Document:

Exhibit 10.1

 

SECURITY AGREEMENT

 

This Security Agreement is made as of June 23, 2005 by
and among LAURUS MASTER FUND, LTD., a Cayman Islands corporation (“Laurus”),
TIME AMERICA, INC., a Nevada corporation (“the Parent”), and each party
listed on Exhibit A attached hereto (each an “Eligible Subsidiary”
and collectively, the “Eligible Subsidiaries”) the Parent and each
Eligible Subsidiary, each a “Company” and collectively, the “Companies”).

 

BACKGROUND

 

The Companies have requested that Laurus make advances
available to the Companies; and

 

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

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the mutual
covenants and undertakings and the terms and conditions contained herein, the
parties hereto agree as follows:

 

1.             General
Definitions and Terms; Rules of Construction.

 

(a)           General
Definitions.  Capitalized terms used
in this Agreement shall have the meanings assigned to them in Annex A.

 

(b)           Accounting
Terms.  Any accounting terms used in
this Agreement which are not specifically defined shall have the meanings
customarily given them in accordance with GAAP and all financial computations
shall be computed, unless specifically provided herein, in accordance with GAAP
consistently applied.

 

(c)           Other
Terms.  All other terms used in this
Agreement and defined in the UCC, shall have the meaning given therein unless
otherwise defined herein.

 

(d)           Rules
of Construction.  All Schedules,
Addenda, Annexes and Exhibits hereto or expressly identified to this Agreement
are incorporated herein by reference and taken together with this Agreement
constitute but a single agreement.  The
words “herein”, “hereof” and “hereunder” or other words of similar import refer
to this Agreement as a whole, including the Exhibits, Addenda, Annexes and
Schedules thereto, as the same may be from time to time amended, modified,
restated or supplemented, and not to any particular section, subsection or
clause contained in this Agreement. 
Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter. 
The term “or” is not exclusive. 
The term “including” (or any form thereof) shall not be limiting or
exclusive.  All references to statutes
and related regulations shall include any amendments of same and any successor
statutes and regulations.  All references
in this Agreement or in the Schedules, Addenda, Annexes and Exhibits to this
Agreement to sections, schedules, disclosure schedules, exhibits, and
attachments shall refer to the corresponding sections, schedules, disclosure
schedules, exhibits, and attachments of or to this Agreement.  All references to any instruments or
agreements, including references to any of this Agreement or the Ancillary
Agreements shall include any and all modifications or amendments thereto and
any and all extensions or renewals thereof.

 

2.             Loan
Facility.

 

(a)           Loans.

 

(i)            Subject
to the terms and conditions set forth herein and in the Ancillary Agreements,
Laurus may make loans (the “Loans”) to Companies from time to time
during the Term which, in the

 

 

aggregate at any
time outstanding, will not exceed the lesser of (x) (I) the Capital
Availability Amount minus (II) such reserves as Laurus may reasonably in its
good faith judgment deem proper and necessary from time to time (the “Reserves”)
and (y) an amount equal to (I) the Accounts Availability minus (II) the
Reserves.  The amount derived at any time
from Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II) shall be referred to as
the “Formula Amount.”  The
Companies shall, jointly and severally, execute and deliver to Laurus on the
Closing Date the Revolving Note and a Minimum Borrowing Note evidencing the
Loans funded on the Closing Date.  From
time to time thereafter, the Companies shall jointly and severally execute and
deliver to Laurus immediately prior to the final funding of each additional
$1,000,000 tranche of Loans allocated to any Minimum Borrowing Note issued
after the date hereof (calculated on a cumulative basis for each such tranche)
an additional Minimum Borrowing Note evidencing such tranche, substantially in
the form of the Minimum Borrowing Note delivered by the Companies to Laurus on
the Closing Date.  Notwithstanding
anything herein to the contrary, whenever during the Term the outstanding
balance on the Minimum Borrowing Note shall be less than the Minimum Borrowing
Amount (such amount being referred to herein as the “Transferable Amount”)
to the extent that the outstanding balance on the Revolving Note should equal
or exceed $500,000, that portion of the balance of the Revolving Note that
exceeds $500,000, but does not exceed the Transferable Amount, shall be
segregated from the outstanding balance under the Revolving Note and allocated
to and aggregated with the then existing balance of the next unissued
serialized Minimum Borrowing Note (the “Next Unissued Serialized Note”);
provided that such segregated amount shall remain subject to the terms and
conditions of such Revolving Note until a new serialized Minimum Borrowing Note
is issued as set forth below.  The Next
Unissued Serialized Note shall remain in book entry form until the balance
thereunder shall equal the Minimum Borrowing Amount, at which time a new
serialized Minimum Borrowing Note in the face amount equal to the Minimum
Borrowing Amount will be issued and registered as set forth in the Registration
Rights Agreement (and the outstanding balance under the Revolving Note shall at
such time be correspondingly reduced in the amount equal to the Minimum
Borrowing Amount as a result of the issuance of such new serialized Minimum
Borrowing Note).

 

(ii)           Notwithstanding
the limitations set forth above, if requested by any Company, Laurus retains
the right to lend to such Company from time to time such amounts in excess of
such limitations as Laurus may determine in its sole discretion.

 

(iii)          The
Companies acknowledge that the exercise of Laurus’ discretionary rights
hereunder may result during the Term in one or more increases or decreases in
the advance percentages used in determining Accounts Availability and each of
the Companies hereby consent to any such increases or decreases which may limit
or restrict advances requested by the Companies, provided that in the case of
any such decrease in the advance percentages the events giving rise to such
decrease and Laurus’ use of such discretion are attributable to a significant
change in the assets, liabilities, condition (financial or otherwise),
properties, operations, prospects or Eligible Accounts in the reasonable good
faith judgment of Laurus.

 

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

 

(v)           If any
Company at any time fails to perform or observe any of the covenants contained
in this Agreement or any Ancillary Agreement, Laurus may, but need not, perform
or observe such covenant on behalf and in the name, place and stead of such
Company (or, at Laurus’ option, in Laurus’ name) and may, but need not, take
any and all other actions which Laurus may deem necessary to cure or correct
such failure (including the payment of taxes, the satisfaction of Liens, the
performance of obligations owed to Account Debtors, lessors or other obligors,
the procurement and maintenance of insurance, the execution of assignments,
security agreements and financing statements, and the endorsement of
instruments).  The amount of all monies
expended and all costs and expenses (including attorneys’ fees and legal
expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Laurus shall be charged to the Companies’ account as a Loan and added to the
Obligations.  To facilitate Laurus’
performance or observance of such covenants by each Company, each Company
hereby irrevocably appoints Laurus, or Laurus’ delegate, acting alone, as such
Company’s attorney in fact (which appointment is coupled with an interest) 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 behalf of such Company any
and all instruments, documents, assignments, security agreements, financing
statements,

 

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applications for
insurance and other agreements and writings required to be obtained, executed,
delivered or endorsed by such Company. 
This power of attorney shall only be exercisable following the
occurrence and during the continuation of an Event of Default, except with
respect to the filing of financing statements, in which case such power of
attorney shall be exercisable on and after the date hereof.

 

(vi)          Laurus will
account to Company Agent monthly with a statement of all Loans and other
advances, charges and payments made pursuant to this Agreement, and such
account rendered by Laurus shall be deemed final, binding and conclusive unless
Laurus 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 to
which objection is made.

 

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

 

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

 

(b)           Receivables
Purchase.  Following the occurrence
and during the continuance of an Event of Default, Laurus may, at its option,
elect to convert the credit facility contemplated hereby to an accounts
receivable purchase facility.  Upon such
election by Laurus (subsequent notice of which Laurus shall provide to Company
Agent), the Companies shall be deemed to hereby have sold, assigned,
transferred, conveyed and delivered to Laurus, and Laurus shall be deemed to
have purchased and received from the Companies, all right, title and interest
of the Companies in and to all Accounts which shall at any time constitute
Eligible Accounts (the “Receivables Purchase”).  All outstanding Loans hereunder shall be
deemed obligations under such accounts receivable purchase facility.  Following payment in full of all Obligations
Laurus shall promptly assign to Parent any remaining Eligible 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 with the terms hereof shall not be deemed an
exercise by Laurus of its secured creditor rights under Article 9 of the
UCC.  Immediately following Laurus’
request, the Companies shall execute all such further documentation as may be
required by Laurus to more fully set forth the accounts receivable purchase
facility herein contemplated, including, without limitation, an accounts
receivable purchase agreement and account debtor notification letters in form
and substance reasonably satisfactory to Laurus, but any Company’s failure to
enter into any such documentation shall not impair or affect the Receivables
Purchase in any manner whatsoever.

 

(c)           Minimum
Borrowing Amount.  After a
registration statement registering the Registrable Securities (as defined in
the Registration Rights Agreement) has been declared effective by the SEC,
conversions of the Minimum Borrowing Amount into the Common Stock may be
initiated as set forth in the respective Minimum Borrowing Note.  From and after the date upon which any
outstanding principal of the Minimum Borrowing Amount (as evidenced by the
first Minimum Borrowing Note) is converted into Common Stock (the “First
Conversion Date”), (i) corresponding amounts of all outstanding Loans (not
attributable to the then outstanding Minimum Borrowing Amount) existing on or
made after the First Conversion Date will be aggregated in accordance with
Section 2(a)(i) and (ii) the Companies will issue a new (serialized) Minimum
Borrowing Note to Laurus in accordance with Section 2(a)(i), and (iii) the
Parent shall prepare and file a subsequent registration statement with the SEC
to register such subsequent Minimum Borrowing Note as set forth in the
Registration Rights Agreement.

 

3.             Repayment
of the Loans.  The Companies (a) may prepay the Obligations
from time to time in accordance with the terms and provisions of the Notes (and
Section 17 hereof if such prepayment is due to a termination of this
Agreement); (b) shall repay on the expiration of the Term (i) the then
aggregate outstanding principal balance of the Loans together with accrued and
unpaid interest, fees and charges and; (ii) all other amounts owed Laurus under
this Agreement and the Ancillary Agreements; and (c) subject to Section
2(a)(ii), shall repay on any day on which the then aggregate outstanding
principal balance of the Loans are in excess of the Formula

 

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Amount at such time, Loans in an amount equal to such
excess. Any payments of principal, interest, fees or any other amounts payable
hereunder or under any Ancillary Agreement shall be made prior to 2:00 p.m.
(New York time) on the due date thereof in immediately available funds.

 

4.             Procedure
for Loans.  Company Agent may by written notice request a
borrowing of Loans prior to 2:00 p.m. (New York time) on the Business Day of
its request to incur, on the next Business Day, a Loan.  Together with each request for a Loan (or at
such other intervals as Laurus may request), Company Agent shall deliver to
Laurus a Borrowing Base Certificate in the form of Exhibit B attached
hereto, which shall be certified as true and correct by the Chief Executive
Officer or Chief Financial Officer of Parent together with all supporting
documentation relating thereto.  All
Loans shall be disbursed from whichever office or other place Laurus may
designate from time to time and shall be charged to the Companies’ account on
Laurus’ books.  The proceeds of each Loan
made by Laurus shall be made available to Company Agent on the Business Day
following the Business Day so requested in accordance with the terms of this
Section 4 by way of credit to the applicable Company’s operating account
maintained with such bank as Company Agent designated to Laurus.  Any and all Obligations due and owing
hereunder may be charged to the Companies’ account and shall constitute Loans.

 

5.             Interest
and Payments.

 

(a)           Interest.

 

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

 

(ii)           Interest
and payments shall be computed on the basis of actual days elapsed in a year of
360 days.  At Laurus’ option, Laurus may
charge the Companies’ account for said interest.

 

(iii)          Effective
upon the occurrence of any Event of Default and for so long as any Event of
Default shall be continuing, the Contract Rate shall automatically be increased
as set forth in the Notes (such increased rate, the “Default Rate”), and
all outstanding Obligations, excluding unpaid interest, shall continue to
accrue interest from the date of such Event of Default at the Default Rate
applicable to such Obligations.

 

(iv)          In no event
shall the aggregate interest payable hereunder exceed the maximum rate
permitted under any applicable law or regulation, as in effect from time to
time (the “Maximum Legal Rate”), and if any provision of this Agreement
or any Ancillary Agreement is in contravention of any such law or regulation,
interest payable under this Agreement and each Ancillary Agreement shall be
computed on the basis of the Maximum Legal Rate (so that such interest will not
exceed the Maximum Legal Rate).

 

(v)           The
Companies shall jointly and severally pay principal, interest and all other
amounts payable hereunder, or under any Ancillary Agreement, without any
deduction whatsoever, including any deduction for any set-off or counterclaim.

 

(b)           Payments;
Certain Closing Conditions.

 

(i)            Closing/Annual
Payments.  Upon execution of this
Agreement by each Company and Laurus, the Companies shall jointly and severally
pay to Laurus Capital Management, LLC a closing payment in an amount equal to
three and six-tenths percent (3.60%) of the Capital Availability Amount.  Such payment shall be deemed fully earned on
the Closing Date and shall not be subject to rebate or proration for any
reason.

 

(ii)           Overadvance
Payment.  Without affecting Laurus’
rights hereunder in the event (x) the Loans exceed the Formula Amount (each
such event, an “Overadvance”) without the written consent of Laurus, all
such Overadvances shall bear additional interest at a rate of 1.0% per annum
for all times such amounts shall be in excess of the Formula Amount and (y) an
Overadvance exists following the receipt by the Companies of the written
consent of Laurus, all such Overadvances shall bear additional interest at a
rate mutually acceptable to

 

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Laurus and Parent
for all times such amounts shall be in excess of the Formula Amount.  All amounts that are incurred pursuant to
this Section 5(b)(ii) shall be due and payable by the Companies monthly, in
arrears, on the first business day of each calendar month and upon expiration
of the Term.

 

(iii)          Financial
Information Default.  Without affecting
Laurus’ other rights and remedies, in the event any Company fails to deliver
the financial information required by Section 11 on or before the date required
by this Agreement, the Companies shall jointly and severally pay Laurus an
aggregate fee in the amount of $500.00 per week (or portion thereof) for each
such failure until such failure is cured to Laurus’ satisfaction or waived in
writing by Laurus.  All amounts that are
incurred pursuant to this Section 5(b)(iii) shall be due and payable by the
Companies monthly, in arrears, on the first business of each calendar month and
upon expiration of the Term.

 

(iv)          Expenses.  The Companies shall jointly and severally
reimburse Laurus for its expenses (including reasonable legal fees and
expenses) incurred in connection with the preparation and negotiation of this
Agreement and the Ancillary Agreements, and expenses incurred in connection
with Laurus’ due diligence review of each Company and its Subsidiaries and all
related matters.  Amounts required to be
paid under this Section 5(b)(iv) will be paid on the Closing Date and shall be
$30,000 for such expenses referred to in this Section 5(b)(iv).

 

6.             Security
Interest.

 

(a)           To secure
the prompt payment to Laurus of the Obligations, each Company hereby assigns,
pledges and grants to Laurus a continuing security interest in and Lien upon
all of the Collateral.  All of each
Company’s Books and Records relating to the Collateral shall, until delivered
to or removed by Laurus, be kept by such Company in trust for Laurus until all
Obligations have been paid in full.  Each
confirmatory assignment schedule or other form of assignment hereafter executed
by each Company shall be deemed to include the foregoing grant, whether or not
the same appears therein.

 

(b)           Each Company
hereby (i) authorizes Laurus to file any financing statements, continuation
statements or amendments thereto that (x) indicate the Collateral (1) as all
assets and personal property of such Company or words of similar effect,
regardless of whether any particular asset comprised in the Collateral falls
within the scope of Article 9 of the UCC of such jurisdiction, or (2) as being
of an equal or lesser scope or with greater detail, and (y) contain any other
information required by Part 5 of Article 9 of the UCC for the sufficiency or
filing office acceptance of any financing statement, continuation statement or
amendment and (ii) ratifies its authorization for Laurus to have filed any
initial financial statements, or amendments thereto if filed prior to the date
hereof.  Each Company acknowledges that
it is not authorized to file any financing statement or amendment or
termination statement with respect to any financing statement without the prior
written consent of Laurus and agrees that it will not do so without the prior
written consent of Laurus, subject to such Company’s rights under
Section 9-509(d)(2) of the UCC.

 

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

 

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

 

5

 

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

 

(b)           it shall
not encumber, mortgage, pledge, assign or grant any Lien in any Collateral or
any other assets to anyone other than Laurus and except for Permitted Liens.

