**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-K**
| **(Mark One)**                                                                                                                                                                           | ** **                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| x                                                                                                                                                                                        | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| **For the fiscal year ended December 31, 2005**                                                                                                                                     |
| **or**                                                                                                                                                                                   |
| o                                                                                                                                                                                        | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| **For the transition period from**            **to**             |

 

**Commission file number 000-31511**

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**@Road, Inc.**

(Exact name of registrant as specified in its charter)

| **Delaware**                    |   | **94-3209170**      |
|---------------------------------|--------|---------------------|
| (State or other jurisdiction of |   | (I.R.S. Employer    |
| incorporation or organization)  |   | Identification No.) |

 

**47071 Bayside Parkway**

**Fremont, CA 94538**

(Address of principal executive offices, including zipcode)

**Registrant’stelephone number, including area code: 510-668-1638**

**Securities registered pursuant to Section 12(b) ofthe Act:**

**None**

**Securities registered pursuant to Section 12(g) ofthe Act:**

**Common Stock**

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in the Exchange Act Rule 12b-2).
| Large Accelerated Filer o |   | Accelerated Filer x |   | Non-Accelerated Filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is a  shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

The aggregate market value of the voting stock held bynon-affiliates of the registrant was approximately $122,887,300 as of June 30,2005, based upon the closing sale price on the NASDAQ National Market reportedfor such date. Shares of Common Stock held by each officer and director and byeach person who owns 5% or more of the outstanding Common Stock have beenexcluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

There were 61,214,911 shares of the registrant’s CommonStock issued and outstanding as of February 15, 2006.

**DOCUMENTSINCORPORATED BY REFERENCE**

The information requiredunder Part III of this report on Form 10-K is incorporated herein byreference from the definitive proxy statement to be filed in connection withthe registrant’s 2006 annual meeting of stockholders.

 

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**TABLE OF CONTENTS**

| **PART I**  |   |                                                                                                                                       |   |   |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.          |   | Business                                                                                                                                   |   | 1      |
| Item  1A.        |   | Risk Factors                                                                                                                               |   | 11     |
| Item 1B.         |   | Unresolved Staff Comments                                                                                                                  |   | 20     |
| Item  2.         |   | Properties                                                                                                                                 |   | 21     |
| Item  3.         |   | Legal Proceedings                                                                                                                          |   | 21     |
| Item 4.          |   | Submission of Matters to a Vote of Security Holders                                                                                        |   | 21     |
| **PART II** |   |                                                                                                                                       |   |   |
| Item 5.          |   | Market for Registrant’s Common Equity and Related  Stockholder Matters                                                                |   | 22     |
| Item 6.          |   | Selected  Financial Data                                                                                                                   |   | 23     |
| Item 7.          |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                |   | 24     |
| Item 7A.         |   | Quantitative and Qualitative Disclosures About Market  Risk                                                                                |   | 42     |
| Item 8.          |   | Financial Statements and Supplementary Data                                                                                                |   | 44     |
| Item 9.          |   | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure                                                 |   | 44     |
| Item 9A.         |   | Controls and Procedures                                                                                                                    |   | 44     |
| Item 9B.         |   | Other  Information                                                                                                                         |   | 49     |
| **PART IV** |   |                                                                                                                                       |   |   |
| Item 15.         |   | Exhibits and Financial Statement Schedules                                                                                                 |   | 49     |
|             |   | Report of Independent Registered Public Accounting  Firm                                                                                   |   | 53     |
|             |   | Consolidated  Balance Sheets—December 31, 2005 and 2004                                                                          |   | 54     |
|             |   | Consolidated Statements of Operations—Years ended  December 31, 2005, 2004 and 2003                                    |   | 55     |
|             |   | Consolidated Statements of Stockholders’ Equity and  Comprehensive Income—Years ended December 31, 2005, 2004 and 2003 |   | 56     |
|             |   | Consolidated Statements of Cash Flows—Years ended  December 31, 2005, 2004 and 2003                                    |   | 57     |
|             |   | Notes to Consolidated Financial Statements                                                                                                 |   | 58     |

 

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Except for the historicalinformation contained in this Report on Form 10-K, the matters discussedin this Report are forward-looking statements involving risks anduncertainties that could cause actual results to differ materially from thosein such forward-looking statements. Potential risks and uncertaintiesinclude, but are not limited to, fluctuations in quarterly results, customeracceptance of our products and services, our ability to adapt to rapidtechnological change, our dependence on wireless networks, networkinfrastructure and positioning systems owned and controlled by others andgeneral economic and political conditions. Further information regarding theseand other risks is included in this Report and in our other filings with theSecurities and Exchange Commission (“SEC”).

**PART I**

**Item 1.**                        *Business*

**Overview**

@Road®, Inc. is a leading provider ofmobile resource management (“MRM”) solutions, a category of businessproductivity solutions designed to enable the effective management of mobileresources. Currently, we market and sell our solutions to a range of customersin North America and Europe.

@Road, Inc. was incorporatedin 1996 under the laws of the State of Delaware. From July 1996through June 1998, our operations consisted primarily of various start-upactivities relating to our MRM solutions, including development of globalpositioning system (“GPS”) technologies, recruiting personnel and raisingcapital. We did not recognize any revenue prior to June 1998, and ourexpenses consisted of research and development, sales and marketing, andgeneral and administrative expenses. In 1998, we expanded our strategy toprovide location-relevant and time-sensitive information solutions to companiesmanaging mobile resources. In the second half of 1998, we introduced the firstversion of a MRM solution that is now called @Road GeoManagerSM *i*LM®, which provides location,reporting, dispatch, messaging, and other management services to help companiesmanage their mobile resources more efficiently. Subsequent to the introductionof @Road GeoManager *i*LM, weintroduced a number of additional MRM solutions, including @Road PathwaySM and @Road PorticoSM.

On February 18, 2005, we acquired VidusTM Limited(“Vidus”), a provider of dynamic field service automation software located inIpswich, United Kingdom. Vidus markets and sells a software solution called TaskforceTMprimarily to utility and telecommunications companies in Europe. In January of2006, Vidus changed its name to @Road, Ltd. All references herein to “Vidus” or“@Road, Ltd.” shall mean our subsidiary, @Road, Ltd., formerly named VidusLimited.

During 2005, we completed a substantial portion of themigration of subscribers away from cellular digital packet data (“CDPD”) wirelessprovided by wireless carriers to more up-to-date network protocols. We endedour migration initiative in February 2006. Some of our wireless carrierpartners, such as AT&T Wireless and Verizon Wireless notified us as earlyas 2002 that they were planning to discontinue their CDPD networks over aperiod of years. Today, CDPD is an older wireless technology and has largelybeen superseded in the industry by more modern protocols, such as code divisionmultiple access (“CDMA”) 1XRTT, general packet radio service("GPRS"), evolution-data optimized (“EvDO”) and enhanced data ratesfor GSM evolution (“EDGE”). At December 31, 2004, we still servedapproximately 64,000 subscribers on CDPD networks. At December 31, 2005,this number was approximately 19,000 subscribers. During 2005, we were requiredto dedicate considerable resources to our effort to switch CDPD subscribers to otherprotocols. Now that we have concluded our CDPD migration initiative, we plan toreallocate these resources to other business functions.

In2004, we were selected by SBC Services, Inc. (now AT&T), toprovide mobile resource management solutions for up to 35,000 of their fieldservice technicians. At December 31, 2005, we had 

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deployedour solutions to approximately 32,000 field service technicians under ouragreement with SBC (AT&T).

**Strategy**

We believe thatleaders in the global MRM market are evaluated on a number of criteria,including size, technology leadership, financial strength, strength of customerbase, breadth and depth of strategic relationships, ability to manage largesolution deployments and management experience. We believe that based on thesecriteria, we are a leader in the MRM market. Our objective is to enhance ourleadership position in the global MRM market. Key elements of our strategy are:

·       *Further penetrate vertical markets in which we have or are developingleading reference customers.  *We have developed relationshipswith leading companies in selected vertical markets, such astelecommunications, utilities and construction. We seek to leverage ourrelationships with these customers and our knowledge of their MRM needs toattract other potential medium- to large-sized customers in thesemarkets. In other vertical markets, we intend to replicate the model ofdeploying our solutions with a leading reference customer and leveraging thisrelationship and our MRM market expertise to attract other customers in thosemarkets.

·       *Create new value-added services for our customers.  *Weintend to continue to add new features and functionality to our solutions anddevelop new platforms that take advantage of advancements in hostedapplications, business analytics, optimization, data processing and wirelesscommunications. We expect to continue to release new features that synthesizethe information currently retrieved by our existing solutions and which arisefrom working closely with our customers. We expect some of these features to beincorporated into our solutions as free enhancements, while others will beoffered for additional fees. We intend to continue to use our internationalcapabilities to help develop and support new features and functionality for oursolutions. In addition, we intend to continue to develop an open platformarchitecture to allow our customers and partners to integrate third-partyapplications with our solutions.

·       *Expand our solutions internationally.  *We intend toidentify new geographic markets for which our solutions can satisfy evolvingcustomer demands. We currently market all our solutions in the United Statesand Canada, and certain of our solutions in Europe. We intend to expand the setof solutions offered in Europe in future periods. We believe that leveragingour technology leadership position, our experience with customers in the UnitedStates and Canada and the distribution resources of resellers, agents andwireless carriers internationally will help us establish customer awareness andacceptance of our solutions in international markets.

