Document:

Exhibit 10.1

 

SECURITY AND
PURCHASE AGREEMENT

 

LAURUS MASTER FUND, LTD.

 

TIME AMERICA, INC., a Nevada corporation

 

TIME AMERICA, INC., an Arizona corporation

 

and

 

NETEDGE DEVICES, LLC, an Arizona limited liability company

 

 

Dated: January 3, 2006

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  1.

  	
  General
  Definitions and Terms; Rules of Construction

  	
  1

  
	
   

  	
   

  	
   

  
	
  2.

  	
  Loan
  Facility

  	
  2

  
	
   

  	
   

  	
   

  
	
  3.

  	
  Repayment
  of the Loans

  	
  4

  
	
   

  	
   

  	
   

  
	
  4.

  	
  Procedure
  for Revolving Loans

  	
  4

  
	
   

  	
   

  	
   

  
	
  5.

  	
  Interest
  and Payments

  	
  5

  
	
   

  	
   

  	
   

  
	
  6.

  	
  Security
  Interest

  	
  6

  
	
   

  	
   

  	
   

  
	
  7.

  	
  Representations,
  Warranties and Covenants Concerning the Collateral

  	
  7

  
	
   

  	
   

  	
   

  
	
  8.

  	
  Payment
  of Accounts

  	
  9

  
	
   

  	
   

  	
   

  
	
  9.

  	
  Collection
  and Maintenance of Collateral

  	
  10

  
	
   

  	
   

  	
   

  
	
  10.

  	
  Inspections
  and Appraisals

  	
  10

  
	
   

  	
   

  	
   

  
	
  11.

  	
  Financial
  Reporting

  	
  11

  
	
   

  	
   

  	
   

  
	
  12.

  	
  Additional
  Representations and Warranties

  	
  12

  
	
   

  	
   

  	
   

  
	
  13.

  	
  Covenants

  	
  23

  
	
   

  	
   

  	
   

  
	
  14.

  	
  Further
  Assurances

  	
  29

  
	
   

  	
   

  	
   

  
	
  15.

  	
  Representations,
  Warranties and Covenants of Laurus

  	
  31

  
	
   

  	
   

  	
   

  
	
  16.

  	
  Power of
  Attorney

  	
  32

  
	
   

  	
   

  	
   

  
	
  17.

  	
  Term of
  Agreement

  	
  32

  
	
   

  	
   

  	
   

  
	
  18.

  	
  Termination
  of Lien

  	
  32

  
	
   

  	
   

  	
   

  
	
  19.

  	
  Events of
  Default

  	
  34

  
	
   

  	
   

  	
   

  
	
  20.

  	
  Remedies

  	
  36

  
	
   

  	
   

  	
   

  
	
  21.

  	
  Waivers

  	
  36

  
	
   

  	
   

  	
   

  
	
  22.

  	
  Expenses

  	
  37

  
	
   

  	
   

  	
   

  
	
  23.

  	
  Assignment
  By Laurus

  	
  37

  
	
   

  	
   

  	
   

  
	
  24.

  	
  No
  Waiver; Cumulative Remedies

  	
  37

  

 

i

 

	
   

  	
   

  	
  Page(s)

  
	
   

  	
   

  	
   

  
	
  25.

  	
  Application
  of Payments

  	
  37

  
	
   

  	
   

  	
   

  
	
  26.

  	
  Indemnity

  	
  37

  
	
   

  	
   

  	
   

  
	
  27.

  	
  Revival

  	
  38

  
	
   

  	
   

  	
   

  
	
  28.

  	
  Borrowing
  Agency Provisions

  	
  38

  
	
   

  	
   

  	
   

  
	
  29.

  	
  Notices

  	
  39

  
	
   

  	
   

  	
   

  
	
  30.

  	
  Governing
  Law, Jurisdiction and Waiver of Jury Trial

  	
  40

  
	
   

  	
   

  	
   

  
	
  31.

  	
  Limitation
  of Liability

  	
  41

  
	
   

  	
   

  	
   

  
	
  32.

  	
  Entire
  Understanding; Maximum Interest

  	
  41

  
	
   

  	
   

  	
   

  
	
  33.

  	
  Severability

  	
  41

  
	
   

  	
   

  	
   

  
	
  34.

  	
  Survival

  	
  41

  
	
   

  	
   

  	
   

  
	
  35.

  	
  Captions

  	
  42

  
	
   

  	
   

  	
   

  
	
  36.