 

(c)           the Liens
granted pursuant to this Agreement, upon completion of the filings and other
actions listed on Schedule 7(c) (which, in the case of all filings and
other documents referred to in said Schedule, have been delivered to Laurus in
duly executed form) constitute valid perfected security interests in all of the
Collateral in favor of Laurus as security for the prompt and complete payment and
performance of the Obligations, enforceable in accordance with the terms hereof
against any and all of its creditors and purchasers and such security interest
is prior to all other Liens in existence on the date hereof.

 

(d)           no
effective security agreement, mortgage, deed of trust, financing statement,
equivalent security or Lien instrument or continuation statement covering all
or any part of the Collateral is or will be on file or of record in any public
office, except those relating to Permitted Liens.

 

(e)           it shall
not dispose of any of the Collateral whether by sale, lease or otherwise except
for the sale of Inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment having an aggregate fair market value
of not more than $25,000.  and only to
the extent that (i) the proceeds of any such disposition are used to acquire
replacement Equipment which is subject to Laurus’ first priority security
interest or are used to repay Loans or to pay general corporate expenses, or
(ii) following the occurrence of an Event of Default which continues to exist
the proceeds of which are remitted to Laurus to be held as cash collateral for
the Obligations.

 

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

 

(g)           it shall
promptly, and in any event within five (5) Business Days after the same is
acquired by it, notify Laurus of any commercial tort claim (as defined in the
UCC) acquired by it and unless otherwise consented by Laurus, it shall enter
into a supplement to this Agreement granting to Laurus a Lien in such
commercial tort claim.

 

(h)           it shall
place notations upon its Books and Records and any of its financial statements
to disclose Laurus’ Lien in the Collateral.

 

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

 

(j)            it shall
perform in a reasonable time all other steps requested by Laurus to create and
maintain in Laurus’ favor a valid perfected first Lien in all Collateral
subject only to Permitted Liens.

 

(k)           it shall
notify Laurus promptly and in any event within three (3) Business Days after
obtaining knowledge thereof (i) of any event or circumstance that, to its
knowledge, would cause Laurus to consider

 

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any then existing
Account as no longer constituting an Eligible Account; (ii) of any material
delay in its performance of any of its obligations to any Account Debtor; (iii)
of any assertion by any Account Debtor of any material claims, offsets or
counterclaims; (iv) of any allowances, credits and/or monies granted by it to
any Account Debtor; (v) of all material adverse information relating to the
financial condition of an Account Debtor; (vi) of any material return of goods;
and (vii) of any loss, damage or destruction of any of the Collateral.

 

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

 

(m)          it shall
keep and maintain its Equipment in good operating condition, except for
ordinary wear and tear, and shall make all necessary repairs and replacements
thereof so that the value and operating efficiency shall at all times be
maintained and preserved.  It shall not
permit any such items to become a Fixture to real estate or accessions to other
personal property.

 

(n)           it shall
maintain and keep all of its Books and Records concerning the Collateral at its
executive offices listed in Schedule 12(aa).

 

(o)           it shall
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 notice
of such changes or new location and (ii) prior to such change or opening of a
new location where Collateral having a value of more than $50,000 will be
located, it executes and delivers to Laurus such agreements deemed reasonably
necessary or prudent by Laurus, including landlord agreements, mortgagee agreements
and warehouse agreements, each in form and substance reasonably satisfactory to
Laurus, to adequately protect and maintain Laurus’ security interest in such
Collateral.

 

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

 

8.             Payment
of Accounts.

 

(a)           Each
Company will irrevocably direct all of its Account Debtors who receive invoices
from any Company following the date hereof and other Persons obligated to make
payments constituting Collateral to make such payments directly to the
lockboxes maintained by such Company (the “Lockboxes”) with Wells Fargo
Bank or such other financial institution accepted by Laurus in writing as may
be selected by such Company (the “Lockbox Bank”) pursuant to the terms
of the certain agreements among one or more Companies, Laurus and/or the
Lockbox Bank dated as of              ,
2005.  On or prior to the Closing Date,
each Company shall and shall cause the Lockbox Bank to enter into all such
documentation acceptable to Laurus pursuant to which, among other things, the
Lockbox Bank agrees to:  (a) sweep
the Lockbox on a daily basis and deposit all checks received therein to an
account designated by Laurus in writing and (b) comply only with the
instructions or other directions of Laurus concerning the Lockbox.  All of each Company’s invoices, account
statements and other written or oral communications directing, instructing,
demanding or requesting payment of any Account of any Company or any other
amount constituting Collateral shall conspicuously direct that all payments be
made to the Lockbox or such other address as Laurus may direct in writing.  If, notwithstanding the instructions to
Account Debtors, any Company receives any payments, such Company shall
immediately remit such payments to Laurus in their original

 

7

 

form with all
necessary endorsements.  Until so
remitted, such Company shall hold all such payments in trust for and as the
property of Laurus and shall not commingle such payments with any of its other
funds or property.

 

(b)           At Laurus’
election, following the occurrence of an Event of Default which is continuing,
Laurus may notify each Company’s Account Debtors of Laurus’ security interest
in the Accounts, collect them directly and charge the collection costs and
expenses thereof to Company’s and the Eligible Subsidiaries joint and several
account.

 

9.             Collection
and Maintenance of Collateral.

 

(a)           Laurus may
verify each Company’s Accounts from time to time, but not more often than once
every three (3) months, unless an Event of Default has occurred and is
continuing, utilizing an audit control company or any other agent of Laurus.

 

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

 

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

 

10.           Inspections
and Appraisals.  At all times during normal business hours,
Laurus, and/or any agent of Laurus shall have the right to (a) have access to,
visit, inspect, review, evaluate and make physical verification and appraisals
of each Company’s properties and the Collateral, (b) inspect, audit and copy
(or take originals if necessary) and make extracts from each Company’s Books
and Records, including management letters prepared by the Accountants, and (c)
discuss with each Company’s directors, principal officers, and independent
accountants, each Company’s business, assets, liabilities, financial condition,
results of operations and business prospects., provided, however, such visits
inspections, etc. shall not occur more than one every three (3) months.  The limitation set forth in the immediately
preceding proviso shall not apply following the occurrence and during the
continuation of an Event of Default. 
Each Company will deliver to Laurus any instrument necessary for Laurus
to obtain records from any service bureau maintaining records for such
Company.  If any internally prepared
financial information, including that required under this Section is
unsatisfactory in any manner to Laurus, Laurus may request that the Accountants
review the same.

 

11.           Financial
Reporting.  Company Agent will deliver, or cause to be
delivered, to Laurus each of the following, which shall be in form and detail
acceptable to Laurus:

 

(a)           As soon as
available, and in any event within ninety (90) days after the end of each
fiscal year of the Parent, each Company’s audited financial statements with a
report of independent certified public accountants of recognized standing
selected by the Parent and acceptable to Laurus (the “Accountants”),
which annual financial statements shall be without qualification and shall
include each Company’s balance sheet as at the end of such fiscal year and the
related statements of each Company’s income, retained earnings and cash flows
for the fiscal year then ended, prepared, if Laurus so requests, on a
consolidating and consolidated basis to include all Subsidiaries and Affiliates
of each Company, all in reasonable detail and prepared in accordance with GAAP,
together with (i) if and when available, copies of any management letters
prepared by the Accountants; and (ii) a certificate of the Parent’s President,
Chief Executive Officer or Chief Financial Officer stating that such financial
statements have been prepared in accordance with GAAP and whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with respect
thereto;

 

8

 

(b)           As soon as
available and in any event within forty five (45) days after the end of each
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 such quarter
and for the year to date period then ended, prepared, if Laurus so requests, on
a consolidating and consolidated basis to include all Subsidiaries and
Affiliates of each Company, in reasonable detail and stating in comparative
form the figures for the corresponding date and periods in the previous year,
all prepared in accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of the Parent’s President, Chief Executive Officer
or Chief Financial Officer, stating (i) that such financial statements have
been prepared in accordance with GAAP, subject to year-end audit adjustments,
and (ii) whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder not theretofore reported and remedied
and, if so, stating in reasonable detail the facts with respect thereto;

 

(c)           Within thirty
(30) days after the end of each month (or more frequently if Laurus so
requests), agings of each Company’s Accounts, unaudited trial balances and
their accounts payable and a calculation of each Company’s Accounts and
Eligible Accounts, provided, however, that if Laurus shall request the
foregoing information more often than as set forth in the immediately preceding
clause, each Company shall have thirty (30) days from each such request to
comply with Laurus’ demand; and

 

(d)           Promptly
after (i) the filing thereof, copies of the Parent’s most recent registration
statements and annual, quarterly, monthly or other regular reports which 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.

 

Notwithstanding the financial reporting requirements
set forth in Sections 11(a) and (b) hereof, Company Agent shall have no
obligation to deliver the financial statement information set forth in such
subsections so long as Parent has timely filed its 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 Exchange Commission.

 

12.           Additional
Representations and Warranties.  Each Company hereby represents and warrants
to Laurus as follows:

 

(a)           Organization,
Good Standing and Qualification.  It
and each of its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of organization.  It and each of its Subsidiaries has the
corporate power and authority to own and operate its properties and assets and,
insofar as it is or shall be a party thereto, to (i) execute and deliver this Agreement
and the Ancillary Agreements, (ii) to issue the Notes and the shares of Common
Stock issuable upon conversion of the Notes (the “Note Shares”), (iii)
to issue the Warrants and the shares of Common Stock issuable upon conversion
of the Warrants (the “Warrant Shares”), and to (iv) carry out the
provisions of this Agreement and the Ancillary Agreements and to carry on its
business as presently conducted.  It and
each of its Subsidiaries is duly qualified and is authorized to do business and
is in good standing as a foreign corporation in all jurisdictions in which the
nature or location of its activities and of its properties (both owned and
leased) makes such qualification necessary, except for those jurisdictions in
which failure to do so has not had, or could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect.

 

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

 

(c)           Capitalization;
Voting Rights.

 

(i)            The
authorized capital stock of the Parent, as of the date hereof consists of
50,000,000 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, and 10,000,000 are shares of preferred stock, par value $0.01
per share of which no shares of preferred stock are issued and
outstanding.  The authorized, issued and
outstanding capital stock of each Subsidiary of each Company is set forth on Schedule
12(c).

 

9

 

(ii)           Except as
disclosed on Schedule 12(c), other than: 
(i) the shares reserved for issuance under the Parent’s stock option
plans; and (ii) shares which may be issued pursuant to this Agreement and the
Ancillary Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Parent of any of its securities.  Except as disclosed on Schedule 12(c),
neither the offer or issuance of any of the Notes or the Warrants, or the
issuance of any of the Note Shares nor the Warrant Shares, nor the consummation
of any transaction contemplated hereby will result in a change in the price or
number of any securities of the Parent outstanding, under anti-dilution or
other similar provisions contained in or affecting any such securities.

 

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

 

(iv)          The rights,
preferences, privileges and restrictions of the shares of the Common Stock are
as stated in the Parent’s Certificate of Incorporation (the “Charter”).  The Note Shares and the Warrant Shares have
been duly and validly reserved for issuance. 
When issued and paid for in compliance with the provisions of this
Agreement and the Parent’s Charter, the Securities will be validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances; provided,
however, that the Securities may be subject to restrictions on transfer
under state and/or federal securities laws as set forth herein or as otherwise
required by such laws at the time a transfer is proposed.

 

(d)           Authorization;
Binding Obligations.  All corporate
action on its and its Subsidiaries’ part (including their respective officers
and directors) necessary for the authorization of this Agreement and the
Ancillary Agreements, the performance of all of its and its Subsidiaries’
obligations hereunder and under the Ancillary Agreements on the Closing Date
and, the authorization, issuance and delivery of the Notes and the Warrant has
been taken or will be taken prior to the Closing Date.  This Agreement and the Ancillary Agreements,
when executed and delivered and to the extent it is a party thereto, will be
its and its Subsidiaries’ valid and binding obligations enforceable against
each such Person in accordance with their terms, except:

 

(i)            as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and

 

(ii)           general
principles of equity that restrict the availability of equitable or legal
remedies.

 

The issuance of the Notes and the subsequent conversion
of the Notes into Note Shares are not and will not be subject to any preemptive
rights or rights of first refusal that have not been properly waived or
complied with.  The issuance of the
Warrants and the subsequent exercise of the Warrants for Warrant Shares are not
and will not be subject to any preemptive rights or rights of first refusal
that have not been properly waived or complied with.

 

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

 

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

 

(i)            There are
no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which it or any of its Subsidiaries is a
party or to its knowledge by which it is bound which may involve:  (i) obligations (contingent or otherwise) 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 its Subsidiaries arising from
purchase or sale agreements entered into in the ordinary course of business);
or (ii) the transfer or license of any patent, copyright, trade secret or other
proprietary right to or from it (other than licenses arising from the purchase
of “off the shelf” or other standard products); or (iii) provisions restricting
the development, manufacture or

 

10

 

distribution of
its or any of its Subsidiaries’ products or services; or (iv) indemnification
by it or any of its Subsidiaries with respect to infringements of proprietary
rights.

 

(ii)           Since June
30, 2004 (the “Balance Sheet Date”) neither it nor any of its
Subsidiaries has:  (i) declared or paid
any dividends, or authorized or made any distribution upon or with respect to
any class or series of its capital stock; (ii) incurred any indebtedness for
money borrowed or any other liabilities (other than ordinary course
obligations) individually in excess of $50,000 or, in the case of indebtedness
and/or liabilities individually less than $50,000, in excess of $100,000 in the
aggregate; (iii) made any loans or advances to any Person not in excess,
individually or in the aggregate, of $100,000, other than ordinary advances for
travel expenses; or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its Inventory 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 transactions involving the same Person (including Persons it or
any of its applicable Subsidiaries has reason to believe are affiliated
therewith or with any Subsidiary thereof) shall be aggregated for the purpose
of meeting the individual minimum dollar amounts of such subsections.

 

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

 

(v)           The Parent
makes and keeps books, records, and accounts, that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of its
assets.  It maintains internal control
over financial reporting (“Financial Reporting Controls”) designed by,
or under the supervision of, its principal executive and principal financial
officers, and effected by its management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
GAAP, including that:

 

(1)           transactions
are executed in accordance with management’s general or specific authorization;

 

(2)           unauthorized
acquisition, use, or disposition of the Parent’s assets that could have a
material effect on the financial statements are prevented or timely detected;

 

(3)           transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that its receipts and expenditures are being made
only in accordance with authorizations of the Parent’s management and board of
directors;

 

(4)           transactions
are recorded as necessary to maintain accountability for assets; and

 

(5)           the
recorded accountability for assets is compared with the existing assets at
reasonable intervals, and appropriate action is taken with respect to any
differences.

 

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

 

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

 

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

 

11

 

(ii)           reimbursement
for reasonable expenses incurred on its or its Subsidiaries’ behalf;

 

(iii)          for
other standard employee benefits made generally available to all employees
(including stock option agreements outstanding under any stock option plan
approved by its and its Subsidiaries’ Board of Directors, as applicable); and

 

(iv)          obligations
listed in its and each of its Subsidiary’s financial statements or disclosed in
any of the Parent’s Exchange Act Filings.

 

Except as described above or set forth on Schedule
12(g), none of its officers, directors or, to the knowledge, key employees
or stockholders, any of its Subsidiaries or any members of their immediate
families, are indebted to it or any of its Subsidiaries, individually or in the
aggregate, in excess of $50,000 or have any direct or indirect ownership
interest in any Person with which it or any of its Subsidiaries is affiliated
or with which it or any of its Subsidiaries has a business relationship, or any
Person which competes with it or any of its Subsidiaries, other than passive
investments in publicly traded companies (representing less than one percent
(1%) of such company) which may compete with it or any of its Subsidiaries.
Except as described above, none of its officers, directors or stockholders, or
any member of their immediate families, is, directly or indirectly, interested
in any material contract with it or any of its Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between it or any of
its Subsidiaries and any such Person. 
Except as set forth on Schedule 12(g), neither it nor any of its
Subsidiaries is a guarantor or indemnitor of any indebtedness of any other
Person.

