The following discussion is intended to assist you in understanding our financial condition and results of operations and should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Many of the amounts and percentages in this section have been rounded for convenience of presentation, but actual recorded amounts have been used in computations. Accordingly, some information may appear not to compute accurately.

Overview

We develop, market and sell wireless solutions for managing and securing high-value enterprise assets. These assets include industrial vehicles, such as forklifts and airport ground support equipment, and rental vehicles. Our patented Wireless Asset Net system, which utilizes RFID technology, addresses the needs of organizations to control, track, monitor and analyze their assets. Our solutions enable our customers to achieve tangible economic benefits by making timely, informed decisions that increase the security, productivity and efficiency of their operations.

We sell our system to both executive and division-level management. Typically, our initial system deployment serves as a basis for potential expansion across the customer's organization. Ford Motor Company, Walgreens, the U.S. Postal Service, Target and Wal-Mart Stores, Inc. are all examples of this progression.

· Ford initially implemented our system at one plant in 1999, which led to a blanket purchase order to deploy our system across its North American operations. As of December 31, 2008, we had deployed our system at 38 Ford facilities.

· Walgreens initially deployed our system at a single distribution center in 2003.As of December 31, 2008, we had deployed our system at 12 distribution centers.

· The U.S. Postal Service used the implementation of our system at one of its facilities to form the basis of a solicitation for competitive bids for a powered vehicle management system. Based on our proposal for that program, the U.S. Postal Service awarded us a national contract in 2004 to deploy our system at up to 460 U.S. Postal Service facilities nationwide. As of December 31, 2008, we had deployed our system at 113 facilities.

· Beginning in 2003, Target utilized our system on a limited number of vehicles at one of its facilities As of December 31, 2008, we had deployed our system at 31 facilities.

· Wal-Mart initially deployed our system at a single distribution center in 2005. After testing our system, Wal-Mart ordered our system to be deployed in 50 facilities as of December 31, 2008.

We work closely with customers like these to help maximize the utilization and benefits of our system and demonstrate the value of enterprise-wide deployments.

We have incurred net losses of approximately $7.3 million and $4.2 million for the years ended December 31, 2007 and 2008, respectively, and have incurred additional net losses since inception. At December 31, 2008, we had an accumulated deficit of approximately $23.7 million.

During the year ended December 31, 2008, we generated revenues of $27 million, and the U.S. Postal Service and Wal-Mart Stores, Inc. accounted for 42% and 41% of our revenues, respectively. During the year ended December 31, 2007, we generated revenues of $17.1 million, and the U.S. Postal Service, Wal-Mart Stores, Inc. and Ford Motor Company accounted for 37%, 32% and 10% of our revenues, respectively.

Our ability to increase our revenues and generate net income will depend on a number of factors, including our ability to:

· increase sales of products and services to our existing customers;

· convert our initial programs into larger or enterprise-wide purchases by our customers;

· increase market acceptance and penetration of our products; and

· develop and commercialize new products and technologies.

Critical Accounting Policies And Estimates

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in Note B to our financial statements. Certain accounting policies involve significant judgments and assumptions by our management that can have a material impact on the carrying value of certain assets and liabilities. We consider such accounting policies to be our critical accounting policies. The judgments and assumptions used by our management in these critical accounting policies are based on historical experience and other factors that our management believes to be reasonable under the circumstances. Because of the nature of these judgments and assumptions, actual results could differ significantly from these judgments and estimates, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. Our critical accounting policies are described below.

Revenue Recognition

We derive our revenues from: (i) sales of our Wireless Asset Net system, which includes training and technical support; (ii) post-contract maintenance and support agreements; and periodically (iii) leasing arrangements. Our system consists of on-asset hardware, communication infrastructure and software. Revenue is allocated to each element based upon vendor specific objective evidence (VSOE) of the fair value of the element. VSOE of the fair value is based upon the price charged when the element is sold separately. Revenue from the sale of our system is recognized as the element is earned based on the selling price of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements. Our system is typically implemented by the customer or a third party and, as a result, revenues are recognized when title and risk of loss passes to the customer, which usually is upon delivery of the system, pervasive evidence of an arrangement exists, sales price is fixed and determinable, collectability is reasonably assured and contractual obligations have been satisfied. In some instances, we are also responsible for providing installation services. The additional installation services, which could be performed by third parties, are considered another element in a multi-element deliverable and revenue for installation services is recognized at the time the installation is provided. Revenues from training and technical support are recognized as such services are provided.

