurus wouldbe willing to provide such Additional Financing to the Additional FinancingParties. The Laurus Term Sheet shall contain terms no less favorable to theAdditional Financing Parties than those outlined in Proposed Term Sheet. Laurusshall deliver to Company Agent the Laurus Term Sheet within ten Business Daysof receipt of each such Proposed Term Sheet. If the provisions of the LaurusTerm Sheet are at least as favorable to the Additional Financing Parties as theprovisions of the Proposed Term Sheet, the Additional

 

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### Financing Parties shall enter into and consummate the AdditionalFinancing transaction outlined in the Laurus Term Sheet.

###  

### (ii)                        Itshall not, and shall not permit its Subsidiaries to, agree, directly or indirectly,to any restriction with any Person which limits the ability of Laurus toconsummate an Additional Financing with, or provide additional debt or equityfinancing to, it or any of its Subsidiaries.

###  

## (v)                                 Prohibitionof Amendments to Subordinated Debt Documentation. It shall not, without theprior written consent of Laurus, amend, modify or in any way alter the terms ofany of the Subordinated Debt Documentation.

##  

## (w)                               Prohibitionof Grant of Collateral for Subordinated Debt Documentation. It shall not, withoutthe prior written consent of Laurus, grant or permit any of its Subsidiaries togrant to any Person any Collateral of such Company or any collateral of any ofits Subsidiaries as security for any obligation arising under the SubordinatedDebt Documentation.

##  

## (x)                                   Prohibitionsof Payment Under Subordinated Debt Documentation. Neither it nor any of itsSubsidiaries shall, without the prior written consent of Laurus, make anypayments in respect of the indebtedness evidenced by the Subordinated Debt Documentation,other than as expressly permitted by the terms thereof.

##  

# 14.                                 FurtherAssurances. At any time and fromtime to time, upon the written request of Laurus and at the sole expense ofCompanies, each Company shall promptly and duly execute and deliver any and allsuch further instruments and documents and take such further action as Laurus may request(a) to obtain the full benefits of this Agreement and the AncillaryAgreements, (b) to protect, preserve and maintain Laurus’ rights in theCollateral and under this Agreement or any Ancillary Agreement, and/or (c) toenable Laurus to exercise all or any of the rights and powers herein granted orany Ancillary Agreement.

#  

# 15.                                 Representations,Warranties and Covenants of Laurus. Laurus hereby represents, warrants and covenants to each Company asfollows:

#  

## (a)                                  RequisitePower and Authority. Laurus has all necessary power and authority under allapplicable provisions of law to execute and deliver this Agreement and theAncillary Agreements and to carry out their provisions. All corporate action onLaurus’ part required for the lawful execution and delivery of thisAgreement and the Ancillary Agreements have been or will be effectively takenprior to the Closing Date. Upon their execution and delivery, this Agreementand the Ancillary Agreements shall be valid and binding obligations of Laurus,enforceable in accordance with their terms, except (a) as limited byapplicable bankruptcy, insolvency, reorganization, moratorium or other laws ofgeneral application affecting enforcement of creditors’ rights, and (b) aslimited by general principles of equity that restrict the availability ofequitable and legal remedies.

##  

## (b)                                 InvestmentRepresentations. Laurus understands that the Securities are being offeredand sold pursuant to an exemption from registration contained in the SecuritiesAct based in part upon Laurus’ representations contained in thisAgreement, including, without limitation, that Laurus is an “accreditedinvestor” within the meaning of Regulation D under the

 

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## Securities Act. Laurus has received or has had full access to all theinformation it considers necessary or appropriate to make an informedinvestment decision with respect to the Grant Shares, the Notes to be issued toit under this Agreement and the Securities acquired by it upon the conversionof the Secured Convertible Term Note.

##  

## (c)                                  LaurusBears Economic Risk. Laurus has substantial experience in evaluating andinvesting in private placement transactions of securities in companies similarto the Parent so that it is capable of evaluating the merits and risks of itsinvestment in the Parent and has the capacity to protect its own interests. Laurusmust bear the economic risk of this investment until the Securities are soldpursuant to (i) an effective registration statement under the SecuritiesAct, or (ii) an exemption from registration is available.

##  

## (d)                                 Investmentfor Own Account. The Securities are being issued to Laurus for its ownaccount for investment only, and not as a nominee or agent and not with a viewtowards or for resale in connection with their distribution.

##  

## (e)                                  LaurusCan Protect Its Interest. Laurus represents that by reason of its, or ofits management’s, business and financial experience, Laurus has the capacity toevaluate the merits and risks of its investment in the Notes, and theSecurities and to protect its own interests in connection with the transactionscontemplated in this Agreement, and the Ancillary Agreements. Further, Laurusis aware of no publication of any advertisement in connection with thetransactions contemplated in the Agreement or the Ancillary Agreements.

##  

## (f)                                    AccreditedInvestor. Laurus represents that it is an accredited investor within themeaning of Regulation D under the Securities Act.

##  

## (g)                                 Shorting.Neither Laurus nor any of its Affiliates or investment partners has, will, orwill cause any Person, to directly engage in “short sales” of the Parent’sCommon Stock as long as any Note shall be outstanding.

##  

## (h)                                 PatriotAct. Laurus certifies that, to the best of Laurus’ knowledge, Laurus hasnot been designated, and is not owned or controlled, by a “suspected terrorist”as defined in Executive Order 13224. Laurus seeks to comply with all applicablelaws concerning money laundering and related activities. In furtherance ofthose efforts, Laurus hereby represents, warrants and covenants that:  (i) none of the cash or property thatLaurus will use to make the Loans has been or shall be derived from, or relatedto, any activity that is deemed criminal under United States law; and (ii) nodisbursement by Laurus to any Company to the extent within Laurus’ control,shall cause Laurus to be in violation of the United States Bank Secrecy Act,the United States International Money Laundering Control Act of 1986 or theUnited States International Money Laundering Abatement and Anti-TerroristFinancing Act of 2001. Laurus shall promptly notify the Company Agent if any ofthese representations ceases to be true and accurate regarding Laurus. Laurusagrees to provide the Company any additional information regarding Laurus thatthe Company deems necessary or convenient to ensure compliance with allapplicable laws concerning money laundering and similar activities. Laurusunderstands and agrees that if at any time it is discovered that any of theforegoing representations are incorrect, or if otherwise required by applicablelaw or regulation related to money laundering similar activities, Laurus may undertakeappropriate actions to ensure

 

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## compliance with applicable law or regulation, including but not limitedto segregation and/or redemption of Laurus’ investment in the Parent. Laurusfurther understands that the Parent may release information about Laurusand, if applicable, any underlying beneficial owners, to proper authorities ifthe Parent, in its sole discretion, determines that it is in the best interestsof the Parent in light of relevant rules and regulations under the lawsset forth in subsection (ii) above.

##  

## (i)                                     Limitationon Acquisition of Common Stock. Notwithstanding anything to the contrarycontained in this Agreement, any Ancillary Agreement, or any document,instrument or agreement entered into in connection with any other transactionentered into by and between Laurus and any Company (and/or Subsidiaries orAffiliates of any Company), Laurus shall not acquire stock in the Parent(including, without limitation, pursuant to a contract to purchase, by exercisingan option or warrant, by converting any other security or instrument, byacquiring or exercising any other right to acquire, shares of stock or othersecurity convertible into shares of stock in the Parent, or otherwise, and suchoptions, warrants, conversion or other rights shall not be exercisable) to theextent such stock acquisition would cause any interest (including any originalissue discount) payable by any Company to Laurus not to qualify as portfoliointerest, within the meaning of Section 881(c)(2) of the InternalRevenue Code of 1986, as amended (the “Code”) by reason of Section 881(c)(3) ofthe Code, taking into account the constructive ownership rules under Section 871(h)(3)(C) ofthe Code (the “Stock Acquisition Limitation”). The Stock AcquisitionLimitation shall automatically become null and void without any notice to anyCompany upon the earlier to occur of either (a) the Parent’s delivery toLaurus of a Notice of Redemption (as defined in the Notes) or (b) theexistence of an Event of Default at a time when the average closing price ofthe Common Stock as reported by Bloomberg, L.P. on the Principal Market for theimmediately preceding five trading days is greater than or equal to 150% of theFixed Conversion Price (as defined in the Secured Convertible Term Note).

