As filed with the Securities and Exchange Commission on March 1,August 8, 2006

Registration No. 333-          333-132146

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

TIME AMERICA, INC.

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of incorporation or organization)

7372

(Primary Standard Industrial Classification Code Number)

13-3465289

(I.R.S. Employer Identification Number)

8840 East Chaparral Road, Suite 100, Scottsdale, Arizona 85250

(480) 296-0400

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

Copies to:

As soon as practicable after the effective date of this Registration Statement

(Approximate date of commencement of proposed sale to the public)

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ýx

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Calculation of Registration Fee

(1)           Represents the estimated maximum number of shares of common stock to which one of the selling shareholders, Laurus Master Funds, Ltd., may be entitled upon conversion of the $2,000,000 secured convertible note issued by us to Laurus on January 3, 2006. The initial fixed conversion price of the convertible note is $0.65 per share, but is subject to adjustment in the event of a stock split, stock dividend or similar transaction. Pursuant to Rule 416 under the Securities Act, this registration statement also covers an indeterminate number of additional securities that may be issuable from time to time in connection with any stock split, stock dividend or similar transaction.

(2)           Represents 351,923 shares of common stock issued to Laurus upon consummation of the note issuances to Laurus on January 3, 2006.

(3)           Represents shares of common stock issuable upon the conversion of warrants issued to Laurus.

(4)           Represents the estimated maximum number of shares of common stock to which one of the selling shareholders, Oberon Securities, LLC, may be entitled in connection with certain fees due by us to Oberon.

(5)           Represents shares of common stock issuable upon the conversion of warrants issued to Oberon.

(6)           Pursuant to Rule 457(c), and solely for purposes of calculating the registration fee, the proposed maximum offering price per share is calculated based upon the average of the high and low prices of the common stock on the OTC Bulletin Board as of February 24, 2006.

(7)           Pursuant to Rule 457(g), and solely for purposes of calculating the registration fee, the proposed maximum offering price per share is calculated based upon the highest price at which the warrants may be exercised.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED MARCH 1,AUGUST 8, 2006

Prospectus

TIME AMERICA, INC.

5,437,214 Shares of

Common Stock

This prospectus relates to the resale of up to 5,437,214 shares of our common stock, which includes up to 4,000,000 shares issuable upon the conversion of a secured convertible term note dated January 3, 2006, 768,098 shares are issuable upon the exercise of related warrants, and up to 669,116 shares issued in connection with certain related fees. The 4,000,000 shares underlying the secured convertible term note include 3,076,923 shares at the initial $0.65 fixed conversion price, plus additional shares in the event of any price adjustments.

We will not receive any of the proceeds from the shares of common stock sold by the selling shareholders, but if the warrants are exercised in whole or in part, we will receive payment for the exercise price.

Our common stock is traded on the NASDAQ Over-the-Counter Bulletin Board under the symbol TMAM.OB. On February 24,August 2, 2006, the closing sale price of our common stock was $0.62$0.30  per share.

The price you pay for shares of common stock sold by the selling shareholders named in this prospectus will be determined at the time of such sale, as set forth under the heading “Plan of Distribution.”

Investing in our common stock involves a high degree of risk. See Risk Factors on page 6.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is MarchAugust    , 2006.

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WHERE YOU CAN FIND MORE INFORMATION

We file reports and other information with the U.S. Securities and Exchange Commission. You may read and copy any document that we file at the SEC’S public reference facilities at 100 F Street NE, Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-732-0330 for more information about its public reference facilities. Our SEC filings are also available to you free of charge at the SEC’s web site at http://www.sec.gov.

Copies of publicly available documents that we have filed with the SEC can also be inspected and copied at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

INCORPORATION OF DOCUMENTS BY REFERENCE

The SEC allows us to incorporate by reference the information we file with them. This means that we can disclose information to you by referring you to those documents. The documents that have been incorporated by reference are an important part of the prospectus, and you should review that information in order to understand the nature of any investment by you in the common stock. Information contained in this prospectus automatically updates and supersedes previously filed information. We incorporate by reference the following documents that we previously filed with the SEC pursuant to the Securities Exchange Act of 1934:

If you would like a copy of any of these documents, at no cost, please write or call us at:

Time America, Inc.

8840 East Chaparral Road, Suite 100

Scottsdale, Arizona 85250

Telephone: (480) 296-0400

The documents incorporated by reference into this prospectus, as well as additional information about us, are available at our web site located at http://www.timeamerica.com. Information contained in our web site is not a part of this prospectus.

You should only rely upon the information included in or incorporated by reference into this prospectus or in any prospectus supplement that is delivered to you. We have not authorized anyone to provide you with additional or different information. You should not assume that the information included in or incorporated by reference into this prospectus or any prospectus supplement is accurate as of any date later than the date on the front of the prospectus or prospectus supplement.

We have not authorized any person to provide you with information different from that contained or incorporated by reference in this prospectus. The selling shareholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock.

FORWARD-LOOKING STATEMENTS

Some of the information in this prospectus, including the summary, contains “forward-looking statements” concerning Time America, Inc. and its operations, performance, financial condition and likelihood of success.

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You can identify these statements by use of terms such as “expect,” “believe,” “goal,” “plan,” “intend,” “estimate,” “may,” and “will” or similar words. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those described in the “Risk Factors” section and other parts of this prospectus that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

These forward looking statements include statements regarding the belief or current expectation of management and are based on management’s current understanding of the markets and industries in which we operate. That understanding could change or could prove to be inconsistent with actual developments. Our actual results could differ materially from the results discussed in this prospectus, including those anticipated in or implied by any forward-looking statements. Factors that could cause or contribute to such differences include those previously described, as well as those discussed elsewhere in this prospectus.

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SUMMARY

This summary highlights information contained in other parts of this prospectus. Because this is a summary, it may not contain all of the information you should consider before investing in our common stock. You should carefully read this entire prospectus, including the factors described under Risk Factors at page 6 of this prospectus.