 

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

 

(i)            any
change 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 to
have, a Material Adverse Effect;

 

(ii)           any
resignation or termination of any of its or its Subsidiaries’ officers, key
employees or groups of employees;

 

(iii)          any
material change, except in the ordinary course of business, in its or any of
its Subsidiaries’ contingent obligations by way of guaranty, endorsement,
indemnity, warranty or otherwise;

 

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

 

(v)           any waiver
by it or any of its Subsidiaries of a valuable right or of a material debt owed
to it;

 

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

 

(vii)         any
material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder;

 

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

 

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

 

12

 

(x)            any debt,
obligation or liability incurred, assumed or guaranteed by it or any of its
Subsidiaries, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;

 

(xi)           any sale,
assignment or transfer of any Intellectual Property or other intangible assets;

 

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

 

(xiii)         any
other event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; or

 

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

 

(i)            Title
to 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 their respective properties and
assets, and good title to its leasehold interests, in each case subject to no
Lien, other than Permitted Liens.

 

All facilities,
Equipment, Fixtures, vehicles and other properties owned, leased or used by it
or any of its Subsidiaries are in good operating condition and repair and are
reasonably fit and usable for the purposes for which 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 of
each lease to which it is a party or is otherwise bound.

 

(j)            Intellectual
Property.

 

(i)            It and
each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now
conducted and, to its knowledge as presently proposed to be conducted, without
any known infringement of the rights of others. 
There are no outstanding options, licenses or agreements of any kind
relating to its or any of its Subsidiary’s Intellectual Property, nor is it or
any of its Subsidiaries bound by or a party to any options, licenses or
agreements of any kind with respect to the Intellectual Property of any other
Person other than such licenses or agreements arising from the purchase of “off
the shelf” or standard products.

 

(ii)           Neither it
nor any of its Subsidiaries has received any communications alleging that it or
any of its Subsidiaries has violated any of the Intellectual Property or other
proprietary rights of any other Person, nor is it or any of its Subsidiaries
aware of any basis therefor.

 

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

 

(k)           Compliance
with Other Instruments.  Neither it
nor any of its Subsidiaries is in violation or default of (x) any term of its
Charter or Bylaws, or (y) any provision of any indebtedness, mortgage,
indenture, contract, agreement or instrument 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 or default, in the case of this clause (y),
has had, or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect. 
The execution, delivery and performance of and compliance with this
Agreement and the Ancillary Agreements to which it is a party, and the issuance
of the Notes and the other Securities each pursuant hereto and thereto, will
not, with or without the passage of time or giving of notice, result in any
such material violation, or be in conflict with or constitute a default under
any such term or provision, or result in the creation of any Lien upon any of
its or any of

 

13

 

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, their businesses 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 threatened against it or any of its Subsidiaries that prevents
it or any of its Subsidiaries from entering into this Agreement or the
Ancillary Agreements, or from consummating the transactions contemplated hereby
or thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result in
any change in its or any of its Subsidiaries’ current equity ownership, nor is
it aware that there is any basis to assert any of the foregoing.  Neither it nor any of its Subsidiaries is a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality.  There is no action, suit, proceeding or
investigation by it or any of its Subsidiaries currently pending or which it or
any of its Subsidiaries intends to initiate.

 

(m)          Tax
Returns and Payments.  It and each of
its Subsidiaries has timely filed all tax returns (federal, state and local)
required to be filed by it.  All taxes
shown to be due and payable on such returns, any assessments imposed, and all
other taxes due and payable by it and each of its Subsidiaries on or before the
Closing Date, have been paid or will be paid prior to the time they become
delinquent.  Except as set forth on Schedule
12(m), neither it nor any of its Subsidiaries has been advised:

 

(i)            that any
of its returns, federal, state or other, have been or are being audited as of
the date hereof; or

 

(ii)           of any
adjustment, deficiency, assessment or court decision in respect of its federal,
state or other taxes.

 

Neither it nor any of its Subsidiaries has any
knowledge of any liability of any tax to be imposed upon its properties or
assets 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 its Subsidiaries 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 disclosed in the Exchange Act Filings or on Schedule 12(n),
neither it nor any of its Subsidiaries is a party to or bound by any currently
effective employment contract, deferred compensation arrangement, bonus plan,
incentive plan, profit sharing plan, retirement agreement or other employee
compensation plan 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 has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual
to be employed by, or to contract with, it or any of its Subsidiaries because
of the nature of the business to be conducted by it or any of its Subsidiaries;
and to its knowledge the continued employment by it and its Subsidiaries of
their present employees, and the performance of its and its Subsidiaries
contracts with its independent contractors, will not result in any such
violation.  Neither it nor any of its
Subsidiaries is aware that any of its or any of its Subsidiaries’ employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency that would interfere with their duties to it
or any of its Subsidiaries.  Neither it
nor any of its Subsidiaries has received any notice alleging that any such
violation has occurred.  Except for
employees who have a current effective employment agreement with it or any of
its Subsidiaries, none of its or any of its Subsidiaries’ employees has been
granted the right to continued employment by it or any of its Subsidiaries or
to any material compensation following termination of employment with it or any
of its Subsidiaries.  Except as set forth
on Schedule 12(n), neither it nor any of its Subsidiaries is aware
that any officer, key employee or group of employees intends to terminate his,
her or their employment with it or any of its Subsidiaries, as applicable, nor
does it or any of its Subsidiaries have a present intention to terminate the
employment of any officer, key employee or group of employees.

 

(o)           Registration
Rights and Voting Rights.  Except as
set forth on Schedule 12(o) and except as disclosed in Exchange Act
Filings, neither it nor any of its Subsidiaries is presently under any
obligation, and neither it nor any of its Subsidiaries has granted any rights,
to register any of its or any of its Subsidiaries’ presently

 

14

 

outstanding
securities or any of its securities that may hereafter be issued.  Except as set forth on Schedule 12(o)
and except as disclosed in Exchange Act Filings, neither it nor any of its Subsidiaries
has entered into any agreement with respect to its or any of its Subsidiaries’
voting of equity securities.

 

(p)           Compliance
with Laws; Permits.  Neither it nor
any of its Subsidiaries is in violation of the Sarbanes-Oxley Act of 2002 or
any SEC related regulation or rule or any rule of the Principal Market
promulgated thereunder or any other applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of
its properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.  No governmental orders, permissions,
consents, approvals or authorizations are required to be obtained and no
registrations or declarations are required to be filed in connection with the
execution and delivery of this Agreement 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 to any filings that must be made after the
Closing Date, as will be filed in a timely manner.  It and each of its Subsidiaries has all
material franchises, permits, licenses and any similar authority necessary for
the conduct of its business as now being conducted by it, the lack of which
could, either individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect.

 

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

 

(i)            materials
which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that
govern the existence and/or remedy of contamination on property, the protection
of the environment from contamination, the control of hazardous wastes, or
other activities involving hazardous substances, including building materials;
and

 

(ii)           any
petroleum products or nuclear materials.

 

(r)            Valid
Offering.  Assuming the accuracy of
the representations and warranties of Laurus contained in this Agreement, the
offer and issuance of the Securities will be exempt from the registration
requirements of the Securities Act of 1933, as amended (the “Securities Act”),
and will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.

 

(s)           Full
Disclosure.  It and each of its
Subsidiaries has provided Laurus with all information requested by Laurus in
connection with Laurus’ decision to enter into this Agreement.  Neither this Agreement, the Ancillary
Agreements nor the exhibits and schedules hereto and thereto nor any other
document delivered by it or any of its Subsidiaries to Laurus or its attorneys
or agents in connection herewith or therewith or with the transactions
contemplated hereby or thereby, contain any untrue statement of a material fact
nor omit to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading.  Any financial
projections and other estimates provided to Laurus by it or any of its
Subsidiaries were based on its and its Subsidiaries’ experience in the industry
and on assumptions of fact and opinion as to future events which it or any of
its Subsidiaries, at the date of the issuance of such projections or estimates,
believed to be reasonable.

 

(t)            Insurance.  It and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which it believes are customary for companies similarly situated to
it and its Subsidiaries in the same or similar business.

 

(u)           SEC
Reports and Financial Statements. 
Except as set forth on Schedule 12(u), it and each of its
Subsidiaries has filed all proxy statements, reports and other documents
required to be filed by it under the Exchange Act.  The Parent has furnished Laurus with copies
of:  (i) its Annual Report on Form 10-KSB
for its

 

15

 

fiscal year ended
June 30, 2004; and (ii) its Quarterly Reports on Form 10-QSB for its fiscal
quarters ended September 30, 2004, December 31, 2004 and March 31, 2005 and the
Form 8-K filings which it has made during its fiscal year 2005 to date
(collectively, the “SEC Reports”). 
Except as set forth on Schedule 12(u), each SEC Report was, at
the time of its filing, in substantial compliance with the requirements of its
respective form and none of the SEC Reports, nor the financial statements (and
the notes thereto) included in the SEC Reports, as of their respective filing
dates, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.  Such financial statements
have been prepared in accordance with GAAP applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial condition,
the results of operations and cash flows of the Parent and its Subsidiaries, on
a consolidated basis, as of, and for, the periods presented in each such SEC
Report.

 

(v)           Listing.  The Parent’s Common Stock is listed or
quoted, as applicable, on the Principal Market and satisfies all requirements
for the continuation of such listing or quotation, as applicable, and the
Parent shall do all things necessary for the continuation of such listing or
quotation, as applicable.  The Parent has
not received any notice that its Common Stock will be delisted from, or no
longer quoted on, as applicable, the Principal Market or that its Common Stock
does not meet all requirements for such listing or quotation, as applicable.

 

(w)          No
Integrated Offering.  Neither it, nor
any of its Subsidiaries nor any of its Affiliates, nor any Person acting on its
or their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this Agreement or any
Ancillary Agreement to be integrated with prior offerings by it for purposes of
the Securities Act which would prevent it from issuing the Securities pursuant
to Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will it or any of its Affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.

 

(x)            Stop
Transfer.  The Securities are
restricted securities as of the date of this Agreement.  Neither it nor any of its Subsidiaries will
issue any stop transfer order or other order impeding the sale and delivery of
any of the Securities at such time as the Securities are registered for public
sale or an exemption from registration is available, except as required by
state and federal securities laws.

 

(y)           Dilution.  It specifically acknowledges that the Parent’s
obligation to issue the shares of Common Stock upon conversion of the Notes and
exercise of the Warrants is binding upon the Parent and enforceable regardless
of the dilution such issuance may have on the ownership interests of other
shareholders of the Parent.

 

(z)            Patriot
Act.  It certifies that, to its
knowledge, neither it nor any of its Subsidiaries has been designated, nor is
or shall be owned or controlled, by a “suspected terrorist” as defined in
Executive Order 13224.  It hereby
acknowledges that Laurus seeks to comply with all applicable laws concerning
money laundering and related activities. 
In furtherance of those efforts, it hereby represents, warrants and
covenants that:  (i) none of the cash or
property that it or any of its Subsidiaries will pay or will contribute to
Laurus has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no contribution or payment by
it or any of its Subsidiaries to Laurus, to the extent that they are within its
or any such Subsidiary’s 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 the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001.  It shall promptly notify Laurus if any of
these representations, warranties and covenants ceases to be true and accurate
regarding it or any of its Subsidiaries. 
It shall provide Laurus with any additional information regarding it and
each Subsidiary thereof that Laurus deems necessary or convenient to ensure
compliance with all applicable laws concerning money laundering and similar
activities.  It understands and agrees
that if at any time it is discovered that any of the foregoing representations,
warranties and covenants are incorrect, or if otherwise required by applicable
law or regulation related to money laundering or similar activities, Laurus may
undertake appropriate 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 release confidential information about it and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper

 

16

 

authorities if
Laurus, in its sole discretion, determines that it is in the best interests of
Laurus in light of relevant rules and regulations under the laws set forth in
subsection (ii) above.

 

(aa)         Company
Name; Locations of Offices, Records and Collateral.  Schedule 12(aa) sets forth each
Company’s name as it appears in official filings in the state of its
organization, the type of entity of each Company, the organizational
identification number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s state of
organization, and the location of each Company’s chief executive office,
corporate offices, warehouses, other locations of Collateral and locations
where records with respect to Collateral are kept (including in each case the
county 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 the Closing 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 (including trade 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 its Subsidiaries has engaged in any Prohibited Transactions (as
defined in Section 406 of ERISA and Section 4975 of the Code); (ii) it and each
of its Subsidiaries has met all applicable minimum funding requirements under
Section 302 of ERISA in respect of its plans; (iii) neither it nor any of its
Subsidiaries has any knowledge of any event or occurrence which would cause the
Pension Benefit Guaranty Corporation to institute proceedings under Title IV of
ERISA to terminate any employee benefit plan(s); (iv) neither it nor any of its
Subsidiaries has any fiduciary responsibility for investments with respect to
any plan existing for the benefit of persons other than its or such Subsidiary’s
employees; and (v) neither it nor any of its Subsidiaries has withdrawn,
completely or partially, from any multi-employer pension plan so as to incur
liability under the Multiemployer Pension Plan Amendments Act of 1980.

 

13.           Covenants. 
Each Company, as applicable, covenants and agrees with Laurus as
follows:

 

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

 

(b)           Listing.  It shall promptly secure the listing or
quotation, as applicable, of the shares of Common Stock issuable upon
conversion of the Notes and exercise of the Warrants on the Principal Market
upon which shares of Common Stock are listed or quoted, as applicable, (subject
to official notice of issuance) and shall maintain such listing or quotation,
as applicable, so long as any other shares of Common Stock shall be so listed
or quoted, as applicable.  The Parent
shall maintain the listing or quotation, as applicable, of its Common Stock on
the Principal Market, and will comply in all material respects with the Parent’s
reporting, filing and other obligations under the bylaws or rules of the
National Association of Securities Dealers (“NASD”) and such exchanges,
as applicable.

 

(c)           Market
Regulations.  It shall notify the
SEC, NASD and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall
take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid issuance
of the Securities to Laurus and promptly provide copies thereof to Laurus.

 

(d)           Reporting
Requirements.  It shall timely file
with the SEC all reports required to be filed pursuant to the Exchange Act and
refrain from terminating its status as an issuer required by the Exchange Act
to file reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination.

 

(e)           Use of
Funds.  It shall use the proceeds of
the Loans for general working capital purposes only.

 

(f)            Access
to 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

 

17

 

business hours, at
Company’s expense and accompanied by a representative of Company Agent
(provided that no such prior notice shall be required to be given and no such
representative shall be required to accompany Laurus in the event Laurus
believes such access is necessary to preserve or protect the Collateral or
following the occurrence and during the continuance of an Event of Default),
to:

 

(i)            visit and
inspect any of its or any such Subsidiary’s properties;

 

(ii)           examine
its or any such Subsidiary’s corporate and financial records (unless such
examination is not permitted by federal, state or local law or by contract) and
make copies thereof or extracts therefrom; and

 

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

 

Notwithstanding the foregoing, neither it nor any of
its Subsidiaries shall provide any material, non-public information to Laurus
unless Laurus signs a confidentiality agreement and otherwise complies with
Regulation FD, under the federal securities laws.

 

(g)           Taxes.  It shall, and shall cause each of its
Subsidiaries to, promptly pay and discharge, or cause to be paid and
discharged, when due and payable, all lawful taxes, assessments and governmental
charges or levies imposed upon it and its Subsidiaries’ income, profits,
property or business, as the case may be; provided, however, that any such tax,
assessment, charge or levy need not be paid currently if (i) the validity
thereof shall currently and diligently be contested in good faith by
appropriate proceedings, (ii) such tax, assessment, charge or levy shall have
no effect on the Lien priority of Laurus in 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 reserves with respect thereto in accordance with
GAAP; and provided, further, that it shall, and shall cause each of its
Subsidiaries to, pay all such taxes, assessments, charges or levies forthwith
upon the commencement of proceedings to 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 with respect to the Collateral.  It and each of its Subsidiaries shall keep
its assets which are of an insurable character insured by financially sound and
reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in similar business similarly situated
as it and its Subsidiaries; and it and its Subsidiaries shall maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
which it and/or such Subsidiary thereof reasonably believes is customary for
companies in similar business similarly situated as it and its Subsidiaries and
to the extent available on commercially reasonable terms.  It and each of its Subsidiaries will jointly
and severally bear the full risk of loss from any loss of any nature whatsoever
with respect to the assets pledged to Laurus as security for its obligations
hereunder and under the Ancillary Agreements. 
At its own cost and expense in amounts and with carriers reasonably
acceptable to Laurus, it and each of its Subsidiaries shall (i) keep all their
insurable properties and properties in which they have an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to it or the
respective Subsidiary’s including business interruption insurance; (ii)
maintain a bond in such amounts as is customary in the case of companies
engaged in businesses similar to it and its Subsidiaries’ insuring against
larceny, embezzlement or other criminal misappropriation of insured’s officers
and employees who may either singly or jointly with others at any time have
access to its or any of its Subsidiaries assets or funds either directly or
through governmental authority to draw upon such funds or to direct generally
the disposition of such assets; (iii) maintain public and product liability
insurance against claims for personal injury, death or property damage suffered
by others; (iv) maintain all such worker’s compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which it or any
of its Subsidiaries is engaged in business; and (v) furnish Laurus with
(x) copies of all policies and evidence of the maintenance of such
policies at least thirty (30) days before any 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 and substance reasonably satisfactory to
Laurus, naming Laurus as lenders loss payee, and (z) evidence that as to Laurus
the insurance coverage shall not be impaired or invalidated by any act or
neglect of any Company or any of its Subsidiaries and the insurer will provide

 

18

 

Laurus with at
least thirty (30) days notice prior to cancellation.  It shall instruct the insurance carriers that
in the event of any loss thereunder, the carriers shall make payment for such
loss to 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 to any 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 and do such other things
as Laurus may deem advisable to reduce the same to cash.  Laurus is hereby authorized to adjust and
compromise claims.  All loss recoveries
received by Laurus upon any such insurance may be applied to the Obligations,
in such order as Laurus in its sole discretion shall determine or shall
otherwise be delivered to Company Agent for the benefit of the applicable
Company and/or its Subsidiaries.  Any
surplus shall be paid by Laurus to Company Agent for the benefit of the
applicable Company and/or its Subsidiaries, or applied as may be otherwise
required by law.  Any deficiency thereon
shall be paid, as applicable, by Companies and their Subsidiaries to Laurus, on
demand.