##  

# 16.                                 Powerof Attorney. Each Company herebyappoints Laurus, or any other Person whom Laurus may designate as suchCompany’s attorney, with power to:  (i) endorsesuch Company’s name on any checks, notes, acceptances, money orders, drafts orother forms of payment or security that may come into Laurus’ possession; (ii) signsuch Company’s name on any invoice or bill of lading relating to any Accounts,drafts against Account Debtors, schedules and assignments of Accounts, noticesof assignment, financing statements and other public records, verifications ofAccount and notices to or from Account Debtors; (iii) verify the validity,amount or any other matter relating to any Account by mail, telephone,telegraph or otherwise with Account Debtors; (iv) do all things necessaryto carry out this Agreement, any Ancillary Agreement and all related documents;and (v) on or after the occurrence and during the continuation of an Eventof Default, notify the post office authorities to change the address fordelivery of such Company’s mail to an address designated by Laurus, and toreceive, open and dispose of all mail addressed to such Company. Each Companyhereby ratifies and approves all acts of the attorney. Neither Laurus, nor theattorney will be liable for any acts or omissions or for any error of judgmentor mistake of fact or law, except for gross negligence or willful misconduct. Thispower, being coupled with an interest, is irrevocable so long as Laurus has asecurity interest and until the Obligations have been fully satisfied. Thepower of attorney set forth in this Section 16 shall only be exercisablefollowing the occurrence and during the continuation of an Event of Default,except with respect to the filing of financing statements, in which case suchpower of attorney shall be exercisable on and after the date hereof.

 

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# 17.                                 Termof Agreement. Laurus’ agreement tomake Revolving Loans and extend financial accommodations under and inaccordance with the terms of this Agreement or any Ancillary Agreement shallcontinue in full force and effect until the expiration of the Term. At Laurus’election following the occurrence of an Event of Default, Laurus may terminatethis Agreement. The termination of the Agreement shall not affect any of Laurus’rights hereunder or any Ancillary Agreement and the provisions hereof andthereof shall continue to be fully operative until all transactions enteredinto, rights or interests created and the Obligations have been irrevocablydisposed of, concluded or liquidated. Notwithstanding the foregoing, Laurusshall release its security interests at any time after thirty (30) days noticeupon irrevocable payment to it of all Obligations if each shall have paid toLaurus an early payment fee in an amount equal to (1) five percent (5.0%)of the Capital Availability Amount if such payment occurs prior to the firstanniversary of the Closing Date and (2) four percent (4.0%) of the CapitalAvailability Amount if such payment occurs thereafter during the Term; such feebeing intended to compensate Laurus for its costs and expenses incurred ininitially approving this Agreement or extending same. Such early payment feeshall be due and payable jointly and severally by the Companies to Laurus upontermination by acceleration of this Agreement elected by Laurus due to theoccurrence and continuance of an Event of Default.

#  

# 18.                                 Terminationof Lien. The Liens and rightsgranted to Laurus hereunder and any Ancillary Agreements and the financingstatements filed in connection herewith or therewith shall continue in fullforce and effect, notwithstanding the termination of this Agreement or the factthat any Company’s account may from time to time be temporarily in a zeroor credit position, until all of the Obligations have been indefeasibly paid orperformed in full after the termination of this Agreement. Laurus shall not berequired to send termination statements to any Company, or to file them withany filing office, unless and until this Agreement and the Ancillary Agreementsshall have been terminated in accordance with their terms and all Obligationsindefeasibly paid in full in immediately available funds.

#  

# 19.                                 Eventsof Default. The occurrence of anyof the following shall constitute an “Event of Default”:

#  

## (a)                                  failureto make payment of any of the Obligations when required hereunder, and, in anysuch case, such failure shall continue for a period of three (3) daysfollowing the date upon which any such payment was due;

##  

## (b)                                 failureby any Company or any of its Subsidiaries to pay any taxes when due unless suchtaxes are being contested in good faith by appropriate proceedings and withrespect to which adequate reserves have been provided on such Company’s and/orsuch Subsidiary’s books;

##  

## (c)                                  failureto perform under, and/or committing any breach of, in any materialrespect, this Agreement or any covenant contained herein, which failure orbreach shall continue without remedy for a period of thirty (30) days after theoccurrence thereof;

##  

## (d)                                 anyrepresentation, warranty or statement made by any Company or any of itsSubsidiaries hereunder, in any Ancillary Agreement, any certificate, statementor document delivered pursuant to the terms hereof, or in connection with thetransactions contemplated by

 

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## this Agreement should prove to be false or misleading in any materialrespect on the date as of which made or deemed made;

##  

## (e)                                  theoccurrence of any default (or similar term) in the observance or performance ofany other agreement or condition relating to any indebtedness or contingentobligation of any Company or any of its Subsidiaries (including, withoutlimitation, the indebtedness evidenced by the Subordinated Debt Documentation)beyond the period of grace (if any), the effect of which default is to cause,or permit the holder or holders of such indebtedness or beneficiary orbeneficiaries of such contingent obligation to cause, such indebtedness tobecome due prior to its stated maturity or such contingent obligation to becomepayable;

##  

## (f)                                    attachmentsor levies in excess of $250,000 in the aggregate are made upon any Company’sassets or a judgment is rendered against any Company’s property involving aliability of more than $250,000 which shall not have been vacated, discharged,stayed or bonded within ninety (90) days from the entry thereof;

##  

## (g)                                 anychange in any Company’s or any of its Subsidiary’s condition or affairs(financial or otherwise) which in Laurus’ reasonable, good faith opinion, couldreasonably be expected to have a Material Adverse Effect;

##  

## (h)                                 anyLien created hereunder or under any Ancillary Agreement for any reason ceasesto be or is not a valid and perfected Lien having a first priority interest,excluding invalidations or imperfections that arise as a direct result ofactions taken by Laurus;

##  

## (i)                                     anyCompany or any of its Subsidiaries shall (i) apply for, consent to orsuffer to exist the appointment of, or the taking of possession by, a receiver,custodian, trustee or liquidator of itself or of all or a substantial part ofits property, (ii) make a general assignment for the benefit of creditors,(iii) commence a voluntary case under the federal bankruptcy laws (as nowor hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) filea petition seeking to take advantage of any other law providing for the reliefof debtors, (vi) acquiesce to without challenge within ten (10) daysof the filing thereof, or failure to have dismissed within ninety (90) days,any petition filed against it in any involuntary case under such bankruptcylaws, or (vii) take any action for the purpose of effecting any of theforegoing;

##  

## (j)                                     anyCompany or any of its Subsidiaries shall admit in writing its inability, or begenerally unable, to pay its debts as they become due or cease operations ofits present business;

##  

## (k)                                  anyCompany or any of its Subsidiaries directly or indirectly sells, assigns,transfers, conveys, or suffers or permits to occur any sale, assignment,transfer or conveyance of any assets of such Company or any interest therein,except as permitted herein;

##  

## (l)                                     any“Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) ofthe Exchange Act, as in effect on the date hereof), other than the Holder, isor becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5under the Exchange Act), directly or indirectly, of 40% or more on a fullydiluted basis of the then outstanding voting equity interest of anyCompany,  (ii) the Board ofDirectors of the Parent shall cease to consist of a majority of the Board ofDirectors of the Parent on the date hereof (or directors appointed by a

 

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## majority of the board of directors in effect immediately prior to suchappointment) or (iii) the Parent or any of its Subsidiaries merges orconsolidates with, or sells all or substantially all of its assets to, anyother person or entity;

##  

## (m)                               theindictment or threatened indictment of any Company or any of its Subsidiariesor any executive officer of any Company or any of its Subsidiaries under anycriminal statute, or commencement or threatened commencement of criminal orcivil proceeding against any Company or any of its Subsidiaries or anyexecutive officer of any Company or any of its Subsidiaries pursuant to whichstatute or proceeding penalties or remedies sought or available includeforfeiture of any of the property of any Company or any of its Subsidiaries;

##  

## (n)                                 anEvent of Default (or similar term) shall occur under and as defined in (x) anyNote or in any other Ancillary Agreement or (y) that certain SecuritiesPurchase Agreement, dated as of March 22, 2004, by and between the Parentand Laurus (as amended, modified or supplemented from time to time, the “2004Securities Purchase Agreement”) or any Related Agreement referred to in, anddefined in, the 2004 Securities Purchase Agreement;

##  

## (o)                                 anyCompany or any of its Subsidiaries shall breach any term or provision of anyAncillary Agreement to which it is a party, in any material respect whichbreach is not cured within any applicable cure or grace period provided inrespect thereof (if any);

##  

## (p)                                 anyCompany or any of its Subsidiaries attempts to terminate, challenges thevalidity of, or its liability under this Agreement or any Ancillary Agreement,or any proceeding shall be brought to challenge the validity, binding effect ofany Ancillary Agreement or any Ancillary Agreement ceases to be a valid,binding and enforceable obligation of such Company or any of its Subsidiaries(to the extent such Persons are a party thereto);

##  

## (q)                                 anSEC stop trade order or Principal Market trading suspension of the Common Stockshall be in effect for five (5) consecutive days or five (5) daysduring a period of ten (10) consecutive days, excluding in all cases asuspension of all trading on a Principal Market, provided that the Parent shallnot have been able to cure such trading suspension within thirty (30) days ofthe notice thereof or list the Common Stock on another Principal Market withinsixty (60) days of such notice;

##  

## (r)                                    theParent’s failure to deliver Common Stock to Laurus pursuant to and in the form requiredby the Notes and this Agreement, if such failure to deliver Common Stock shallnot be cured within two (2) Business Days or any Company is required toissue a replacement Note to Laurus and such Company shall fail to deliver suchreplacement Note within seven (7) Business Days; or

##  

## (s)                                  anyCompany, or any of its Subsidiaries shall take or participate in any actionwhich would be prohibited under the provisions of any of the Subordinated DebtDocumentation or make any payment on the indebtedness evidenced by theSubordinated Debt Documentation to a Person that was not entitled to receivesuch payments under the subordination provisions of applicable SubordinatedDebt Documentation.