TIME AMERICA, INC.

Overview of Our Business

Time America, Inc. was organized in 1988 as a Nevada corporation under the name Richard Barrie Fragrances, Inc. Since our formation we have undergone a number of changes to our corporate name and to the nature of the business we conduct. We entered the time and attendance industry in 1999 when we acquired the outstanding capital stock of Vitrix Incorporated, a privately held Arizona corporation formed in 1996, which became our only operating subsidiary. In 2001, we acquired Time America, Inc. through the merger of that entity into our subsidiary Vitrix Incorporated. In 2003, we changed our name from Vitrix, Inc. to Time America, Inc. to capitalize on the then 13-year history and name recognition of Time America in the time and attendance industry.

We develop, manufacture and market a line of time and labor management software and hardware products which are designed to improve productivity by automating time and attendance, workforce scheduling and management of labor resources. Our product solutions are designed for use by a broad range of businesses, from small single location companies with only a few employees to enterprise level companies with multiple sites and thousands of employees.

Our products are internally developed, proprietary software applications that maintain and automate the process of collecting timesheet information, provide interfaces to popular payroll software solutions and enable users to generate a variety of reports that aid in the tracking and analyzing of how employees utilize their work time. Our product solutions use a variety of technologies, including products that are delivered through a 100% Web-based application service provider model, as well as client/server and PC-based applications. Our current products consist of NETtime, HourTrack, Genesis SQL and Pro, and the TA50 and TA100 product lines.

We market our products to companies in the U.S. and abroad through our direct sales and support organization and through our Business Alliance and Reseller Program. Our direct sales and reseller sales efforts accounted for approximately 44% and 56%, respectively, of our total revenues for the fiscal year ended June 30, 2005.

Market Opportunity

We believe that significant opportunities exist for our products in the market for time and labor management software and hardware products includingis large and growing. Our belief is based on market data on associated markets, such as payroll, aswhich show that these markets are growing. We believe there is a correlation between these markets and the time and labor management market. This belief is further supported by the numerous competitors in the time and attendance space. There are currently no definitive figures on the market size of the time and attendance market.

Growth Strategy

We have a long history of providing high quality time and labor management products to our targeted markets. Our goal is to maintain and strengthen our market position. We intend to pursue the following growth strategies to attain this goal:

•                  Leveraged Distribution. We plan to continue to sign strategic partners to enable us to do rapid and wide-scale private label distribution of our products.

•                  Introduction of New Technologies. We intend to continue to introduce and expand into new technologies that will differentiate us from our competitors by making our products more scalable,

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easily customized and adding new features. In July 2005, we introduced our internally developed proprietary hardware device designed to support multiple modes of employee data identification, including biometrics.

•                  Expand Reseller Sales Organization. To better service our growing reseller base, we have added an additional Regional Account Representative to cover our newly created North Central territory.  In addition, we have added a pre-sales support person to help resellers with product demonstrations, qualifications, and to address all other channel sales needs, as necessary.  This position will also have responsibility for developing remote dealer workshops and sales training courses.

Recent Developments

In November 2005, we formed a subsidiary, NetEdge Devices, LLC, an Arizona limited liability company, to manufacture and distribute a new line of advanced data collection devices that track and display critical labor information across a variety of industries. NetEdge Devices, which is headquartered in Scottsdale, Arizona, offers the TA7000 family of data collection devices as a private label solution to software application development companies, systems integration providers and value-added resellers. See “Products and Services – The TA7000”.

On January 3, 2006, we entered into agreements with Laurus Master Funds, Ltd, a Cayman Islands corporation, pursuant to which we refinanced our obligations to Laurus under existing agreements. As part of this refinancing, we issued common stock, convertible and non-convertible debt and a warrant to purchase common stock to Laurus in a private offering pursuant to exemption from registration under Section 4(2) of the Securities Act of 1933. The securities issued to Laurus include the following:

•                  A Secured Convertible Term Note in the aggregate principal amount of $2,000,000, convertible into shares of our common stock at an initial fixed conversion price of $0.65 per share. Of this amount, $1,058,310 was used to repay in full the principal balance under a prior secured convertible term note, issued to Laurus on March 22, 2004, and the remaining $941,690 was advanced to the Company on January 4, 2006;

•                  A Secured Non-Convertible Revolving Note in the aggregate principal amount not to exceed $1,500,000. Of this amount, $1,000,000 was used to repay in full the balance under our prior revolving facility with Laurus. As of the date of this prospectus, the Company has received no other proceeds from the revolving note;

•                  A common stock purchase warrant, exercisable for a period of seven years, to purchase 140,000 shares of common stock at a per share exercise price of $0.65. This warrant is in addition to warrants issued to Laurus under prior agreements, including a warrant issued in June 2005, exercisable for a period of seven years, to purchase 210,000 shares of common stock, at exercise prices of $0.72 per share for the first 150,000 shares, $0.75 per share for the next 30,000 shares, and $0.78 per share for any additional shares, and a warrant, issued in March 2004, exercisable for seven years, to purchase 280,000 shares of common stock, at exercise prices of $1.29 per share for 200,000 shares, $1.35 per share for 40,000 shares, and $1.40 per share for 40,000 shares; and

•                  A total of 351,923 shares of common stock, issued on January 3, 2006, upon closing of the term note and the revolving note.

Under the terms of the revolving note, we are permitted to borrow an amount based upon our eligible accounts receivable and our inventory, as defined in the agreements with Laurus, not to exceed an aggregate of $1,500,000. As of February 24, 2006,the date of this prospectus, the maximum amount we would be able to borrow under this facility based on eligible accounts receivable and eligible inventory is $1,072,000, which amount is less the amount Laurus agreed to fund on the closing. The revolving note matures on January 3, 2008, and is subject to an early termination fee of 5% of the face amount of the revolving note in the first year, and 4% thereafter.