 

(i)            Intellectual
Property.  It shall, and shall cause
each of its Subsidiaries to, maintain in full force and effect its corporate
existence, rights and franchises and all licenses and other rights to use
Intellectual Property owned or possessed by it and 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 in good 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 cause each of its Subsidiaries to, at all
times comply with each provision of all leases to which it is a party or under
which it occupies property if the breach of such provision could reasonably be
expected to have a Material Adverse Effect.

 

(k)           Confidentiality.  It shall not, and shall not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of Laurus, unless expressly agreed to by Laurus or unless and until such
disclosure is required by the terms of this Agreement, law or applicable
regulation, and then only to the extent of such requirement.  Notwithstanding the foregoing, each Company
and its Subsidiaries may disclose Laurus’ identity and the terms of this
Agreement to its current and prospective debt and equity financing sources.

 

(l)            Required
Approvals.  It shall not, and shall
not permit any of its Subsidiaries to, without the prior written consent of
Laurus, (i) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt) whether secured or unsecured other than each Company’s
indebtedness to Laurus and as set forth on Schedule 13(l)(i)
attached hereto and made a part hereof; (ii) cancel any debt owing to it in
excess of $50,000 in the aggregate during any 12 month period; (iii) assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other Person, except the endorsement of
negotiable instruments by it or its Subsidiaries for deposit or collection or
similar transactions in the ordinary course of business; (iv) directly or
indirectly declare, pay or make any dividend or distribution on any class of
its Stock or apply any of its funds, property or assets to the purchase,
redemption or other retirement of any of its or its Subsidiaries’ Stock
outstanding on the date hereof, or issue any preferred stock; (v) purchase or
hold beneficially any Stock or other securities or evidences of indebtedness
of, make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including any partnership
or 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 are designated as either a co-borrower hereunder or has entered
into such guaranty and security documentation required by Laurus, including,
without limitation, to grant to Laurus a first priority perfected security interest
in substantially all of such Subsidiary’s assets to secure the Obligations;
(vi) create or permit to exist any Subsidiary, other than any Subsidiary in
existence on the date hereof and listed in Schedule 12(b) unless such
new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus as
either a co-borrower or guarantor hereunder and such Subsidiary shall have
entered into all such documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest in
substantially all of such Subsidiary’s assets to secure the Obligations; (vii)
directly or indirectly, prepay any indebtedness (other than to Laurus and in
the ordinary course of business), or repurchase, redeem, retire or otherwise acquire
any indebtedness (other than to Laurus and in the ordinary course of business)
except to make scheduled payments of principal and interest thereof; (viii)
enter into any merger, consolidation or other reorganization with or into any
other Person or acquire all or a portion of the assets or Stock of any Person
or permit any other Person to consolidate with or merge with it, unless
(1) such Company is the surviving entity of such merger or consolidation,
(2) no Event of Default shall exist immediately prior to and after giving
effect to such merger or consolidation, (3) such Company shall have
provided Laurus copies of all documentation relating to such

 

19

 

merger or
consolidation and (4) such Company shall have provided Laurus with at least
thirty (30) days’ prior written notice of such merger or consolidation; (ix)
materially change the nature of the business in which it is presently engaged;
(x) become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under
any circumstances) restrict its or any of its Subsidiaries’ right to perform
the provisions of this Agreement or any of the Ancillary Agreements; (xi)
change its fiscal year or make any changes in accounting treatment and
reporting practices without prior written notice to Laurus except as required
by GAAP or in the tax reporting treatment or except as required by law; (xii)
enter into any transaction with any employee, director or Affiliate, except in
the ordinary course on arms-length terms; (xiii) bill Accounts under any name
except the present name of such Company; or (xiv) sell, lease, transfer or
otherwise dispose of any of its properties or assets, or any of the properties
or assets of its Subsidiaries, except for (1) the sale of Inventory in the
ordinary course of business and (2) the disposition or transfer in the ordinary
course of business during any fiscal year of obsolete and worn-out Equipment
and only to the extent that (x) the proceeds of any such disposition are used
to acquire replacement Equipment which is subject to Laurus’ first priority
security interest or are used to repay Loans or to pay general corporate
expenses, or (y) following the occurrence of an Event of Default which
continues to exist, the proceeds of which are remitted to Laurus to be held as
cash collateral for the Obligations.

 

(m)          Reissuance
of Securities.  The Parent shall
reissue certificates representing the Securities without the legends set forth
in Section 39 below at such time as:

 

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

 

(ii)           upon
resale subject to an effective registration statement after such Securities are
registered under the Securities Act.

 

The Parent agrees to cooperate with Laurus in
connection 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 to allow such
resales provided the Parent and its counsel receive reasonably requested
representations from Laurus and broker, if any.

 

(n)           Opinion.  On the Closing Date, it shall deliver to
Laurus an opinion acceptable to Laurus from each Company’s legal counsel.  Each Company will provide, at the Companies’
joint and several expense, such other legal opinions in the future as are
reasonably necessary for the conversion of the Notes and the exercise of the
Warrants.

 

(o)           Legal
Name, etc.  It shall not, without
providing Laurus with 30 days prior written notice, change (i) its name as it
appears in the official filings in the state of its organization, (ii) the type
of legal entity it is, (iii) its organization identification number, if
any, issued by its state of organization, (iv) its state of organization or (v)
amend its certificate of incorporation, by-laws or other organizational
document.

 

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

 

(q)           Notices.  It and each of its Subsidiaries shall
promptly inform Laurus in writing of: 
(i) the commencement of all proceedings and investigations by or before
and/or the receipt of any notices from, any governmental or nongovernmental
body and all actions and proceedings in any court or before any arbitrator
against or in any way concerning any event which could reasonably be expected
to have singly or in the aggregate, a Material Adverse Effect; (ii) any change
which has had, or could reasonably be expected to have, a Material Adverse
Effect; (iii) any Event of Default or Default; and (iv) any default or any
event which with the passage of time or giving of notice or both would
constitute a default under any agreement for the payment of money to which it
or any of its Subsidiaries is a party or by which it or any of its Subsidiaries
or any of its or any such Subsidiary’s properties may be bound the breach of
which would have a Material Adverse Effect.

 

20

 

(r)            Margin
Stock.  It shall not permit any of
the proceeds of the Loans made hereunder to be used directly or indirectly to “purchase”
or “carry” “margin stock” or to repay indebtedness incurred to “purchase” or “carry”
“margin stock” within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.

 

(s)           Offering
Restrictions.  Except as previously
disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock
options granted to its employees or directors, neither it nor any of its
Subsidiaries shall, prior to the full repayment or conversion of the Notes
(together with all accrued and unpaid interest and fees related thereto), (x)
enter into any equity line of credit agreement or similar agreement or (y)
issue, or enter into any agreement to issue, any securities with a
variable/floating conversion and/or pricing feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock subject
to a registration statement).

 

(t)            Authorization
and Reservation of Shares.  The Parent
shall at all times have authorized and reserved a sufficient number of shares
of Common Stock to provide for the conversion of the Notes and exercise of the
Warrants.

 

(u)           Financing
Right of First Refusal.

 

(i)            It hereby
grants to Laurus a right of first refusal to provide any Additional Financing
(as defined below) to be issued by any Company and/or any of its Subsidiaries
(the “Additional Financing Parties”), subject to the following terms and
conditions.  From and after the date
hereof, prior to the incurrence of any additional convertible indebtedness by
the Additional Financing Parties (an “Additional Financing”), Company
Agent shall notify Laurus of such Additional Financing.  In connection therewith, Company Agent shall
submit a fully executed term sheet (a “Proposed Term Sheet”) to Laurus
setting forth the terms, conditions and pricing of any such Additional
Financing (such financing to be negotiated on “arm’s length” terms and the
terms thereof to be negotiated in good faith) proposed to be entered into by
the Additional Financing Parties.  Laurus
shall have the right, but not the obligation, to deliver to Company Agent its
own proposed term sheet (the “Laurus Term Sheet”) setting forth the
terms and conditions upon which Laurus would be willing to provide such
Additional Financing to the Additional Financing Parties.  The Laurus Term Sheet shall contain terms no
less favorable to the Additional Financing Parties than those outlined in
Proposed Term Sheet.  Laurus shall
deliver to Company Agent the Laurus Term Sheet within ten Business Days of
receipt of each such Proposed Term Sheet. 
If the provisions of the Laurus Term Sheet are at least as favorable to
the Additional Financing Parties as the provisions of the Proposed Term Sheet,
the Additional Financing Parties shall enter into and consummate the Additional
Financing transaction outlined in the Laurus Term Sheet.

 

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

 

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

 

(w)          Prohibition
of Grant of Collateral for Subordinated Debt Documentation.  It shall not, without the prior written
consent of Laurus, grant or permit any of its Subsidiaries to grant to any
Person any Collateral of such Company or any collateral of any of its
Subsidiaries as security for any obligation arising under the Subordinated Debt
Documentation.

 

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

 

14.           Further
Assurances.  At any time and from time to time, upon the
written request of Laurus and at the sole expense of Companies, each Company
shall promptly and duly execute and deliver any and

 

21

 

all such further instruments and documents and take
such further action as Laurus may request (a) to obtain the full benefits of
this Agreement and the Ancillary Agreements, (b) to protect, preserve and
maintain Laurus’ rights in the Collateral and under this Agreement or any
Ancillary Agreement, and/or (c) to enable Laurus to exercise all or any of the
rights and powers herein granted or any Ancillary Agreement.

 

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

 

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

 

(b)           Investment
Representations.  Laurus understands
that the Securities are being offered pursuant to an exemption from
registration contained in the Securities Act based in part upon Laurus’
representations contained in this Agreement, including, without limitation,
that Laurus is an “accredited investor” within the meaning of Regulation D
under the Securities Act.  Laurus has
received or has had full access to all the information it considers necessary
or appropriate to make an informed investment decision with respect to the
Notes to be issued to it under this Agreement and the Securities acquired by it
upon the conversion of the Notes.

 

(c)           Laurus
Bears Economic Risk.  Laurus has
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Parent so that it is
capable of evaluating the merits and risks of its investment in the Parent and
has the capacity to protect its own interests. 
Laurus must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement under
the Securities Act, or (ii) an exemption from registration is available.

 

(d)           Investment
for Own Account.  The Securities are
being issued to Laurus for its own account for investment only, and not as a
nominee or agent and not with a view towards or for resale in connection with
their distribution.

 

(e)           Laurus
Can Protect Its Interest.  Laurus
represents that by reason of its, or of its management’s, business and
financial experience, Laurus has the capacity to evaluate the merits and risks
of its investment in the Notes, and the Securities and to protect its own
interests in connection with the transactions contemplated in this Agreement,
and the Ancillary Agreements.  Further,
Laurus is aware of no publication of any advertisement in connection with the
transactions contemplated in the Agreement or the Ancillary Agreements.

 

(f)            Accredited
Investor.  Laurus represents that it
is an accredited investor within the meaning of Regulation D under the
Securities Act.

 

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

 

(h)           Patriot
Act.  Laurus certifies that, to the
best of Laurus’ knowledge, Laurus has not been designated, and is not owned or
controlled, by a “suspected terrorist” as defined in Executive Order
13224.  Laurus seeks to comply with all
applicable laws concerning money laundering and related activities.  In furtherance of those efforts, Laurus
hereby represents, warrants and covenants that: 
(i) none of the cash or property that Laurus will use to make the Loans
has been or shall be derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no disbursement 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 the United States
International Money Laundering Abatement and Anti-Terrorist Financing

 

22

 

Act of 2001.  Laurus shall promptly notify the Company
Agent if any of these representations ceases to be true and accurate regarding
Laurus.  Laurus agrees to provide the
Company any additional information regarding Laurus that the Company deems
necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities.  Laurus understands and agrees that if at any
time it is discovered that any of the foregoing representations are incorrect,
or if otherwise required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of Laurus’ investment in the Parent.  Laurus further understands that the Parent
may release information about Laurus and, if applicable, any underlying
beneficial owners, to proper authorities if the Parent, in its sole discretion,
determines that it is in the best interests of the Parent in light of relevant
rules and regulations under the laws set forth in subsection (ii) above.

 

(i)            Limitation
on Acquisition of Common Stock. 
Notwithstanding anything to the contrary contained in this Agreement,
any Ancillary Agreement, or any document, instrument or agreement entered into
in connection with any other transaction entered into by and between Laurus and
any Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall
not acquire stock in the Parent (including, without limitation, pursuant to a
contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Parent, or otherwise, and such options, warrants, conversion or other
rights shall not be exercisable) to the extent such stock acquisition would
cause any interest (including any original issue discount) payable by any
Company to Laurus not to qualify as portfolio interest, within the meaning of
Section 881(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”)
by reason of Section 881(c)(3) of the Code, taking into account the
constructive ownership rules under Section 871(h)(3)(C) of the Code (the “Stock
Acquisition Limitation”).  The Stock
Acquisition Limitation shall automatically become null and void without any
notice to any Company upon the earlier to occur of either (a) the Parent’s
delivery to Laurus of a Notice of Redemption (as defined in the Notes) or (b)
the existence of an Event of Default at a time when the average closing price
of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for
the immediately preceding five trading days is greater than or equal to 150% of
the Fixed Conversion Price (as defined in the Notes).

 

16.           Power
of Attorney.  Each Company hereby appoints Laurus, or any
other Person whom Laurus may designate as such Company’s attorney, with power
to:  (i) endorse such Company’s name on
any checks, notes, acceptances, money orders, drafts or other forms of payment
or security that may come into Laurus’ possession; (ii) sign such Company’s
name on any invoice or bill of lading relating to any Accounts, drafts against
Account Debtors, schedules and assignments of Accounts, notices of assignment,
financing statements and other public records, verifications of Account 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 necessary to carry out this Agreement,
any Ancillary Agreement and all related documents; and (v) on or after the
occurrence and during the continuation of an Event of Default, notify the post
office authorities to change the address for delivery of such Company’s mail to
an address designated by Laurus, and to receive, open and dispose of all mail
addressed to such Company.  Each Company
hereby ratifies and approves all acts of the attorney.  Neither Laurus, nor the attorney will be
liable for any acts or omissions or for any error of judgment or mistake of
fact or law, except for gross negligence or willful misconduct.  This power, being coupled with an interest,
is irrevocable so long as Laurus has a security interest and until the
Obligations have been fully satisfied.  The
power of attorney set forth in this Section 16 shall only be exercisable
following the occurrence and during the continuation of an Event of Default,
except with respect to the filing of financing statements, in which case such
power of attorney shall be exercisable on and after the date hereof.