##  

# 20.                                 Remedies. Following the occurrence of an Event ofDefault, Laurus shall have the right to demand repayment in full of allObligations, whether or not otherwise due.

 

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# Until all Obligationshave been fully and indefeasibly satisfied, Laurus shall retain its Lien in allCollateral. Laurus shall have, in addition to all other rights provided hereinand in each Ancillary Agreement, the rights and remedies of a secured partyunder the UCC, and under other applicable law, all other legal and equitablerights to which Laurus may be entitled, including the right to takeimmediate possession of the Collateral, to require each Company to assemble theCollateral, at Companies’ joint and several expense, and to make it availableto Laurus at a place designated by Laurus which is reasonably convenient toboth parties and to enter any of the premises of any Company or wherever theCollateral shall be located, with or without force or process of law, and tokeep and store the same on said premises until sold (and if said premises bethe property of any Company, such Company agrees not to charge Laurus forstorage thereof), and the right to apply for the appointment of a receiver forsuch Company’s property. Further, Laurus may, at any time or times after theoccurrence of an Event of Default, sell and deliver all Collateral held by orfor Laurus at public or private sale for cash, upon credit or otherwise, atsuch prices and upon such terms as Laurus, in Laurus’ sole discretion, deemsadvisable or Laurus may otherwise recover upon the Collateral in anycommercially reasonable manner as Laurus, in its sole discretion, deemsadvisable. The requirement of reasonable notice shall be met if such notice ismailed postage prepaid to Company Agent at Company Agent’s address as shown inLaurus’ records, at least ten (10) days before the time of the event ofwhich notice is being given. Laurus may be the purchaser at any sale, ifit is public. In connection with the exercise of the foregoing remedies, Laurusis granted permission to use all of each Company’s Intellectual Property. Theproceeds of sale shall be applied first to all costs and expenses of sale,including attorneys’ fees, and second to the payment (in whatever order Lauruselects) of all Obligations. After the indefeasible payment and satisfaction infull of all of the Obligations, and after the payment by Laurus of any otheramount required by any provision of law, including Section 9-608(a)(1) ofthe UCC (but only after Laurus has received what Laurus considers reasonableproof of a subordinate party’s security interest), the surplus, if any, shallbe paid to Company Agent (for the benefit of the applicable Companies) or itsrepresentatives or to whosoever may be lawfully entitled to receive thesame, or as a court of competent jurisdiction may direct. The Companiesshall remain jointly and severally liable to Laurus for any deficiency. Inaddition, the Companies shall jointly and severally pay Laurus a liquidationfee (“LiquidationFee”) in the amount of five percent (5%) of the actual amountcollected in respect of each Account outstanding at any time during aLiquidation Period”. For purposes hereof, “Liquidation Period” means a period:  (i) beginning on the earliest date of(x) an event referred to in Section 19(i) or 19(j), or (y) thecessation of any Company’s business; and (ii) ending on the date on whichLaurus has actually received all Obligations due and owing it under thisAgreement and the Ancillary Agreements. The Liquidation Fee shall be paid onthe date on which Laurus collects the applicable Account by deduction from theproceeds thereof. Each Company and Laurus acknowledge that the actual damagesthat would be incurred by Laurus after the occurrence of an Event of Defaultwould be difficult to quantify and that such Company and Laurus have agreedthat the fees and obligations set forth in this Section and in thisAgreement would constitute fair and appropriate liquidated damages in the eventof any such termination. The parties hereto each hereby agree that the exerciseby any party hereto of any right granted to it or the exercise by anyparty hereto of any remedy available to it (including, without limitation, theissuance of a notice of redemption, a borrowing request and/or anotice of default), in each case, hereunder or under any AncillaryAgreement which has been publicly filed with the SECshall not constitute confidential information and no partyshall have any duty to the

 

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# other party to maintainsuch information as confidential, except for the portions of such publiclyfiled documents that are subject to confidential treatment request made by theCompanies to the SEC

#  

# 21.                                 Waivers. To the full extent permitted by applicablelaw, each Company hereby waives (a) presentment, demand and protest, andnotice of presentment, dishonor, intent to accelerate, acceleration, protest,default, nonpayment, maturity, release, compromise, settlement, extension orrenewal of any or all of this Agreement and the Ancillary Agreements or anyother notes, commercial paper, Accounts, contracts, Documents, Instruments,Chattel Paper and guaranties at any time held by Laurus on which such Company may inany way be liable, and hereby ratifies and confirms whatever Laurus may doin this regard; (b) all rights to notice and a hearing prior to Laurus’taking possession or control of, or to Laurus’ replevy, attachment or levyupon, any Collateral or any bond or security that might be required by anycourt prior to allowing Laurus to exercise any of its remedies; and (c) thebenefit of all valuation, appraisal and exemption laws. Each Companyacknowledges that it has been advised by counsel of its choices and decisionswith respect to this Agreement, the Ancillary Agreements and the transactionsevidenced hereby and thereby.

#  

# 22.                                 Expenses. The Companies shall jointly and severallypay all of Laurus’ out-of-pocket costs and expenses, including reasonable feesand disbursements of outside counsel and appraisers, in connection with the preparation,execution and delivery of this Agreement and the Ancillary Agreements, and inconnection with the prosecution or defense of any action, contest, dispute,suit or proceeding concerning any matter in any way arising out of, related toor connected with this Agreement or any Ancillary Agreement. The Companiesshall also jointly and severally pay all of Laurus’ reasonable fees, charges,out-of-pocket costs and expenses, including fees and disbursements of counseland appraisers, in connection with (a) the preparation, execution anddelivery of any waiver, any amendment thereto or consent proposed or executedin connection with the transactions contemplated by this Agreement or theAncillary Agreements, (b) Laurus’ obtaining performance of the Obligationsunder this Agreement and any Ancillary Agreements, including, but not limitedto, the enforcement or defense of Laurus’ security interests, assignments ofrights and Liens hereunder as valid perfected security interests, (c) anyattempt to inspect, verify, protect, collect, sell, liquidate or otherwisedispose of any Collateral, (d) any appraisals or re-appraisals of anyproperty (real or personal) pledged to Laurus by any Company or any of itsSubsidiaries as Collateral for, or any other Person as security for, theObligations hereunder and (e) any consultations in connection with any ofthe foregoing. The Companies shall also jointly and severally pay Laurus’customary bank charges for all bank services (including wire transfers)performed or caused to be performed by Laurus for any Company or any of itsSubsidiaries at any Company’s or such Subsidiary’s request or in connectionwith any Company’s loan account with Laurus. All such costs and expensestogether with all filing, recording and search fees, taxes and interest payableby the Companies to Laurus shall be payable on demand and shall be secured bythe Collateral. If any tax by any Governmental Authority is or may beimposed on or as a result of any transaction between any Company and/or anySubsidiary thereof, on the one hand, and Laurus on the other hand, which Laurusis or may be required to withhold or pay, the Companies hereby jointly andseverally indemnifies and holds Laurus harmless in respect of such taxes, andthe Companies will repay to Laurus the amount of any such taxes which shall becharged to the Companies’ account; and until the Companies shall furnish Lauruswith indemnity therefor (or supply Laurus with

 

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# evidence reasonably satisfactoryto it that due provision for the payment thereof has been made), Laurus may holdwithout interest any balance standing to each Company’s credit and Laurus shallretain its Liens in any and all Collateral.

#  

# 23.                                 AssignmentBy Laurus. Laurus may assignany or all of the Obligations together with any or all of the security thereforto any Person and any such assignee shall succeed to all of Laurus’ rights withrespect thereto; provided that Laurus shall not be permitted to effect any suchassignment to a competitor of any Company unless an Event of Default hasoccurred and is continuing. Upon such assignment, Laurus shall be released fromall responsibility for the Collateral to the extent same is assigned to anytransferee. Laurus may from time to time sell or otherwise grantparticipations in any of the Obligations and the holder of any suchparticipation shall, subject to the terms of any agreement between Laurus andsuch holder, be entitled to the same benefits as Laurus with respect to anysecurity for the Obligations in which such holder is a participant. EachCompany agrees that each such holder may exercise any and all rights ofbanker’s lien, set-off and counterclaim with respect to its participation inthe Obligations as fully as though such Company were directly indebted to suchholder in the amount of such participation.