The principal amount of the secured convertible term note, together with accrued interest thereon, is payable in thirty (30) equal monthly installments of $66,666.67, commencing on July 1, 2006. The term note, which

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matures on January 3, 2009, may be redeemed by us in cash by paying the holder 115% of the principal amount, plus accrued interest. Monthly principal and interest payments will be converted into shares of our common stock if the average market price of such stock for the five (5) days preceding the payment is 10% above the initial fixed conversion price of $0.65 per share. The conversion price may be adjusted in certain circumstances such as if we pay a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution.

Annual interest on the revolving note and the term note accrues at the prime rate published in The Wall Street Journal from time to time plus 2%, with a minimum interest rate of 7.25%. Interest on the notes is payable monthly in arrears on the first business day of each month, commencing on February 3, 2006. Our obligations under the notes are secured by substantially all of our assets and the assets of our wholly-owned subsidiaries, Time America, Inc., an Arizona corporation, and NetEdge Devices, LLC, an Arizona limited liability company. Upon the occurrence and continuation of an event of default, as defined in the agreements governing the notes, Laurus may elect to require us to pay 125% of the outstanding principal amount of the notes plus accrued but unpaid interest and any fees due.

We are obligated to file a registration statement registering the resale of shares of the common stock issuable upon conversion of the term note and exercise of the warrants. We must file the registration statement by March 3, 2006, and use our best efforts to have the registration statement declared effective within 120 days thereafter.

At closing, we paid a fee to Laurus Capital Management LLC, the manager of Laurus Master Funds, Ltd., equal to $36,000, or 3.60% of the additional $1,000,000 in financing available pursuant to the refinancing of the Company’s prior agreements with Laurus. Additionally, we issued 351,923 shares of common stock to Laurus at closing.

Effective March 31, 2006, we closed on the sale of certain of our direct sales assets to Unitime Systems, Inc. pursuant to an Asset Purchase Agreement between the parties. Under the terms of the agreement, Unitime purchased certain assets associated with our direct sales business, including a copy of the source code and other intellectual property relating to our NETtime, HourTrack and GENESIS time and attendance software products, related ASP and maintenance contracts, and certain specified direct channel sales opportunities.

The sale generated cash to us at closing of approximately $530,000. The purchase price under the agreement included cash payable to us at the closing in consideration for a copy of the source code and related intellectual property. The consideration for the ASP and maintenance contracts was determined based on multiples of the projected annualized revenues under such contracts. 100% of the total consideration for the customer ASP contracts and 40% of the total consideration for the maintenance contracts was paid to the Company in cash at the closing. The remaining consideration for the maintenance contracts is payable quarterly over the next 14 months. We will also be transitioning over additional ASP customers over the next six months that will be paid for at the time of transfer. Additionally, for the 12-month period following the closing, Unitime is obligated to pay to us  monthly royalty payments equal to 27.5% of the revenues Unitime generates in connection with direct channel sales opportunities specified at closing.

Our principal executive offices are located at 8840 East Chaparral Road, Scottsdale, Arizona 85250. Our telephone number is (480) 296-0400.

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THE OFFERING

The selling stockholders identified in this prospectus are offering for sale up to 5,437,214 shares of our common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.

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SELECTED AND SUMMARY CONSOLIDATED FINANCIAL DATA

The following selected and summary consolidated financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. The selected financial data as of and for the fiscal year ended June 30, 2005, are derived from our audited financial statements included in our Form l0-KSB for the fiscal year ended June 30, 2005, and the related notes, incorporated herein by reference. The selected financial data as of and for the six months ended December 31, 2005, are derived from our unaudited financial statements included in our Form l0-QSB for the fiscal quarter ended December 31, 2005, and the related notes, incorporated herein by reference. The selected financial data as of and for the fiscal years ended June 30, 2001, 2002, 2003 and 2004 are derived from our audited financial statements not included elsewhere in this prospectus, and the selected financial data as of and for the three months ended December 31, 2004 are derived from our unaudited financial statements not included elsewhere in this prospectus. The supplementary financial data for the fiscal quarters in the fiscal years ended June 30, 2004 and 2005 are derived from our unaudited financial statements not included elsewhere in this prospectus.

Selected Financial Data:

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(1)           On March 28, 2001, the Company completed a merger with Time America, Inc. which was accounted for as a pooling of interests. Pursuant to the terms of the Merger Agreement, Time America Inc. merged with and into the Company’s wholly owned subsidiary, Vitrix Incorporated, with Vitrix Incorporated continuing as the surviving corporation. In connection with the acquisition, the Company’s shareholders approved a proposal effecting a 1-for-10 reverse stock split. The above selected and summary consolidated financial data for the fiscal year ended June 30, 2001 are based on the assumption that the companies were combined for the full fiscal year.

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Supplementary Financial Information:

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RISK FACTORS

An investment in our common stock involves a significant degree of risk and you should not invest in our common stock unless you can afford to lose some or even all of your investment. You should consider these risk factors together with all the other information included in this prospectus before you decide to purchase shares of our common stock.

WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE SUSTAINED OPERATING INCOME FROM THE SALE OF OUR TIME AND ATTENDANCE PRODUCTS.

As of June 30, 2005 and DecemberMarch 31, 2005,2006, we had an accumulated deficit of $9,994,280 and $11,300,323,$11,756,130, respectively. In addition, we have reported net income in only one fiscal quarter over the past six fiscal years ended June 30, 2005. No assurance can be made that we will ever be able to generate sustained operating income from the sale of our time and attendance products.

We believe that our future profitability and success will depend in large part on our ability to generate revenue from the sale of our products. Our profitability and success will depend on:

•                  our ability to generate sufficient sales volume.

•                  our ability to maintain existing reseller relationships and our ability to enter into new relationships.

WE WILL REQUIRE ADDITIONAL FUNDS IN ORDER TO MAINTAIN AND GROW OUR BUSINESS, WHICH MAY NOT BE AVAILABLE TO US WHEN WE NEED THEM OR, IF AVAILABLE, ON TERMS THAT ARE ACCEPTABLE TO US.