  	
  Counterparts;
  Telecopier Signatures

  	
  42

  
	
   

  	
   

  	
   

  
	
  37.

  	
  Construction

  	
  42

  
	
   

  	
   

  	
   

  
	
  38.

  	
  Publicity

  	
  42

  
	
   

  	
   

  	
   

  
	
  39.

  	
  Joinder

  	
  42

  
	
   

  	
   

  	
   

  
	
  40.

  	
  Legends

  	
  42

  

 

ii

 

SECURITY AND
PURCHASE AGREEMENT

 

This Security and Purchase Agreement is made as of January 3,
2006 by and among LAURUS MASTER FUND, LTD., a Cayman Islands corporation (“Laurus”),
TIME AMERICA, INC., a Nevada corporation (the “Parent”), and 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 that 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 revolving loans (the “Revolving Loans”) to the
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, plus (II) the
Inventory Availability, minus (III) the Reserves. The amount derived at any
time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus
2(a)(i)(y)(III) shall be referred to as the “Formula Amount.”  The Companies shall, jointly and severally,
execute and deliver to Laurus on the Closing Date the Secured Non-Convertible
Revolving Note and the Secured Convertible Term Note. The Companies hereby each
acknowledge and agree that Laurus’ obligation to purchase the Secured
Non-Convertible Revolving Note and the Secured Convertible Term Note from the
Companies on the Closing Date shall be contingent upon the satisfaction (or
waiver by Laurus in its sole discretion) of the items and matters set forth in
the closing checklist provided by Laurus to the Companies on or prior to the
Closing Date.

 

(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/or Inventory 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,

 

2

 

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 Revolving 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, 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 Revolving 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

 

3

 

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)                                  Term Loan. Subject to the
terms and conditions set forth herein and in the Ancillary Agreements, Laurus
shall make a term loan (the “Term Loan”) to Company Agent
(for the benefit of Companies) in an aggregate amount equal to Two Million
Dollars ($2,000,000). The Term Loan shall be advanced on the Closing Date and
shall be, with respect to principal, payable in consecutive monthly
installments of principal commencing on July 1, 2006 and on the first day
of each month thereafter, subject to acceleration upon the occurrence of an
Event of Default or termination of this Agreement. The Term Loan shall be
evidenced by the Secured Convertible Term Note.

 

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 the Term Loan on the
Maturity Date (as defined in the Secured Convertible Term Note (i) the
then aggregate outstanding principal balance of the Term Loan together with
accrued and unpaid interest, fees and charges and; (ii) all other amounts
owed Laurus under Secured Convertible Term Note, (c) shall repay the
Revolving Loans on the expiration of the Term (i) the then aggregate
outstanding principal balance of the Revolving 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 (d) 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 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 Revolving Loans. Company Agent
may by written notice request a borrowing of Revolving Loans prior to 2:00 p.m.
(New York time) on the Business Day of its request to incur, on the next
Business Day, a Revolving 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 Revolving 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 Revolving 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

 

4

 

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 Revolving 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; Grant Shares. Upon execution of this Agreement by each Company
and Laurus: (x) the Companies shall jointly and severally pay to Laurus Capital
Management, LLC a closing payment in an amount equal to $36,000 (the “Closing
Payment”); and (y) the Parent shall issue to Laurus 351,923 fully paid and
non-assessable shares of Common Stock (the “Grant Shares”). The Closing
Payment and the Grant Shares 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

 

5

 

(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 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
upon expiration of the Term and on the Maturity Date (as defined in the Secured
Convertible Term Note).

 

(iv)                    Expenses.
The Companies shall jointly and severally reimburse Laurus for its expenses
(including reasonable legal fees and expenses) incurred in connection with 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 the sum of $30,000 for such expenses referred to in this Section 5(b)(iv) plus
the cost of fees and expenses of outside counsel, the retention of whom is
deemed reasonably necessary by Laurus.

 

6.                                       Security
Interest.

 

(a)                                  Each
Company hereby acknowledges, confirms and agrees that Laurus has and shall
continue to have a lien upon and security interest in all Collateral heretofore
granted to Laurus pursuant to the March 2004 Subsidiary Security
Agreement, the March 2004 Parent Security Agreement and the June 2005
Security Agreement to secure the Obligations, and, to the extent not otherwise
granted thereunder, and in order 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

 

6

 

(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 Revolving Loan and made as of the time of each and every
Revolving Loan hereunder) and covenants as follows:

 

(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

 

7

 

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 any then existing Account
and/or Inventory as no longer constituting an Eligible Account or Eligible
Inventory, as the case may be; (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.

