MobileMax helps for-hire trucking companies track and manage nearly every aspect of their fleets' activities to help control costs and increase ROI. The MobileMax solution features Multi-Mode communication capabilities that automatically switch between land-based and satellite communications to take advantage of the cost-savings and reliability of both terrestrial and satellite communication. MobileMax integrates with dispatching and routing applications for a seamless flow of information.

• People. Several XATA employees have been with our company for many years, providing a thorough understanding of the trucking industry. With employee expertise in safety, fleet management and technology, XATA is able to provide consultation services to help organizations implement best practices for fleet productivity and develop specific customer hardware and reporting requirements.

• Processes. All XATA processes are designed to make managing fleets easier. Drawing on hundreds of successful implementations with a wide variety of fleets including multibillion-dollar organizations, XATA carefully plans each phase of the implementation and follows well established methodologies. The process begins with assessing our customers' objectives. Then, we develop a detailed implementation schedule that includes all aspects of the project, from implementation to conversion, integration, training and problem solving.

Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of our financial statements and are based upon management's current judgments. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements. Note 2 of the Notes to Financial Statements includes a summary of the significant accounting policies and methods we use. The following is a discussion of what we believe to be the most critical of these policies and methods.
Revenue Recognition. The Company derives its revenue from sales of hardware, software and related services, and from application service contracts. The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, and Securities and Exchange Commission Staff Accounting Bulletin (SAB) 104, Revenue Recognition in Financial Statements.
Software revenue is recognized under SOP 97-2 and SAB 104 when (i) persuasive evidence of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has occurred, as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or determinable and payable within twelve months, and (iv) collectability is probable and supported by credit checks or past payment history.
With regard to software arrangements involving multiple elements, the Company allocates revenue to the software and service elements based on the relative fair value of each element with the residual amount allocated to the system revenue which is recognized upon delivery. The Company's determination of fair value relating to the software and service elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to consulting services and post-contract customer support (PCS) components of its license arrangements. The Company sells its consulting services separately, and has established VSOE on this basis. VSOE for PCS components are determined based upon the customer's annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from licenses is recognized upon delivery, and revenue from PCS components are recognized ratably over the applicable term, typically one year. Agreements that do not meet the requirements described in Emerging Issues Task Force (EITF) 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware, to allow treatment under SOP 97-2, result in the recognition of all revenue ratably over the term of the agreement.
Allowance for doubtful accounts. We grant credit to customers in the normal course of business. The majority of the Company's accounts receivable and investment in sales-type leases receivable are due from companies with fleet trucking operations in a variety of industries. Credit is extended based on an evaluation of a customer's financial condition and, generally, collateral is not required, although sales-type leases receivable are secured by a retained security interest in the leased equipment. Accounts receivable are typically due from customers within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered

past due. We determine the allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, our previous loss history, the customer's current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We reserve for these accounts receivable by increasing bad debt expense when they are determined to be uncollectible. Payments subsequently received, or otherwise determined to be collectible, are treated as recoveries that reduce bad debt expense.
Goodwill. As of September 30, 2008, the Company had a goodwill balance of $3,011,000 that resulted from the Company's acquisition of GeoLogic Solutions, Inc. on January 31, 2008. The Company records goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," the Company will review goodwill for impairment at least annually, on the first day of the fourth quarter, or more frequently if an event occurs indicating the potential for impairment. Goodwill is not amortized, but instead tested for impairment at the reporting unit level. We have one reporting unit. The annual goodwill impairment test is a two-step process. First, we determine if the carrying value of our related reporting unit exceeds fair value, which would indicate that goodwill may be impaired. If we then determine that goodwill may be impaired, we compare the implied fair value of the goodwill to its carrying amount to determine if there is an impairment loss. The Company completed this review in the fourth quarter of fiscal 2008 and concluded that no impairment existed.
Intangible assets are carried at cost less accumulated amortization. The Company amortizes the cost of identified intangible assets on a straight-line basis over their expected economic lives. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews intangible assets that have finite useful lives when an event occurs indicating the potential for earlier impairment. The Company reviews for impairment using facts or circumstances, either internal or external, indicating that it may not recover the carrying value of the asset. The Company measures impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. The Company measures fair value under SFAS No. 144, which is generally based on the present value of estimated future cash flows. The Company's analysis is based on available information and on assumptions and projections it considers to be reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company's best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.
Product Warranties. The Company sells its hardware products with a limited warranty, with an option to purchase extended warranties. The Company provides for estimated warranty costs in relation to the recognition of the associated revenue. Factors affecting the Company's product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors. At September 30, 2008 and 2007, the Company had an accrual for product warranties of $1,576,000 and $911,000, respectively. These amounts are included in accrued expenses on the Company's balance sheet.
Capitalized system development costs. System development costs incurred after establishing technological feasibility are capitalized as capitalized system development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs that are capitalized are amortized to cost of goods sold beginning when the product is first released for sale to the general public. Amortization is at the greater of the amount computed using the ratio of current gross revenues for the product to the total of current and anticipated future gross revenues or the straight-line method over the estimated economic life of the product (two to five years). As of September 30, 2008 and 2007 there were zero capitalized development costs. Research and development expenses are charged to expense as incurred. Such expenses include product development costs which have not met the capitalization criteria of SFAS No. 86.

Income taxes. Deferred income taxes are provided for using the liability method whereby deferred tax assets and deferred tax liabilities are recognized for the effects of taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
On October 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 requires application of a "more-likely-than-not" threshold to the recognition and derecognition of uncertain tax positions. Under FIN 48, once the-more-likely-than-not threshold is met, the amount of benefit to be recognized is the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such a change. The impact of adopting FIN 48 on the Company's consolidated financial statements was not material and no cumulative effect adjustment was recorded to the October 1, 2007 balance of accumulated deficit. In 2008, the Company recognized no tax benefit or liabilities for uncertainties related to prior and current year income tax positions, which were determined to be immaterial.
Stock-based Compensation. The Company accounts for share-based employee compensation plans under the provisions of SFAS 123(R), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. The Company estimates the fair value of options granted using the Black-Scholes option valuation model and the assumptions shown in Note 8 to the financial statements. The Company estimates the volatility of the common stock at the date of grant based on a historical volatility rate, consistent with SFAS 123(R) and Securities and Exchange Commission SAB No. 107. The decision to use historical volatility was based upon the lack of traded common stock options. The expected term is estimated consistent with the simplified method identified in SAB 107 for share-based awards granted during fiscal 2008 and 2007. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the options. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. The fair value of options are amortized over the vesting period of the awards utilizing a straight-line method. Operating Results
We believe the percentage relationship between net sales and major expense items in the statement of operations is important in evaluating the performance of our business operations. We operate as one business segment and believe the information presented in our Management's Discussion and Analysis of Financial Condition and Results of Operations provides an understanding of our business, operations and financial condition. The following table sets forth certain Statements of Operations data as a percentage of net sales:

                                                         For the Years Ended
                                                            September 30,
                                                          2008          2007
        Net sales                                         100.0 %      100.0 %
        Gross profit                                       47.4 %       44.8 %
        Selling, general and administrative expense        40.5 %       54.4 %
        Research and development expense                   11.2 %       14.2 %
        Operating loss                                     (4.3 %)     (23.8 %)
        Net loss                                           (6.3 %)     (22.2 %)