The maintenance and growth of our business could require us to expend funds in excess of the cash generated by our operations. As of DecemberMarch 31, 2005, we had a working capital deficit of $(165,973),$664,505, as compared to working capital of $489,777$851,916 at December 31, 2004.June 30, 2006. Our current liquidity needs are being met out of cash flow from operations and borrowings under our existing credit facilities. We believe our current cash reserves, cash generated from operations, and our borrowing capacity under our credit facilities will be sufficient to fund our cash requirements over the next 12 months. However, we may need to raise additional funds in the future in order to fund our operations, as well as to financemore rapid expansion; to develop new and enhanced products; to increase customer support or technical staff; to respond to competitive pressures; and to acquire complimentary businesses, technologies, or services. We cannot predict the timing and amount of any such capital requirements at this time. If we raise additional funds through the issuance of equity or convertible securities, existing shareholders may experience additional dilution and such securities may have rights, preferences, or privileges senior to those of the rights of our common shareholders. There can be no assurance that we will be able to obtain additional financing on acceptable terms, or at all. If adequate funds are not available on acceptable terms, we may not be able to fund expansion, promote our products, take advantage of acquisition opportunities, develop or enhance products and services, or respond to competitive pressures.  Additionally, we may be unable to fund our operations and may experience defaults under certain of our contractual agreements, including the lease agreement for our corporate headquarters.

We may wish to acquire complementary businesses, products, services, or technologies in the future. We may not be able to identify suitable acquisition candidates or make acquisitions on commercially acceptable terms. We may have difficulty integrating an acquired company’s personnel, operations, products, services, or technologies into our operations. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses, and adversely affect our business.

WE FACE INTENSE COMPETITION FROM MAJOR DOMESTIC AND EMERGING SOFTWARE COMPANIES, AND THIS COMPETITION COULD NEGATIVELY AFFECT OUR BUSINESS AND OUR REVENUE.

The market for software solutions is constantly evolving and extremely competitive. We expect competition to intensify in the future. We compete with major domestic companies. Emerging companies also may increase their participation in the market for software applications such as the applications we offer. Some of our

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current and potential competitors have greater market recognition and substantially greater financial, technical,

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marketing, distribution, and other resources than we have, and we may be unable to compete effectively against them. As a result, they may be able to provide their products at lower costs or to customers unavailable to us.

IF WE FAIL TO ENHANCE OUR PRODUCTS OR DEVELOP AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS, WE MAY NOT BE ABLE TO ADDRESS THE NEEDS OF OUR CUSTOMERS, OUR TECHNOLOGY MAY BECOME OBSOLETE AND OUR RESULTS OF OPERATIONS MAY BE HARMED.

Our success depends in part upon our ability to enhance our existing products and services and to develop new products and services on a timely and cost-effective basis. We cannot provide assurance that we will be able to successfully identify new opportunities and develop and bring to market new products and services in a timely and cost-effective manner. In addition, we cannot provide assurance that our products and services will not become obsolete, noncompetitive, or that they will sustain market acceptance.

We may not be able to adapt to rapidly changing technologies or we may incur significant costs in doing so. The software industry is characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands. New turn-key business solution products and services based on new technologies or new industry standards could render our existing products and services obsolete and unmarketable. To be successful, we must adapt to our rapidly evolving market by continually enhancing our products and services and introducing new products and services to address our users’ changing and increasingly sophisticated requirements. We may use new technologies ineffectively or we may fail to adapt our products and infrastructure to meet customer requirements, competitive pressures, or emerging industry standards. We could incur substantial costs if we need to modify our services or infrastructure. Our business could be materially and adversely affected if we incur significant costs to adapt, or cannot adapt, to these changes.

AN ADVERSE CHANGE IN OUR RELATIONSHIPS WITH AFFILIATES, RESELLERS AND LICENSEES COULD INCREASE OUR EXPENSES AND HURT OUR RELATIONSHIPS WITH OUR CUSTOMERS.

Our success depends on forming relationships with affiliates, resellers and licensees. The success of our business model depends upon a constant revenue stream generated by a high number of end-users. Our business model contemplates attracting end-users by forming relationships with affiliates, resellers, and licensees that market our products and services. We believe that it will be less costly and more efficient for us to attract end-users through indirect distribution channels than to attempt to attract the end-users directly. Consequently, we must establish and maintain relationships with resellers and licensees. We may not be able to attract additional affiliates, resellers, or licensees on acceptable terms, or at all. If we fail to establish and maintain relationships with affiliates, resellers, and licensees on a cost-effective basis, our business could be adversely affected through higher costs or the resulting potential inability to service our customers.

THE CURRENT CAPITALIZATION COULD DELAY, DEFER, OR PREVENT A CHANGE OF CONTROL.

We are authorized to issue up to 50,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, in one or more series, and to determine the price, rights, preferences and privileges of the shares of each such series without any further vote or action by the shareholders. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, thereby delaying, deferring, or preventing a change of control of the Company.

THE LIMITED TRADING VOLUME OF OUR COMMON STOCK, HISTORICAL PRICE VOLATILITY, NUMBER OF SHARES REGISTERED FOR RESALE, AND THE PRICE AT WHICH THE SELLING SHAREHOLDERS MAY SELL SHARES OF COMMON STOCK PURSUANT TO THIS PROSPECTUS, MAY CAUSE DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK AND NEGATIVELY IMPACT AN INVESTOR’S ABILITY TO SELL SHARES OF OUR COMMON STOCK IN THE FUTURE.