#  

# 24.                                 NoWaiver; Cumulative Remedies. Failureby Laurus to exercise any right, remedy or option under this Agreement, anyAncillary Agreement or any supplement hereto or thereto or any other agreementbetween or among any Company and Laurus or delay by Laurus in exercising thesame, will not operate as a waiver; no waiver by Laurus will be effectiveunless it is in writing and then only to the extent specifically stated. Laurus’rights and remedies under this Agreement and the Ancillary Agreements will becumulative and not exclusive of any other right or remedy which Laurus may have.

#  

# 25.                                 Applicationof Payments. Each Companyirrevocably waives the right to direct the application of any and all paymentsat any time or times hereafter received by Laurus from or on such Company’sbehalf and each Company hereby irrevocably agrees that Laurus shall have thecontinuing exclusive right to apply and reapply any and all payments received atany time or times hereafter against the Obligations hereunder in such manner asLaurus may deem advisable notwithstanding any entry by Laurus upon any ofLaurus’ books and records.

#  

# 26.                                 Indemnity. Each Company hereby jointly and severallyindemnify and hold Laurus, and its respective affiliates, employees, attorneysand agents (each, an “Indemnified Person”), harmless from and against any andall suits, actions, proceedings, claims, damages, losses, liabilities andexpenses of any kind or nature whatsoever (including attorneys’ fees anddisbursements and other costs of investigation or defense, including thoseincurred upon any appeal) which may be instituted or asserted against orincurred by any such Indemnified Person as the result of credit having beenextended, suspended or terminated under this Agreement or any of the AncillaryAgreements or with respect to the execution, delivery, enforcement, performanceand administration of, or in any other way arising out of or relating to, thisAgreement, the Ancillary Agreements or any other documents or transactionscontemplated by or referred to herein or therein and any actions or failures toact with respect to any of the foregoing, except to the extent that any suchindemnified liability is finally determined by a court of competentjurisdiction to have resulted solely from such Indemnified Person’s grossnegligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE

 

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# OR LIABLE TO ANY COMPANYOR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARYOR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FORINDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BEALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATEDUNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHERTRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

#  

# 27.                                 Revival. The Companies further agree that to theextent any Company makes a payment or payments to Laurus, which payment orpayments or any part thereof are subsequently invalidated, declared to befraudulent or preferential, set aside and/or required to be repaid to atrustee, receiver or any other party under any bankruptcy act, state or federallaw, common law or equitable cause, then, to the extent of such payment orrepayment, the obligation or part thereof intended to be satisfied shallbe revived and continued in full force and effect as if said payment had notbeen made.

#  

# 28.                                 BorrowingAgency Provisions.

#  

## (a)                                  EachCompany hereby irrevocably designates Company Agent to be its attorney andagent and in such capacity to borrow, sign and endorse notes, and execute anddeliver all instruments, documents, writings and further assurances now orhereafter required hereunder, on behalf of such Company, and hereby authorizesLaurus to pay over or credit all loan proceeds hereunder in accordance with therequest of Company Agent.

##  

## (b)                                 Thehandling of this credit facility as a co-borrowing facility with a borrowingagent in the manner set forth in this Agreement is solely as an accommodationto the Companies and at their request. Laurus shall not incur any liability toany Company as a result thereof. To induce Laurus to do so and in considerationthereof, each Company hereby indemnifies Laurus and holds Laurus harmless fromand against any and all liabilities, expenses, losses, damages and claims ofdamage or injury asserted against Laurus by any Person arising from or incurredby reason of the handling of the financing arrangements of the Companies asprovided herein, reliance by Laurus on any request or instruction from CompanyAgent or any other action taken by Laurus with respect to this Paragraph 28.

##  

## (c)                                  AllObligations shall be joint and several, and the Companies shall make paymentupon the maturity of the Obligations by acceleration or otherwise, and suchobligation and liability on the part of the Companies shall in no way beaffected by any extensions, renewals and forbearance granted by Laurus to anyCompany, failure of Laurus to give any Company notice of borrowing or any othernotice, any failure of Laurus to pursue to preserve its rights against anyCompany, the release by Laurus of any Collateral now or thereafter acquiredfrom any Company, and such agreement by any Company to pay upon any noticeissued pursuant thereto is unconditional and unaffected by prior recourse byLaurus to any Company or any Collateral for such Company’s Obligations or thelack thereof.

##  

## (d)                                 EachCompany expressly waives any and all rights of subrogation, reimbursement,indemnity, exoneration, contribution or any other claim which such Company

 

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## may now or hereafter have against the other or other Person directlyor contingently liable for the Obligations, or against or with respect to anyother’s property (including, without limitation, any property which isCollateral for the Obligations), arising from the existence or performance ofthis Agreement, until all Obligations have been indefeasibly paid in full andthis Agreement has been irrevocably terminated.

##  

## (e)                                  EachCompany represents and warrants to Laurus that (i) Companies have one ormore common shareholders, directors and officers, (ii) the businesses andcorporate activities of Companies are closely related to, and substantiallybenefit, the business and corporate activities of Companies, (iii) thefinancial and other operations of Companies are performed on a combined basisas if Companies constituted a consolidated corporate group, (iv) Companieswill receive a substantial economic benefit from entering into this Agreementand will receive a substantial economic benefit from the application of eachLoan hereunder, in each case, whether or not such amount is used directly byany Company and (v) all requests for Loans hereunder by the Company Agentare for the exclusive and indivisible benefit of the Companies as though, forpurposes of this Agreement, the Companies constituted a single entity.

##  

# 29.                                 Notices. Any notice or request hereunder may begiven to any Company, Company Agent or Laurus at the respective addresses setforth below or as may hereafter be specified in a notice designated as achange of address under this Section. Any notice or request hereunder shall begiven by registered or certified mail, return receipt requested, hand delivery,overnight mail or telecopy (confirmed by mail). Notices and requests shall be,in the case of those by hand delivery, deemed to have been given when deliveredto any officer of the party to whom it is addressed, in the case of those bymail or overnight mail, deemed to have been given three (3) Business Daysafter the date when deposited in the mail or with the overnight mail carrier,and, in the case of a telecopy, when confirmed.

#  

Notices shall be provided as follows:

 
| If to Laurus:      | Laurus Master Fund,  Ltd.                 |
|--------------------|-------------------------------------------|
|               | c/o Laurus Capital  Management, LLC       |
|               | 825 Third Avenue, 14th  Fl.               |
|               | New York, New York  10022                 |
|               | Attention:                                | John E. Tucker, Esq. |
|               | Telephone:                                | (212) 541-4434 |
|               | Telecopier:                               | (212) 541-5800 |
|               |                                      |   |
| If to any Company, |                                      |   |
| or Company Agent:  | Time America, Inc.                   |
|               | 8840 East Chaparral  Road, Suite 100 |
|               | Scottsdale, Arizona  85250                |
|               | Attention:                                | Craig Smith |
|               | Telephone:                                | (480) 296-0442 |
|               | Facsimile:                                | (480) 296-0444 |

 

39

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| With a copy to: | Squire, Sanders &  Dempsey L.L.P. |
|-----------------|--------------------------------------------|
|            | Two Renaissance Square                     |
|            | 40 North Central  Avenue, Suite 2700  |
|            | Phoenix, Arizona 85004                     |
|            | Attention:                                 | Gregory R. Hall, Esq. |
|            | Telephone:                                 | (602) 528-4134 |
|            | Facsimile:                                 | (602) 253-8129 |

 

or such other address as may be designated inwriting hereafter in accordance with this Section 29 by such Person.

 

# 30.                                 GoverningLaw, Jurisdiction and Waiver of Jury Trial.

#  

## (a)                                  THISAGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED ANDENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TOCONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OFCONFLICTS OF LAW.

##  

## (b)                                 EACHCOMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED INTHE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TOHEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND,AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARYAGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANYOF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND EACH COMPANYACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY ACOURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHERPROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TOPRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHERJURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANYOTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURTORDER IN FAVOR OF LAURUS. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS INADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,AND EACH COMPANY HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPONLACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACHCOMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHERPROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCHSUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED ORCERTIFIED MAIL ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANYAGENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S.MAILS, PROPER POSTAGE PREPAID.

 

40

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## (c)                                  THEPARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCHAPPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OFTHE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TOTRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANYDISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS, AND/ORANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THERELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANYANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

##  

# 31.                                 Limitationof Liability. Each Companyacknowledges and understands that in order to assure repayment of theObligations hereunder Laurus may be required to exercise any and all ofLaurus’ rights and remedies hereunder and agrees that, except as limited byapplicable law, neither Laurus nor any of Laurus’ agents shall be liable foracts taken or omissions made in connection herewith or therewith except foractual bad faith.