We also enter into post-contract maintenance and support agreements. Revenues are recognized over the service period and the cost of providing these services is expensed as incurred.

Stock-Based Compensation

Prior to January 1, 2006, we accounted for stock-based employee compensation under Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and had adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), "Share-Based Payment," which replaced SFAS 123 and superseded APB Opinion No. 25. Under the provisions of SFAS 123R, companies are generally required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. SFAS 123R requires that compensation expense be recognized for the unvested portions of existing options granted prior to its effective date and the cost of options granted to employees after the effective date based on the fair value of the stock options at grant date. Commencing January 1, 2006, we adopted SFAS 123R, and have applied the modified prospective method such that periods prior to adoption have not been restated. Pursuant to SFAS No. 123(R), stock based compensation expense amounted to $2,975,000, $3,288,000 and $2,989,000 for the fiscal years ended December 31, 2006, 2007 and 2008, respectively.

Results of Operations

The following table sets forth certain items related to our statement of operations as a percentage of revenues for the periods indicated and should be read in conjunction with our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. A detailed discussion of the material changes in our operating results is set forth below.

                                                      Year Ended December 31,
                                                      2006        2007     2008
     Revenues:
     Products                                            65.5 %    64.6 %   74.2 %
     Services                                            34.5      35.4     25.8
                                                        100.0     100.0    100.0
     Cost of Revenues:
     Products                                            33.3      34.3     37.0
     Services                                            22.1      18.0     12.8

     Total Gross Profit                                  44.6      47.7     50.2

     Selling, general and administrative expenses        52.3      93.4     62.0
     Research and development expenses                   10.7      16.7     10.7

     Loss from operations                               (18.4 )   (62.4 )  (22.4 )
     Interest income                                     11.3      19.0      8.2
     Interest expense                                    (0.1 )    (0.1 )
     Other income (loss)                                  0.6       0.5    (1.2)

     Net loss                                           (6.5) %  (43.0) % (15.4) %

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

REVENUES. Revenues increased by $9.9 million, or 58.3%, to $27.0 million in 2008 from $17.1 million in 2007.

Revenues from product increased by $9.0 million, or 81.9%, to $20.0 million in 2008 from $11.0 million in 2007. The increase in product revenue was primarily attributable to an increase in product revenue from the U.S. Postal Service and Wal-Mart Stores, Inc.

Revenues from service increased $928,000, or 15.3%, to $6.9 million in 2008 from $6.0 million in 2007. The increase in revenues was primarily attributable to an increase in service revenue from the U.S. Postal Service.

COST OF REVENUES. Cost of revenues increased by $4.5 million, or 50.8%, to $13.4 million in 2008 from $8.9 million in 2007. Gross profit was $13.6 million in 2008 compared to $8.2 million in 2007. As a percentage of revenues, gross profit increased to 50.2% in 2008 from 47.7% in 2007.

Cost of product increased by $4.1 million, or 70.6%, to $10.0 million in 2008 from $5.9 million in the same period in 2007. Gross profit from product revenue was $10.0 million in 2008 compared to $5.2 million in 2007. As a percentage of product revenues, gross profit increased to 50.2% in 2008 from 46.9% in 2007. The increase in gross profit is primarily attributable to a lesser amount reserved for inventory obsolescence in 2008 as compared to 2007. The amount of inventory identified as obsolete and therefore charged to cost of product was $517,000 in 2007 and $126,000 in 2008.

Cost of service increased by $400,000, or 13.0%, to $3.5 million in 2008 from $3.1 million in the same period in 2007. Gross profit from service revenue was $3.5 million in 2008 compared to $3.0 million in 2007. As a percentage of service revenues, gross profit slightly increased to 50.2% in 2008 from 49.2% in 2007. The increase was marginal and was attributed to increased service revenue, in general.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $797,000, or 5.0%, to $16.8 million in 2008 compared to $16.0 million in 2007. This increase was attributable primarily to
(i) the increase in payroll and related costs of approximately $661,000 primarily resulting from the hiring of additional staff within our sales and customer service departments and (ii) an increase in insurance expense of approximately $183,000 in 2008. As a percentage of revenues, selling, general and administrative expenses decreased to 62.0% in 2008 from 93.4% in 2007 due to an increase in revenue, partially offset by the aforementioned increase to payroll and payroll related expenses.