The price at which the selling shareholders will sell the shares of common stock described in this prospectus may vary from time to time and will be determined at the time of such sale. The negotiated selling price may represent a discount from our trading price. Any level of discount from the current market price, together with

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any of the following factors, may cause downward pressure on the price of our common stock and negatively impact your ability to sell your shares of common stock when you desire to do so:

•                  We are registering for resale an aggregate of 5,437,214 shares of common stock to be sold by the selling shareholders named in this prospectus. The ability to freely trade these shares may create downward pressure on the price of our common stock.

•                  The trading price of our common stock has been volatile over the past 114 fiscal quartersyears and may continue to be volatile in the future. During the threefour fiscal years ended June 30, 2005, 2004, and 2003 and the quarters ended September 30, 2005 and December 31, 2005, our stock price has ranged from a high of $1.50 per share and a low of $0.15 per share.

•                  The average daily trading volume of our common stock over the six-month period ended DecemberMarch  31, 20052006 is approximately 23,60018,000 shares. Any material increase in trading volume resulting from the sale of the shares that are the subject of this prospectus or otherwise could cause downward pressure on the trading price of our common stock.

The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss due to potential illiquidity and the possibility that our common stock may suffer greater declines.

USE OF PROCEEDS

We will not receive any of the proceeds from the sale of shares by the selling shareholders. We may receive proceeds from the exercise of warrants entitling the selling shareholders to purchase an aggregate of 768,098 shares of our common stock. If all warrants held by the selling shareholders are exercised, we will receive an aggregate of $578,028. We expect to use any proceeds we receive from the exercise of the warrants for general corporate purposes, including, but not limited to, working capital, capital expenditures and repaying or refinancing of our obligations.

DESCRIPTION OF SECURITIES

Common Stock

The Company’s Certificate of Incorporation authorizes the issuance of 50,000,000 shares of common stock, $.005 par value per share, and 10,000,000 shares of preferred stock, par value $.01 per share.

The holder of common stock is entitled to receive dividends when and as declared by the board of directors of the company out of funds legally available therefor, provided that if any shares of common stock are at the time outstanding, the payment of dividends on common stock and other distributions (including purchases of common stock) may be subject to the declaration and payment of full cumulative dividends, and the absence of arrearages in any mandatory sinking funds, on outstanding shares of common stock.

The holder of common stock is entitled to one vote for each share on all matters voted on by stockholders, including election of directors. The holder of common stock does not have any conversion, redemption or preemptive rights. In the event of the dissolution, liquidation or winding up of the company, holders of common stock are entitled to share ratably in any assets remaining after the satisfaction in full of the prior rights of creditors, including holders of the Company’s indebtedness, and the aggregate liquidation preference of any preferred stock then outstanding.

All outstanding shares of common stock are, and the shares offered hereby, upon issuance, will be, fully paid and non-assessable.

Certain provisions of the Company’s Certificate of Incorporation and Bylaws may be considered as having an anti-takeover effect. Such provisions empower the board of directors of the Company to fix the rights and preferences of and to issue shares of preferred stock. In addition, certain provisions of law may have the effect of

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significant holders (as specified) of the Company’s voting stock may not, without approval of a specified vote of the other stockholders, or approval of the Company’s board of directors (or the independent members thereof) prior to becoming a significant holder, acquire additional interests in the Company’s assets or capital stock.

The transfer agent for the common stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.

Pursuant to agreements with Oberon in connection with our financing transactions with Laurus, we are registering 735,291 shares of common stock to be resold by Oberon, a selling shareholder listed in this prospectus, which represent shares issuable to Oberon as follows:

•                  Up to 317,193 shares issuable in payment of certain fees due by us to Oberon;

•                  136,364 shares issuable pursuant to a common stock purchase warrant, issued March 22, 2004, exercisable for a period of three years, at an exercise price of $1.10 per share; and

•                  281,734 shares issuable pursuant to common stock purchase warrants, issued June 23, 2005, and January 3, 2006, each exercisable for a period of three years, at an exercise price of $0.65 per share.

See the disclosure under the caption “Oberon Securities” for a complete description of our agreements with Oberon.

The Laurus Master Fund, Ltd. Refinancing

Pursuant to financing arrangements entered into with Laurus in June 2005 and January 2006, as described below, we are registering 4,701,923 shares of common stock to be resold by Laurus, a selling shareholder listed in this prospectus, to which we issued common stock, a convertible term note, a non-convertible revolving note and a warrant to purchase shares of our common stock. The common stock, the notes and the warrant were issued in a private offering pursuant to an exemption from registration under Section 4(2) of the Securities Act.

Overview. On January 3, 2006, we entered into a financing transaction with Laurus Master Fund, Ltd., under which we refinanced our obligations to Laurus under prior agreements, and obtained an additional $1,000,000 in new financing. As part of the refinancing transaction, Laurus purchased from us a secured convertible term note in the aggregate principal amount of $2,000,000, and a secured non-convertible revolving note in the aggregate principal amount of $1,500,000. The term note replaced an existing secured convertible term note with an issue date of March 22, 2004 and a principal balance of $1,058,310 that was paid in full with the proceeds of the term note. Gross proceeds received by us under the term note were $941,690, which may be used for working capital purposes. The revolving note replaced an existing $1,500,000 revolving facility that had an outstanding balance of $1,000,000 that was paid in full with proceeds from the revolving note. We did not receive any of the proceeds from the revolving note. Our obligations under the notes are secured by substantially all of our assets and the assets of our subsidiaries. Amounts outstanding under the term note will be paid in monthly installments either in cash or converted into shares of common stock.

We are obligated to file a registration statement with the Securities and Exchange Commission covering the resale of the shares of common stock issued and issuable under the refinancing transaction, and to use our best efforts to cause the registration statement to be declared effective within 180 days from the closing of the notes. The two notes are described more fully below under the subheading entitled Security Agreement and Notes. We also issued a seven-year warrant to Laurus, which gives Laurus the right to purchase an aggregate of 140,000 shares of our common stock, at an exercise price of $0.65 per share. The warrant exercise price is subject to anti-dilution protection adjustments.