 

8

 

(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.

 

(q)                                 All
Inventory manufactured by it in the United States of America shall be produced
in accordance with the requirements of the Federal Fair Labor Standards Act of
1938, as amended and all rules, regulations and orders related thereto or
promulgated thereunder.

 

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

 

9

 

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 January 3, 2006. 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 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,

 

10

 

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;

 

(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

 

11

 

accounts payable and a calculation of each Company’s Accounts and Eligible
Accounts, Inventory and/or Eligible Inventory, 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, partnership or limited liability company, as the case may be,
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, partnership or limited liability company, as the case may be,  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 and
sell the Notes and the shares of Common Stock issuable upon conversion of the
Secured Convertible Term Note (the “Note Shares”), (iii) to issue
and sell the Warrants and the shares of Common Stock issuable upon exercise of
the Warrants (the “Warrant Shares”), (iv) to issue and sell the
Grant Shares and (v) to 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, partnership or limited
liability company, as the case may be, 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,

 

12

 

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).

 

(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, the Warrant Shares and/or the Grant Shares,
or 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, the Warrant Shares and the Grant 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, partnership or limited liability
company, as the case may be, 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 Grant
Shares, 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.

 

13

 

The issuance of the Notes and the subsequent
conversion of the Secured Convertible Term Note 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. The issuance of the Grant 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
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, 2005 (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.

 

14

 

(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;

 

(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.

 

15

 

Except as described above or set forth on Schedule 12(g),
none of its officers, directors or, to its 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;

 

16

 

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

 

(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.

 

17

 

(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 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.

 

18

 

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 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

 

19

 

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.

 

20

 

(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 fiscal year ended June 30, 2005;
and (ii) its Quarterly Report on Form 10-QSB for its fiscal quarter
ended September 30, 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.

 

21

 

(y)                                 Dilution.
It specifically acknowledges that the Parent’s issuance of the Grant Shares and
the Parent’s obligation to issue the shares of Common Stock upon conversion of
the Secured Convertible Term Note 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 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

 

22

 

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 Grant
Shares and the shares of Common Stock issuable upon conversion of the Secured
Convertible Term Note 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 (i) to repay in full
the Existing Indebtedness and (ii) 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 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

 

23

 

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

 

24

 

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 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.

 

25

 

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 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

 

26

 

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 resale of the Grant Shares, the conversion of the
Secured Convertible Term Note 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

 

27

 

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.

 

(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 Secured Convertible Term Note (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
issuance of the Grant Shares, the conversion of the Secured Convertible Term
Note 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

 

28

 

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 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
and sold 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

 

29

 

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 Grant Shares, the Notes to be issued to
it under this Agreement and the Securities acquired by it upon the conversion
of the Secured Convertible Term Note.

 

(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 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 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

 

30

 

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 Secured Convertible Term Note).

 

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.

 

31

 

17.                                 Term
of Agreement. Laurus’ agreement to
make Revolving 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 if each shall have paid to
Laurus an early payment fee in an amount equal to (1) five percent (5.0%)
of the Capital Availability Amount if such payment occurs prior to the first
anniversary of the Closing Date and (2) four percent (4.0%) of the Capital
Availability Amount if such payment occurs thereafter during the Term; such fee
being intended to compensate Laurus for its costs and expenses incurred in
initially approving this Agreement or extending same. Such early payment fee
shall be due and payable jointly and severally by the Companies to Laurus upon
termination by acceleration of this Agreement elected by Laurus due to the
occurrence and continuance of an Event of Default.

 

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

 

32

 

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 (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

 

33

 

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 (or similar term) 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.

 

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.

 

34

 

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. The parties hereto each hereby agree that the exercise
by any party hereto of any right granted to it or the exercise by any
party hereto of any remedy available to it (including, without limitation, the
issuance of a notice of redemption, a borrowing request and/or a
notice of default), in each case, hereunder or under any Ancillary
Agreement which has been publicly filed with the SEC
shall not constitute confidential information and no party
shall have any duty to the

 

35

 

other party to maintain
such information as confidential, except for the portions of such publicly
filed documents that are subject to confidential treatment request made by the
Companies to the SEC

 

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 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

 

36

 

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 waives 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
jurisdiction to have resulted solely from such Indemnified Person’s gross
negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE

 

37

 

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

 

38

 

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 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

  

 

39

 

	
  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 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 THAT 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.