 

17.           Term of
Agreement.  Laurus’ agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Term.  At
Laurus’ election following the occurrence of an Event of Default, Laurus may
terminate this Agreement.  The
termination of the Agreement shall not affect any of Laurus’ rights hereunder
or any Ancillary Agreement and the provisions hereof and thereof shall continue
to be fully operative until all transactions entered into, rights or interests
created and the Obligations have been irrevocably disposed of, concluded or
liquidated.  Notwithstanding the
foregoing, Laurus shall release its security interests at any time after thirty
(30) days notice upon irrevocable payment to it of all Obligations.

 

23

 

18.           Termination
of Lien.  The Liens and rights granted to Laurus
hereunder and any Ancillary Agreements and the financing statements filed in
connection herewith or therewith shall continue in full force and effect,
notwithstanding the termination of this Agreement or the fact that any Company’s
account may from time to time be temporarily in a zero or credit position,
until all of the Obligations have been indefeasibly paid or performed in full
after the termination of this Agreement. 
Laurus shall not be required to send termination statements to any
Company, or to file them with any filing office, unless and until this
Agreement and the Ancillary Agreements shall have been terminated in accordance
with their terms and all Obligations indefeasibly paid in full in immediately
available funds.

 

19.           Events
of Default.  The occurrence of any of the following shall
constitute an “Event of Default”:

 

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

 

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

 

(c)           failure to
perform under, and/or committing any breach of, in any material respect, this
Agreement or any covenant contained herein, which failure or breach shall
continue without remedy for a period of thirty (30) days after the occurrence
thereof;

 

(d)           any
representation, warranty or statement made by any Company or any of its
Subsidiaries hereunder, in any Ancillary Agreement, any certificate, statement
or document delivered pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should prove to be false or
misleading in any material respect on the date as of which made or deemed made;

 

(e)           the
occurrence of any default (or similar term) in the observance or performance of
any other agreement or condition relating to any indebtedness or contingent
obligation of any Company or any of its Subsidiaries (including, without
limitation, 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 or
beneficiaries of such contingent obligation to cause, such indebtedness to
become due prior to its stated maturity or such contingent obligation to become
payable;

 

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

 

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

 

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

 

(i)            any
Company or any of its Subsidiaries shall (i) apply for, consent to or
suffer 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 of
its property, (ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, (vi) acquiesce to without challenge within ten (10) days of the filing
thereof, or failure to have dismissed within ninety

 

24

 

(90) days, any
petition filed against it in any involuntary case under such bankruptcy laws,
or (vii) take any action for the purpose of effecting any of the foregoing;

 

(j)            any
Company or any of its Subsidiaries shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business;

 

(k)           any
Company 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) of the
Exchange Act, as in effect on the date hereof), other than the Holder, is or
becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under
the Exchange Act), directly or indirectly, of 40% or more on a fully diluted
basis of the then outstanding voting equity interest of any Company, (ii) the
Board of Directors of the Parent shall cease to consist of a majority of the
Board of Directors of the Parent on the date hereof (or directors appointed by
a majority of the board of directors in effect immediately prior to such
appointment) or (iii) the Parent or any of its Subsidiaries merges or
consolidates with, or sells all or substantially all of its assets to, any
other person or entity;

 

(m)          the
indictment or threatened indictment of any Company or any of its Subsidiaries
or any executive officer of any Company or any of its Subsidiaries under any
criminal statute, or commencement or threatened commencement of criminal or
civil proceeding against any Company or any of its Subsidiaries or any
executive officer of any Company or any of its Subsidiaries pursuant to which
statute or proceeding penalties or remedies sought or available include
forfeiture of any of the property of any Company or any of its Subsidiaries;

 

(n)           an Event
of Default shall occur under and as defined in (x) any Note or in any other
Ancillary Agreement or (y) that certain Securities Purchase Agreement, dated as
of March 22, 2004, by and between the Parent and Laurus (as amended, modified
or supplemented from time to time, the “2004 Securities Purchase Agreement”) or
any Related Agreement referred to in, and defined in, the 2004 Securities
Purchase Agreement;

 

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

 

(p)           any
Company or any of its Subsidiaries attempts to terminate, challenges the
validity of, or its liability under this Agreement or any Ancillary Agreement,
or any proceeding shall be brought to challenge the validity, binding effect of
any 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)           an SEC
stop trade order or Principal Market trading suspension of the Common Stock
shall be in effect for five (5) consecutive days or five (5) days during a
period of ten (10) consecutive days, excluding in all cases a suspension of all
trading on a Principal Market, provided that the Parent shall not have been
able to cure such trading suspension within thirty (30) days of the notice
thereof or list the Common Stock on another Principal Market within sixty (60)
days of such notice;

 

(r)            the
Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form
required by the Notes and this Agreement, if such failure to deliver Common
Stock shall not be cured within two (2) Business Days or any Company is
required to issue a replacement Note to Laurus and such Company shall fail to
deliver such replacement Note within seven (7) Business Days; or

 

(s)           any
Company, or any of its Subsidiaries shall take or participate in any action
which would be prohibited under the provisions of any of the Subordinated Debt
Documentation or make any payment on the indebtedness evidenced by the
Subordinated Debt Documentation to a Person that was not entitled to receive
such payments under the subordination provisions of applicable Subordinated
Debt Documentation.

 

25

 

20.           Remedies. 
Following the occurrence of an Event of Default, Laurus shall have the
right to demand repayment in full of all Obligations, whether or not otherwise
due.  Until all Obligations have been
fully and indefeasibly satisfied, Laurus shall retain its Lien in all
Collateral.  Laurus shall have, in
addition to all other rights provided herein and in each Ancillary Agreement,
the rights and remedies of a secured party under the UCC, and under other
applicable law, all other legal and equitable rights to which Laurus may be
entitled, including the right to take immediate possession of the Collateral,
to require each Company to assemble the Collateral, at Companies’ joint and
several expense, and to make it available to Laurus at a place designated by Laurus
which is reasonably convenient to both parties and to enter any of the premises
of any Company or wherever the Collateral shall be located, with or without
force or process of law, and to keep and store the same on said premises until
sold (and if said premises be the property of any Company, such Company agrees
not to charge Laurus for storage thereof), and the right to apply for the
appointment of a receiver for such Company’s property.  Further, Laurus may, at any time or times
after the occurrence of an Event of Default, sell and deliver all Collateral
held by or for Laurus at public or private sale for cash, upon credit or
otherwise, at such prices and upon such terms as Laurus, in Laurus’ sole
discretion, deems advisable or Laurus may otherwise recover upon the Collateral
in any commercially reasonable manner as Laurus, in its sole discretion, deems
advisable.  The requirement of reasonable
notice shall be met if such notice is mailed postage prepaid to Company Agent
at Company Agent’s address as shown in Laurus’ records, at least ten (10) days
before the time of the event of which notice is being given.  Laurus may be the purchaser at any sale, if
it is public.  In connection with the exercise
of the foregoing remedies, Laurus is granted permission to use all of each
Company’s Intellectual Property.  The
proceeds of sale shall be applied first to all costs and expenses of sale,
including attorneys’ fees, and second to the payment (in whatever order Laurus
elects) of all Obligations.  After the
indefeasible payment and satisfaction in full of all of the Obligations, and
after the payment by Laurus of any other amount required by any provision of
law, including Section 9-608(a)(1) of the UCC (but only after Laurus has
received what Laurus considers reasonable proof of a subordinate party’s
security interest), the surplus, if any, shall be paid to Company Agent (for
the benefit of the applicable Companies) or its representatives or to whosoever
may be lawfully entitled to receive the same, or as a court of competent
jurisdiction may direct.  The Companies
shall remain jointly and severally liable to Laurus for any deficiency.  In addition, the Companies shall jointly and
severally pay Laurus a liquidation fee (“Liquidation Fee”) in the amount
of five percent (5%) of the actual amount collected in respect of each Account
outstanding at any time during a Liquidation 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) the cessation of any Company’s business; and (ii) ending on the date on
which Laurus has actually received all Obligations due and owing it under this
Agreement and the Ancillary Agreements. 
The Liquidation Fee shall be paid on the date on which Laurus collects
the applicable Account by deduction from the proceeds thereof.  Each Company and Laurus acknowledge that the
actual damages that would be incurred by Laurus after the occurrence of an Event
of Default would be difficult to quantify and that such Company and Laurus have
agreed that the fees and obligations set forth in this Section and in this
Agreement would constitute fair and appropriate liquidated damages in the event
of any such termination.

 

21.           Waivers.  To
the full extent permitted by applicable law, each Company hereby waives (a)
presentment, demand and protest, and notice of presentment, dishonor, intent to
accelerate, acceleration, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of any or all of this Agreement
and the Ancillary Agreements or any other notes, commercial paper, Accounts,
contracts, Documents, Instruments, Chattel Paper and guaranties at any time
held by Laurus on which such Company may in any way be liable, and hereby
ratifies and confirms whatever Laurus may do in this regard; (b) all rights to
notice and a hearing prior to Laurus’ taking possession or control of, or to
Laurus’ replevy, attachment or levy upon, any Collateral or any bond or
security that might be required by any court prior to allowing Laurus to
exercise any of its remedies; and (c) the benefit of all valuation, appraisal
and exemption laws.  Each Company
acknowledges that it has been advised by counsel of its choices and decisions
with respect to this Agreement, the Ancillary Agreements and the transactions
evidenced hereby and thereby.

 

22.           Expenses.  The
Companies shall jointly and severally pay all of Laurus’ out-of-pocket costs
and expenses, including reasonable fees and disbursements of outside counsel
and appraisers, in connection with the preparation, execution and delivery of
this Agreement and the Ancillary Agreements, and in connection with the
prosecution or defense of any action, contest, dispute, suit or proceeding
concerning any matter in any way arising out of, related to or connected with
this Agreement or any Ancillary Agreement. 
The Companies shall also jointly and severally pay all of Laurus’
reasonable fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the
preparation, execution and delivery of any

 

26

 

waiver, any amendment thereto or consent proposed or
executed in connection with the transactions contemplated by this Agreement or
the Ancillary Agreements, (b) Laurus’ obtaining performance of the Obligations
under this Agreement and any Ancillary Agreements, including, but not limited
to, the enforcement or defense of Laurus’ security interests, assignments of
rights and Liens hereunder as valid perfected security interests, (c) any
attempt to inspect, verify, protect, collect, sell, liquidate or otherwise
dispose of any Collateral, (d) any appraisals or re-appraisals of any property
(real or personal) pledged to Laurus by any Company or any of its Subsidiaries
as Collateral for, or any other Person as security for, the Obligations
hereunder and (e) any consultations in connection with any of the
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 its Subsidiaries at any Company’s or such Subsidiary’s
request or in connection with any Company’s loan account with Laurus.  All such costs and expenses together with all
filing, recording and search fees, taxes and interest payable by the Companies
to Laurus shall be payable on demand and shall be secured by the
Collateral.  If any tax by any Governmental
Authority is or may be imposed on or as a result of any transaction between any
Company and/or any Subsidiary thereof, on the one hand, and Laurus on the other
hand, which Laurus is or may be required to withhold or pay, the Companies
hereby jointly and severally indemnifies and holds Laurus harmless in respect
of such taxes, and the Companies will repay to Laurus the amount of any such
taxes which shall be charged to the Companies’ account; and until the Companies
shall furnish Laurus with indemnity therefor (or supply Laurus with evidence
reasonably satisfactory to it that due provision for the payment thereof has
been made), Laurus may hold without interest any balance standing to each
Company’s credit and Laurus shall retain its Liens in any and all Collateral.

 

23.           Assignment
By Laurus.  Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person and
any such assignee shall succeed to all of Laurus’ rights with respect thereto;
provided that Laurus shall not be permitted to effect any such assignment to a
competitor of any Company unless an Event of Default has occurred and is
continuing.  Upon such assignment, Laurus
shall be released from all responsibility for the Collateral to the extent same
is assigned to any transferee.  Laurus
may from time to time sell or otherwise grant participations in any of the
Obligations and the holder of any such participation shall, subject to the
terms of any agreement between Laurus and such holder, be entitled to the same
benefits as Laurus with respect to any security for the Obligations in which
such holder is a participant.  Each
Company agrees that each such holder may exercise any and all rights of banker’s
lien, set-off and counterclaim with respect to its participation in the
Obligations as fully as though such Company were directly indebted to such
holder in the amount of such participation.

 

24.           No
Waiver; Cumulative Remedies.  Failure by Laurus to exercise any right,
remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between or among any
Company and Laurus or delay by Laurus in exercising the same, will not operate
as a waiver; no waiver by Laurus will be effective unless it is in writing and
then only to the extent specifically stated. 
Laurus’ rights and remedies under this Agreement and the Ancillary
Agreements will be cumulative and not exclusive of any other right or remedy
which Laurus may have.

 

25.           Application
of Payments.  Each Company irrevocably waive the right to
direct the application of any and all payments at any time or times hereafter
received by Laurus from or on such Company’s behalf and each Company hereby
irrevocably agrees that Laurus shall have the continuing exclusive right to
apply and reapply any and all payments received at any time or times hereafter
against the Obligations hereunder in such manner as Laurus may deem advisable
notwithstanding any entry by Laurus upon any of Laurus’ books and records.

 

26.           Indemnity. 
Each Company hereby jointly and severally indemnify and hold Laurus, and
its respective affiliates, employees, attorneys and agents (each, an “Indemnified
Person”), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of any kind or
nature whatsoever (including attorneys’ fees and disbursements and other costs
of investigation or defense, including those incurred upon any appeal) which
may be instituted or asserted against or incurred by any such Indemnified
Person as the result of credit having been extended, suspended or terminated
under this Agreement or any of the Ancillary Agreements or with respect to the
execution, delivery, enforcement, performance and administration of, or in any
other way arising out of or relating to, this Agreement, the Ancillary
Agreements or any other documents or transactions contemplated by or referred
to herein or therein and any actions or failures to act with respect to any of
the foregoing, except to the extent that any such indemnified liability is
finally determined by a court of competent

 

27

 

jurisdiction to have resulted solely from such
Indemnified Person’s gross negligence or willful misconduct. NO INDEMNIFIED
PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR
TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON
ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT
HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY
ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED
HEREUNDER OR THEREUNDER.

 

27.           Revival.  The
Companies further agree that to the extent any Company makes a payment or
payments to Laurus, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under
any bankruptcy act, state or federal law, common law or equitable cause, then,
to the extent of such payment or repayment, the obligation or part thereof
intended to be satisfied shall be revived and continued in full force and
effect as if said payment had not been made.

 

28.           Borrowing
Agency Provisions.

 

(a)           Each
Company hereby irrevocably designates Company Agent to be its attorney and
agent and in such capacity to borrow, sign and endorse notes, and execute and
deliver all instruments, documents, writings and further assurances now or
hereafter required hereunder, on behalf of such Company, and hereby authorizes
Laurus to pay over or credit all loan proceeds hereunder in accordance with the
request of Company Agent.

 

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

 

(c)           All
Obligations shall be joint and several, and the Companies shall make payment
upon the maturity of the Obligations by acceleration or otherwise, and such
obligation and liability on the part of the Companies shall in no way be
affected by any extensions, renewals and forbearance granted by Laurus to any
Company, failure of Laurus to give any Company notice of borrowing or any other
notice, any failure of Laurus to pursue to preserve its rights against any
Company, the release by Laurus of any Collateral now or thereafter acquired
from any Company, and such agreement by any Company to pay upon any notice
issued pursuant thereto is unconditional and unaffected by prior recourse by
Laurus to any Company or any Collateral for such Company’s Obligations or the
lack thereof.

 

(d)           Each
Company expressly waives any and all rights of subrogation, reimbursement,
indemnity, exoneration, contribution or any other claim which such Company may
now or hereafter have against the other or other Person directly or
contingently liable for the Obligations, or against or with respect to any
other’s property (including, without limitation, any property which is
Collateral for the Obligations), arising from the existence or performance of
this Agreement, until all Obligations have been indefeasibly paid in full and
this Agreement has been irrevocably terminated.

 

(e)           Each
Company represents and warrants to Laurus that (i) Companies have one or more
common shareholders, directors and officers, (ii) the businesses and corporate
activities of Companies are closely related to, and substantially benefit, the
business and corporate activities of Companies, (iii) the financial and other
operations of Companies are performed on a combined basis as if Companies
constituted a consolidated corporate group, (iv) Companies will receive a
substantial economic benefit from entering into this Agreement and will receive
a substantial economic benefit from the application of each Loan hereunder, in
each case, whether or not such amount is used directly by any Company and (v)
all requests for Loans hereunder by the Company Agent are

 

28

 

for the exclusive
and indivisible benefit of the Companies as though, for purposes of this
Agreement, the Companies constituted a single entity.