The following paragraphs summarize the material terms of the agreements governing the financing transactions with Laurus. The description below is qualified in its entirety by reference to the agreements entered into in connection with the refinancing, which are set forth in the exhibits to this registration statement.

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Upon the closing of the January 3, 2006 transactions, we paid a fee to Laurus Capital Management LLC, the manager of Laurus Master Funds, Ltd., equal to $36,000, or 3.60% of the additional $1,000,000 in financing available pursuant to the refinancing of our prior agreements with Laurus. Additionally, we issued Laurus 250,000 shares of common stock at the closing of the revolving note, and 76,923 shares of common stock at the closing of the term note, for an aggregate of 351,923 shares. As of the date of this prospectus, Laurus beneficially owns 351,923 shares of our common stock, or 2.3% of our outstanding capital stock. As a result, based on the 4.99% limitation described above, Laurus could only convert $271,700 principal amount of the amount outstanding under the secured convertible term note as of the date of this prospectus.

Security and Events of Default. The notes are secured by a lien on substantially all of the Company’s assets. The Security and Purchase Agreement contains no specific financial covenants; however, it defines certain circumstances under which the agreement can be declared in default and subject to termination, including among others, if

•                  there is a material adverse change in the Company’s business or financial condition;

•                  an insolvency proceeding is commenced;

•                  the Company defaults on any of its material agreements with third parties or there are material liens or attachments levied against the Company’s assets;

•                  the Company’s common stock ceases to be publicly traded; and

•                  the Company fails to comply with the terms, representations and conditions of the agreement.

Upon the occurrence and during the continuation of an event of default, the interest rate charged on outstanding balances will be increased by 4% per annum under the revolving note and 2% per month under the term note, until the default is cured. Should the default continue beyond any applicable grace period, then Laurus could require the Company to repay 125% of any principal outstanding under the agreement, plus accrued interest, fees and all other amounts payable under the agreement.

Conversion Rights. All or a portion of the outstanding principal and interest due under the term note may be converted, at the option of the holder, into shares of our common stock, at any time prior to the maturity date, subject to certain limitations as defined in the notes, at the fixed conversion price of $0.65 per share if the average market price of such stock for the five days preceding the payment is 10% above the initial fixed conversion price of $0.65 per share. Unless an event of default has occurred and Laurus has provided us with 75 days written notice to the contrary, Laurus has contractually agreed to restrict its ability to convert balances owing under the term note if the conversion would cause the number of shares of common stock beneficially owned by Laurus, including common stock issuable upon exercise of warrants and options held by Laurus, to exceed 4.99% of the then outstanding shares of our common stock. The fixed conversion price is subject to anti-dilution protection adjustments.

Lockbox. We also entered into a Reaffirmation and Ratification Agreement with Laurus, under which we acknowledged that our existing obligations under the Wholesale Lockbox Agreement with Laurus and Wells Fargo Bank dated June 25, 2005, continue in full force and effect after giving effect to the January 2006 refinancing. Under the terms of the lockbox agreement, we are obligated to direct all third parties to remit all payments owing to us to our post office lockbox located at Wells Fargo Bank. The effect of this arrangement is to give Laurus complete control over and access to all of our funds deposited at Wells Fargo Bank.

Escrow. On January 3, 2006, we also entered into a Funds Escrow Agreement with Laurus and Loeb & Loeb LLC, as escrow agent, pursuant to the requirements of the Security and Purchase Agreement. Under the terms of the Funds Escrow Agreement, the $1 million funded under the revolving note and the $2 million funded under the term note was placed in escrow pending satisfaction of the receipt by the escrow agent of fully executed transaction documents and joint escrow instructions. Of the $3 million placed in escrow under the Funds Escrow Agreement, $2,058,310 was used to repay our obligations under prior notes payable to Laurus, and we received the remaining $941,690.

Registration Rights. Pursuant to the terms of a Registration Rights Agreement, the Company is obligated to file a registration statement with the Securities and Exchange Commission registering the resale of shares of the

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Company’s common stock issuable upon conversion of the term note and upon the exercise of the warrant. The registration statement must be filed within 60 days of the closing of the transaction, and declared effective within 180 days of the closing of the transaction.

Warrants

In this prospectus we are also registering for resale by the selling shareholders an aggregate of 768,098 shares of common stock issuable upon exercise of warrants issued to the selling shareholders. In connection with the January 2006 refinancing transaction described in this prospectus, we have issued to Laurus a warrant to purchase 140,000 shares of our common stock. Laurus may exercise the warrant at any time through January 1, 2013, at an exercise price of $0.65 per share. In connection with the June 2005 financing transaction with Laurus, we issued to Laurus a seven-year warrant to purchase 210,000 shares of common stock, at exercise prices of $0.72 per share for the first 150,000 shares, $0.75 per share for the next 30,000 shares, and $0.78 per share for any additional shares. We have also issued a three-year warrant to purchase 108,657 shares of our common stock to Oberon Securities, LLC in connection with our January 2006 refinancing transactions with Laurus. Oberon may exercise the warrant at an exercise price of $0.65 per share. This warrant is in addition to prior three-year warrants granted to Oberon in connection with our prior financing transactions with Laurus, including a warrant granted on March 22, 2004, for 136,364 shares at an exercise price of $1.10 per share, and a warrant granted on June 23, 2005, for 173,077 shares at an exercise price of $0.65 per share.

The warrants provide for anti-dilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits or other changes in our corporate structure. As of January 31, 2006, we had outstanding warrants to purchase an aggregate of 1,291,456 shares of our common stock at exercise prices ranging from $0.15 to $4.38.

Oberon Securities

Under the terms of our agreement with Oberon Securities, LLC relating to our financing transactions with Laurus, we are registering 735,291 shares of common stock to be resold by Oberon, a selling shareholder listed in this prospectus, which represent up to 317,193 shares of common stock issuable in payment of certain fees due by us to Oberon, shares underlying a three-year warrant, issued March 22, 2004, to purchase 136,364 shares at an exercise price of $1.10 per share, and shares underlying three-year warrants, issued June 23, 2005, and January 3, 2006, to purchase an aggregate of 281,734 shares at an exercise price of $0.65 per share. The following paragraphs describe our agreements with Oberon.