Research and Development Expenses. Research and development expenses were nearly flat with a minor increase of $34,000, or 1.2%, to $2.9 million in 2008 from $2.8 million in 2007. As a percentage of revenues, research and development expenses decreased to 10.7% in 2008 from 16.7% in 2007 due to an increase in revenue.

Interest Income. Interest income decreased $1.0 million, or 31.2%, to $2.2 million in 2008 from $3.2 million in 2007. This decrease was attributable to the decrease in interest rates as well as a decrease in the amount of cash, cash equivalents and investments in 2008.

Interest Expense. Interest expense decreased $10,000 to $0 in 2008 from $10,000 in 2007. The decrease was attributable to the payoff of our outstanding debt in February 2008.

Other Income (loss). Other loss of $338,000 in 2008 reflects a charge to operations related to our auction rate securities and auction rate securities right as disclosed in Note C of the financial statements. Other income of $89,000 in 2007 reflects rental income earned from a sublease arrangement. In July 2007, we released the sub-lessee from the sublease and reassumed the space.

Net Loss. Net loss was $4.2 million, or $(0.38) per basic and diluted share for the year ended December 31, 2008, as compared to net loss of $7.3 million or $(0.66) per basic and diluted share for the year ended December 31, 2007. The decrease in net loss was due primarily to the reasons described above with emphasis on the increase in revenue and an improvement in the gross profit percentage.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

REVENUES. Revenues decreased by $7.7 million, or 30.9%, to $17.1 in 2007 from $24.7 million in 2006.

Revenues from product decreased by $5.2 million, or 31.9%, to $11.0 million in 2007 from $16.2 million in 2006. The decrease in product revenue was primarily attributable to a decrease in product revenue from the U.S. Postal Service of approximately $6.2 million, offset by an increase of product revenue from Wal-Mart Stores, Inc of approximately $2.0 million, and a decrease in product revenue from other customers.

Revenues from service decreased $2.5 million, or 29.2%, to $6.0 million in 2007 from $8.5 million in 2006. The decrease in revenues was primarily attributable to a decrease in service revenue from the U.S. Postal Service of approximately $2.7 million, partially offset by an increase in service revenue from other customers.

COST OF REVENUES . Cost of revenues decreased by $4.8 million, or 34.8%, to $8.9 million in 2007 from $13.7 million in 2006. Gross profit was $8.2 million in 2007 compared to $11.0 million in 2006. As a percentage of revenues, gross profit increased to 47.7% in 2007 from 44.6% in 2006.

Cost of product decreased by $2.4 million, or 28.8%, to $5.9 million in 2007 from $8.2 million in the same period in 2006. Gross profit from product revenue was $5.2 million in 2007 compared to $8.0 million in 2006. As a percentage of product revenues, gross profit decreased to 46.9% in 2007 from 49.2% in 2006. The decrease in gross profit is primarily attributable to a greater amount reserved for inventory obsolescence in 2007 as compared to 2006. The amount of inventory identified as obsolete and therefore charged to cost of product was $517,000 in 2007 and $100,000 in 2006.

Cost of service decreased by $2.4 million, or 43.9%, to $3.1 million in 2007 from $5.5 million in the same period in 2006. Gross profit from service revenue was $3.0 million in 2007 compared to $3.1 million in 2006. As a percentage of service revenues, gross profit increased to 49.2% in 2007 from 35.9% in 2006. The increase was primarily attributable to the fact that a larger percentage of the service revenue in 2007 was from engineering services and maintenance, which typically have higher gross margins than revenue from implementation services.