#  

# 32.                                 EntireUnderstanding; Maximum Interest. ThisAgreement and the Ancillary Agreements contain the entire understanding amongeach Company and Laurus as to the subject matter hereof and thereof and anypromises, representations, warranties or guarantees not herein contained shallhave no force and effect unless in writing, signed by each Company’s and Laurus’respective officers. Neither this Agreement, the Ancillary Agreements, nor anyportion or provisions thereof may be changed, modified, amended, waived,supplemented, discharged, cancelled or terminated orally or by any course ofdealing, or in any manner other than by an agreement in writing, signed by theparty to be charged. Nothing contained in this Agreement, any AncillaryAgreement or in any document referred to herein or delivered in connectionherewith shall be deemed to establish or require the payment of a rate ofinterest or other charges in excess of the maximum rate permitted by applicablelaw. In the event that the rate of interest or dividends required to be paid orother charges hereunder exceed the maximum rate permitted by such law, anypayments in excess of such maximum shall be credited against amounts owed bythe Companies to Laurus and thus refunded to the Companies.

#  

# 33.                                 Severability. Wherever possible each provision of thisAgreement or the Ancillary Agreements shall be interpreted in such manner as tobe effective and valid under applicable law, but if any provision of thisAgreement or the Ancillary Agreements shall be prohibited by or invalid underapplicable law such provision shall be ineffective to the extent of suchprohibition or invalidity, without invalidating the remainder of such provisionor the remaining provisions thereof.

#  

# 34.                                 Survival.The representations, warranties, covenants and agreements made herein shallsurvive any investigation made by Laurus and the closing of the transactionscontemplated hereby to the extent provided therein. All statements as tofactual matters contained in any certificate or other instrument delivered byor on behalf of the Companies pursuant hereto in connection with thetransactions contemplated herebly shall be deemed to be representations andwarranties by the Companies hereunder solely as of the date of such certificateor instrument. All indemnities set forth herein shall survive the execution,delivery

 

41

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# and termination of this Agreement and the Ancillary Agreements and themaking and repaying of the Obligations.

#  

# 35.                                 Captions. All captions are and shall be withoutsubstantive meaning or content of any kind whatsoever.

#  

# 36.                                 Counterparts;Telecopier Signatures. ThisAgreement may be executed in one or more counterparts, each of which shallconstitute an original and all of which taken together shall constitute one andthe same agreement. Any signature delivered by a party via telecopiertransmission shall be deemed to be any original signature hereto.

#  

# 37.                                 Construction. The parties acknowledge that each partyand its counsel have reviewed this Agreement and that the normal rule ofconstruction to the effect that any ambiguities are to be resolved against thedrafting party shall not be employed in the interpretation of this Agreement orany amendments, schedules or exhibits thereto.

#  

# 38.                                 Publicity. Each Company hereby authorizes Laurus tomake appropriate announcements of the financial arrangement entered into by andamong each Company and Laurus, including, without limitation, announcementswhich are commonly known as tombstones, in such publications and to suchselected parties as Laurus shall in its sole and absolute discretion deemappropriate, or as required by applicable law.

#  

# 39.                                 Joinder. It is understood and agreed that anyPerson that desires to become a Company hereunder, or is required to execute acounterpart of this Agreement after the date hereof pursuant to therequirements of this Agreement or any Ancillary Agreement, shall become aCompany hereunder by (a) executing a Joinder Agreement in form andsubstance reasonably satisfactory to Laurus, (b) delivering supplements tosuch exhibits and annexes to this Agreement and the Ancillary Agreements asLaurus shall reasonably request and (c) taking all actions as specified inthis Agreement as would have been taken by such Company had it been an originalparty to this Agreement, in each case with all documents required above to bedelivered to Laurus and with all documents and actions required above to betaken to the reasonable satisfaction of Laurus.

#  

# 40.                                 Legends. The Securities shall bear legends asfollows;

#  

## (a)                                  TheSecured Convertible Term Note shall bear substantially the following legend:

##  

“THIS NOTE AND THE COMMON STOCK ISSUABLE UPONCONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THECOMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD,OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVEREGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT ANDAPPLICABLE STATE SECURITIES LAWS

 

42

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OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TOTIME AMERICA, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

## (b)                                 TheSecured Non-Convertible Revolving Note shall bear substantially the followinglegend:

##  

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THESECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THISNOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THEABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACTAND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLYSATISFACTORY TO TIME AMERICA, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

## (c)                                  TheGrant Shares and any shares of Common Stock issued pursuant to conversion ofthe Secured Convertible Term Note or exercise of the Warrants, shall bear alegend which shall be in substantially the following form until suchshares are covered by an effective registration statement filed with the SEC:

##  

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOTBEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANYAPPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFEREDFOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATIONSTATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR ANOPINION OF COUNSEL REASONABLY SATISFACTORY TO TIME AMERICA, INC. THAT SUCHREGISTRATION IS NOT REQUIRED.”

 

## (d)                                 TheWarrants shall bear substantially the following legend:

##  

“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPONEXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THECOMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVEREGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMONSTOCK UNDER

 

43

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SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR ANOPINION OF COUNSEL REASONABLY SATISFACTORY TO TIME AMERICA, INC. THAT SUCHREGISTRATION IS NOT REQUIRED.”

 

[Balance of page intentionally left blank;signature page follows.]

 

44

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IN WITNESS WHEREOF, the parties have executed thisSecurity and Purchase Agreement as of the date first written above.

 

 
| ** ** | **TIME AMERICA, INC., a Nevada corporation**               |
|------------|-----------------------------------------------------------------|
| ** ** | ** **                                                      |
| ** ** | ** **                                                      |
|       | By:                                                             |   |   |
|       | Name:                                                           |   |   |
|       | Title:                                                          |   |   |
|       |                                                            |
|       |                                                            |
| ** ** | **TIME AMERICA, INC., an Arizona corporation**             |
| ** ** | ** **                                                      |
| ** ** | ** **                                                      |
|       | By:                                                             |   |   |
|       | Name:                                                           |   |   |
|       | Title:                                                          |   |   |
|       |                                                            |
|       |                                                            |
| ** ** | **NETEDGE DEVICES, LLC, an Arizona limited  liability company** |
| ** ** | ** **                                                      |
| ** ** | ** **                                                      |
|       | By:                                                             |   |   |
|       | Name:                                                           |   |   |
|       | Title:                                                          |   |   |
| ** ** | ** **                                                      |
| ** ** | ** **                                                      |
| ** ** | **LAURUS MASTER FUND, LTD.**                                    |
| ** ** | ** **                                                      |
| ** ** | ** **                                                      |
|       | By:                                                             |   |   |
|       | Name:                                                           |   |   |
|       | Title:                                                          |   |   |
|            |                                                                 |  |  |  |

 

45

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Annex A - Definitions

 

“Account Debtor” means any Person who is or may beobligated with respect to, or on account of, an Account.

 

“Accountants” has the meaning given to suchterm in Section 11(a).

 

“Accounts” means all “accounts”, as such termis defined in the UCC, now owned or hereafter acquired by any Person,including:  (a) all accountsreceivable, other receivables, book debts and other forms of obligations (otherthan forms of obligations evidenced by Chattel Paper or Instruments) (includingany such obligations that may be characterized as an account or contractright under the UCC); (b) all of such Person’s rights in, to and under allpurchase orders or receipts for goods or services; (c) all of such Person’srights to any goods represented by any of the foregoing (including unpaid sellers’rights of rescission, replevin, reclamation and stoppage in transit andrights to returned, reclaimed or repossessed goods); (d) all rights topayment due to such Person for Goods or other property sold, leased, licensed,assigned or otherwise disposed of, for a policy of insurance issued or to beissued, for a secondary obligation incurred or to be incurred, for energyprovided or to be provided, for the use or hire of a vessel under a charter orother contract, arising out of the use of a credit card or charge card, or forservices rendered or to be rendered by such Person or in connection with anyother transaction (whether or not yet earned by performance on the part ofsuch Person); and (e) all collateral security of any kind given by anyAccount Debtor or any other Person with respect to any of the foregoing.

 

“Accounts Availability” means up to ninetypercent (90%) of the net face amount of Eligible Accounts.

 

“Affiliate” means, with respect to any Person, (a) anyother Person (other than a Subsidiary) which, directly or indirectly, is incontrol of, is controlled by, or is under common control with such Person or (b) anyother Person who is a director or officer (i) of such Person, (ii) ofany Subsidiary of such Person or (iii) of any Person described in clause (a) above.For the purposes of this definition, control of a Person shall mean the power(direct or indirect) to direct or cause the direction of the management andpolicies of such Person whether by contract or otherwise.