Comparison of Fiscal 2008 operating results to Fiscal 2007 Net Sales
Overall net sales increased 75.1 percent to $53.7 million for fiscal 2008 compared to $30.7 million in fiscal 2007. Net sales of products and services acquired with GeoLogic Solutions, Inc. were $14.1 million for the eight month period ending September 30, 2008. Fiscal 2008 net sales, excluding GeoLogic Solutions, Inc., increased by 29.2 percent compared to fiscal 2007 driven by a sales increase of 57.0 percent in XATANET products. Fiscal 2008 net sales derived from the legacy OpCenter product line decreased 43.0 percent as expected to $4.9 million compared to $8.6 million for fiscal 2007 as we continue to migrate customers to the XATANET platform. Recurring revenue, including monthly subscriptions from XATANET and monthly fees from MobileMax and OpCenter product lines, increased 51.3 percent to comprise 44.1 percent of total sales compared to 34.8 percent for fiscal 2007.
We ended fiscal 2008 with $12.8 million of deferred revenue in comparison to $9.6 million at the end of fiscal 2007. For agreements that do not meet the requirements described in EITF 00-03, all revenue was recognized over the initial term of each subscription rather than at the time of delivery. The initial term of customer contracts are a minimum of twelve months. Cost of Goods Sold
Cost of goods sold includes the direct product costs associated with fulfilling customer orders, warranty costs related to previously sold systems, communication and hosting costs, product repair and refurbishment costs, and expenses associated with the enhancement of released products. Total cost of goods sold increased $11.3 million to $28.2 million for fiscal 2008 compared to $16.9 million for fiscal 2007. Overall gross profit as a percent of net sales improved 2.6 percentage points to 47.4 percent for fiscal 2008 versus 44.8 percent for fiscal 2007. This improvement in overall margins for fiscal 2008 was the result of the increase in higher margin recurring revenue as a percent of total revenue and improved XATANET subscription margins. XATANET subscription margins improved to 60.0 percent for fiscal 2008 compared to 56.5 percent in fiscal 2007.
Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of employee salaries in our sales, support and administration functions, sales commissions, marketing and promotional expenses, executive and administrative costs, and accounting and professional fees. Selling, general and administrative expenses were $21.8 million for fiscal 2008 compared to $16.7 million for fiscal 2007. Selling, general and administrative expenses reflect an increase due to additional costs of GeoLogic Solutions, Inc., amortization expense of $1.1 million related to intangible assets acquired with GeoLogic Solutions, Inc., and investments in our brand strategy, professional services business, and direct sales model. Fiscal 2007 selling, general and administration expenses included charges of $1.4 million of legal and settlement costs associated with a patent infringement lawsuit and $1.9 million write-off of capitalized system development cost relating to products that will not be marketed.

Research & Development Expenses
Research and development expenses consist of employee salaries and expenses related to development personnel and consultants, as well as expenses associated with software and hardware development. Research and development expenses were $6.0 million for fiscal 2008 compared to $4.4 million for fiscal 2007. The increase of $1.6 million was primarily due to an increase in development costs associated with future releases of fleet management systems that have not yet reached technological feasibility and additional costs of GeoLogic Solutions, Inc.
Net Interest Expense
Net interest expense increased $1.5 million to $1.0 million in fiscal 2008, compared to net interest income of $0.5 million in fiscal 2007. The increase in interest expense was primarily due to borrowings of long-term debt related to the acquisition of GeoLogic Solutions, Inc. Income Taxes
No income tax benefit or expense was recorded in fiscal 2008 or fiscal 2007 as the result of continued operating losses and the Company does not have objectively verifiable positive evidence of future taxable income as prescribed by SFAS No. 109. We concluded that a full valuation allowance was appropriate. Realization of deferred tax assets is dependent on future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The amount of the net deferred tax asset considered realizable could be increased in the future if we return to profitability and actual future taxable income is higher than currently estimated. At September 30, 2008, we had federal net operating loss carryforwards of approximately $45.8 million.
The Company implemented the provisions of FIN 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, effective October 1, 2007. The impact of adopting FIN 48 on the Company's consolidated financial statements was not material and no cumulative effect adjustment was recorded to the October 1, 2007 balance of accumulated deficit. Net Loss to Common Shareholders
We incurred net losses to common shareholders of $3.6 million and $7.8 million for fiscal 2008 and 2007, respectively. Net loss to common shareholders for fiscal 2007 reflects preferred stock deemed dividends relating to the issuance of Series D Preferred Stock of $0.7 million. Fiscal 2008 and 2007 reflect preferred stock dividends and preferred stock deemed dividends of $0.3 million and $0.3 million, respectively, relating to Series B Preferred Stock. Liquidity and Capital Resources
As of September 30, 2008, we held $8.9 million in cash and cash equivalents and had working capital, which is total current assets less total current liabilities, of $8.1 million. This compared to $13.7 million in cash and cash equivalents, and working capital of $10.5 million, as of September 30, 2007. Operating activities used cash of $1.1 million during fiscal 2008 primarily the result of the $4.0 million increase in accounts receivable supporting the revenue growth, while operating activities provided cash of $1.6 million during fiscal 2007.
Cash used in investing activities of $19.4 million for fiscal 2008 included $16.3 million for the purchase of GeoLogic Solutions Inc. and $3.1 million for purchases of equipment and leasehold improvements.