·       *Acquire orinvest in complementary businesses and technologies.  *We intendto supplement our customer base, revenue, solutions and geographic presence byselectively acquiring or investing in complementary businesses and technologies.

**@Road Solutions**

Our MRM solutions are designed to allow customers toimprove productivity by enabling the effective management of the activities oftheir mobile workers, assets, goods and services. In addition, our solutionsare designed to enable customers to increase the utility of their mobileresources and decrease their costs of operations by enhancing scheduling ofmobile workers in both pre-planned static and real-time dynamic workenvironments and by facilitating business processes, such as event confirmationand forms processing in the field. Our solutions also provide location,reporting, routing, auditing, messaging, and other management services.

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As a result of our development and ongoing managementof a complex MRM infrastructure integrating wireless communications,location-based technologies, software applications, transaction processing andthe Internet, our solutions offer a secure, scalable, upgradeable,enterprise-class platform, available in hosted, on-premise or hybridenvironments, that connect mobile workers in the field to corporate dataon-demand.

Our customers candeploy and use our solutions in several ways, including:

·       *Hosted*—Customers manage their mobile resources over theInternet by logging on to our website and using certain of our applicationsthat are hosted by us at data centers in the United States.

·       *Licensed*—Customers can manage their mobile resources byinstalling certain of our software at their premises and using the applicationswith their internal information technology infrastructure.

·       *Hybrid*—Customers can manage their mobile resources bydeploying MRM solutions that contain both Hosted and Licensed elements in aconfiguration responsive to their needs.

Additionally, our solutions are designed to becompatible with a number of third-party applications as well as the commercialor proprietary applications of our customers. Our solutions are capable ofcommunicating with customers’ applications and third-party applications byusing application programming interfaces or by using our continuous data feedservice called DirectData.

@Road combinesthree elements of MRM—Field Force Management, Field Service Management andField Asset Management—to create solutions for a variety of industries,including telecommunications, utilities, construction, transportation, fieldservices, waste management and facilities management. Our solutions can besummarized as follows:

·       *Field Force Management (“FFM”)***:***  *Our FFM solutions are designed to help companiesbetter manage their mobile workers. These solutions include hosted applicationsand in–field hardware integrating cellular or satellite wirelesscommunications, GPS capability, Internet–enabled applications and hostedcustomer information databases.

·       *Field Service Management (“FSM”)***:***  *Our FSM solutions are designed to help companiesbetter manage their mobile workers’ work. These solutions include licensedsoftware applications providing automated static, or pre-planned, as well asdynamic routing and scheduling of mobile workers using a customer’s actual workorders and a set of constraint—based variables.

·       *Field Asset Management (“FAM”)***:***  *Our FAM solutions are designed to help companiesbetter manage their mobile workers’ assets in the field. These solutionsinclude hosted applications and in-field hardware to capture and assess vehiclediagnostics information and data arising from sensors installed in vehicles.

We believe thatcustomers use an anticipated or expected return on investment as a primaryselection criterion when evaluating MRM solutions. We believe that the benefitsof our solutions that drive a rapid return on investment for our customersinclude the following:

·       Improvedproductivity of mobile resources;

·       Decreasedcosts of operations of mobile resources;

·       Improvedefficiency of a customer’s overall operations; and

·       Improvedresponsiveness to our customers’ customers.

In addition, we offermulti-year subscription contracts that allow our customers to pay us on amonthly basis and minimize upfront cash commitments. We believe a monthlypayment subscription model further accelerates a customer’s return oninvestment in our solutions.

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***More on @Road Field Force Management Solutions***

Our FFM solutions integrate wireless communications,location-based technologies, software applications, transaction processing andthe Internet, and are designed to provide customers with detailed informationabout the activities and locations of their mobile workers. These solutionsprovide current and historical data relating to a customer’s mobile resourcesin a variety of hosted formats, including activity reports, maps and completedbusiness forms. Our FFM solutions are grouped into three lines of products: @RoadGeoManager, @Road Pathway and @Road Portico.

Our customers generallycontract to receive our FFM solutions for terms of one to five years and areprovided the option to purchase value-added service features for additionalfees. Upon the completion of the initial term of a customer’s contract, thecustomer’s services continue on a month-to-month basis. Our revenue is derivedfrom monthly fees for our FFM solutions and any purchased value-added features,and monthly or upfront fees for the in-vehicle hardware devices enabling themobile resource to utilize our FFM solutions.

*@Road GeoManager*

@Road GeoManager is our flagshipFFM solution and is designed to provide comprehensive MRM for customers in all ourtarget markets. We commence implementation of the GeoManager solutionwith the deployment of a hardware device to each of the customer’s mobileresources, such as service vehicles or trucks. We refer to each mobile resourcewith such a hardware device as a ‘‘subscriber.’’  The GeoManager solution operates within-vehicle hardware and mobile telephones. Our proprietary Internet LocationManager (“*i*LM”) hardware device is installed in avehicle and integrates a GPS receiver and a wireless modem with our operatingand diagnostic software. To deploy the GeoManager solution using a mobiletelephone, customers download our operating and diagnostic software to mobiletelephones over the appropriate wireless network.

The in-vehicle and hand-held hardware devices send andreceive a variety of information at regular intervals and on-demand. Such dataincludes location, velocity, time, operational diagnostics and businessinformation. These data are transmitted to our data centers using wirelessnetworks and the Internet. If a wireless connection to a hardware device is notavailable, the hardware device will typically store up to five days of captureddata and seek to transmit the data when a wireless connection is nextavailable.

The GeoManager solutionprovides customers a variety of features and reports, including a MapViewfeature that allows them to locate mobile workers in real-time using anon-screen map. Users are able to establish personal “Landmarks” on the maprepresenting their customers’ sites, common stops and other locations, in orderto more easily view arrival and departure times to and from desired locations. Ourtwo-way messaging service feature permits text communication between a fieldworker such as a technician or driver, and a user of our solution connected tothe Internet, such as an operations manager or dispatcher.

*@Road Pathway*

Our @Road Pathway solution is designed to be amid-level FFM solution, with more features than our Portico solution (discussedbelow) but fewer than our GeoManager solution. The Pathway solution providescustomers a number of features and reports, including a MapView feature thatallows them to locate mobile workers on-demand using an on-screen map.Customers are able to establish personal Landmarks in order to view arrival anddeparture times to and from desired locations.

The Pathway solution isdeployed in substantially the same manner as our GeoManager solution, whichrequires either the installation of a hardware device in each of the customer’svehicles or installation of our software on each user’s mobile telephone.

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*@Road Portico*

Our @Road Portico solution is designed to be anentry-level FFM solution, with fewer features than GeoManager or Pathway. ThePortico solution provides customers with a MapView feature that allows them tolocate mobile workers on-demand using an on-screen map. It also allowscustomers to use reports or on-demand alerts to help users manage productivityin the field.

The Portico solution isdeployed in substantially the same manner as the GeoManager option that requiresthe installation of a hardware device in each of the customer’s vehicles.

***More on the @Road Field Service Management Solution***

Our FSM solution is a licensed software program thatuses constraint-based variables and current information about the status ofwork orders and mobile resources to provide optimized scheduling and routingdata to our customers. This solution is currently delivered to our customers inthe form of a software license relating to the number of workers theapplication is intended to manage. This solution, called Taskforce, wasacquired in connection with our acquisition of Vidus in February 2005.

We currently offer Taskforce as a licensed softwaresolution and expect to offer it on a managed services basis and hosted basis inthe future. Our customers contract to receive our FSM solution on a licensedbasis, which generally includes licensing, installation, training and supportand maintenance fees.

*Taskforce*

Taskforce is anintelligent software application that enables customers to automaticallyschedule their mobile workers, such as technicians or telecommunicationsengineers. The software allocates workers to the jobs in the field in a mannerdesigned to reduce operational inefficiencies. This is achieved by reducingtravel and other non-productive time and ensuring that the mobile worker hasthe necessary skills and equipment to complete the job allocated to that worker.Taskforce can adapt to changing and unpredictable circumstances, such astraffic delays, as the schedule produced by the software is constantly updatedduring the day. This dynamic responsiveness to changing conditions helps toensure that an appropriate worker arrives at the customer’s premises whenexpected.

***More on @Road Field Asset Management Solutions***

Our FAM solutions are integrated with our FFMsolutions and are designed to help customers better manage their assets in thefield by providing current and historical information relating to the use andoperation of those assets. Examples of our FAM solutions include VehicleDiagnostics and Status Sensors.

Our customers generallycontract to receive our FAM solutions in connection with the purchase of ourFFM solutions. Upon the completion of the initial term of a customer’scontract, the customer’s services continue on a month-to-month basis. Ourrevenue is derived from monthly fees for our FAM solutions, and monthly orupfront fees for the in-vehicle hardware device, if any, enabling the mobileresource to utilize our FAM solutions.