 

“Ancillary Agreements” means the Notes, theWarrants, the Registration Rights Agreements, each Security Document and allother agreements, instruments, documents, mortgages, pledges, powers ofattorney, consents, assignments, contracts, notices, security agreements, trustagreements and guarantees whether heretofore, concurrently, or hereafterexecuted by or on behalf of any Company, any of its Subsidiaries or any otherPerson or delivered to Laurus, relating to this Agreement or to thetransactions contemplated by this Agreement or otherwise relating to therelationship between or among any Company and Laurus, as each of the same may beamended, supplemented, restated or otherwise modified from time to time.

 

“Balance Sheet Date” has the meaning given suchterm in Section 12(f)(ii).

 

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“Books and Records” means all books, records,board minutes, contracts, licenses, insurance policies, environmental audits,business plans, files, computer files, computer discs and other data andsoftware storage and media devices, accounting books and records, financialstatements (actual and pro forma), filings with Governmental Authorities andany and all records and instruments relating to the Collateral or otherwisenecessary or helpful in the collection thereof or the realization thereupon.

 

“Business Day” means a day on which Laurus isopen for business and that is not a Saturday, a Sunday or other day on whichbanks are required or permitted to be closed in the State of New York.

 

“Capital Availability Amount” means $1,500,000.

 

“Charter” has the meaning given such term in Section 12(c)(iv).

 

“Chattel Paper” means all “chattel paper,” assuch term is defined in the UCC, including electronic chattel paper, now ownedor hereafter acquired by any Person.

 

“Closing Date” means the date on which anyCompany shall first receive proceeds of the initial Loans or the date hereof,if no Loan is made under the facility on the date hereof.

 

“Code” has the meaning given such term in Section 15(i).

 

“Collateral” means all of each Company’sproperty and assets, whether real or personal, tangible or intangible, andwhether now owned or hereafter acquired, or in which it now has or at any timein the future may acquire any right, title or interests including all ofthe following property in which it now has or at any time in the future may acquireany right, title or interest:

 

(a)                                  allInventory;

 

(b)                                 allEquipment;

 

(c)                                  allFixtures;

 

(d)                                 allGoods;

 

(e)                                  allGeneral Intangibles;

 

(f)                                    allAccounts;

 

(g)                                 allDeposit Accounts, other bank accounts and all funds on deposit therein;

 

(h)                                 allInvestment Property;

 

(i)                                     allStock;

 

(j)                                     allChattel Paper;

 

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(k)                                  allLetter-of-Credit Rights;

 

(l)                                     allInstruments;

 

(m)                               allcommercial tort claims set forth on Schedule 1(A);

 

(n)                                 allBooks and Records;

 

(o)                                 allIntellectual Property;

 

(p)                                 allSupporting Obligations including letters of credit and guarantees issued insupport of Accounts, Chattel Paper, General Intangibles and InvestmentProperty;

 

(q)                                 (i) allmoney, cash and cash equivalents and (ii) all cash held as cash collateralto the extent not otherwise constituting Collateral, all other cash or propertyat any time on deposit with or held by Laurus for the account of any Company(whether for safekeeping, custody, pledge, transmission or otherwise); and

 

(r)                                    allproducts and Proceeds of all or any of the foregoing, tort claims and allclaims and other rights to payment including (i) insurance claims againstthird parties for loss of, damage to, or destruction of, the foregoingCollateral and (ii) payments due or to become due under leases, rentalsand hires of any or all of the foregoing and Proceeds payable under, orunearned premiums with respect to policies of insurance in whatever form.

 

“Common Stock” means the shares of stockrepresenting the Parent’s common equity interests.

 

“Company Agent” means the Parent.

 

“Contract Rate” has the meaning given such termin the respective Note.

 

“Default” means any act or event that, with thegiving of notice or passage of time or both, would constitute an Event ofDefault.

 

“Deposit Accounts” means all “deposit accounts”as such term is defined in the UCC, now or hereafter held in the name of anyPerson, including, without limitation, the Lockboxes.

 

“Disclosure Controls” has the meaning givensuch term in Section 12(f)(iv).

 

“Documents” means all “documents”, as such termis defined in the UCC, now owned or hereafter acquired by any Person, whereverlocated, including all bills of lading, dock warrants, dock receipts, warehousereceipts, and other documents of title, whether negotiable or non-negotiable.

 

“Eligible Accounts” means each Account of eachCompany which conforms to the following criteria:  (a) shipment of the merchandise or therendition of services, other than the Company’s implementation, training,custom programming and maintenance services, has

 

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been completed; (b) no return, rejection orrepossession of the merchandise has occurred; (c) merchandise or servicesshall not have been rejected or disputed by the Account Debtor and there shallnot have been asserted any offset, defense or counterclaim; (d) continuesto be in full conformity with the representations and warranties made by suchCompany to Laurus with respect thereto; (e) Laurus is, and continues tobe, satisfied with the credit standing of the Account Debtor in relation to theamount of credit extended; (f) there are no facts existing or threatenedwhich are likely to result in any adverse change in an Account Debtor’sfinancial condition; (g) is documented by an invoice in a form approvedby Laurus and shall not be unpaid more than one hundred twenty (120) days frominvoice date; (h) not more than twenty-five percent (25%) of the unpaidamount of invoices due from such Account Debtor remains unpaid more than onehundred twenty (120) days from invoice date; (i) is not evidenced bychattel paper or an instrument of any kind with respect to or in payment of theAccount unless such instrument is duly endorsed to and in possession of Laurusor represents a check in payment of an Account; (j) the Account Debtor islocated in the United States; provided, however, Laurus may, fromtime to time, in the exercise of its sole discretion and based uponsatisfaction of certain conditions to be determined at such time by Laurus,deem certain Accounts as Eligible Accounts notwithstanding that such Account isdue from an Account Debtor located outside of the United States; (k) Laurus hasa first priority perfected Lien in such Account and such Account is not subjectto any Lien other than Permitted Liens; (l) does not arise out oftransactions with any employee, officer, director, stockholder or Affiliate ofany Company; (m) is payable to such Company; (n) does not arise out of a billand hold sale prior to shipment and does not arise out of a sale to any Personto which such Company is indebted; (o) is net of any returns, discounts,claims, credits and allowances; (p) if the Account arises out of contractsbetween such Company, on the one hand, and the United States, on the otherhand, any state, or any department, agency or instrumentality of any of them,such Company has so notified Laurus, in writing, prior to the creation of suchAccount, and there has been compliance with any governmental notice or approvalrequirements, including compliance with the Federal Assignment of Claims Act;(q) is a good and valid account representing an undisputed bona fideindebtedness incurred by the Account Debtor therein named, for a fixed sum asset forth in the invoice relating thereto with respect to an unconditional saleand delivery upon the stated terms of goods sold by such Company or work, laborand/or services rendered by such Company; (r) does not arise out of progressbillings prior to completion of the order; (s) the total unpaid Accounts fromsuch Account Debtor does not exceed twenty-five percent (25%) of all EligibleAccounts; (t) such Company’s right to payment is absolute and not contingentupon the fulfillment of any condition, other than the Company’s implementation,training, custom programming and maintenance services; (u) such Company is ableto bring suit and enforce its remedies against the Account Debtor throughjudicial process; (v) does not represent interest payments, late orfinance charges owing to such Company, and (w) is otherwise satisfactory toLaurus as determined by Laurus in the exercise of its sole discretion. In theevent any Company requests that Laurus include within Eligible Accounts certainAccounts of one or more of such Company’s acquisition targets, Laurus shall atthe time of such request consider such inclusion, but any such inclusion shallbe at the sole option of Laurus and shall at all times be subject to theexecution and delivery to Laurus of all such documentation (including, withoutlimitation, guaranty and security documentation) as Laurus may require inits sole discretion.

 

“Eligible Inventory” means Inventory owned by aCompany which Laurus, in its sole and absolute discretion, determines:  (a) is subject to a first priorityperfected Lien in favor

 

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of Laurus and is subject to no other Liens whatsoever(other than Permitted Liens); (b) is located on premises with respect towhich Laurus has received a landlord or mortgagee waiver acceptable in form andsubstance to Laurus; (c) is not in transit; (d) is in good conditionand meets all standards imposed by any governmental agency, or department ordivision thereof having regulatory Governmental Authority over such Inventory,its use or sale including the Federal Fair Labor Standards Act of 1938 asamended, and all rules, regulations and orders thereunder; (e) iscurrently either usable or salable in the normal course of such Company’sbusiness; (f) is not placed by such Company on consignment or held by suchCompany on consignment from another Person; (g) is in conformity with therepresentations and warranties made by such Company to Laurus with respectthereto; (h) is not subject to any licensing, patent, royalty, trademark,trade name or copyright agreement with any third parties; (i) does notrequire the consent of any Person for the completion of manufacture, sale orother disposition of such Inventory and such completion, manufacture or saledoes not constitute a breach or default under any contract or agreement towhich such Company is a party or to which such Inventory is or may besubject; (j) is not work-in-process; (k) is covered by casualty insuranceacceptable to Laurus and under which Laurus has been named as a lender’s losspayee and additional insured; and (l) not to be ineligible for any otherreason.