Cash provided by financing activities of $15.8 million for fiscal 2008 included borrowings on long-term debt of $19.2 million offset by payments on long-term debt of $3.2 million and payments on financing costs of $0.3 million. In connection with the financing of the acquisition of GeoLogic Solutions, Inc., the Company entered into a three-year secured credit facility with Silicon Valley Bank ("SVB") consisting of a $10.0 million revolving line of credit bearing interest at a floating rate equal to 0.5% over SVB's Prime Rate. The credit facility is secured by substantially all the assets of the Company. Interest is paid monthly in arrears, and the entire amount of any outstanding principal is due at maturity on January 30, 2011. The credit agreement contains certain financial covenants which impose a minimum level of net worth and fixed charge coverage ratio.
Also in connection with the acquisition of GeoLogic Solutions, Inc., the Company entered into a four year secured credit facility consisting of an $8.0 million term loan with Partner's for Growth II, L.P. ("PFG") bearing interest at a fixed rate of 14.5%, subject to adjustment under various circumstances. Under the terms of the loan agreement, the Company must comply with financial covenants specifying minimum levels of net worth and fixed charge coverage ratio. The loan is secured by substantially all the assets of the Company and is subordinate to the security interest of SVB. Interest is payable monthly, and the Company is required to make periodic principal payments on specified dates over the term of the loan with the remainder of the unpaid principal due at maturity on January 31, 2012.
In addition to the preceding sources of financing, the Company also issued $1.8 million of debt obligations to the seller (the "Seller Notes") in conjunction with the acquisition of GeoLogic Solutions, Inc. The Seller Notes bear interest at an annual rate of 11% and mature in full on January 31, 2009. A portion of the Seller Notes with a principal amount of $525,000 are convertible into common stock of the Company upon maturity, in the event the Company does not repay such Seller Notes in full. The conversion price for such Seller Notes is $3.308 per share. The Seller Notes are subordinate to the security interests of SVB and PFG.
We believe our existing funds, debt facilities and vendor terms will provide adequate cash to fund operating needs for the foreseeable future. In addition, as debt facilities become due, it may be necessary to obtain additional external funding.
Our Series B Preferred Stock prohibits payment of dividends to the holders of any other capital stock unless and until we have paid dividends accrued on the Series B Preferred Stock, which pays an annual cumulative dividend of 4 percent of the original issue price. At the option of the Series B Preferred Stock holders, such dividends are payable in additional shares of Preferred Stock or cash. In fiscal 2008 and 2007, we issued 75,000 and 72,000 shares, respectively, of Series B Preferred Stock for payment of accrued dividends. We are further restricted from dividend payments by our primary lender. Off-Balance Sheet Arrangements
Not applicable
Recently Issued Accounting Pronouncements Fair Value Measurements (SFAS 157)
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements but does not require any new fair value measurements. In February 2008, the Financial Accounting Standards Board issued FASB Staff Position ("FSP") No. 157-2, "Effective Date of FASB No. 157," which delays the effective date for non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, except for items that are measured at fair value in the financial statements on a recurring basis (at least annually). The adoption of this accounting pronouncement is not expected to have a material effect on the financial statements.