*Vehicle Diagnostics*

Our VehicleDiagnostics solution for both heavy (J1708) and light-duty (OBD II) vehicles isan add-on option to our GeoManager solution. This service is designed toconnect with the vehicle’s data bus and retrieve engine and other vehiclediagnostic data so our customers can remotely monitor engine performance for proactive intervention andprevention of vehicle downtime.

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*Status Sensors*

We offer SwitchStatus and TempStatus sensor solutions.The SwitchStatus solution monitors and reports on the status of one to fourswitches located in a vehicle. SwitchStatus may be used to monitor theoccurrence of specific events such as when the ignition switch on a vehicle isturned off, or when a vehicle door is opened or closed.

The TempStatus solutionmonitors and reports on the temperature in a compartment of a vehicle, such asa refrigeration compartment. This solution is designed for segments in whichthe temperature of a vehicle’s compartment is important, such as the food andchemical distribution markets.

**Customers**

Wemarket and sell our solutions to a broad range of customers in the UnitedStates, Europe and Canada. The number of mobile resources enabled with oursolutions on either a subscription or a per seat license basis has grown from135 as of December 31, 1998, to approximately 188,000 as of December 31,2005. We categorize a customer in a small, medium or large-sized customergroup by reference to the total number of subscribers to our services or userlicenses relating to our software for that customer. Small-sizedcustomers have 100 or fewer subscribers or user licenses, medium-sizedcustomers have 101 to 1,000 subscribers or user licenses, and large-sizedcustomers have more than 1,000 subscribers or user licenses. Currently, we havecustomers in the following industries:

| ·  Telecommunications                   |   | ·  Courier/Delivery |
|---------------------------------------------------|--------|-------------------------------|
| ·  Field Service                        |   | ·  Distribution     |
| ·  Construction                         |   | ·  Security         |
| ·  Facilities/Waste Management          |   | ·  Cable/Broadband  |
| ·  Freight and Passenger Transportation |   | ·  Utilities        |

 

In 2005, 2004 and 2003,one customer, Verizon Communications, represented 13%, 17% and 17% of totalrevenues, respectively. No other customer comprised 10% or more of totalrevenues during any of those periods. We do not expect revenues from VerizonCommunications to exceed 10% of our total revenues in 2006. During 2006, weexpect that revenues from AT&T may comprise more than 10% of our totalrevenues.

**Research and Development**

We concentrate our researchand development activities on software development, services and deviceengineering. Our research and development resources and personnel are locatedin the United States, the United Kingdom and India. To enhance our existingsolutions and to introduce new solutions to our existing and potentialcustomers, we focus on the following key areas:

·       *Software*.*  *Weintend to continue to develop our software solutions by offering new releasesenhancing our existing software applications. In addition to other offeringsannounced in 2005, we announced the release of Taskforce 7, which includes aMicrosoft .Net architecture and enables end users to use Internet-basedtools to book appointments directly with our customers’ appointment bookingsystems.

·       *Services.  *We intend to continue to develop ourservices by offering new features and options while enhancing existing features.In addition to other offerings announced in 2005, we announced a vehiclediagnostics service, which provides our customers access to their vehiclediagnostic information over the Internet. This service is designed to helpremote field asset managers quickly identify engine problems and diagnose suchproblems to better utilize maintenance and repair resources.

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·       *Devices.  *We intend to continue to develop and releasedevices to add new features as well as to enhance existing features. Inaddition to other offerings announced in 2005, we announced our *i*LM 3100-W series device, which adds third generationwireless data communications such as EDGE and EvDO and a Wi-Fi hotspot connectivityto our line of Internet Location Manager devices.

We spent $13.0 million,$6.2 million and $5.5 million on research and development activities in 2005,2004 and 2003, respectively. As of December 31, 2005, we had 137 employeesin research and development.

**Technology**

Our technologyefforts focus on creating new solutions and enhancing the reliability,availability and features of our existing solutions while maintaining a scalableand cost-effective architecture. Our proprietary technologies are designed towork with technologies from other companies. We expect to continue to developadditional proprietary technology where feasible and to purchase or licensetechnology where cost-effective. Our technology efforts focus on the followingareas:

·       *Access and Internet technology.  *The delivery of oursolutions can be complex in part because it involves the continuous collection,storage and processing of data from subscribers in the field and from workorder and customer service systems deployed by our customers, as well as the processingof requests from users and third party applications accessing our data centersfrom the Internet. To manage the throughput of customer information and todeliver our solutions to our customers, we use secure Internet connectionsbetween our data centers and customers and between our data centers and thewireless networks transmitting customer information.

·       *Software applications.  *We have a software developmentorganization that designs, builds and tests new software for use with oursolutions. This organization includes personnel and other resources in Fremont,California, Ipswich, England and Chennai, India. We have created a speciallydesigned environment that is intended to accelerate the development and testingof new software without impacting the availability of our solutions to existingcustomers. We also design, build and test software for installation in thehardware devices that are used to deliver our solutions, including the *i*LM, Internet Data Terminal or *i*DT(our messaging and business forms field client device) and mobile telephones.

·       *Wireless technology.  *Our hosted solutions currentlyoperate on several wireless networks offered by a number of wireless carriers,including GPRS, CDMA 1XRTT, EDGE,EvDO, and Integrated Digital Enhanced Network (“iDEN”). Certain of ourhosted solutions also are designed to use satellite wireless communications.

·       *Informationtechnology.  *We have an information technology organizationdedicated to maintaining and enhancing our data centers. By using our datacenters, we relieve our customers of the development and operations burden ofmanaging wireless communications protocols, location technologies, hostedsoftware applications, transaction processing infrastructure and Internettechnologies. Our data centers include servers located in Redwood City,California and Ashburn, Virginia and at our network operations center inFremont, California. We maintain variable-speed capacity connectionsbetween our data centers and the Internet and dedicated connections to thewireless networks we use. In addition, our data centers automatically replicatecustomer data on a minute-by-minute basis. In the event of a power failure, oursystems would be powered by a backup power supply.

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**Key Alliances and Relationships**

We intend tocontinue to establish relationships with third parties for the purpose ofaccelerating the adoption of our solutions. We believe that establishingstrategic relationships will facilitate our technological leadership andprovide early access to emerging technologies and new customers. Some of ourexisting relationships include:

·       *Wireless carriers.  *We have established relationshipswith Bell Mobility, Cingular Wireless (which acquired AT&T Wireless, andtherefore our relationship with AT&T Wireless, in October 2004), NextelPartners, Sprint (which acquired Nextel Communications and therefore, ourrelationship with Nextel Communications, in August 2005), TELUS Mobilityand Verizon Wireless to provide wireless connectivity between our subscribersand the Internet. With Bell Mobility, Nextel Partners, TELUS Mobility andVerizon Wireless, our customers generally have separate contracts for wirelesscommunications with the carrier. With Sprint and Cingular Wireless, we contractwith the carriers to provide wireless communications which are bundled with oursolutions, to certain customers, while other customers contract directly withthese carriers for wireless communications. In addition, we have established arelationship with Nextel Communications (now Sprint) by which it can resellcertain @Road solutions in exchange for monthly fees.

·       *SystemIntegrators.  *We have established relationships with thirdparties who assist us in marketing and selling our solutions. For example, wehave established a relationship with LogicaCMG, enabling it to integrate ourTaskforce solution with LogicaCMG products and market the combined solution inthe United States utilities industry.

**Sales and Marketing**

Our sales andmarketing objective is to achieve broad market penetration through verticalmarketing and targeted sales activities. We currently market and sell oursolutions through several sales channels, including the following:

·       *Strategic sales force.  *We have a team of salesemployees focused on marketing and selling our solutions to enterprise accounts.Enterprise accounts are defined as prospects with greater than 1,000 mobileresources. The sales process with enterprise accounts often requires manymonths of activity, is competitive and requires a pilot test of our solutions. Thissales force includes personnel in the United States, Europe and Australia.

·       *Major account sales force.  *We have a team of salesemployees focused on marketing and selling our solutions to major accounts. Majoraccounts are defined as customers with 101 to 1,000 mobile resources. Thissales force is geographically dispersed throughout the United States and in theUnited Kingdom.

·       *Inside sales force.  *We have a team of sales employeesfocused on marketing and selling our solutions to small business customers andselling additional solutions to existing customers. This sales force is locatedin Fremont, California.

·       *Agent sales force.  *We have a team of sales employeeswho manage a network of sales agents focused on marketing and selling oursolutions. These sales agents are geographically dispersed throughout theUnited States. Participants in the agent sales program are compensated for thesales of our solutions. Sales agents facilitate sales of our solutions throughtheir own efforts and work with wireless carrier alliances to increase ourcustomer base.

·       *Wireless carrier sales force.  *We have a team of sales employeesfocused on marketing and selling our solutions with the sales personnel ofwireless carriers. These wireless carriers include Cingular Wireless, Sprint andVerizon Wireless. These carrier alliances market or facilitate sales of our 

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solutions through theirown sales channels or work with our dedicated wireless carrier sales force toincrease our customer base.

Our marketing department is engaged in a variety ofactivities, such as awareness and lead generation programs, development ofcollateral and sales tools, public relations, seminars, direct mail, tradeshows, and co-marketing with third parties.

We spent $21.4 million,$12.3 million and $11.4 million on sales and marketing activities in 2005, 2004and 2003, respectively. As of December 31, 2005, our sales and marketingteam consisted of 117 employees.