 

40

 

(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

 

41

 

and termination of this Agreement and the Ancillary Agreements and the
making and repaying of the Obligations.

 

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
Secured Convertible Term Note 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

 

42

 

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

 

(b)                                 The
Secured Non-Convertible Revolving Note shall bear substantially the following
legend:

 

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. 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 APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO TIME AMERICA, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(c)                                  The
Grant Shares and any shares of Common Stock issued pursuant to conversion of
the Secured Convertible Term Note 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 COUNSEL REASONABLY SATISFACTORY TO TIME AMERICA, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

(d)                                 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

 

43

 

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.]

 

44

 

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

 

 

	
   

  	
  TIME AMERICA, INC., a Nevada corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TIME AMERICA, INC., an Arizona corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NETEDGE DEVICES, LLC, an Arizona limited

  liability company

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
					

 

45

 

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.

 

“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.

 

“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
Goods;

 

(e)                                  all
General Intangibles;

 

(f)                                    all
Accounts;

 

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

 

(h)                                 all
Investment Property;

 

(i)                                     all
Stock;

 

(j)                                     all
Chattel Paper;

 

 

(k)                                  all
Letter-of-Credit Rights;

 

(l)                                     all
Instruments;

 

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

 

(n)                                 all
Books and Records;

 

(o)                                 all
Intellectual Property;

 

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

 

(q)                                 (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

 

(r)                                    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.

 

“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 that, 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 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 Inventory” means Inventory owned by a
Company which Laurus, in its sole and absolute discretion, determines:  (a) is subject to a first priority
perfected Lien in favor

 

 

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

 

“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, fixtures, 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.

 

“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.

 

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

 

“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.

 

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

 

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

 

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

 

“Letter-of-Credit Rights” means “letter-of-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” means the Revolving Loans and the Term
Loan and all other extensions of credit hereunder and under any Ancillary
Agreement.

 

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

 

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

 

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

 

 

“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.

 

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

 

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

 

“Notes” means the Secured Non-Convertible
Revolving Note and the Secured Convertible Term 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 Capital 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).

 

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

 

“SEC” means the Securities and Exchange
Commission.

 

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

 

“Secured Non-Convertible Revolving Note” means
that certain Secured Non-Convertible Revolving Note dated as of the Closing
Date made by the Companies in favor of Laurus in the original face 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.

 

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

 

“Securities” means the Notes and the Warrants,
the Grant Shares and the shares of Common Stock which may be issued
pursuant to conversion of the Secured Convertible Term Note in whole or in part or
exercise of the 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 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 Amended and Restated Subordination
Agreement, dated as of January 3, 2006, by and among

 

 

Joseph L. Simek, Frances L. Simek, the Parent and
Laurus (as amended and restated, amended modified or supplemented from time to
time, the “Subordination Agreement”) and (ii) each “Subordinated Loan
Document” under, and as defined in, the 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 second 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.

 

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

 

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

 

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

 

“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.

 

 

Exhibit A

 

Eligible Subsidiaries

 

Time America, Inc.,
an Arizona corporation

 

NetEdge Devices, LLC, an
Arizona limited liability company

 

 

Exhibit B

 

Borrowing Base Certificate

 

[To be inserted]Exhibit 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 TERM NOTE

 

FOR VALUE RECEIVED, TIME AMERICA, INC., a Nevada
corporation (the “Company”),
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, sum of Two Million Dollars ($2,000,000), together with
any accrued and unpaid interest hereon, on January 3, 2009 (the “Maturity Date”) if not sooner paid.

 

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

 

The following terms shall apply to this Secured
Convertible Term Note (this “Note”):

 

ARTICLE I
CONTRACT RATE AND AMORTIZATION

 

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 equal to the “prime rate” published in The Wall Street Journal
from time to time (the “Prime Rate”),
plus two percent (2.0%) (the “Contract 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.  The Contract Rate shall not at any time be
less than seven and one quarter percent (7.25%).  Interest shall be (i) calculated on the
basis of a 360 day year, and (ii) payable monthly, in arrears, commencing
on February 1, 2006, 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           Principal
Payments.  Amortizing payments of the
aggregate principal amount outstanding under this Note at any time (the “Principal Amount”) shall be made by the
Company on July 1, 2006 and on the first business day of each succeeding
month thereafter through and including the Maturity Date (each, an “Amortization Date”).  Subject to Article III below, commencing
on the first Amortization Date, the Company shall make monthly payments

 

 

to the Holder on each
Repayment Date, each such payment in the amount of $66,666.67 together with any
accrued and unpaid interest on such portion of the Principal Amount plus any
and all other unpaid amounts which are then owing under this Note, the Security
Agreement and/or any other Ancillary Agreement (collectively, the “Monthly Amount”).  Any outstanding Principal Amount together
with any accrued and unpaid interest and any and all other unpaid amounts which
are then owing by the Company to the Holder under this Note, the Security
Agreement and/or any other Ancillary Agreement shall be due and payable on the
Maturity Date.