On January 15, 2004, we entered into a 3-month agreement with The Oberon Group, LLC to provide us with nonexclusive financial advisory services. This arrangement was terminable by either party upon 30 days notice. Under the terms of this agreement, we agreed to pay the following consideration to Oberon:

•                  A monthly retainer fee of $7,500, which fees would be credited against any fees owed to Oberon under the agreement.

•                  A fee equal to 7.5% of the amount of any common equity, convertible preferred equity, convertible debt and/or mezzanine debt financing facility entered into by the Company arising out of contracts made by Oberon on behalf of the Company.

Under the terms of this agreement, these fees are payable to Oberon if we enter into any such financing transactions within 24 months of the termination of the agreement. The amount of such fee is reduced by the amount of any fees payable to a third party in connection with such financing transaction. For example, if a third party other than Oberon secures financing for us and we pay such third party a fee equal to 5% of such financing, then the fee payable to Oberon would equal 2.5%.

On May 18, 2005, we entered into a Novation Agreement with The Oberon Group, LLC and Oberon Securities, LLC. Under the terms of the Novation Agreement, The Oberon Group, LLC and the Company agreed to mutually release each other from their obligations under the January 15, 2004 agreement and any claims they may

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have against each other, excluding claims relating to a party’s fraud. Under this 2005 agreement, Oberon Securities agreed to assume all of The Oberon Group, LLC’s obligations under the January 2004 agreement and we accepted the assumption of such agreement by Oberon Securities, LLC. Fees paid or payable under this agreement are described below:

•                  In March 2004, we issued a $2 million secured convertible term note due March 22, 2007 to Laurus, together with a warrant to purchase 280,000 shares of our common stock. In consideration for facilitating this transaction, we paid an advisory fee of $150,000 to Oberon and issued Oberon a three-year warrant to purchase 136,364 shares of our common stock at a per share exercise price of $1.10.

•                  In consideration for Oberon’s role in facilitating the June 2005 revolving credit facility transactions with Laurus, Oberon was paid an advisory fee of $112,500, 50% of which was paid in cash and the remainder was paid in additional restricted shares of common stock and issued a three-year warrant to purchase 173,077 shares of our common stock at a per share exercise price of $0.65.

On January 13, 2006, we entered into an agreement with Oberon Securities, LLC setting forth the compensation due to Oberon Securities in connection with its facilitation of the Company’s January 3, 2006 refinancing with Laurus. Under this 2006 agreement, and in addition to the compensation set forth above, Oberon Securities is due the compensation described below:

•                  An advisory fee of $70,627, payable in stock, calculated by dividing $70,627 by the average per sale price at which the Company’s common stock trades on the five trading daysdate following the date on which the registration statement of which this prospectus is a part is declared effective by the Securities and Exchange Commission. Of the $56,250 advisory fee from the June 2005 financing transaction that was payable in cash, Oberon agreed to accept payment of such fee in stock, calculated as set forth in the preceding sentence. All of the foregoing shares in respect of advisory fees are to be delivered to Oberon within eight days following the date on which the registration statement of which this prospectus is a part is declared effective.

•                  The Company issued a three-year warrant to purchase 108,657 shares of our common stock at a per share exercise price of $0.65.

PLAN OF DISTRIBUTION

Any or all of the shares of common stock to be sold by the selling shareholders may be sold from time to time by the selling shareholders, or by pledgees, donees, transferees or other successors in interest. Such sales may be made on one or more exchanges or in the over-the-counter market or otherwise, at prices and at terms than prevailing or at prices related to the then current market price, or in negotiated transactions. There is no assurance that the selling shareholders will sell any or all of the shares of common stock in this offering. The common stock may be sold in one or more of the following types of transactions:

(a)                                  a block trade in which a selling shareholder will engage a broker-dealer who will then attempt to sell the common stock, or position and resell a portion of the block as principal to facilitate the transaction;

(b)                                 purchases by a broker-dealer as principal and resale by such broker-dealer for its account pursuant to this prospectus;

(c)                                  an exchange distribution in accordance with the rules of such exchange;

(d)                                 ordinary brokerage transactions and transactions in which the broker solicits purchasers; and

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Expenses of the Distribution. We will bear all of the costs and expenses of registering under the Securities Act the sale of securities offered by this prospectus. Commissions and discounts, if any, attributable to the sales of the common stock will be borne by the selling shareholders.

State Securities Laws. In order to comply with the securities laws of various states, if applicable, sales of the common stock made in those states will only be made through registered or licensed brokers or dealers. In addition, some states do not allow the securities to be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with by us and the selling shareholders. We have no obligation to obtain such registrations or qualifications.

SELLING SHAREHOLDERS

The table below sets forth information concerning the resale by the selling shareholders of the common stock. We will not receive any proceeds from the resale of the common stock by the selling shareholders, but may receive proceeds from the exercise of warrants entitling the selling shareholders to purchase an aggregate of 768,098 shares of our common stock. Because the selling shareholders may sell all, a portion or none of their shares, no estimate can be made of the aggregate number of shares that may actually be sold by the selling shareholders or that may be subsequently owned by the selling shareholders.

The table below sets forth the name of each selling shareholder who may offer the resale of the common stock by this prospectus, the number of such securities beneficially owned by the selling shareholder, the number of such securities that may be sold in this offering and the number of such securities the selling shareholder will own after the offering, assuming it sells all of the shares offered.

(1)                                  The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the selling shareholder has sole or shared voting power or investment power and also any shares that the selling shareholder has the right to acquire within 60 days.