**Competition**

We face strong competition for our solutions, and thiscompetition is expected to increase in the future. We compete primarily on thebasis of functionality, integration capability, deployment expertise, ease ofuse, quality, price, service availability, customer service and corporatefinancial strength. As the demand for MRM solutions increases, the quality,functionality and breadth of competing products and services will likelyimprove and new competitors will likely enter our market. In addition, thewidespread adoption of industry standards and the deployment of high-speedwireless data networks may make it easier for new market entrants or existingcompetitors to improve their existing products and services, to offer some orall of the products and services we offer or may offer in the future, or tooffer new products and services that we do not offer. We also do not know towhat extent network infrastructure developers and wireless network operatorswill seek to provide integrated wireless communications, GPS, softwareapplications, transaction processing, and Internet solutions, including accessdevices developed internally or through captive suppliers.

If we are unable tocompete successfully, our business may suffer and our sales cycles couldlengthen, resulting in a loss of market share or revenues. We face competitionfrom a number of different business productivity solution providers, including:

·       Solutionsdeveloped internally by our prospective customers’ information technologystaffs, particularly by large companies;

·       Discretemeans of communication with mobile workers, such as pagers, two-way radios,hand-held devices and wireless telephones;

·       Solutionstargeted at specific vertical markets, such as services offered by Qualcommthat monitor assets in the long-haul transportation sector;

·       Solutionsdesigned to help companies schedule and route their mobile workers; and

·       Solutionsoffered by smaller market entrants.

Many of our existing andpotential competitors have substantially greater financial, technical,marketing and distribution resources than we do. Additionally, many of thesecompanies have greater name recognition and more established relationships withour target customers. Furthermore, these competitors may be able to adopt moreaggressive pricing policies and offer customers more attractive terms than wecan.

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**Raw Materials**

See the risk factor underItem 1A below entitled “We depend on a limited number of third parties tomanufacture and supply certain components of our solutions,” which is incorporatedherein by this reference.

**Intellectual Property**

We rely on a combination of patent, trade secret,trademark and copyright laws, nondisclosure agreements and other contractualrestrictions to protect our proprietary technology. As of December 31, 2005,we possessed 21 patents, which we believe cover various aspects of our hostedsolutions and elements of our licensed software solutions. We also havenumerous additional patents pending in jurisdictions throughout the world. Wehave filed and intend to continue to file patent applications in any countrywhere we believe there is a strategic, technological or business justification.

As part of our confidentiality procedures, wegenerally enter into nondisclosure agreements with our employees, consultants,distributors and corporate alliances and limit access to and distribution ofour software, documentation and other proprietary information. In the eventthat a third party breaches the confidentiality provisions or other obligationsin one or more of our agreements or misappropriates or infringes ourintellectual property or the intellectual property licensed to us by thirdparties, our business could be seriously harmed. Third parties mayindependently discover or invent competing technologies or reverse engineer ourtrade secrets, software or other technology. Furthermore, laws in some foreigncountries may not protect our proprietary rights to the same extent as the lawsof the United States. Therefore, the measures we take to protect our proprietaryrights may not be adequate.

Third parties may claimthat our current or future products or services infringe their proprietaryrights or assert other claims against us. As the number of entrants into ourmarket increases, the possibility of an intellectual property or other claimagainst us grows. Any intellectual property or other claim, with or withoutmerit, would be time-consuming and expensive to litigate or settle and coulddivert management attention from focusing on our core business. As a result ofsuch a dispute, we may have to pay damages, incur substantial legal fees,develop costly non-infringing technology, if possible, or enter into licenseagreements, which may not be available on terms acceptable to us, if at all.Any of these results would increase our expenses and could decrease thefunctionality of our solutions, which would make our solutions less attractiveto our current or potential customers. We have agreed in some of ouragreements, and may agree in the future, to indemnify other parties for anyexpenses or liabilities resulting from claimed infringements of the proprietaryrights of third parties.

**Employees**

As of December 31, 2005, we had 582 employees,344 of whom were located in the United States, 127 of whom were located inIndia and 111 of whom were located in the United Kingdom. Our future success issubstantially dependent on the performance of our executives, senior managementand key technical personnel, and on our ability to find and retain highlyqualified technical and managerial personnel. We believe relationships with ouremployees are good.

**Segments**

Reportable segments are based upon our internalorganization structure, the manner in which the operations are managed, thecriteria used by our chief operating decision-maker to evaluate segmentperformance, the availability of separate financial information and overallmateriality considerations. The chief operating decision-maker is our ChiefExecutive Officer.

Effective with the acquisition of Vidus, we report theresults of our operations in two segments: Hosted and Licensed. The segmentsare managed separately because each offers different products and 

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serves different segmentsof the market. The Hosted segment provides FFM and FAM solutions that connectmobile workers in the field to corporate data on demand, help measure overallmobile workforce performance and manage mobile assets. The Licensed segmentprovides customers with our FSM solution, which is designed to enable apredictable and reliable customer experience from commitment to servicefulfillment; and to help synchronize the call center and field serviceoperations.

The financial information used by our chief operatingdecision-maker includes net revenue from external customers, gross margin andnet income (loss) for each of these segments.

For an analysis offinancial information about geographic areas as well as our segments, see “Note 12—SegmentReporting” to our consolidated financial statements incorporated herein.

**Available Information**

Our primary Internetaddress is *www.road.com*. We make our periodic SECreports (Forms 10-Q and Forms 10-K) and current reports (Forms 8-K)available free of charge through our website as soon as reasonably practicableafter they are filed electronically with the SEC. We may from time to timeprovide important disclosures to investors by posting them in the investorrelations section of our website, as allowed by SEC rules.

**Item 1A.**                *Risk Factors*

In addition to the other information contained in thisReport, the following factors should be carefully considered in evaluating ourbusiness and prospects. The risks and uncertainties described below areintended to be ones that are specific to us or our industry and that we deemmaterial, but they are not the only ones that we face.

**On February 18, 2005, we acquired Vidus. Thecombined company may not realize expected benefits because of integration andother challenges.**

If the combined company fails to meet the challengesinvolved in integrating operations and products successfully or otherwise failsto realize any of the anticipated benefits of the acquisition, then the resultsof operations of the combined company could be seriously harmed. Realizing thebenefits of the acquisition, if any, will depend in part on the successfulintegration of technology, operations and personnel. The integration of thecompanies is a complex, time-consuming and expensive process that couldsignificantly disrupt the business of the combined company.

The combined company may not successfully integratethe operations of @Road and Vidus in a timely manner, or at all, and thecombined company may not realize the anticipated benefits of the acquisition tothe extent, or in the timeframe, anticipated. The anticipated benefits of theacquisition are based on projections and assumptions, including successfulintegration, not actual experience. In addition to the integration risksdiscussed above, the combined company’s ability to realize those benefits couldbe adversely affected by practical or legal constraints on its ability tocombine operations.

**If thevalue of Vidus’ goodwill and or intangibles becomes impaired, we may berequired to incur significant costs that would adversely affect our financialresults.**

Under the purchase method of accounting, the combinedcompany allocated the total estimated purchase price of $46.3 million to Vidus’tangible assets, purchased technology and other intangible assets andliabilities assumed based on their fair values as of the date of completion ofthe acquisition, and recorded the excess of the purchase price over those fairvalues as goodwill. The combined company will incur amortization expense overthe useful lives of amortizable intangible assets acquired in connection withthe acquisition. In addition, to the extent the value of goodwill and orintangibles becomes impaired, the combined company may be required to incurmaterial charges relating to the impairment of these 

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assets. Any potentialimpairment charge could have a material impact on the combined company’sresults of operations and could have a material adverse effect on the marketvalue of our common stock.

**Ifwireless communications providers on which we depend for services decide to adoptnew wireless technologies, or abandon or do not continue to expand theirwireless networks, our operations may be disrupted, we may lose customers andour revenues could decrease.**

Currently, our solutions function on GPRS, CDMA 1xRTT,EvDO, EDGE and iDEN networks. These protocols cover only portions of the UnitedStates, Europe and Canada. We recently completed a costly and time consumingmigration from CDPD, to the protocols set forth above, after wirelesscommunications providers abandoned their CDPD networks in favor of newertechnology. If wireless communications providers abandon the protocols uponwhich our solutions now function in favor of other types of wirelesstechnology, we may not be able to provide services to our customers, or we maybe forced to incur considerable costs in order to adapt our solutions to newprotocols. In addition, if cellular carriers do not expand their coverageareas, we will be unable to meet the needs of customers who may wish to use ourservices outside the current cellular coverage area.

**Anymaterial weakness or significant deficiency identified in our internal controlscould have an adverse effect on our business.**

Section 404 of the Sarbanes-Oxley Act of2002 requires that companies evaluate and report on their internal controlstructure and procedures for financial reporting. As part of our first quarter2005 and fourth quarter 2005 closing processes and assessments of internal controlover our financial reporting, we identified two internal control deficienciesthat constituted material weaknesses. The first material weakness concerned ourinterpretation and implementation of various complex accounting principles inthe area of non-recurring transactions, and the second concerned our calculationand timely review of the annual tax provision for 2005. Please see Item 9AControls and Procedures in Part II of this Report. There can be no assurancethat there will not be other significant deficiencies or material weaknessesthat would be required to be reported in the future. In addition, we expect theevaluation process and any required remediation, if applicable, will increaseour accounting, legal and other costs, and may divert management resources fromother business objectives and concerns.