 

“Eligible Subsidiary” means each Subsidiary ofthe Parent set forth on Exhibit A hereto, as the same may beupdated from time to time with Laurus’ written consent.

 

“Equipment” means all “equipment” as such termis defined in the UCC, now owned or hereafter acquired by any Person, whereverlocated, including any and all machinery, apparatus, equipment, fittings,furniture, Fixtures, motor vehicles and other tangible personal property (otherthan Inventory) of every kind and description that may be now or hereafterused in such Person’s operations or that are owned by such Person or in whichsuch Person may have an interest, and all parts, accessories andaccessions thereto and substitute ons and replacements therefor.

 

“ERISA” has the meaning given such term in Section 12(bb).

 

“Event of Default” means the occurrence of anyof the events set forth in Section 19.

 

“Exchange Act” means the Securities ExchangeAct of 1934, as amended.

 

“Exchange Act Filings” means the Parent’sfilings under the Exchange Act made prior to the date of this Agreement.

 

“Financial Reporting Controls” has the meaninggiven such term in Section 12(f)(v).

 

“Fixtures” means all “fixtures” as such term isdefined in the UCC, now owned or hereafter acquired by any Person.

 

“Formula Amount” has the meaning given suchterm in Section 2(a)(i).

 

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“GAAP” means generally accepted accountingprinciples, practices and procedures in effect from time to time in the UnitedStates of America.

 

“General Intangibles” means all “generalintangibles” as such term is defined in the UCC, now owned or hereafteracquired by any Person including all right, title and interest that such Personmay now or hereafter have in or under any contract, all PaymentIntangibles, customer lists, Licenses, Intellectual Property, interests inpartnerships, joint ventures and other business associations, permits,proprietary or confidential information, inventions (whether or not patented orpatentable), technical information, procedures, designs, knowledge, know-how,Software, data bases, data, skill, expertise, experience, processes, models,drawings, materials, Books and Records, Goodwill (including the Goodwillassociated with any Intellectual Property), all rights and claims in or underinsurance policies (including insurance for fire, damage, loss, and casualty,whether covering personal property, real property, tangible rights orintangible rights, all liability, life, key-person, and business interruptioninsurance, and all unearned premiums), uncertificated securities, choses inaction, deposit accounts, rights to receive tax refunds and other payments,rights to received dividends, distributions, cash, Instruments and otherproperty in respect of or in exchange for pledged Stock and InvestmentProperty, and rights of indemnification.

 

“Goods” means all “goods”, as such term isdefined in the UCC, now owned or hereafter acquired by any Person, whereverlocated, including embedded software to the extent included in “goods” asdefined in the UCC, manufactured homes, fixtures, standing timber that is cutand removed for sale and unborn young of animals.

 

“Goodwill” means all goodwill, trade secrets,proprietary or confidential information, technical information, procedures,formulae, quality control standards, designs, operating and training manuals,customer lists, and distribution agreements now owned or hereafter acquired byany Person.

 

“Governmental Authority” means any nation orgovernment, any state or other political subdivision thereof, and any agency,department or other entity exercising executive, legislative, judicial,regulatory or administrative functions of or pertaining to government.

 

“Grant Shares” has the meaning given such termin Section 5(b)(i).

 

“Instruments” means all “instruments”, as suchterm is defined in the UCC, now owned or hereafter acquired by any Person,wherever located, including all certificated securities and all promissorynotes and other evidences of indebtedness, other than instruments thatconstitute, or are a part of a group of writings that constitute, ChattelPaper.

 

“Intellectual Property” means any and allpatents, trademarks, service marks, trade names, copyrights, trade secrets,Licenses, information and other proprietary rights and processes.

 

“Inventory” means all “inventory”, as such termis defined in the UCC, now owned or hereafter acquired by any Person, whereverlocated, including all inventory, merchandise, goods and other personalproperty that are held by or on behalf of such Person for sale or lease or arefurnished or are to be furnished under a contract of service or that constitute

 

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raw materials, work in process, finished goods,returned goods, or materials or supplies of any kind, nature or descriptionused or consumed or to be used or consumed in such Person’s business or in the processing,production, packaging, promotion, delivery or shipping of the same, includingall supplies and embedded software.

 

“Inventory Availability” means up to the lesserof (a) thirty percent (30%) of the value of Companies’ Eligible Inventory(calculated on the basis of the lower of cost or market, on a first-infirst-out basis) and (b) $1,000,000.

 

“Investment Property” means all “investmentproperty”, as such term is defined in the UCC, now owned or hereafter acquiredby any Person, wherever located.

 

“June 2005 Security Agreement” means theSecurity Agreement dated as of June 23, 2005 by the Parent and TimeAmerica-Arizona for the benefit of Laurus, as same may be amended,modified and/or supplemented from time to time.

 

“Letter-of-Credit Rights” means “letter-of-creditrights” as such term is defined in the UCC, now owned or hereafter acquired byany Person, including rights to payment or performance under a letter ofcredit, whether or not such Person, as beneficiary, has demanded or is entitledto demand payment or performance.

 

“License” means any rights under any writtenagreement now or hereafter acquired by any Person to use any trademark,trademark registration, copyright, copyright registration or invention forwhich a patent is in existence or other license of rights or interests now heldor hereafter acquired by any Person.

 

“Lien” means any mortgage, security deed, deedof trust, pledge, hypothecation, assignment, security interest, lien (whetherstatutory or otherwise), charge, claim or encumbrance, or preference, priorityor other security agreement or preferential arrangement held or asserted inrespect of any asset of any kind or nature whatsoever including any conditionalsale or other title retention agreement, any lease having substantially thesame economic effect as any of the foregoing, and the filing of, or agreementto give, any financing statement under the UCC or comparable law of anyjurisdiction.

 

“Loans” means the Revolving Loans and the TermLoan and all other extensions of credit hereunder and under any AncillaryAgreement.

 

“Lockboxes” has the meaning given such term in Section 8(a).

 

“March 2004 Subsidiary Security Agreement”means the Security Agreement dated as of March 24, 2004 by TimeAmerica-Arizona for the benefit of Laurus, as same may be amended,modified and/or supplemented from time to time.

 

“March 2004 Parent Security Agreement”means the Security Agreement dated as of March 24, 2004 by the Parent forthe benefit of Laurus, as same may be amended, modified and/orsupplemented from time to time.

 

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“Material Adverse Effect” means a materialadverse effect on (a) the business, assets, liabilities, condition(financial or otherwise), properties, operations or prospects of any Company orany of its Subsidiaries (taken individually and as a whole), (b) anyCompany’s or any of its Subsidiary’s ability to pay or perform theObligations in accordance with the terms hereof or any Ancillary Agreement, (c) thevalue of the Collateral, the Liens on the Collateral or the priority of anysuch Lien or (d) the practical realization of the benefits of Laurus’rights and remedies under this Agreement and the Ancillary Agreements.

 

“NASD” has the meaning given such term in Section 13(b).

 

“Note Shares” has the meaning given such termin Section 12(a).

 

“Notes” means the Secured Non-ConvertibleRevolving Note and the Secured Convertible Term Note made by Companies in favorof Laurus in connection with the transactions contemplated hereby, as each ofthe same may be amended, supplemented, restated and/or otherwise modifiedfrom time to time.

 

“Obligations” means all Loans, all advances,debts, liabilities, obligations, covenants and duties owing by each Company andeach of its Subsidiaries to Laurus (or any corporation that directly or indirectlycontrols or is controlled by or is under common control with Laurus) of everykind and description (whether or not evidenced by any note or other instrumentand whether or not for the payment of money or the performance ornon-performance of any act), direct or indirect, absolute or contingent, due orto become due, contractual or tortious, liquidated or unliquidated, whetherexisting by operation of law or otherwise now existing or hereafter arisingincluding any debt, liability or obligation owing from any Company and/or eachof its Subsidiaries to others which Laurus may have obtained by assignmentor otherwise and further including all interest (including interest accruing atthe then applicable rate provided in this Agreement after the maturity of theLoans and interest accruing at the then applicable rate provided in thisAgreement after the filing of any petition in bankruptcy, or the commencementof any insolvency, reorganization or like proceeding, whether or not a claimfor post-filing or post-petition interest is allowed or allowable in suchproceeding), charges or any other payments each Company and each of itsSubsidiaries is required to make by law or otherwise arising under or as aresult of this Agreement, the Ancillary Agreements or otherwise, together withall reasonable expenses and reasonable attorneys’ fees chargeable to theCompanies’ or any of their Subsidiaries’ accounts or incurred by Laurus inconnection therewith.