 

ARTICLE II

CONVERSION AND REDEMPTION

 

2.1           Payment
of Monthly Amount.

 

(a)           Payment in Cash
or Common Stock.  If the Monthly
Amount (or a portion of such Monthly Amount if not all of the Monthly Amount
may be converted into shares of Common Stock pursuant to Section 3.2) is
required to be paid in cash pursuant to Section 2.1(b), then the Company
shall pay the Holder an amount in cash equal to 100% of the Monthly Amount (or
such portion of such Monthly Amount to be paid in cash) due and owing to the
Holder on the Amortization Date.  If the
Monthly Amount (or a portion of such Monthly Amount if not all of the Monthly
Amount may be converted into shares of Common Stock pursuant to Section 3.2)
is required to be paid in shares of Common Stock pursuant to Section 2.1(b),
the number of such shares to be issued by the Company to the Holder on such
Amortization Date (in respect of such portion of the Monthly Amount converted
into shares of Common Stock pursuant to Section 2.1(b)), shall be the
number determined by dividing (i) the portion of the Monthly Amount
converted into shares of Common Stock, by (ii) the then applicable Fixed
Conversion Price.  For purposes hereof,
subject to Section 3.6 hereof, the initial “Fixed Conversion Price” means $ 0.65.

 

(b)           Monthly Amount
Conversion Conditions. Subject to Sections 2.1(a), 2.2, and 3.2
hereof, the Holder shall convert into shares of Common Stock all or a portion
of the Monthly Amount due on each Amortization Date if the following conditions
(the “Conversion Criteria”) are
satisfied: (i) the average closing price of the Common Stock as reported
by Bloomberg, L.P. on the Principal Market for the five (5) trading days
immediately preceding such Amortization Date shall be greater than or equal to
110% of the Fixed Conversion Price and (ii) the amount of such conversion
does not exceed twenty percent (20%) of the aggregate dollar trading volume of
the Common Stock for the period of twenty-two (22) trading days immediately
preceding such Amortization Date.  If subsection (i) of
the Conversion Criteria is met but subsection (ii) of the Conversion
Criteria is not met as to the entire Monthly Amount, the Holder shall convert
only such part of the Monthly Amount that meets subsection (ii) of
the Conversion Criteria.  Any portion of
the Monthly Amount due on an Amortization Date that the Holder has not been
able to convert into shares of Common Stock due to the failure to meet the
Conversion Criteria, shall be paid in cash by the Company at the rate of 100%
of the Monthly Amount otherwise due on such Amortization Date, within three (3) business
days of such Amortization Date.

 

2.2           No Effective Registration.  Notwithstanding anything to the contrary
herein, none of the Company’s obligations to the Holder may be converted into
Common Stock

 

2

 

unless (a) either (i) an effective current
Registration Statement (as defined in the Registration Rights Agreement)
covering the shares of Common Stock to be issued in connection with
satisfaction of such obligations exists or (ii) an exemption from
registration for resale of all of the Common Stock issued and issuable is
available pursuant to Rule 144 of the Securities Act and (b) no Event
of Default (as hereinafter defined) exists and is continuing, unless such Event
of Default is cured within any applicable cure period or otherwise waived in
writing by the Holder.

 

2.3           Optional Redemption in Cash.  The Company may prepay this Note (“Optional Redemption”) by paying to the
Holder a sum of money equal to one hundred fifteen percent (115%) of the
Principal Amount outstanding at such time 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 ten (10) business 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 (as hereinafter defined) or for conversions
elected to be made by the Holder pursuant to Section 3.3 during the
Redemption Period.  The Redemption Amount
shall be determined as if the 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 must be paid in good funds to the Holder.  In the event the Company fails to pay the
Redemption Amount on the Redemption Payment Date as set forth herein, then such
Redemption Notice will be null and void.