**Our stock price is volatile, which may cause youto lose money and could lead to costly litigation against us that could divertour resources.**

From time to time, stock markets experience dramaticprice and volume fluctuations, particularly for shares of technology companies.These fluctuations can be unrelated to the operating performance of thesecompanies. Broad market fluctuations may reduce the market price of our commonstock and cause you to lose some or all of your investment. These fluctuationsmay be exaggerated if the trading volume of our common stock is low. Inaddition, due to the technology-intensive nature and growth rate of ourbusiness and the MRM market, the market price of our common stock may rise andfall in response to:

·       quarterlyvariations in operating results;

·       failureto achieve operating results anticipated by securities analysts and investors;

·       changesin estimates of our financial performance or changes in recommendations bysecurities analysts;

·       announcementsof technological or competitive developments;

·       thegain or loss of a significant customer or order;

·       dispositionof shares of our common stock held by large investors; and

·       acquisitionsor strategic alliances by us or our competitors.

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When the market price of a company’s stock dropssignificantly, stockholders often institute securities class action lawsuitsagainst that company. A lawsuit against us could cause us to incur substantialcosts and could divert the time and attention of our management and otherresources from our business.

**We facecompetition from internal development teams of potential customers and fromexisting and potential competitors, and if we fail to compete effectively, ourability to acquire new customers could decrease, our revenues would decline andour business would suffer.**

The market for MRMsolutions is competitive and is expected to become even more competitive in thefuture. If we do not compete effectively, competition could harm our businessand limit our ability to acquire new customers and grow revenues, which in turncould result in a loss of our market share and decline in revenues. We believethat our solutions face competition from a number of business productivitysolutions, including:

·       solutionsdeveloped internally by our prospective customers’ information technologystaff, particularly by large customer prospects;

·       discretemeans of communication with mobile workers, such as pagers, two-way radios,handheld devices and cellular telephones;

·       solutionstargeted at specific vertical markets, such as a service offered by Qualcommthat monitors assets in the long-haul transportation sector;

·       solutionsdesigned to help companies schedule and route their mobile workers; and

·       solutionsoffered by smaller market entrants, many of which are privately held andoperate on a regional basis.

In addition, we believe that our solutions facecompetition from manufacturing companies that seek to enter the mobile resourcemanagement market, such as Trimble Navigation.

We may also face competition from our current andpotential alliances, such as wireless carriers, that may develop their ownsolutions, develop solutions with captive and other suppliers or support themarketing of solutions of other competitors.

We also facenumerous challenges associated with overcoming the following competitivefactors:

·       *Size and resources.  *Many of our current and potentialcompetitors have access to substantially greater financial, marketing,distribution, engineering and manufacturing resources than we do, which mayenable them to react more effectively to new market opportunities and customerrequirements. Furthermore, these competitors may be able to adopt moreaggressive pricing policies and offer more attractive terms than we can.

·       *Name recognition.  *Many of our current and potentialcompetitors have greater name recognition and market presence than we do, whichmay allow them to more effectively market and sell solutions to our current andpotential customers.

·       *Limits of product and service offerings.  *Although weoffer a broad range of mobile resource management solutions, a customer prospectmay require functionality that we do not offer, which may enable current andpotential competitors to exploit the areas in which we do not developsolutions.

·       *Customer relationships.  *Many of our current andpotential competitors have pre-existing relationships with our large customerprospects, which may allow them to more effectively market and sell competitiveMRM solutions.

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**As weseek to serve larger customers, we face competition from businesses withgreater financial resources, and we may be unable to compete effectively withthese businesses.**

The existing market is competitive. Competition isparticularly vigorous for larger customers, which is a customer segment we haveworked to serve. We expect competition to increase further as companies developnew products and/or modify their existing products to compete directly withours. In addition, competitors may reduce prices to customers and seek toobtain our customers through cost-cutting and other measures. To the extentthese companies compete effectively with us, our business could be adverselyaffected by extended sales cycles, fewer sales, and lower prices, revenue andmargins.

**Under theterms of our customer contracts for our hosted solutions, once the contractperiod expires, a customer may terminate our services with little or no notice.**

Our customer contracts for our hosted solutionstypically provide for a contract period of one, two or three years. Under theterms of a typical contract, a customer will often be subject to a termination feeif it chooses to terminate the contract before the contract period expires. Oncethe contract period has expired, and unless a customer has executed a newcontract, the terms of the contract will remain in force on a month-to-monthbasis, allowing the customer to terminate the contract by giving very shortnotice and without incurring any termination fee. The termination of asignificant number of customer contracts or customer contracts providing amaterial portion of our revenues, could cause our business to suffer andadversely affect our financial results.

**Ourbusiness is subject to the risks associated with international operations.**

We recently began offering our products and servicesin the United Kingdom and Europe, and we have operations in India. Asignificant portion of our revenue is derived from our international operations.We have limited experience operating in these foreign jurisdictions. As aresult, our operating results and financial condition could be significantlyaffected by risks associated with international activities, including economicand labor conditions, political instability, tax laws (including United Statestaxes on foreign subsidiaries), the enactment of new laws affecting ouractivities, government regulation of our activities, and changes in the valueof the United States dollar relative to the local currency in which ourproducts are sold and our goods and services are purchased.

**Ourquarterly operating results are subject to fluctuations, and our stock pricemay decline if we do not meet the expectations of investors and analysts.**

Our quarterlyrevenues and operating results are difficult to predict and may fluctuatesignificantly from quarter to quarter due to a number of factors, many of whichare outside our control. These factors include, but are not limited to:

·       changesin the market for MRM solutions;

·       delaysin market acceptance or implementation of our solutions by customers;

·       changesin length of sales cycles of, or demand by, our customers for existing and additionalsolutions;

·       changesin the productivity of our distribution channels;

·       introductionof new solutions by us or our competitors;

·       changesin our pricing policies or those of our competitors or suppliers;

·       changesin our mix of sources of revenues;

·       generaleconomic and political conditions;

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·       wirelessnetworks, positioning systems and Internet infrastructure owned and controlledby others; and

·       anyneed to migrate to new wireless networks, which could cause our solutions to beincompatible with new wireless networks or become out of date.

Our expense levels are based, in part, on ourexpectation of future revenues. Additionally, a substantial portion of ourexpenses is relatively fixed. As a result, any shortfall in revenues relativeto our expectations could cause significant changes in our operating resultsfrom quarter to quarter. We believe period-to-period comparisons of our revenuelevels and operating results are not meaningful. You should not rely on ourquarterly revenues and operating results to predict our future performance. Ouroperating results have been, and in some future quarters our operating resultsmay be, below the expectations of public market analysts and investors and, asa result, the price of our common stock may fall.

**Oursuccess depends upon our ability to develop new solutions and enhance ourexisting solutions. If we cannot deliver the features and functionality ourcustomers demand, we will be unable to retain or attract new customers.**

If we are unable to develop new solutions, are unableto enhance and improve our solutions successfully in a timely manner, or failto position and/or price our solutions to meet market demand, we may notattract new customers, existing customers may not expand their use of our solutions,and our business and operating results will be adversely affected. If ourenhancements to existing solutions do not deliver the functionality that ourcustomer base demands, our customers may choose not to renew their agreementswith us when they reach the end of their initial contract periods, and ourbusiness and operating results will be adversely affected. If we cannoteffectively deploy, maintain and enhance our solutions, our revenues maydecrease, we may not be able to recover our costs, and our competitive positionmay be harmed.

**If one ormore of the agreements we have with wireless communications providers isterminated and as a result, we are unable to offer our solutions to customerswithin a wireless communications provider’s coverage area, we may be unable todeliver our solutions, we may lose customers, and our revenues could decrease.**

Our existing agreements with wireless communicationsproviders may, in some cases be terminated immediately upon the occurrence ofcertain conditions or with prior written notice. If one or more of our wirelesscommunications providers decides to terminate or not to renew its contract withus, we may incur additional costs relating to obtaining alternate coverage fromanother wireless communications provider outside of its primary coverage area,or we may be unable to replace the coverage at all, causing a complete loss ofservices to our customers in that coverage area.

**We have ahistory of losses, have only recently become profitable and may not sustain or increaseprofitability in the future.**

We have only recently become profitable and may notsustain or increase profitability in the future. As of December 31, 2005,we had an accumulated deficit of approximately $78.4 million. To sustainprofitability, we will need to generate significant revenues to offset our costof revenues and our sales and marketing, research and development and generaland administrative expenses. We may not achieve or sustain our revenue orprofit goals and may incur losses in the future. Changes such as increases in ourpricing for solutions or the pricing of competing solutions may harm ourability to increase sales of our solutions to new and existing customers. If weare not able to expand our customer base and increase our revenue from new andexisting customers, we may be unprofitable.