 

“Payment Intangibles” means all “paymentintangibles” as such term is defined in the UCC, now owned or hereafteracquired by any Person, including, a General Intangible under which the AccountDebtor’s principal obligation is a monetary obligation.

 

“Permitted Liens” means (a) Liens ofcarriers, warehousemen, artisans, bailees, mechanics and materialmen incurredin the ordinary course of business securing sums not overdue; (b) Liensincurred in the ordinary course of business in connection with worker’scompensation, unemployment insurance or other forms of governmental insuranceor benefits, relating to employees, securing sums (i) not overdue or (ii) beingdiligently contested in good faith provided that adequate reserves with respectthereto are maintained on the books of the Companies and their Subsidiaries, asapplicable, in conformity with GAAP; (c) Liens in favor of

 

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Laurus; (d) Liens for taxes (i) not yet dueor (ii) being diligently contested in good faith by appropriateproceedings, provided that adequate reserves with respect thereto aremaintained on the books of the Companies and their Subsidiaries, as applicable,in conformity with GAAP; and which have no effect on the priority of Liens infavor of Laurus or the value of the assets in which Laurus has a Lien; (e) PurchaseMoney Liens securing Purchase Money Indebtedness to the extent permitted inthis Agreement and (f) Liens specified on Schedule 2 hereto.

 

“Person” means any individual, soleproprietorship, partnership, limited liability partnership, joint venture,trust, unincorporated organization, association, corporation, limited liabilitycompany, institution, public benefit corporation, entity or government (whetherfederal, state, county, city, municipal or otherwise, including anyinstrumentality, division, agency, body or department thereof), and shallinclude such Person’s successors and assigns.

 

“Principal Market” means the NASD Over TheCounter Bulletin Board, NASDAQ Capital Market, NASDAQ National Market System,American Stock Exchange or New York Stock Exchange (whichever of the foregoingis at the time the principal trading exchange or market for the Common Stock).

 

“Proceeds” means “proceeds”, as such term isdefined in the UCC and, in any event, shall include:  (a) any and all proceeds of anyinsurance, indemnity, warranty or guaranty payable to any Company or any otherPerson from time to time with respect to any Collateral; (b) any and allpayments (in any form whatsoever) made or due and payable to any Companyfrom time to time in connection with any requisition, confiscation, condemnation,seizure or forfeiture of any Collateral by any governmental body, governmentalauthority, bureau or agency (or any person acting under color of governmentalauthority); (c) any claim of any Company against third parties (i) forpast, present or future infringement of any Intellectual Property or (ii) forpast, present or future infringement or dilution of any trademark or trademarklicense or for injury to the goodwill associated with any trademark, trademarkregistration or trademark licensed under any trademark License; (d) anyrecoveries by any Company against third parties with respect to any litigationor dispute concerning any Collateral, including claims arising out of the lossor nonconformity of, interference with the use of, defects in, or infringementof rights in, or damage to, Collateral; (e) all amounts collected on, ordistributed on account of, other Collateral, including dividends, interest,distributions and Instruments with respect to Investment Property and pledgedStock; and (f) any and all other amounts, rights to payment or otherproperty acquired upon the sale, lease, license, exchange or other dispositionof Collateral and all rights arising out of Collateral.

 

“Purchase Money Indebtedness” means (a) anyindebtedness incurred for the payment of all or any part of the purchaseprice of any fixed asset, including indebtedness under capitalized leases, (b) anyindebtedness incurred for the sole purpose of financing or refinancing all orany part of the purchase price of any fixed asset, and (c) anyrenewals, extensions or refinancings thereof (but not any increases in theprincipal amounts thereof outstanding at that time).

 

“Purchase Money Lien” means any Lien upon anyfixed assets that secures the Purchase Money Indebtedness related thereto butonly if such Lien shall at all times be confined solely to the asset thepurchase price of which was financed or refinanced through the incurrence

 

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of the Purchase Money Indebtedness secured by suchLien and only if such Lien secures only such Purchase Money Indebtedness.

 

“Registration Rights Agreements” means thatcertain Registration Rights Agreement dated as of the Closing Date by andbetween the Parent and Laurus and each other registration rights agreement byand between the Parent and Laurus, as each of the same may be amended,modified and supplemented from time to time.

 

“Revolving Loans” has the meaning given suchterm in Section 2(a)(i).

 

“SEC” means the Securities and ExchangeCommission.

 

“SEC Reports” has the meaning given such termin Section 12(u).

 

“Secured Non-Convertible Revolving Note” meansthat certain Secured Non-Convertible Revolving Note dated as of the ClosingDate made by the Companies in favor of Laurus in the original face amount ofOne Million Five Hundred Thousand Dollars ($1,500,000), as the same may beamended, supplemented, restated and/or otherwise modified from time to time.

 

“Secured Convertible Term Note” means thatcertain Secured Convertible Term Note dated as of the Closing Date made by theCompanies in favor of Laurus in the original face amount of Two Million Dollars($2,000,000), as the same may be amended, supplemented, restated and/orotherwise modified from time to time.

 

“Securities” means the Notes and the Warrants,the Grant Shares and the shares of Common Stock which may be issuedpursuant to conversion of the Secured Convertible Term Note in whole or in part orexercise of the Warrants.

 

“Securities Act” has the meaning given suchterm in Section 12(r).

 

“Security Documents” means all security agreements,mortgages, cash collateral deposit letters, pledges and other agreements whichare executed by any Company or any of its Subsidiaries in favor of Laurus.

 

“Software” means all “software” as such term isdefined in the UCC, now owned or hereafter acquired by any Person, includingall computer programs and all supporting information provided in connectionwith a transaction related to any program.

 

“Stock” means all certificated anduncertificated shares, options, warrants, membership interests, general orlimited partnership interests, participation or other equivalents (regardlessof how designated) of or in a corporation, partnership, limited liabilitycompany or equivalent entity whether voting or nonvoting, including commonstock, preferred stock, or any other “equity security” (as such term is definedin Rule 3a11-1 of the General Rules and Regulations promulgated bythe SEC under the Securities Exchange Act of 1934).

 

“Subordinated Debt Documentation” shall mean,collectively, (i) that certain Amended and Restated SubordinationAgreement, dated as of January 3, 2006, by and among

 

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Joseph L. Simek, Frances L. Simek, the Parent andLaurus (as amended and restated, amended modified or supplemented from time totime, the “Subordination Agreement”) and (ii) each “Subordinated LoanDocument” under, and as defined in, the Subordination Agreement, as each areamended, modified or supplemented from time to time.

 

“Subsidiary” means, with respect to any Person,(i) any other Person whose shares of stock or other ownership interestshaving ordinary voting power (other than stock or other ownership interestshaving such power only by reason of the happening of a contingency) to elect amajority of the directors or other governing body of such other Person, areowned, directly or indirectly, by such Person or (ii) any other Person inwhich such Person owns, directly or indirectly, more than 50% of the equityinterests at such time.

 

“Supporting Obligations” means all “supportingobligations” as such term is defined in the UCC.

 

“Term” means the Closing Date through the closeof business on the day immediately preceding the second anniversary of theClosing Date, subject to acceleration at the option of Laurus upon theoccurrence of an Event of Default hereunder or other termination hereunder.

 

“Term Loan” has the meaning given such term in Section 2(c).

 

“Time America-Arizona” means Time America, Inc.,a corporation organized under the laws of Arizona.

 

“Total Investment Amount” means Three MillionFive Hundred Thousand Dollars ($3,500,000).

 

“UCC” means the Uniform Commercial Code asthe same may, from time to time be in effect in the State of New York;provided, that in the event that, by reason of mandatory provisions of law, anyor all of the attachment, perfection or priority of, or remedies with respectto, Laurus’ Lien on any Collateral is governed by the Uniform CommercialCode as in effect in a jurisdiction other than the State of New York, the term “UCC”shall mean the Uniform Commercial Code as in effect in such otherjurisdiction for purposes of the provisions of this Agreement relating to suchattachment, perfection, priority or remedies and for purposes of definitionsrelated to such provisions; provided further, that to the extent that UCC is usedto define any term herein or in any Ancillary Agreement and such term isdefined differently in different Articles or Divisions of the UCC, thedefinition of such term contained in Article or Division 9 shall govern.

 

“Warrant Shares” has the meaning given suchterm in Section 12(a).

 

“Warrants” means that certain Common StockPurchase Warrant dated as of the Closing Date made by the Parent in favor ofLaurus and each other warrant made by the Parent in favor Laurus, as each ofthe same may be amended, restated, modified and/or supplemented from timeto time.

 

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Exhibit A

 

Eligible Subsidiaries

 

Time America, Inc.,an Arizona corporation

 

NetEdge Devices, LLC, anArizona limited liability company

 

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Exhibit B

 

Borrowing Base Certificate

 

[To be inserted]

 

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