(2)                                  Laurus Capital Management, LLC is the investment manager for Laurus Master Fund, Ltd. The directors of Laurus Capital Management, LLC are David and Eugene Grin. By virtue of their position as directors of Laurus Capital Management, LLC, Messrs. Grin share voting and dispositive power over these securities.

(3)                                  Of the 4,981,923 shares referenced in this column, 351,923 are outstanding as of the date of this prospectus. Of the remaining 4,630,000 shares, (i) up to 4,000,000 are issuable upon conversion of the $2 million secured convertible term note; (ii) 140,000 shares are issuable upon exercise of warrants issued to Laurus in the January 2006 financing transaction; (iii) 210,000 shares are issuable upon exercise of warrants issued to Laurus in the June 2005 financing transaction; and (iv) 280,000 shares are issuable upon exercise of warrants issued to Laurus in March 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our results of operations and financial condition.  The following selected financial information is derived from our historical financial statements and should be read in conjunction with such financial statements and notes thereto, which we incorporate by reference from our annual report on Form 10-KSB for the year ended June 30, 2005, our quarterly reports on Form 10-QSB for the three months ended September 30, 2005, and the six months ended December 31, 2005, and the nine months ended March 31, 2006, and the “Forward-Looking Statements” explanation included herein.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period.  Critical accounting policies are defined as policies that management believes are (a) the most important to the portrayal of our financial condition and results of operations; and (b) that require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

Our significant accounting policies are described in the audited consolidated financial statements and notes thereto included herein.  We believe our most critical accounting policies are revenue recognition, software development costs and the allowance for potentially uncollectible accounts receivable. This listing is not a comprehensive list of all of our accounting policies.  Please refer to note 1 in the notes to our consolidated financial statements incorporated by reference herein for further information.

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

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

•                  Delivery, which is typically FOB shipping point, is complete for the software (either physically or electronically), data collection hardware and related ancillary products;

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

•                  Collectibility is probable; and

•                  Objective evidence of fair value exists for all undelivered elements, typically maintenance and professional services.

The fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue, assuming all other conditions for revenue recognition have been satisfied. Substantially all of our sales agreements contain allocations of the purchase price among the various elements of the arrangement. If we cannot determine the fair value of any undelivered element included in an arrangement, we will defer revenue until all elements are delivered, services are performed or until fair value can be objectively determined.

As part of an arrangement, end-user customers typically purchase maintenance contracts as well as professional services from us. Maintenance services include telephone and Web-based support as well as rights to unspecified upgrades and enhancements, when and if we make them generally available. Professional services are

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limited to, anticipated future gross product revenue, estimated economic life, and changes in software and hardware technology.  Amortization of capitalized software development costs begins when the products are available for

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general release to customers and is computed on a product-by-product basis using straight-line amortization with useful lives of five years or, if less, the remaining estimated economic life of the product.  Amounts related to internal software development that could be capitalized under this statement were deemed immaterial.

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

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, “Inventory Costs.” SFAS 151 amends the guidance in APB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current period charges regardless of whether they meet the criteria of “so abnormal.” In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for financial statements issued for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material affect on our financial position or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets.”  SFAS 153 amends the guidance in APB No. 29, “Accounting for Nonmonetary Assets.”  APB No. 29 was based on the principle that exchanges of nonmonetary assets should be measured on the fair value of the assets exchanged. SFAS 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for financial statements issued for fiscal years beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material affect on our financial position or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” which is a revision of FASB 123, “Accounting for Stock-Based Compensation.”  SFAS 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.”  Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including the grant of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative.

SFAS 123(R) must be adopted by small business issuers for interim periods beginning after January 1, 2006. Early adoption will be permitted in periods in which financial statements have not been issued. We adopted FASB 123(R) effective July 1, 2005, the beginning of our 2006 fiscal year.

In June 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.”  SFAS 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting a change in accounting principle. SFAS 154 requires the retrospective application to prior periods’ financial statements of the direct effect of a voluntary change in accounting principle unless it is impracticable. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FASB stated that SFAS 154 improves financial reporting because its requirements enhance the consistency of financial information between periods. Unless early adoption is elected, SFAS 154 is effective for fiscal years beginning after December 15, 2005. Early adoption is permitted for fiscal years beginning after June 1, 2005. SFAS 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this

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

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Service Revenue:

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The increase in our service revenue in the current quarter and six-monthnine-month period was primarily attributable to a 39%60% and 53%56%, respectively, increase in our NETtime software service revenue over such periods. We believe the increase in our NETtime software service revenue during this period occurred as a result of volume increases, which are attributable to increased customer demand for such service. In addition, maintenance revenue increased by 50%15% in the three month period and by 42%31% in the sixnine month period. The increase in maintenance revenue was primarily attributable to increases in renewal rates versus previous periods.

Gross Profit:

The decrease in overall and product gross profit is primarily due to the accounting for a large contract with a Fortune 100 company. The contract is for a $2,150,000 software and hardware solution requiring successful completion of a pilot program followed by completion of the remainder of the contract. The pilot program portionsection of the contract accountsis for $378,000 of the $2,150,000.$378,000. We are accounting for the software portion of the pilot program using the percentage of completion method for long-term contracts. The estimated costs for development of the software exceed our revenues for the software and the Company recorded an estimated loss of approximately $50,000$177,000 for the software portion of this contract in the first quarter of fiscal 2006.contract. If the revenue and costs under this contract were removed, our overall and product margins for the current quarter and six-monthnine-month period ended DecemberMarch 31, 20052006 would be in line with our normal margins as discussed below. We do expect to achieve a gross profit on the contract as a whole as it is fulfilled over the next year.

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

Our gross profit percentage on services revenue increased in the current quarter and as we increased service revenue by 37% and limited our cost increases. The margin was relatively flat for the current six month period compared to the prior year six month period.both periods presented.

Operating Expenses:

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See “Sales and Marketing Expense,” “Research and Development Expense,” and “General and Administrative Expense” below for discussion of the changes.

Sales and Marketing Expense:

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