 

ARTICLE III

HOLDER’S CONVERSION RIGHTS

 

3.1           Optional Conversion.  Subject to the terms set forth in this Article III,
the Holder shall have the right, but not the obligation, to convert all or any
portion of the issued and outstanding Principal Amount and/or accrued interest
and fees due and payable into fully paid and nonassessable shares of Common
Stock at the Fixed Conversion Price.  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, upon 75 days
prior notice to the Parent, or upon receipt by the Holder of a Notice of
Redemption.

 

3

 

Notwithstanding anything contained 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 Company 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 Company within two (2) business
days after the Conversion Date.  Each
date on which a Notice of Conversion is delivered or telecopied to the Company
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 Company will issue instructions to the transfer agent
accompanied by an opinion of counsel within one (1) business day of the
date of the delivery to the Company 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 Company 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 Company 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 Company written instructions to the contrary.

 

3.4           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. 
In the event of any conversions of a portion of the outstanding
Principal Amount pursuant to this Article III, such conversions shall be
deemed to constitute conversions of the outstanding Principal Amount applying
to Monthly Amounts for the remaining Amortization Dates in chronological order.

 

3.5           Adjustment Provisions.  The Fixed Conversion Price and number and
kind of shares or other securities to be issued upon conversion determined
pursuant to this Note 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 Company 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.

 

4

 

(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 Company 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.

 

3.6           Reservation of Shares.  During the period the conversion right
exists, the Company will reserve from its authorized and unissued Common Stock
a sufficient number of shares to provide for the issuance of the Grant Shares,
the Conversion Shares assuming the full conversion of this Note, and such
number of shares of Common Stock required upon the full exercise of the
Warrants.  The Company represents that
upon issuance, the Conversion Shares will be duly and validly issued, fully
paid and non-assessable.  The Company
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.

 

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

 

3.8           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 Company 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 Company 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

 

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 this Note in an
amount equal to two percent (2%) per month, and all outstanding Obligations,
including 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

 

5

 

Default Payment shall be one hundred twenty-five
percent (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
Company at the address provided 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 Company or the Holder may designate
by ten days advance written notice to the other parties hereto.  A Notice of Conversion shall be deemed given
when made to the Company pursuant to the Security Agreement.

 

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 the 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.  The Company may not assign any of its
obligations under this Note without the

 

6

 

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 Company shall pay the Holder reasonable costs of collection,
including reasonable attorneys’ fees.

 

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

 

7

 

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 Company to the Holder and thus refunded to
the Company.

 

5.11         Security Interest.  The Holder has been granted a security
interest (i) in certain assets of the Company and its Subsidiaries as more
fully described in the March 2004 Security Agreement, the March 2004
Subsidiary Security Agreement and the June 2005 Security Agreement and (ii) pursuant
to that certain Amended and Restated Stock Pledge Agreement dated as of March 22,
2004 and amended and restated as of June 23, 2005, among the Holder, the
Company and certain Subsidiaries of the Company, as amended and restated,
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.

 

5.13         Registered Obligation. This Note
is intended to be a registered obligation within the meaning of Treasury
Regulation Section 1.871-14(c)(1)(i) and the Company (or its agent)
shall register this Note (and thereafter shall maintain such registration) as
to both principal and any stated interest. 
Notwithstanding any document, instrument or agreement relating to this
Note to the contrary, transfer of this Note (or the right to any payments of
principal or stated interest thereunder) may only be effected by (i) surrender
of this Note and either the reissuance by the Company of this Note to the new
holder or the issuance by the Company of a new instrument to the new holder, or
(ii) transfer through a book entry system maintained by the Company (or
its agent), within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).

 

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

 

8

 

IN WITNESS WHEREOF,
the Company has caused this Secured Convertible Term Note to be signed in its
name effective as of this 3rd day of January 2006.

 

	
   

  	
  TIME AMERICA, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
  WITNESS:

  
	
   

  
	
   

  	
   

  
					

 

9

 

EXHIBIT A

 

NOTICE OF CONVERSION

 

(To be executed by the Holder in order to convert all or part of

the Secured Convertible Term Note into Common Stock)

 

[Name and Address of Parent]

 

The undersigned hereby converts $           
of the principal due on [specify applicable Repayment Date] under the Secured
Convertible Term Note dated as of January 3, 2006 (the “Note”) issued by Time America, Inc.
(the “Parent”) by delivery of
shares of Common Stock of the Parent (“Shares”)
on and subject to the conditions set forth in the Note.

 

	
  1.

  	
  Date of Conversion

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  Shares To Be Delivered:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [HOLDER]

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

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