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**We mayestablish alliances or acquire technologies or companies in the future, whichcould result in the dilution of our stockholders and disruption of ourbusiness, which could reduce our revenues or increase our costs.**

We are continuallyevaluating business alliances and external investments in technologies relatedto our business. Acquisitions of companies, divisions of companies, businessesor products and strategic alliances entail numerous risks, any of which couldmaterially harm our business in several ways, including:

·       diversionof management’s attention from our core business objectives and other businessconcerns;

·       failureto integrate efficiently businesses or technologies acquired in the future withour pre-existing business or technologies;

·       potentialloss of key employees from either our pre-existing business or the acquiredbusiness;

·       dilutionof our existing stockholders as a result of issuing equity securities; and

·       assumptionof liabilities of the acquired company.

Some or all of these problems may result from currentor future alliances, acquisitions or investments. Furthermore, we may notrealize any value from these alliances, acquisitions or investments.

**We dependon a limited number of third parties to manufacture and supply certaincomponents of our solutions.**

We rely on a limited number of sole suppliers forcertain components of our solutions. We do not have long-term agreementswith these suppliers. If these parties do not perform their obligations, or ifthey cease to supply the components needed for our solutions, we may be unableto find other suppliers and our business would be seriously harmed. We cannotbe sure that alternative sources for these components will be available whenneeded, or if available, that these components will be available oncommercially reasonable terms. These sole suppliers include Motorola, whichsupplies microcontrollers for use in our Internet Location Manager andMicronet, which supplies our *i*DT.

It is our practice to attempt to maintain no more thana three to nine month supply of microcontrollers, *i*DTdevices and other components and devices needed for our solutions. Although webelieve that we have sufficient quantities of such components and devices tolast the next three to nine months, if our agreements with these or othersuppliers and manufacturers are terminated or expire, if we are unable toobtain sufficient quantities of these products or components critical for oursolutions, if the quality of these products or components is inadequate, or ifthe terms for supply of these products or components become commerciallyunreasonable, our search for additional or alternate suppliers andmanufacturers could result in significant delays, added expense and ourinability to maintain or expand our customer base. Any of these events couldrequire us to take unforeseen actions or devote additional resources to provideour products and services and could harm our ability to compete effectively.

**Adisruption of our services or of our software applications due to accidental orintentional security breaches may harm our reputation, cause a loss of revenuesand increase our expenses.**

Unauthorized access, computer viruses and otheraccidental or intentional actions could disrupt our information systems orcommunications networks or could adversely impact the functionality andsecurity of our software products. We expect to incur significant costs toprotect against the threat of security breaches and to alleviate problemscaused by any breaches. Currently, the wireless transmission of our customers’proprietary information is not protected by encryption technology. If a thirdparty were to misappropriate our customers’ proprietary information oradversely impact the operations of our customers, we could be subject toclaims, litigation or other potential liabilities that could seriously harm ourrevenues and result in the loss of customers.

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**System ornetwork failures could reduce our sales, increase costs or result in liabilityclaims.**

Any disruption to our services, information systems orcommunications networks or those of third parties could result in the inabilityof our customers to receive our services for an indeterminate period of time. Ourhosted solutions and related operations depend upon our ability to maintain andprotect our computer systems at data centers located in Ashburn, Virginia andRedwood City, California, and our network operations center in Fremont,California. The facilities in California are in or near earthquake fault zones.Our services may not function properly and we may not be able to adequatelysupport and maintain our software products if our systems fail, if there is aninterruption in the supply of power, or if there is an earthquake, fire, floodor other natural disaster, or an act of war or terrorism. Within each of ourdata centers, we have fully redundant systems; however, in the event of asystem or network failure, the process of shifting access to customer data fromone data center to the other would be performed manually, and could result in afurther disruption to our services and our ability to adequately support andmaintain our software products. Any disruption to our services could cause usto lose customers or revenue, or face litigation, customer service or repairwork that would involve substantial costs and could distract management fromoperating our business.

**Oursuccess and ability to compete depend upon our ability to secure and protectpatents, trademarks and other proprietary rights.**

Our success and ability to compete depend on ourability to protect our proprietary rights to the technologies used to implementand operate our solutions in the United States, the United Kingdom and in othercountries. In the event that a third party breaches the confidentialityprovisions or other obligations in one or more of our agreements ormisappropriates or infringes our intellectual property rights or theintellectual property rights licensed to us by third parties, our businesscould be seriously harmed. To protect our proprietary rights, we rely on acombination of trade secrets, confidentiality and other contractual provisionsand agreements, and patent, copyright and trademark laws, which afford us onlylimited protection. Third parties may independently discover or inventcompeting technologies or reverse engineer our trade secrets, software or othertechnology. Furthermore, laws in some foreign countries may not protect ourproprietary rights to the same extent as the laws of the United States. Therefore,the measures we take to protect our proprietary rights may not be adequate.

**Claimsthat we infringe third-party proprietary rights could result insignificant expenses or restrictions on our ability to provide our solutions.**

Third parties may claim that our current or futuresolutions infringe their proprietary rights or assert other claims against us. Asthe number of entrants into our market increases, the possibility of anintellectual property or other claim against us grows. Any intellectualproperty or other claim, with or without merit, would be time-consuming andexpensive to litigate or settle and could divert management’s attention fromour core business. As a result of such a dispute, we may have to pay damages,incur substantial legal fees, develop costly non-infringing technology, ifpossible, or enter into license agreements, which may not be available on termsacceptable to us, if at all. Any of these results would increase our expensesand could decrease the functionality of our solutions, which would make oursolutions less attractive to our current or potential customers. We have agreedin some of our agreements, and may agree in the future, to indemnify otherparties for any expenses or liabilities resulting from claimed infringements ofthe proprietary rights of third parties.

**If ourcustomers do not have access to sufficient capacity on reliable wirelessnetworks, we may be unable to deliver our services, our customers’ satisfactioncould decline and our revenues could decrease.**

Part of our ability to grow and maintainprofitability depends on the ability of wireless carriers to provide sufficientnetwork capacity, reliability and security to our customers. Even wherewireless carriers provide coverage to entire metropolitan areas, there areoccasional lapses in coverage, for example due to 

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tunnels blocking thetransmission of data to and from wireless modems used with our solutions. Theseeffects could make our services less reliable and less useful, and customersatisfaction could suffer.

**We dependon GPS technology owned and controlled by others. If we do not have continuedaccess to GPS technology or satellites, we will be unable to deliver a majorityof our solutions and revenues will decrease.**

A majority of our solutions rely on signals from GPSsatellites built and maintained by the United States Department of Defense. GPSsatellites and their ground support systems are subject to electronic andmechanical failures and sabotage. If one or more satellites malfunction, therecould be a substantial delay before they are repaired or replaced, if at all,our products and services may cease to function, and customer satisfactionwould suffer.

In addition, the United States government could decideto discontinue operation and maintenance of GPS satellites or to charge for theuse of GPS. Furthermore, because of ever-increasing commercial applications ofGPS and international political unrest, United States government agencies maybecome increasingly involved in the administration or the regulation of the useof GPS signals in the future. If factors such as the foregoing affect GPS, forexample by affecting the availability, quality, accuracy or pricing of GPStechnology, our business will suffer.

**Defectsor errors in our solutions could result in the cancellation of or delays in theimplementation of our solutions, which would damage our reputation and harm ourfinancial condition.**

We must develop our solutions quickly to keep pacewith the rapidly changing MRM market. Solutions that address this market arelikely to contain undetected errors or defects, especially when firstintroduced or when new versions are introduced. We may be forced to delaycommercial releases of new solutions or updated versions of existing solutionsuntil such errors or defects are corrected, and in some cases, we may need toimplement enhancements to correct errors that were not detected until afterdeployment of our solutions. Even after testing and release, our solutions maynot be free from errors or defects, which could result in the cancellation ordisruption of our services or dissatisfaction of customers. In some cases,customers may terminate their agreements with us without penalty if thesolution we have provided does not meet the specifications agreed upon by theparties. Such contract terminations or customer dissatisfaction would damageour reputation and result in lost revenues, diverted development resources, andincreased support and warranty costs.

**Theproduction or reporting of inaccurate information could cause the loss ofcustomers and expose us to legal liability.**

The accurate production and reporting of informationis critical to our customers’ businesses. If we fail to accurately produce andreport information, we could lose customers, our reputation and ability toattract new customers could be harmed, and we could be exposed to legalliability. We may not have insurance adequate to cover losses we may incur as aresult of these inaccuracies.

**Oursuccess depends on our ability to maintain and expand our sales channels.**

To increase our market awareness, customer base andrevenues, we need to expand our direct and indirect sales operations. There isstrong competition for qualified sales personnel, and we may not be able toattract or retain sufficient new sales personnel to expand our operations. Newsales personnel require training, and it takes time for them to achieve fullproductivity, if at all. In addition, we believe that our success is dependenton the expansion of our indirect distribution channels, including ourrelationships with wireless carriers, independent sales agents and resellers. Thesesales channel alliances require training in selling our solutions and it willtake time for these alliances to achieve productivity, if at all. We may not beable to establish relationships with additional distributors on a timely basis,or at all. Our independent sales agents and resellers, many of which are notengaged with us on an exclusive basis, may not devote adequate resources topromoting and selling our solutions.