 

29.           Notices.  Any
notice or request hereunder may be given to any Company, Company Agent or
Laurus at the respective addresses set forth below or as may hereafter be
specified in a notice designated as a change of address under this
Section.  Any notice or request hereunder
shall be given 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 delivered to any officer
of the party to whom it is addressed, in the case of those by mail or overnight
mail, deemed to have been given three (3) Business Days after 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

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  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 in writing
hereafter in accordance with this Section 29 by such Person.

 

30.           Governing
Law, Jurisdiction and Waiver of Jury Trial.

 

(a)           THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.

 

(b)           EACH
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR 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
ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND
EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF

 

29

 

NEW YORK; AND FURTHER
PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO
PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY
OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF LAURUS.  EACH COMPANY
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION
WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS.  EACH COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY
AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE
DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

 

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

 

31.           Limitation
of Liability.  Each Company acknowledges and understands
that in order to assure repayment of the Obligations hereunder Laurus may be
required to exercise any and all of Laurus’ rights and remedies hereunder and
agrees that, except as limited by applicable law, neither Laurus nor any of
Laurus’ agents shall be liable for acts taken or omissions made in connection
herewith or therewith except for actual bad faith.

 

32.           Entire
Understanding; Maximum Interest.  This Agreement and the Ancillary Agreements
contain the entire understanding among each Company and Laurus as to the
subject matter hereof and thereof and any promises, representations, warranties
or guarantees not herein contained shall have no force and effect unless in
writing, signed by each Company’s and Laurus’ respective officers.  Neither this Agreement, the Ancillary
Agreements, nor any portion or provisions thereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged. 
Nothing contained in this Agreement, any Ancillary Agreement or in any
document referred to herein or delivered in connection herewith shall be deemed
to establish or require the payment of a rate of interest or other charges in
excess of the maximum rate permitted by applicable law.  In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
rate permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Companies to Laurus and thus refunded to
the Companies.

 

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

 

34.           Survival.  The representations, warranties, covenants
and agreements made herein shall survive any investigation made by Laurus and
the closing of the transactions contemplated hereby to the extent provided
therein.  All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Companies pursuant hereto in connection with the transactions
contemplated herebly shall be deemed to be representations and warranties by
the Companies hereunder solely as of the date of such certificate or
instrument.  All indemnities set forth
herein shall survive the execution, delivery and termination of this Agreement
and the Ancillary Agreements and the making and repaying of the Obligations.

 

30

 

35.           Captions.  All
captions are and shall be without substantive meaning or content of any kind
whatsoever.

 

36.           Counterparts;
Telecopier Signatures.  This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same agreement.  Any signature delivered by a party via
telecopier transmission shall be deemed to be any original signature hereto.

 

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

 

38.           Publicity. 
Each Company hereby authorizes Laurus to make appropriate announcements
of the financial arrangement entered into by and among each Company and Laurus,
including, without limitation, announcements which are commonly known as
tombstones, in such publications and to such selected parties as Laurus shall
in its sole and absolute discretion deem appropriate, or as required by
applicable law.

 

39.           Joinder.  It
is understood and agreed that any Person that desires to become a Company
hereunder, or is required to execute a counterpart of this Agreement after the
date hereof pursuant to the requirements of this Agreement or any Ancillary
Agreement, shall become a Company hereunder by (a) executing a Joinder
Agreement in form and substance reasonably satisfactory to Laurus, (b)
delivering supplements to such exhibits and annexes to this Agreement and the
Ancillary Agreements as Laurus shall reasonably request and (c) taking all
actions as specified in this Agreement as would have been taken by such Company
had it been an original party to this Agreement, in each case with all
documents required above to be delivered to Laurus and with all documents and
actions required above to be taken to the reasonable satisfaction of Laurus.

 

40.           Legends.  The
Securities shall bear legends as follows;

 

(a)           The Notes
shall bear substantially the following legend:

 

“THIS NOTE AND THE COMMON STOCK ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.  THIS NOTE AND THE COMMON STOCK ISSUABLE UPON
CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO TIME AMERICA, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

(b)           Any shares
of Common Stock issued pursuant to conversion of the Notes or exercise of the
Warrants, shall bear a legend which shall be in substantially the following
form until such shares are covered by an effective registration statement filed
with the SEC:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE, STATE SECURITIES LAWS.  THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF

 

31

 

COUNSEL REASONABLY SATISFACTORY TO TIME AMERICA, INC.
THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(c)           The
Warrants shall bear substantially the following legend:

 

“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.  THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO TIME
AMERICA, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

 

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

 

32

 

IN WITNESS WHEREOF, the parties have executed this
Security 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:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LAURUS
  MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

33

 

Annex A - Definitions

 

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

 

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

 

“Accounts” means all “accounts”, as such term
is defined in the UCC, now owned or hereafter acquired by any Person,
including:  (a) all accounts receivable,
other receivables, book debts and other forms of obligations (other than forms
of obligations evidenced by Chattel Paper or Instruments) (including any such
obligations that may be characterized as an account or contract right under the
UCC); (b) all of such Person’s rights in, to and under all purchase orders or
receipts for goods or services; (c) all of such Person’s rights to any goods
represented by any of the foregoing (including unpaid sellers’ rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods); (d) all rights to payment 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 be issued, for a
secondary obligation incurred or to be incurred, for energy provided or to be
provided, for the use or hire of a vessel under a charter or other contract,
arising out of the use of a credit card or charge card, or for services
rendered or to be rendered by such Person or in connection with any other
transaction (whether or not yet earned by performance on the part of such
Person); and (e) all collateral security of any kind given by any Account
Debtor or any other Person with respect to any of the foregoing.

 

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

 

“Affiliate” means, with respect to any Person,
(a) any other Person (other than a Subsidiary) which, directly or indirectly,
is in control of, is controlled by, or is under common control with such Person
or (b) any other Person who is a director or officer (i) of such Person, (ii)
of any 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 and policies of such Person
whether by contract or otherwise.

 

“Ancillary Agreements” means the Notes, the
Warrants, the Registration Rights Agreements, each Security Document and all
other agreements, instruments, documents, mortgages, pledges, powers of
attorney, consents, assignments, contracts, notices, security agreements, trust
agreements and guarantees whether heretofore, concurrently, or hereafter
executed by or on behalf of any Company, any of its Subsidiaries or any other
Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same may
be amended, supplemented, restated or otherwise modified from time to time.

 

“Available Minimum Borrowing” has the meaning
given such term in Section 2(a)(i).

 

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

 

“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 and
software storage and media devices, accounting books and records, financial
statements (actual and pro forma), filings with Governmental Authorities and
any and all records and instruments relating to the Collateral or otherwise
necessary or helpful in the collection thereof or the realization thereupon.

 

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

 

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

 

A-1

 

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

 

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

 

“Closing Date” means the date on which any
Company 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’s
property and assets, whether real or personal, tangible or intangible, and
whether now owned or hereafter acquired, or in which it now has or at any time
in the future may acquire any right, title or interests including all of the
following property in which it now has or at any time in the future may acquire
any right, title or interest:

 

(a)           all
Inventory;

 

(b)           all
Equipment;

 

(c)           all
Fixtures;

 

(d)           all
General Intangibles;

 

(e)           all
Accounts;

 

(f)            all
Deposit Accounts, other bank accounts and all funds on deposit therein;

 

(g)           all
Investment Property;

 

(h)           all
Stock;

 

(i)            all
Chattel Paper;

 

(j)            all
Letter-of-Credit Rights;

 

(k)           all
Instruments;

 

(l)            all
commercial tort claims set forth on Schedule 1(A);

 

(m)          all
Books and Records;

 

(n)           all
Intellectual Property;

 

(o)           all
Supporting Obligations including letters of credit and guarantees issued in
support of Accounts, Chattel Paper, General Intangibles and Investment
Property;

 

(p)           (i)
all money, cash and cash equivalents and (ii) all cash held as cash collateral
to the extent not otherwise constituting Collateral, all other cash or property
at any time on deposit with or held by Laurus for the account of any Company
(whether for safekeeping, custody, pledge, transmission or otherwise); and

 

(q)           all
products and Proceeds of all or any of the foregoing, tort claims and all
claims and other rights to payment including (i) insurance claims against third
parties for loss of, damage to, or destruction of, the foregoing Collateral and
(ii) payments due or to become due under leases, rentals and hires of any or all
of the foregoing and Proceeds payable under, or unearned premiums with respect
to policies of insurance in whatever form.

 

A-2

 

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

 

“Company Agent” means the Parent.

 

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

 

“Default” means any act or event which, with
the giving of notice or passage of time or both, would constitute an Event of
Default.

 

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

 

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

 

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

 

“Eligible Accounts” means each Account of each
Company which conforms to the following criteria:  (a) shipment of the merchandise or the
rendition of services, other than the Company’s implementation, training,
custom programming and maintenance services, has been completed; (b) no return,
rejection or repossession of the merchandise has occurred; (c) merchandise
or services shall not have been rejected or disputed by the Account Debtor and
there shall not have been asserted any offset, defense or counterclaim; (d)
continues to be in full conformity with the representations and warranties made
by such Company to Laurus with respect thereto; (e) Laurus is, and continues to
be, satisfied with the credit standing of the Account Debtor in relation to the
amount of credit extended; (f) there are no facts existing or threatened which
are likely to result in any adverse change in an Account Debtor’s financial
condition; (g) is documented by an invoice in a form approved by Laurus and shall
not be unpaid more than one hundred twenty (120) days from invoice date; (h)
not more than twenty-five percent (25%) of the unpaid amount of invoices due
from such Account Debtor remains unpaid more than one hundred twenty (120) days
from invoice date; (i) is not evidenced by chattel paper or an instrument of
any kind with respect to or in payment of the Account unless such instrument is
duly endorsed to and in possession of Laurus or represents a check in payment
of an Account; (j) the Account Debtor is located in the United States; provided,
however, Laurus may, from time to time, in the exercise of its sole
discretion and based upon satisfaction of certain conditions to be determined
at such time by Laurus, deem certain Accounts as Eligible Accounts notwithstanding
that such Account is due from an Account Debtor located outside of the United
States; (k) Laurus has a first priority perfected Lien in such Account and such
Account is not subject to any Lien other than Permitted Liens; (l) does
not arise out of transactions with any employee, officer, director, stockholder
or Affiliate of any Company; (m) is payable to such Company; (n) does not arise
out of a bill and hold sale prior to shipment and does not arise out of a sale
to any Person to which such Company is indebted; (o) is net of any returns,
discounts, claims, credits and allowances; (p) if the Account arises out of
contracts between such Company, on the one hand, and the United States, on the
other hand, 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
such Account, and there has been compliance with any governmental notice or
approval requirements, including compliance with the Federal Assignment of
Claims Act; (q) is a good and valid account representing an undisputed bona
fide indebtedness incurred by the Account Debtor therein named, for a fixed sum
as set forth in the invoice relating thereto with respect to an unconditional
sale and delivery upon the stated terms of goods sold by such Company or work,
labor and/or services rendered by such Company; (r) does not arise out of
progress billings prior to completion of the order; (s) the total unpaid
Accounts from such Account Debtor does not exceed twenty-five percent (25%) of
all Eligible Accounts; (t) such Company’s right to payment is absolute and not
contingent upon the fulfillment of any condition, other than the Company’s
implementation, training, custom programming and maintenance services; (u) such
Company is able to bring suit and enforce its remedies against the Account
Debtor through judicial process; (v) does not represent interest payments, late
or finance charges owing to such Company, and (w) is otherwise satisfactory to
Laurus as determined by Laurus in the exercise of its sole discretion.  In the event any Company requests that Laurus
include within Eligible Accounts certain Accounts of one or more of such
Company’s acquisition targets, Laurus shall at the time of such request
consider such inclusion, but any such inclusion shall be at the sole option of
Laurus and shall at all times be subject

 

A-3

 

to the execution and delivery to Laurus of all such
documentation (including, without limitation, guaranty and security
documentation) as Laurus may require in its sole discretion.

 

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

 

“Equipment” means all “equipment” as such term
is defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including any and all machinery, apparatus, equipment, fittings,
furniture, Fixtures, motor vehicles and other tangible personal property (other
than Inventory) of every kind and description that may be now or hereafter used
in such Person’s operations or that are owned by such Person or in which such
Person may have an interest, and all parts, accessories and accessions 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 any
of the events set forth in Section 19.

 

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

 

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

 

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

 

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

 

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

 

“GAAP” means generally accepted accounting
principles, practices and procedures in effect from time to time in the United
States of America.

 

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

 

“Goods” means all “goods”, as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including embedded software to the extent included in “goods” as
defined in the UCC, manufactured homes, standing timber that is cut and 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 by
any Person.

 

A-4

 

“Governmental Authority” means any nation or
government, 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.

 

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

 

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

 

“Inventory” means all “inventory”, as such term
is defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including all inventory, merchandise, goods and other personal
property that are held by or on behalf of such Person for sale or lease or are
furnished or are to be furnished under a contract of service or that constitute
raw materials, work in process, finished goods, returned goods, or materials or
supplies of any kind, nature or description used 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, including all supplies and
embedded software.

 

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

 

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

 

“License” means any rights under any written
agreement now or hereafter acquired by any Person to use any trademark,
trademark registration, copyright, copyright registration or invention for
which a patent is in existence or other license of rights or interests now held
or hereafter acquired by any Person.

 

“Lien” means any mortgage, security deed, deed
of trust, pledge, hypothecation, assignment, security interest, lien (whether
statutory or otherwise), charge, claim or encumbrance, or preference, priority
or other security agreement or preferential arrangement held or asserted in
respect of any asset of any kind or nature whatsoever including any conditional
sale or other title retention agreement, any lease having substantially the
same economic effect as any of the foregoing, and the filing of, or agreement
to give, any financing statement under the UCC or comparable law of any
jurisdiction.

 

“Loans” has the meaning given such term in
Section 2(a)(i) and shall include all other extensions of credit hereunder and
under any Ancillary Agreement.

 

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

 

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

 

“Minimum Borrowing Amount” means $1,000,000.

 

“Minimum Borrowing Notes” means that certain
Secured Convertible Minimum Borrowing Note dated as of the Closing Date made by
the Companies in favor of Laurus evidencing the Minimum Borrowing Amount and
each other Secured Convertible Minimum Borrowing Note made by the Companies in
favor of Laurus

 

A-5

 

which evidences the Minimum Borrowing Amount, as each
of the same may be amended, supplemented, restated and/or otherwise modified
from time to time.

 

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

 

“Next Unissued Serialized Note” has the meaning
given such term in Section 2(a)(i).

 

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

 

“Notes” means the Minimum Borrowing Notes and
the Revolving Note made by Companies in favor of Laurus in connection with the
transactions contemplated hereby, as each of the same may be amended,
supplemented, restated and/or otherwise modified from time to time.

 

“Obligations” means all Loans, all advances,
debts, liabilities, obligations, covenants and duties owing by each Company and
each of its Subsidiaries to Laurus (or any corporation that directly or
indirectly controls or is controlled by or is under common control with Laurus)
of every kind and description (whether or not evidenced by any note or other
instrument and whether or not for the payment of money or the performance or
non-performance of any act), direct or indirect, absolute or contingent, due or
to become due, contractual or tortious, liquidated or unliquidated, whether
existing by operation of law or otherwise now existing or hereafter arising
including any debt, liability or obligation owing from any Company and/or each
of its Subsidiaries to others which Laurus may have obtained by assignment or
otherwise and further including all interest (including interest accruing at the
then applicable rate provided in this Agreement after the maturity of the Loans
and interest accruing at the then applicable rate provided in this Agreement
after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, whether or not a claim for
post-filing or post-petition interest is allowed or allowable in such
proceeding), charges or any other payments each Company and each of its
Subsidiaries is required to make by law or otherwise arising under or as a
result of this Agreement, the Ancillary Agreements or otherwise, together with
all reasonable expenses and reasonable attorneys’ fees chargeable to the
Companies’ or any of their Subsidiaries’ accounts or incurred by Laurus in
connection therewith.

 

“Payment Intangibles” means all “payment
intangibles” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, including, a General Intangible under which the Account
Debtor’s principal obligation is a monetary obligation.