Selling, General and Administrative Expenses . Selling, general and administrative expenses increased $3.0 million, or 23.3%, to $16.0 million in 2007 compared to $12.9 million in 2006. This increase was attributable primarily to (i) the increase in payroll of approximately $2.2 million primarily resulting from the hiring of additional staff within our sales and customer service departments and (ii) an increase to the stock based employee compensation expense of $439,000 in 2007. As a percentage of revenues, selling, general and administrative expenses increased to 93.4% in 2007 from 52.3% in 2006 due to the aforementioned increase to payroll and payroll related expenses as well as to a decrease in revenue.

Research and Development Expenses. Research and development expenses increased $210,000, or 8.0%, to $2.8 million in 2007 from $2.6 million in 2006. This increase was attributable primarily to the work performed relating to the development of European compliant products. As a percentage of revenues, research and development expenses increased to 16.7% in 2007 from 10.7% in 2006 due to the aforementioned increase to expenses as well as to a decrease in revenue.

Interest Income. Interest income increased $437,000, or 15.6%, to $3.2 million in 2007 from $2.8 million in 2006. This increase was attributable primarily to the increase in cash and cash equivalents and investments resulting from the proceeds received in connection with the public offering completed by us in March 2006.
Interest Expense. Interest expense decreased $19,000, or 65.5%, to $10,000 in 2007 from $29,000 in 2006. The decrease was attributable to a reduction in the principal amount of our outstanding debt in 2007.

Other Income. Other income decreased $66,000, or 42.6%, to $89,000 in 2007 from $155,000 in 2006 and reflects rental income earned from a sublease arrangement. In July 2007, we released the sublessee from the sublease and reassumed the space.

Net Income (Loss). Net loss was $7.3 million or $(0.66) per basic and diluted share in the year ended December 31, 2007 as compared to net loss of $1.6 million or $(0.15) per basic and diluted share for the year ended December 31, 2006. The increase in net loss was due primarily to the reasons described above.

Liquidity and Capital Resources

Historically, our capital requirements have been funded from cash flow generated from our business and net proceeds from the issuance of our securities, including the issuance of our common stock upon the exercise of options and warrants. As of December 31, 2008, we had cash, cash equivalents and investments, which include auction rate securities and an auction rate securities right, of $56.0 million and working capital of $30.9 million compared to $65.0 million and $31.9 million, respectively, as of December 31, 2007.

At December 31, 2007 and 2008, we held approximately $25.1 million ($25.1 million par value) and $18.1 million ($20.4 million par value), respectively, in investments in auction rate securities which represent interests in collateralized pools of student loan receivables issued by agencies established by counties, cities, states and other municipal entities. We sold approximately $5.0 million of these investments in 2008. Since February 2008 we have experienced difficulty in effecting additional sales of such securities because of the failure of the auction mechanism as a result of sell orders exceeding buy orders. Liquidity for these auction rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals. Holders of the securities continue to receive interest on the investments, and the securities continue to be auctioned at the pre-determined intervals (typically every 28 days) until the auction succeeds, the issuer calls the securities, or they mature. These failed auctions represent liquidity risk exposure and are not defaults or credit events. A decline in the value of these securities that is not temporary could materially adversely affect our liquidity and income.

In October 2008, we received an offer (the "Offer") from UBS for a put right permitting us to sell to UBS at par value all auction rate securities previously purchased from UBS at a future date (any time during a two-year period beginning June 30, 2010). The Offer also included a commitment to loan us 75% of the UBS-determined value of the auction rate securities at any time until the put is exercised. In exchange for the Offer, we were required to provide UBS with a general release of claims (other than certain consequential damages claims) concerning our auction rate securities and grant UBS the right to purchase our auction rate securities at any time for full par value. The Offer was non-transferable and expired on November 14, 2008. During November 2008, we accepted the Offer. Our right under the Offer is in substance a put right (with the strike price equal to the par value of the auction rate securities) which we recorded as an asset, measured at its fair value (pursuant to election under SFAS No. 159), with the resultant gain recognized in earnings. Pursuant to SFAS No. 159, we recorded the put right at a fair value of $2.0 million and recognized the gain in operations. As we have classified the auction rate securities as trading securities, the $2.3 million decline in fair value of the auction rate securities was charged to operations in 2008. The net charge to operations in 2008 was $338,000 which was included in other expense. The fair value of the put right was based on an approach in which the present value of all expected future cash flows were subtracted from the current fair market value of the security and the resultant value was calculated as a future value at an interest rate reflective of counterparty risk.