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**We dependon recruiting and retaining qualified personnel, and our inability to do so mayresult in a loss in sales, impair our ability to effectively manage ouroperations or impair our ability to develop and support our solutions.**

Because of the technical nature of our solutions andthe market in which we compete, our success depends on the continued servicesof our current executive officers and our ability to attract and retainqualified personnel with expertise in wireless communications, GPStechnologies, hosted software applications, transaction processing and theInternet. Competitors and others have recruited our employees in the past andmay attempt to do so in the future. In addition, new employees generallyrequire substantial training, which requires significant resources andmanagement attention. Even if we invest significant resources to recruit, trainand retain qualified personnel, there can be no assurances that we will besuccessful in our efforts.

**From timeto time, we are or may be subject to litigation that could result insignificant costs to us.**

From time to time, we are or may be subject tolitigation in the ordinary course of business relating to any number or type ofclaims, including claims for damages related to errors and malfunctions of ourproducts and services or their deployment. A securities, product liability,breach of contract, or other claim could seriously harm our business because ofthe costs of defending the lawsuit, diversion of employees’ time and attention,and potential damage to our reputation. Some of our agreements with customers,suppliers and other third parties contain provisions designed to limit exposureto potential claims. Limitation of liability provisions contained in ouragreements may not be enforceable under the laws of some jurisdictions. As aresult, we could be required to pay substantial amounts of damages insettlement or upon the determination of any of these types of claims. Althoughwe carry general liability and directors and officers insurance, our insurancemay not cover potential claims or may not be adequate to cover all costsincurred in defense of potential claims or to indemnify us for all liabilitiesthat may be imposed.

**Government regulations and standards could subject usto increased regulation, increase our costs of operations or reduce ouropportunities to earn revenue.**

In addition to regulations applicable to businesses ingeneral, we may also be subject to direct regulation by United Statesgovernmental agencies, including the Federal Communications Commission,Department of Defense, Department of Commerce or the State Department. Theseregulations may impose licensing requirements, privacy safeguards relating tocertain subscriber information, or safety standards, for example with respect tohuman exposure to electromagnetic radiation and signal leakage. A number oflegislative and regulatory proposals under consideration by federal, state,provincial, local and foreign governmental organizations may lead to laws orregulations concerning various aspects of the Internet, wireless communicationsand GPS technology, including on-line content, user privacy, taxation, accesscharges and liability for third-party activities. Additionally, it isuncertain how existing laws governing issues such as taxation on the use ofwireless networks, intellectual property, libel, user privacy and propertyownership will be applied to our solutions. The adoption of new laws or theapplication of existing laws may expose us to significant liabilities andadditional operational requirements, which could decrease the demand for oursolutions and increase our cost of doing business. Wireless communicationsproviders who supply us with airtime are subject to regulation by the FederalCommunications Commission, and regulations that affect them could also increaseour costs or limit our ability to provide our solutions.

**Fluctuations in the value of foreign currencies couldresult in decreased revenues, increased product costs and operating expenses.**

We have customers, suppliers and manufacturers thatare located outside the United States. Some transactions relating to supply anddevelopment agreements may be conducted in currencies other than the UnitedStates dollar, and fluctuations in the value of foreign currencies relative tothe United States dollar 

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could cause us to incurcurrency exchange costs. In addition, some of our transactions denominated inUnited States dollars may be subject to currency exchange rate risk. We cannotpredict the effect of exchange rate fluctuations on our future operatingresults. Should there be a sustained increase in average exchange rates for thelocal currencies in these countries, our suppliers and manufacturers mayrequest a price increase at the end of the contract period.

**Geopolitical, economic and military conditions,including terrorist attacks and other acts of war, may materially and adverselyaffect the markets on which our common stock trades, the markets in which weoperate, our operations and our profitability.**

Terrorist attacks and other acts of war, and anyresponse to them, may lead to armed hostilities and such developments wouldlikely cause instability in financial markets. Armed hostilities and terrorismmay directly impact our facilities, personnel and operations which are locatedin the United States, the United Kingdom and India, as well as those of ourcustomers and suppliers. Furthermore, severe terrorist attacks or acts of warmay result in temporary halts of commercial activity in the affected regions,and may result in reduced demand for our solutions. These developments couldhave a material adverse effect on our business and the trading price of ourcommon stock.

**As of February 15, 2006, a limited number ofstockholders own approximately 29% of our stock and may act, or prevent certaintypes of corporate actions, to the detriment of other stockholders.**

Our directors, officers and greater than 5%stockholders own, as of February 15, 2006, approximately 29% of ouroutstanding common stock. Accordingly, these stockholders may, if they acttogether, exercise significant influence over all matters requiring stockholderapproval, including the election of a majority of the directors and thedetermination of significant corporate actions. This concentration could alsohave the effect of delaying or preventing a change in control that couldotherwise be beneficial to our stockholders.

**Our certificate of incorporation and bylaws and statelaw contain provisions that could discourage a takeover.**

Wehave adopted a certificate of incorporation and bylaws, which in addition tostate law, may discourage, delay or prevent a merger or acquisition that astockholder may consider favorable. These provisions include the following:

·       establishinga classified board in which only a portion of the total board members will beelected at each annual meeting;

·       authorizingthe board to issue preferred stock;

·       prohibitingcumulative voting in the election of directors;

·       limitingthe persons who may call special meetings of stockholders;

·       prohibitingstockholder action by written consent; and

·       establishingadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted on by stockholders atstockholder meetings.

We have adopted acertificate of incorporation that permits our board to issue shares ofpreferred stock without stockholder approval, which means that our board couldissue shares with special voting rights or other provisions that could deter atakeover. In addition to delaying or preventing an acquisition, the issuance ofa substantial number of shares of preferred stock could adversely affect theprice of our common stock and dilute existing stockholders.

**Item 1B.**               *Unresolved Staff Comments*

None.

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**Item 2.**                        *Properties*

Wehave offices in California, India, the United Kingdom and Germany.

| Location                 | ** ** | ** ** | ** ** | **Ownership** | ** ** | **Square  Feet**                                                 | ** ** | **Primary Use** | ** ** | **Lease  Expiration** |
|--------------------------|------------|------------|------------|---------------|------------|------------------------------------------------------------------|------------|-----------------|------------|-----------------------|
| Fremont, CA              |       | Leased     |       | 102,544       |       | Corporate headquarters                                           |       | 5/16/2010       |
| Chennai, India           |       | Leased     |       | 10,050        |       | Research and  development, customer service                      |       | 5/31/2006       |
| Chennai, India           |       | Leased     |       | 37,910        |       | Research and  development, customer service                      |       | 1/31/2009       |
| Ipswich, United  Kingdom |       | Leased     |       | 10,494        |       | Research and  development, customer service, sales and marketing |       | 9/28/2014       |
| Derby, United Kingdom    |       | Leased     |       | 2,500         |       | Customer service                                                 |       | 9/30/2008       |

 

While we believe our existing facilities are adequateto meet our immediate needs, it may become necessary to lease or acquireadditional or alternative space to accommodate any future growth.

For a discussion of theaccounting treatment of our leased properties, see “Note 13—Commitments andContingencies” to our consolidated financial statements, included elsewhere inthis Report.

**Item 3.**                        *Legal Proceedings*

From time to time, weinstitute or are subject to claims in legal proceedings arising in the normalcourse of our business. We do not believe that we are party to any pendinglegal action that could reasonably be expected to have a material adverseeffect on our business, financial condition, or operating results.

**Item 4.**                        *Submission of Matters to a Vote of Security Holders*

None.

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**PART II**

**Item 5.        *Market for Registrant’s Common Equity and Related Stockholder Matters***

**Price Range of Common Stock**

Ourcommon stock has been listed for quotation on the NASDAQ National Market underthe symbol “ARDI” since our initial public offering on September 28, 2000.The following table shows the high and low sales prices of our common stock asreported by the NASDAQ National Market for the period indicated.

| ** **                                                          | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended  March 31, 2004                                  |       | $        | 16.82      |    | $          | 10.58 |   |
| Quarter ended  June 30, 2004                                   |       | 13.55    |       | 7.05    |       |
| Quarter ended  September 30, 2004                              |       | 7.55     |       | 3.10    |       |
| Quarter ended  December 31, 2004                               |       | 6.91     |       | 4.01    |       |
| Quarter ended  March 31, 2005                                  |       | 6.65     |       | 3.93    |       |
| Quarter ended  June 30, 2005                                   |       | 4.00     |       | 2.47    |       |
| Quarter ended  September 30, 2005                              |       | 4.85     |       | 2.60    |       |
| Quarter ended  December 31, 2005                               |       | 5.74     |       | 4.16    |       |
| Quarter ended  March 31, 2006 (through February 28, 2006) |       | 4.22     |       | 5.65    |       |
|                                                                     |            |          |            |         |            |  |  |

 

At December 31, 2005, there were approximately112 holders of record of our common stock, although we believe that there is asignificantly larger number of beneficial owners of our common stock.

The market price of ourcommon stock has been and may continue to be subject to wide fluctuations inresponse to a number of events and factors, such as quarterly variations in ouroperating results, announcements of technological innovations or new productsor services or customers by us or our competitors, changes in financialestimates and recommendations by securities analysts, the operating and stockperformance of other companies that investors may deem comparable to us, andnews reports relating to trends in our markets. In addition, the stock marketin recent years has experienced extreme price and volume fluctuations that haveparticularly affected the market prices of many high technology companies andhave often been unrelated or disproportionate to the operating performance ofthose companies. These fluctuations, as well as general political, economic andmarket conditions, may adversely affect the market price for our common stock.