 

“Permitted Liens” means (a) Liens of carriers,
warehousemen, artisans, bailees, mechanics and materialmen incurred in the
ordinary course of business securing sums not overdue; (b) Liens incurred in
the ordinary course of business in connection with worker’s compensation,
unemployment insurance or other forms of governmental insurance or benefits,
relating to employees, securing sums (i) not overdue or (ii) being diligently
contested in good faith provided that adequate reserves with respect thereto
are maintained on the books of the Companies and their Subsidiaries, as
applicable, in conformity with GAAP; (c) Liens in favor of Laurus; (d)
Liens for taxes (i) not yet due or (ii) being diligently contested in good
faith by appropriate proceedings, provided that adequate reserves with respect
thereto are maintained 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 in favor of Laurus or the value of the assets in which Laurus has a
Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness to the
extent permitted in this Agreement and (f) Liens specified on Schedule 2
hereto.

 

“Person” means any individual, sole
proprietorship, partnership, limited liability partnership, joint venture,
trust, unincorporated organization, association, corporation, limited liability
company, institution, public benefit corporation, entity or government (whether
federal, state, county, city, municipal or otherwise, including any instrumentality,
division, agency, body or department thereof), and shall include such Person’s
successors and assigns.

 

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

 

A-6

 

“Proceeds” means “proceeds”, as such term is
defined in the UCC and, in any event, shall include:  (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Company or any other Person from
time to time with respect to any Collateral; (b) any and all payments (in any
form whatsoever) made or due and payable to any Company from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of any Collateral by any governmental body, governmental authority,
bureau or agency (or any person acting under color of governmental authority);
(c) any claim of any Company against third parties (i) for past, present or
future infringement of any Intellectual Property or (ii) for past, present
or future infringement or dilution of any trademark or trademark license or for
injury to the goodwill associated with any trademark, trademark registration or
trademark licensed under any trademark License; (d) any recoveries by any
Company against third parties with respect to any litigation or dispute
concerning any Collateral, including claims arising out of the loss or
nonconformity of, interference with the use of, defects in, or infringement of
rights in, or damage to, Collateral; (e) all amounts collected on, or
distributed on account of, other Collateral, including dividends, interest,
distributions and Instruments with respect to Investment Property and pledged
Stock; and (f) any and all other amounts, rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of Collateral
and all rights arising out of Collateral.

 

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

 

“Purchase Money Lien” means any Lien upon any
fixed assets that secures the Purchase Money Indebtedness related thereto but
only if such Lien shall at all times be confined solely to the asset the
purchase price of which was financed or refinanced through the incurrence of
the Purchase Money Indebtedness secured by such Lien and only if such Lien
secures only such Purchase Money Indebtedness.

 

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

 

“Revolving Note” means that certain Secured
Revolving Note dated as of the Closing Date made by the Companies in favor of
Laurus in the original principal amount of One Million Five Hundred Thousand
Dollars ($1,500,000), as the same may be amended, supplemented, restated and/or
otherwise modified from time to time.

 

“SEC” means the Securities and Exchange
Commission.

 

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

 

“Securities” means the Notes and the Warrants
and the shares of Common Stock which may be issued pursuant to conversion of
such Notes in whole or in part or exercise of such Warrants.

 

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

 

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

 

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

 

“Stock” means all certificated and
uncertificated shares, options, warrants, membership interests, general or
limited partnership interests, participation or other equivalents (regardless
of how designated) of or in a

 

A-7

 

corporation, partnership, limited liability company or
equivalent entity whether voting or nonvoting, including common stock,
preferred stock, or any other “equity security” (as such term is defined in
Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under
the Securities Exchange Act of 1934).

 

“Subordinated Debt Documentation” shall mean,
collectively, (i) that certain Subordination Agreement, dated as of March 22,
2004, by and among Joseph L. Simek, Frances L. Simek, the Parent and Laurus (as
amended, modified or supplemented from time to time, the “2004 Subordination
Agreement”) and (ii) each “Subordinated Loan Document” under, and as defined
in, the 2004 Subordination Agreement, as each are amended, 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 interests having
ordinary voting power (other than stock or other ownership interests having
such power only by reason of the happening of a contingency) to elect a
majority of the directors or other governing body of such other Person, are
owned, directly or indirectly, by such Person or (ii) any other Person in which
such Person owns, directly or indirectly, more than 50% of the equity interests
at such time.

 

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

 

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

 

“Transferable Amount” has the meaning given
such term in Section 2(a)(i).

 

“UCC” means the Uniform Commercial Code as the
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, any or all of
the attachment, perfection or priority of, or remedies with respect to, Laurus’
Lien on any Collateral is governed by the Uniform Commercial Code 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 other jurisdiction for
purposes of the provisions of this Agreement relating to such attachment,
perfection, priority or remedies and for purposes of definitions related to
such provisions; provided further, that to the extent that UCC is used to
define any term herein or in any Ancillary Agreement and such term is defined
differently in different Articles or Divisions of the UCC, the definition of
such term contained in Article or Division 9 shall govern.

 

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

 

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

 

A-8

 

Exhibit A

 

Eligible Subsidiaries

 

Time America,
Inc., an Arizona corporation

 

1

 

Exhibit B

 

Borrowing Base Certificate

 

[To be inserted]

 

2

 

Disclosure Schedules

 

Schedule 1(A)

 

None

 

Schedule 2

 

None

 

Schedule 7(c)

 

UCC-1 Blanket Financing
Statement to be filed in Nevada and Arizona

 

Schedule 7(l)

 

None

 

Schedule 7(p)

Bank Accounts:

 

	
  Borrower (Type of

  Account)

  	
   

  	
  Name, Address, Phone and Fax No.

  of Bank and Bank Contract

  	
   

  
	
  Time America, Inc.

  	
   

  	
  Sunrise Bank, 4350 E.
  Camelback Rd., Ste. 100A, Phoenix AZ 85018

  	
   

  
	
  (Checking and Money Market)

  	
   

  	
  Tyrone Couch, Ph:
  602-522-5733; Fax: 602-956-6258

  	
   

  
	
  Time America, Inc.

  (Inactive)

  	
   

  	
  Morgan Stanley, 2375 E.
  Camelback Rd., Ste. 600, Phoenix AZ 85016

  	
   

  

 

Schedule 12(b)

Subsidiaries:

 

Time
America, Inc. an Arizona corporation; 100% owned.

 

Schedule 12(c)

Subsidiary Capitalization:

 

Time
America, Inc. (AZ); 10,000,000 shares authorized; 9,314,445 shares issued and
outstanding.

 

The Company has the
following warrant agreements outstanding:

 

During
the year ended June 30, 2001, the Company issued 12,000 warrants to an entity
for consulting services.  The exercise
price of the warrants ranges from $1.25 per share to $4.30 per share and are
exercisable through March 2006.  None of the
warrants have been exercised.

 

During the year ended June
30, 2002, the Company issued 62,958 warrants to a related party in
consideration for entering into a promissory note agreement with the
Company.  The exercise price of the
warrant is $.25 per share and is exercisable through September 2006.  None of the warrants have been exercised.

 

During the year ended June
30, 2002, the Company issued 25,000 warrants to a related party in
consideration for entering into a revolving line of credit agreement with the
Company.  The exercise price of the
warrant is $.15 per share and is exercisable through November 2006.  None of the warrants have been exercised.

 

1

 

In December 2003, the
Company issued 20,000 warrants to a related party in consideration for
extending the term of revolving credit facility agreements with the
Company.  The exercise price of the
warrant is $1.20 per share and is exercisable through December 2008.  None of the warrants have been exercised.

 

In March 2004, the Company
consummated a private placement pursuant to which the Company issued a
$2,000,000 principal amount secured convertible term note (the “Laurus Note”),
together with a common stock purchase warrant entitling the holder to purchase
280,000 shares of common stock (the “Laurus Warrant”).  The Laurus Warrant
entitles the holder thereof to purchase, at any time through March 22,
2011:  200,000 shares of the Company’s common stock at a price of $1.29
per share; 40,000 shares of the Company’s common stock at a price of $1.35 per
share; and 40,000 shares of the Company’s common stock at a price of $1.40 per
share.  None of the warrants have been
exercised.

 

The private placement of the
Laurus Note and the Laurus Warrant was facilitated by The Oberon Group, LLC
(Oberon) in consideration for which Oberon was issued a warrant to purchase, at
any time through March 22, 2007, 136,364 shares of the Company’s common stock
at a price of $1.10.  None of the
warrants have been exercised.

 

Schedule 12(g)

Related Party Transactions

 

On
March 31, 2001, the Company borrowed $400,000 from Joseph L. Simek, a
significant stockholder of the Company. 
The loan bears interest at an annual rate of prime plus one percent (1%)
and is secured by all of the Company’s assets. 
Principal and interest payments of approximately $8,500 are due monthly,
with the outstanding principal balance due on October 1, 2004.  On November 2, 2001, Mr. Simek agreed to
provide the Company with a $200,000 line of credit, which is also secured by
all of the Company’s assets.  On
September 24, 2002, Mr. Simek agreed to provide the Company with an additional
$200,000 revolving line of credit, which is also secured by all of the Company’s
assets.  Borrowings under the lines of
credit bear interest at an annual rate of 10%. 
In January 2004, Mr. Simek and the Company agreed to extend the maturity
date of the line of credit facility to December 31, 2005.  At June 30, 2004, $190,345 was outstanding
under the $400,000 loan and $150,000 was outstanding under the line of credit.  These loans are contractually subordinated to
Laurus Master Fund, Ltd.

 

On
September 4, 2001, the Company borrowed $500,000 from Francis Simek, the spouse
of Mr. Simek.  On March 22, 2004, the
Company and Mrs. Simek entered into a subordinated note agreement.  Under the terms of the agreement, the
existing term note was refinanced as a five year term note with monthly
principal and interest payments at 15%. 
The Company issued 25,000 shares of restricted common stock to Mrs.
Simek in consideration for her agreement to subordinate the obligations under
the note to Laurus Master Fund, Ltd.  The
loan is secured by a junior lien all of the Company’s assets.  Principal and interest payments of $9,831 are
due and payable monthly over a 60-month period. 
At June 30, 2004, $394,219 was outstanding under this loan.

 

In
May 2003, Todd P. Belfer, director, purchased 450,000 shares of common stock of
the Company in a private placement transaction.

 

In
May 2003, Circle F. Ventures LLC, a 5% security holder, purchased 111,111
shares of common stock of the Company in private placement transaction.

 

In
October 2003, the Company entered into a consulting services agreement with Mr.
Belfer for a four year period.  In
exchange for the consulting services, Mr. Belfer was granted a non-statutory
option to purchase 200,000 shares of the Company’s common stock at $0.75 per
share.  The options vest over four years
and have a term of four years.

 

On
April 16, 2004, the Company borrowed $500,000 from Mrs. Simek.  The note is a five year term note with
monthly principal and interest payments at 15%. 
In consideration for agreeing to subordinate the note, the Company
issued 25,000 shares of restricted common stock to Mrs. Simek.  The loan is secured by all of the Company’s
assets.  Principal and interest payments
of $11,821 are due and payable monthly over a 60-month period.  At June 30, 2004, $479,831 was outstanding
under this loan.  These loans are
contractually subordinated to Laurus Master Fund, Ltd.

 

2

 

In
September 2004, the Company and Mr. Simek agreed to extend the balloon payment
on a promissory note from October 1, 2004 to October 1, 2005.  All other terms of the agreement remained
unchanged.

 

In November 2004, the Company paid $456,100 to
retire the remaining balance on a term note with Mrs. Simek.  The Company and the shareholder then entered
into a $456,100 revolving credit note agreement.  The revolving credit note agreement expires
in November 2007.  Borrowings under the
note bear interest at 10% per annum with interest payments due monthly.  Unused borrowings are subject to a 2%
commitment fee paid quarterly.  These loans are contractually subordinated to
Laurus Master Fund, Ltd.

 

Schedule 12(i)

 

None

 

Schedule 12(l)

 

None

 

Schedule 12(m)

 

None

 

Schedule 12(n)

 

The
Company has granted registration rights to Laurus Master Fund, Ltd. in
connection with the financing transactions with Laurus described elsewhere in
these disclosure schedules and in connection with the financing transactions
contemplated by the Security Agreement to which these schedules are a part.

 

Schedule 12(o)

 

None

 

Schedule 12(q)

 

None

 

Schedule 12(u)

 

None

 

Schedule 12(aa)

 

Current Location (Since Jan
15, 2005)

8840 East Chaparral Road,
Suite 100

Scottsdale, AZ 85250

 

Previous Location (November
1999 to January 2005)

51 West 3rd
Street, Suite 310

Tempe, AZ 85280

 

Schedule 12(bb)

 

8840 East Chaparral Road,
Suite 100

Scottsdale, AZ 85250

 

3

 

Schedule 13(l)(i)

 

In
March 2005, the Company executed a $2,000,000 convertible note payable to
Laurus Master Fund, Ltd.

 

4Exhibit 10.2

 

THIS NOTE AND THE COMMON SHARES ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. 
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO TIME AMERICA, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

SECURED
CONVERTIBLE MINIMUM BORROWING NOTE

 

FOR VALUE RECEIVED, each of TIME AMERICA, INC., a
Nevada corporation (the “Parent”), and
the other companies listed on Exhibit A attached hereto (such other
companies together with the Parent, each a “Company”
and collectively, the “Companies”),
jointly and severally, promises to pay to LAURUS MASTER FUND, LTD., c/o M&C
Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”) or its registered assigns or successors in
interest, the sum of One Million Dollars ($1,000,000), or, if different, the
aggregate principal amount of all Loans (as defined in the Security Agreement
referred to below), together with any accrued and unpaid interest hereon, on
June 23, 2008 (the “Maturity Date”),
if not sooner paid.

 

Capitalized terms used herein without definition shall
have the meanings ascribed to such terms in the Security Agreement among the
Companies and the Holder dated as of the date hereof (as amended, modified
and/or supplemented from time to time, the “Security
Agreement”).

 

The following terms shall apply to this Minimum
Borrowing Note (this “Note”):

 

ARTICLE I

CONTRACT RATE

 

1.1           Contract
Rate.  Subject to Sections 4.2 and
5.10, interest payable on the outstanding principal amount of this Note (the “Principal Amount”) shall accrue at a rate per annum (the “Contract Rate”) equal to the “prime rate” published in The
Wall Street Journal from time to time (the “Prime Rate”).  The Contract Rate shall be increased or
decreased as the case may be for each increase or decrease in the Prime Rate in
an amount equal to such increase or decrease in the Prime Rate; each change to
be effective as of the day of the change in the Prime Rate.  Interest shall be (i) calculated on the basis
of a 360 day year, and (ii) payable monthly, in arrears, commencing on July 1,
2005 on the first business day of each consecutive calendar month thereafter
through and including the Maturity Date and on the Maturity Date, whether by
acceleration or otherwise.

 

1.2           Contract
Rate Adjustments and Payments.  The
Contract Rate shall be calculated on the last business day of each calendar
month hereafter (other than for increases or decreases in the Prime Rate which
shall be calculated and become effective in accordance with the terms of
Section 1.1) until the Maturity Date (each a “Determination
Date”) and shall be subject to adjustment as set forth herein.  If (i) the Parent shall have registered the
shares of the Common Stock underlying the conversion of each Minimum Borrowing
Note and the exercise of each Warrant on a registration statement declared
effective by the Securities and Exchange Commission (the “SEC”),
and (ii) the market price (the “Market Price”)
of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for
the five (5) trading days immediately preceding a Determination Date exceeds
the then applicable Fixed Conversion Price by at least twenty-five percent
(25%), the Contract Rate for the succeeding calendar month shall automatically
be reduced by 200 basis points (200 b.p.) (2%) for each incremental twenty-five
percent (25%) increase in the Market Price of the Common Stock above the then
applicable Fixed Conversion Price.  If
(i) the Parent shall not have registered the shares of the Common Stock
underlying the conversion of each Minimum Borrowing Note and each Warrant on a
registration statement declared effective by the SEC and which remains effective,
and (ii) the Market Price of the Common Stock as reported by Bloomberg, L.P. on
the principal

 

 

market for the
five (5) trading days immediately preceding a Determination Date exceeds the
then applicable Fixed Conversion Price by at least twenty-five percent (25%),
the Contract Rate for the succeeding calendar month shall automatically be
decreased by 100 basis points (100 b.p.) (1%) for each incremental twenty-five
percent (25%) increase in the Market Price of the Common Stock above the then applicable
Fixed Conversion Price.  Notwithstanding
the foregoing (and anything to the contrary contained herein), in no event
shall the Contract Rate at any time be less than zero percent (0%).

 

ARTICLE II

LOANS; PAYMENTS UNDER THIS NOTE

 

2.1           Loans.  All Loans evidenced by this Note shall be
made in accordance with the terms and provisions of the Security Agreement.