Given the substantial dislocation in the financial markets and among financial services companies, we cannot assure you that UBS ultimately will have the ability to repurchase our auction rate securities at par, or at any other price, as these rights will be an unsecured contractual obligation of UBS or that if UBS determines to purchase our auction rate securities at any time, we will be able to reinvest the cash proceeds of any such sale at the same interest rate or dividend yield currently being paid to us. Also, as a condition of accepting the auction rate securities rights, we were required to sign a release of claims against UBS, which will prevent us from making claims against UBS related to our investment in auction rate securities, other than claims for consequential damages.

Business Acquisition

On April 18, 2008, we acquired the assets of PowerKey, the industrial vehicle monitoring products division of International Electronics, Inc., a manufacturer of access control and security equipment, for approximately $573,000, which includes approximately $73,000 of direct acquisition costs. The tangible assets acquired include inventory (totaling approximately $191,000), and fixed assets (totaling approximately $4,000).

Allocation of the purchase price of the intangible assets consists of the following: goodwill (totaling approximately $200,000), trademarks and trade names (totaling approximately $74,000), and a customer list (totaling approximately $104,000) resulting from the acquisition of PowerKey are carried at cost.

Operating Activities

Net cash used in operating activities was $4.9 million for the year ended December 31, 2008 compared to net cash provided by operating activities of $604,000 for the year ended December 31, 2007. The change was due primarily to an increase in accounts receivable resulting from the increase in revenue, partially offset by a decrease in net loss.

Net cash provided by operating activities was $604,000 for the year ended December 31, 2007 compared to net cash used in operating activities of $1.1 million for the year ended December 31, 2006. The change was due primarily to
(i) a decrease in accounts receivable resulting from improved collections and
(ii) a decrease in finished goods inventory, partially offset by an increase in net loss.

Investing Activities

Net cash provided by investing activities was $15.4 million for the year ended December 31, 2008 compared to net cash provided by investing activities of $284,000 for the year ended December 31, 2007. The increase was due to an increase in the maturities of investments, partially offset by fewer purchases of investments in 2008 and the business acquisition of Powerkey.

Net cash provided by investing activities was $284,000 for the year ended December 31, 2007 compared to net cash used in investing activities of $56.0 million for the year ended December 31, 2006. The change was due primarily to an increase in the maturities of investments and fewer purchases of investments in 2007.

Financing Activities

Net cash used in financing activities was $3.0 million for the year ended December 31, 2008 compared to net cash used in financing activities of $5.4 million for the year ended December 31, 2007. The decrease in cash used was due primarily to less cash used to purchase shares of our issued and outstanding common stock during 2008 pursuant to our share repurchase program authorized by our Board of Directors in May 2007 and an increase in proceeds from the exercise of stock options.

Net cash used in financing activities was $5.4 million for the year ended December 31, 2007 compared to net cash provided by $64.5 million for the year ended December 31, 2006. The decrease was due primarily to the proceeds received in connection with the public offering that was completed in March 2006 that were not received in 2007, as well as the purchase of shares of our issued and outstanding common stock during 2007 pursuant to our share purchase program authorized by our Board of Directors in May 2007.

Capital Requirements

We believe that with the proceeds received from our public offering that was completed by us in March 2006, the cash we have on hand and operating cash flows we expect to generate, we will have sufficient funds available to cover our capital requirements for at least the next 12 months.

Our capital requirements depend on a variety of factors, including, but not limited to, the length of the sales cycle, the rate of increase or decrease in our existing business base, the success, timing, and amount of investment required to bring new products to market, revenue growth or decline and potential acquisitions. Failure to generate positive cash flow from operations will have a material adverse effect on our business, financial condition and results of operations. We may determine in the future that we require additional funds to meet our long-term strategic objectives, including to complete potential acquisitions. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve significant restrictive covenants, and we cannot assure you that such financing will be extended on terms acceptable to us or at all.

Term Loan

In January 2003, we closed on a five-year term loan for $1,000,000 with a financial institution. Interest at the 30-day LIBOR plus 1.75% and principal are . . .