 

2.2           No
Effective Registration. 
Notwithstanding anything to the contrary herein, the Holder shall not be
required to accept shares of Common Stock as payment following a conversion by
the Holder if there fails to exist an effective current Registration Statement
(as defined in the Registration Rights Agreement) covering the shares of Common
Stock to be issued, or if an Event of Default hereunder exists and is
continuing, unless such requirement is otherwise waived in writing by the
Holder in whole or in part at the Holder’s option.

 

2.3           Optional
Redemption in Cash.  The Companies
will have the option of prepaying this Note (“Optional
Redemption”) by paying to the Holder a sum of money equal to one
hundred fifteen percent (115%) of the principal amount of this Note together
with accrued but unpaid interest thereon and any and all other sums due,
accrued or payable to the Holder arising under this Note, the Security
Agreement, or any other Ancillary Agreement (the “Redemption
Amount”) outstanding on the Redemption Payment Date (as defined
below).  The Company shall deliver to the
Holder a written notice of redemption (the “Notice of
Redemption”) specifying the date for such Optional Redemption (the “Redemption Payment Date”), which date shall be seven (7)
days after the date of the Notice of Redemption (the “Redemption
Period”).  A Notice of
Redemption shall not be effective with respect to any portion of this Note for
which the Holder has previously delivered a Notice of Conversion (defined
below) pursuant to Section 3.1, or for conversions elected to be made by the
Holder pursuant to Section 3.1 during the Redemption Period.  The Redemption Amount shall be determined as
if such Holder’s conversion elections had been completed immediately prior to
the date of the Notice of Redemption.  On
the Redemption Payment Date, the Redemption Amount (plus any additional
interest and fees accruing on the Notes during the Redemption Period) must be
irrevocably paid in full in immediately available funds to the Holder.  In the event the Companies fail to pay the
Redemption Amount on the Redemption Payment Date, then such Redemption Notice
shall be null and void.

 

ARTICLE III

CONVERSION RIGHTS AND FIXED CONVERSION PRICE

 

3.1           Optional
Conversion. Subject to the terms of this Article III, the Holder shall have
the right, but not the obligation, at any time until the Maturity Date, or
during an Event of Default (as defined in Article IV), and, subject to the
limitations set forth in Section 3.2 hereof, to convert all or any portion of
the outstanding Principal Amount and/or accrued interest and fees due and
payable into fully paid and nonassessable shares of the Common Stock at the
Fixed Conversion Price.  For purposes
hereof, subject to Section 3.6 hereof, the initial “Fixed
Conversion Price” means $.65. 
The shares of Common Stock to be issued upon such conversion are herein
referred to as the “Conversion Shares.”

 

3.2           Conversion
Limitation.  Notwithstanding anything
contained herein to the contrary, the Holder shall not be entitled to convert
pursuant to the terms of this Note an amount that would be convertible into
that number of Conversion Shares which would exceed the difference between (i)
4.99% of the outstanding shares of Common Stock and (ii) the number of shares
of Common Stock beneficially owned by the Holder.  For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and Regulation 13d-3 thereunder.  The Conversion Shares limitation described in
this Section 3.2 shall automatically become null and void following notice to
any Company upon the occurrence and during the continuance of an Event of
Default, or upon 75 days prior notice to the Parent.  Notwithstanding anything contained

 

2

 

herein to the
contrary, the provisions of this Section 3.2 are irrevocable and may not be
waived by the Holder or any Company.

 

3.3           Mechanics
of Holder’s Conversion.  In the event
that the Holder elects to convert this Note into Common Stock, the Holder shall
give notice of such election by delivering an executed and completed notice of
conversion in substantially the form of Exhibit A hereto (appropriately
completed) (“Notice of Conversion”) to the
Parent and such Notice of Conversion shall provide a breakdown in reasonable
detail of the Principal Amount, accrued interest and fees that are being converted.  On each Conversion Date (as hereinafter
defined) and in accordance with its Notice of Conversion, the Holder shall make
the appropriate reduction to the Principal Amount, accrued interest and fees as
entered in its records and shall provide written notice thereof to the Parent
within two (2) Business Days after the Conversion Date.  Each date on which a Notice of Conversion is
delivered or telecopied to the Parent in accordance with the provisions hereof
shall be deemed a Conversion Date (the “Conversion Date”).  Pursuant to the terms of the Notice of
Conversion, the Parent will issue instructions to the transfer agent
accompanied by an opinion of counsel within three (3) Business Day of the date
of the delivery to the Parent of the Notice of Conversion and shall cause the
transfer agent to transmit the certificates representing the Conversion Shares
to the Holder by crediting the account of the Holder’s designated broker with
the Depository Trust Corporation (“DTC”) through
its Deposit Withdrawal Agent Commission (“DWAC”) system
within three (3) Business Days after receipt by the Parent of the Notice of
Conversion (the “Delivery Date”).  In the case of the exercise of the conversion
rights set forth herein the conversion privilege shall be deemed to have been
exercised and the Conversion Shares issuable upon such conversion shall be
deemed to have been issued upon the date of receipt by the Parent of the Notice
of Conversion.  The Holder shall be
treated for all purposes as the record holder of the Conversion Shares, unless
the Holder provides the Parent written instructions to the contrary.

 

3.4           Late
Payments.  Each Company understands
that a delay in the delivery of the Conversion Shares in the form required
pursuant to this Article beyond the Delivery Date could result in economic loss
to the Holder.  As compensation to the
Holder for such loss, in addition to all other rights and remedies which the
Holder may have under this Note, applicable law or otherwise, the Companies
shall, jointly and severally, pay late payments to the Holder for any late
issuance of Conversion Shares in the form required pursuant to this Article III
upon conversion of this Note, in the amount equal to $500 per Business Day
after the Delivery Date.  The Companies
shall, jointly and severally, make any payments incurred under this Section in
immediately available funds upon demand.

 

3.5           Conversion
Mechanics.  The number of shares of
Common Stock to be issued upon each conversion of this Note shall be determined
by dividing that portion of the principal and interest and fees to be
converted, if any, by the then applicable Fixed Conversion Price.

 

3.6           Adjustment
Provisions. The Fixed Conversion Price and number and kind of shares or
other securities to be issued upon conversion determined pursuant to Section
3.1 shall be subject to adjustment from time to time upon the occurrence of
certain events during the period that this conversion right remains
outstanding, as follows:

 

(a)           Reclassification.  If the Parent at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be
deemed to evidence the right to purchase an adjusted number of such securities
and kind of securities as would have been issuable as the result of such change
with respect to the Common Stock (i) immediately prior to or (ii) immediately
after such reclassification or other change at the sole election of the Holder.

 

(b)           Stock
Splits, Combinations and Dividends. 
If the shares of Common Stock are subdivided or combined into a greater
or smaller number of shares of Common Stock, or if a dividend is paid on the
Common Stock or any preferred stock issued by the Parent in shares of Common
Stock, the Fixed Conversion Price shall be proportionately reduced in case of
subdivision of shares or stock dividend or proportionately increased in the
case of combination of shares, in each such case by the ratio which the total
number of shares of Common Stock outstanding immediately after such event bears
to the total number of shares of Common Stock outstanding immediately prior to
such event.

 

3

 

(c)           Share
Issuances.  Subject to the provisions
of this Section 3.6, if the Parent shall on any date on or after June 23, 2006
and prior to the conversion or repayment in full of the Principal Amount issue
any shares of Common Stock or securities convertible into Common Stock to a
person other than the Holder (except (i) pursuant to Sections 3.6(a) or (b)
above; (ii) pursuant to options, warrants, or other obligations to issue shares
outstanding on the date hereof as disclosed to the Holder in writing; or (iii)
pursuant to options that may be issued under any employee incentive stock
option and/or any qualified stock option plan adopted by the Parent) for a
consideration per share (the “Offer Price”)
less than the Fixed Conversion Price in effect at the time of such issuance,
then the Fixed Conversion Price shall be immediately reset to such lower Offer
Price.  For purposes hereof, the issuance
of any security of the Parent convertible into or exercisable or exchangeable
for Common Stock shall result in an adjustment to the Fixed Conversion Price
upon the issuance of such securities.

 

(d)           Computation
of Consideration.  For purposes of
any computation respecting consideration received pursuant to Section 3.6(c)
above, the following shall apply:

 

(i)            in the
case of the issuance of shares of Common Stock for cash, the consideration
shall be the amount of such cash, provided that in no case shall any deduction
be made for any commissions, discounts or other expenses incurred by the Parent
for any underwriting of the issue or otherwise in connection therewith;

 

(ii)           in the
case of the issuance of shares of Common Stock for a consideration in whole or
in part other than cash, the consideration other than cash shall be deemed to
be the fair market value thereof as determined in good faith by the Board of
Directors of the Parent (irrespective of the accounting treatment thereof); and

 

(iii)          upon
any such exercise, the aggregate consideration received for such securities
shall be deemed to be the consideration received by the Parent for the issuance
of such securities plus the additional minimum consideration, if any, to be
received by the Parent upon the conversion or exchange thereof (the
consideration in each case to be determined in the same manner as provided in
subsections (i) and (ii) of this Section 2.5).

 

3.7           Reservation
of Shares.  During the period the
conversion right exists, the Parent will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Conversion Shares upon the full conversion of this Note and the
warrant.  The Parent represents that upon
issuance, the Conversion Shares will be duly and validly issued, fully paid and
non-assessable.  The Parent agrees that
its issuance of this Note shall constitute full authority to its officers,
agents, and transfer agents who are charged with the duty of executing and
issuing stock certificates to execute and issue the necessary certificates for
the Conversion Shares upon the conversion of this Note.

 

3.8           Registration
Rights.  The Holder has been granted
registration rights with respect to the Conversion Shares as set forth in a
Registration Rights Agreement.

 

3.9           Issuance
of New Note.  Upon any partial
conversion of this Note, a new Note containing the same date and provisions of
this Note shall, at the request of the Holder, be issued by the Parent to the
Holder for the principal balance of this Note and interest which shall not have
been converted or paid.  Subject to the
provisions of Article IV of this Note, the Parent shall not pay any costs, fees
or any other consideration to the Holder for the production and issuance of a
new Note.

 

ARTICLE IV

EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS

 

4.1           Events
of Default.  The occurrence of an
Event of Default under the Security Agreement shall constitute an event of
default (“Event of Default”) hereunder.

 

4.2           Default
Interest.  Following the occurrence
and during the continuance of an Event of Default, the Companies shall, jointly
and severally, pay additional interest on the outstanding principal balance of

 

4

 

this Note in an
amount equal to four percent (4.0%) per annum, and all outstanding Obligations,
excluding unpaid interest, shall continue to accrue interest at such additional
interest rate from the date of such Event of Default until the date such Event
of Default is cured or waived.

 

4.3           Default
Payment.  Following the occurrence
and during the continuance of an Event of Default, the Holder, at its option,
may elect, in addition to all rights and remedies of the Holder under the
Security Agreement and the Ancillary Agreements and all obligations of each
Company under the Security Agreement and the Ancillary Agreements, to require
the Companies, jointly and severally, to make a Default Payment (“Default Payment”). 
The Default Payment shall be 125% of the outstanding principal amount of
the Note, plus accrued but unpaid interest, all other fees then remaining
unpaid, and all other amounts payable hereunder.  The Default Payment shall be applied first to
any fees due and payable to the Holder pursuant to the Notes and/or the
Ancillary Agreements, then to accrued and unpaid interest due on the Notes, the
Security Agreement and then to the outstanding principal balance of the
Notes.  The Default Payment shall be due
and payable immediately on the date that the Holder has exercised its rights
pursuant to this Section 4.3.

 

ARTICLE V

MISCELLANEOUS

 

5.1           Conversion
Privileges.  The conversion
privileges set forth in Article III shall remain in full force and effect
immediately from the date hereof until the date this Note is indefeasibly paid
in full and irrevocably terminated.

 

5.2           Cumulative
Remedies.  The remedies under this
Note shall be cumulative.

 

5.3           Failure
or Indulgence Not Waiver.  No failure
or delay on the part of the Holder hereof in the exercise of any power, right
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.

 

5.4           Notices.  Any notice herein required or permitted to be
given shall be in writing and shall be deemed effectively given: (a) upon
personal delivery to the party notified, (b) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient, if not, then
on the next business day, (c) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. 
All communications shall be sent to the respective Company at the
addresses provided for such Company in the Security Agreement executed in
connection herewith, and to the Holder at the address provided in the Security
Agreement for such Holder, with a copy to John E. Tucker, Esq., 825 Third
Avenue, 14th Floor, New York, New York 10022, facsimile number (212)
541-4434, or at such other address as the respective Company or the Holder may
designate by ten days advance written notice to the other parties hereto.

 

5.5           Amendment
Provision.  The term “Note” and all
references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented, and any successor instrument as such successor
instrument may be amended or supplemented.

 

5.6           Assignability.  This Note shall be binding upon each Company
and its successors and assigns, and shall inure to the benefit of the Holder
and its successors and assigns, and may be assigned by the Holder in accordance
with the requirements of the Security Agreement.  No Company may assign any of its obligations
under this Note without the prior written consent of the Holder, any such purported
assignment without such consent being null and void.

 

5.7           Cost of
Collection.  In case of any Event of
Default under this Note, the Companies shall, jointly and severally, pay the
Holder’s reasonable costs of collection, including reasonable attorneys’ fees.

 

5

 

5.8           Governing
Law, Jurisdiction and Waiver of Jury Trial.

 

(a)           THIS NOTE
SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

 

(b)           EACH
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND,
AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE, THE SECURITY
AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT
OF OR RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER
ANCILLARY AGREEMENTS; PROVIDED, THAT EACH COMPANY ACKNOWLEDGES THAT ANY
APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER  PROVIDED,
THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR
THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
HOLDER.  EACH COMPANY EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS.  EACH COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE
COMPANY AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.

 

(c)           EACH
COMPANY DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS.  THEREFORE, TO ACHIEVE
THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION,
EACH COMPANY HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING
BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE
BETWEEN THE HOLDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED
OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH
THIS NOTE, THE SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE
TRANSACTIONS RELATED HERETO OR THERETO.

 

5.9           Severability.  In the event that any provision of this Note
is invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law.  Any such provision which may prove
invalid or unenforceable under any law shall not affect the validity or
enforceability of any other provision of this Note.

 

5.10         Maximum
Payments.  Nothing contained herein
shall be deemed to establish or require the payment of a rate of interest or
other charges in excess of the maximum permitted by applicable law.  In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.

 

5.11         Security
Interest.  The Holder has been
granted a security interest (i) in certain assets of the Companies as more
fully described in the Security Agreement, as amended, restated, modified or
supplemented from time to time and (ii) pursuant to that certain Amended and
Restated Stock Pledge Agreement dated as of March

 

6

 

22, 2004 and
amended and restated as of the date hereof, among the Holder and the Companies,
as amended, restated, modified or supplemented from time to time.

 

5.12         Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Note and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Note to favor
any party against the other.

 

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

 

7

 

IN WITNESS WHEREOF, each Company
has caused this Secured Convertible Minimum Borrowing Note to be signed in its
name effective as of this 23rd day of June 2005.

 

 

	
   

  	
  TIME AMERICA, INC., a
  Nevada corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   Name:

  
	
   

  	
   

  	
   Title:

  
	
   

  	
   

  
	
  WITNESS:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TIME AMERICA, INC., an
  Arizona corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   Name:

  
	
   

  	
   

  	
   Title:

  
	
   

  	
   

  
	
  WITNESS:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  

 

8

 

EXHIBIT A

 

OTHER COMPANIES

 

Time America, Inc., an Arizona corporation

 

 

EXHIBIT B

 

NOTICE OF
CONVERSION

 

(To be executed by the Holder in order to convert the

Secured Convertible Minimum Borrowing Note)

 

The undersigned hereby elects to convert $          of
the principal and $          of
the interest due on the Secured Convertible Minimum Borrowing Note dated as of
June    , 2005 (the “Note”) issued
by Time America, Inc., a Nevada corporation (the “Parent”)
and the other Companies named and as defined therein into shares of Common
Stock of the Parent in accordance with the terms and conditions set forth in
the Note, as of the date written below.

 

Date of
Conversion:

 

Conversion Price:

 

Shares To Be
Delivered:

 

Signature:

 

Print Name:

 

Address:

 

Holder DWAC
instructions:

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