**Dividend Policy**

We have never paid cash dividends on our common stock.We currently intend to retain any future earnings to fund the development andgrowth of our business. Therefore, we do not currently anticipate declaring anycash dividends on our common stock in the foreseeable future. 

We intend to pay dividends accrued on redeemablepreferred stock upon redemption.

**RecentSales of Unregistered Securities**

OnFebruary 18, 2005, we issued (a) approximately 5,454,000shares of our common stock, par value $0.0001 per share, (b) approximately 24,000shares of our Series A-1 Redeemable Preferred Stock, $0.001 parvalue per share, (c) approximately 44,000 shares of our Series A-2Redeemable Preferred Stock, $0.001 par value per share, (d) approximately 5,000shares of our Series B-1 Redeemable Preferred Stock, $0.001 parvalue per share, and (e) approximately 5,000 shares of our Series B-2Redeemable Preferred Stock, $0.001 par value per shares, all in connection withour acquisition of all the outstanding capital stock of Vidus. The fair valuesof issued common and non-convertible redeemable preferred stock as purchaseconsideration for Vidus stock were $24.7 million and $12.9 million,respectively. These issuances were 

22

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made inreliance on Regulation S promulgated under the Securities Act of 1933, asamended (the “Securities Act”) and on Section 4(2) of the SecuritiesAct, and were made without general solicitation or advertising. Shares issuedin reliance on Section 4(2) of the Securities Act were issued only toaccredited investors. Shares issued in reliance on Regulation S wereissued in an “offshore transaction’’ as defined under Regulation S, topersons other than “U.S. Persons.’’ Such persons represented to us that theywould resell the shares only in compliance with Regulation S. Thecertificates evidencing those shares bear a legend restricting transfer exceptpursuant to Regulation S.

**IssuerPurchases of Equity Securities**

We did not repurchase anyof our equity securities during the quarter ended December 31, 2005.

**Item 6.**                        *Selected Financial Data*

Theselected consolidated financial data set forth below should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations, the consolidated financial statements, the relatednotes and other information contained in this Report.

| ** **                                                                    | ** ** | **Years Ended December 31,**                           | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005(1)**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                    | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Consolidated Statements of  Operations Data:**                              |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues:                                                                     |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Hosted                                                                        |       | $                                                                     | 79,945     |   | $ | 75,234 |   | $ | 63,363 |   | $ | 44,420 |   | $ | 27,450 |   |
| Licensed                                                                      |       | 12,911                                                                |       | — |   | — |   | — |   | — |   |
| Total revenues                                                                |       | 92,856                                                                |       | 75,234 |   | 63,363 |   | 44,420 |   | 27,450 |   |
| Costs and expenses:                                                           |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cost of hosted revenue  (excluding intangibles amortization included below)   |       | 39,657                                                                |       | 34,825 |   | 35,516 |   | 30,609 |   | 26,489 |   |
| Cost of licensed revenue  (excluding intangibles amortization included below) |       | 4,949                                                                 |       | — |   | — |   | — |   | — |   |
| Intangibles amortization                                                      |       | 3,487                                                                 |       | 28 |   | 455 |   | 1,670 |   | 1,656 |   |
| In-process research and  development                                          |       | 5,640                                                                 |       | — |   | — |   | — |   | — |   |
| Impairment of intangible  assets                                              |       | 2,270                                                                 |       | — |   | — |   | — |   | — |   |
| Sales and marketing                                                           |       | 21,398                                                                |       | 12,336 |   | 11,433 |   | 10,818 |   | 17,255 |   |
| Research and development                                                      |       | 13,024                                                                |       | 6,192 |   | 5,472 |   | 6,200 |   | 7,822 |   |
| General and  administrative                                                   |       | 17,506                                                                |       | 12,022 |   | 9,516 |   | 9,168 |   | 15,296 |   |
| Terminated acquisition  costs                                                 |       | —                                                                |       | 2,138 |   | — |   | — |   | — |   |
| Restructuring charges                                                         |       | —                                                                |       | — |   | — |   | — |   | 218 |   |
| Total costs and expenses                                                      |       | 107,931                                                               |       | 67,541 |   | 62,392 |   | 58,465 |   | 68,736 |   |
| (Loss) income from  operations                                                |       | (15,075                                                               | )          | 7,693 |   | 971 |   | (14,045 | ) | (41,286 | ) |
| Other income (expense),  net:                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Interest income                                                               |       | 3,039                                                                 |       | 1,532 |   | 686 |   | 964 |   | 2,662 |   |
| Interest expense                                                              |       | —                                                                |       | — |   | (11 | ) | (15 | ) | (9 | ) |
| Change in derivative  instrument liability                                    |       | 2,256                                                                 |       | — |   | — |   | — |   | — |   |
| Investment impairment  charge                                                 |       | —                                                                |       | — |   | — |   | (1,035 | ) | — |   |
| Other (expense) income,  net                                                  |       | (103                                                                  | )          | (4 | ) | 16 |   | (106 | ) | (14 | ) |
| Total other income  (expense), net                                            |       | 5,192                                                                 |       | 1,528 |   | 691 |   | (192 | ) | 2,639 |   |
| Net (loss) income before income  taxes                                        |       | (9,883                                                                | )          | 9,221 |   | 1,662 |   | (14,237 | ) | (38,647 | ) |
| Benefit from income taxes                                                     |       | 38,482                                                                |       | — |   | — |   | — |   | — |   |
| Net income (loss)                                                             |       | 28,599                                                                |       | 9,221 |   | 1,662 |   | (14,237 | ) | (38,647 | ) |
| Preferred stock dividends                                                     |       | (436                                                                  | )          | — |   | — |   | — |   | — |   |
| Net income (loss)  attributable to common stockholders                        |       | $                                                                     | 28,163     |   | $ | 9,221 |   | $ | 1,662 |   | $ | (14,237 | ) | $ | (38,647 | ) |
| Net income (loss) per  share:                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                         |       | $                                                                     | 0.47       |   | $ | 0.17 |   | $ | 0.03 |   | $ | (0.31 | ) | $ | (0.88 | ) |
| Diluted                                                                       |       | $                                                                     | 0.46       |   | $ | 0.16 |   | $ | 0.03 |   | $ | (0.31 | ) | $ | (0.88 | ) |
| Shares used in  calculating net income (loss) per share:                      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                         |       | 59,928                                                                |       | 54,296 |   | 49,978 |   | 46,134 |   | 43,892 |   |
| Diluted                                                                       |       | 61,353                                                                |       | 57,435 |   | 54,282 |   | 46,134 |   | 43,892 |   |

 

23

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| ** **                                            | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2005(1)**                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                    | ** ** |
| **Consolidated Balance Sheet  Data:**                 |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                            |       | $                                     | 25,773     |   | $ | 14,494 |   | $ | 103,669 |   | $ | 35,659 |   | $ | 40,164 |   |
| Restricted and  non-restricted short-term investments |       | 77,643                                |       | 103,222 |   | 2,000 |   | 2,241 |   | 2,216 |   |
| Working capital                                       |       | 109,823                               |       | 119,373 |   | 108,120 |   | 45,771 |   | 51,300 |   |
| Total assets                                          |       | 246,974                               |       | 152,210 |   | 139,016 |   | 70,550 |   | 78,474 |   |
| Redeemable preferred  stock                           |       | 8,184                                 |       | — |   | — |   | — |   | — |   |
| Total stockholders’  equity                      |       | $                                     | 186,860    |   | $ | 124,836 |   | $ | 112,128 |   | $ | 50,167 |   | $ | 60,411 |   |

 

| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2005(1)**                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                          | ** ** |
| **Consolidated Cash Flow Data:**                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Operating  activities                                 |       | $                                           | (5,626     | ) | $ | 11,216 |   | $ | 9,454 |   | $ | (6,653 | ) | $ | (34,717 | ) |
| Investing  activities                                 |       | 14,645                                      |       | (104,053 | ) | (1,276 | ) | (780 | ) | 4,364 |   |
| Financing  activities                                 |       | 2,260                                       |       | 3,662 |   | 59,832 |   | 2,928 |   | 1,237 |   |
| Net increase (decrease)  in cash and cash equivalents |       | $                                           | 11,279     |   | $ | (89,175 | ) | $ | 68,010 |   | $ | (4,505 | ) | $ | (29,116 | ) |

----

(1)          OnFebruary 18, 2005, we completed the acquisition of Vidus. Financialinformation, including the results of operations, for Vidus is included from thedate of acquisition.

**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

The following discussion should be read in conjunctionwith the consolidated financial statements and the related notes containedelsewhere in this Report. Except for the historical information containedherein, the matters discussed in this Report are forward-looking statementsinvolving risks and uncertainties that could cause actual results to differmaterially from those in such forward-looking statements. Numerousfactors, risks and uncertainties affect our operating results and could causeour actual results to differ materially from forecasts and estimates or fromany other forward-looking statements made by us or on our behalf and there canbe no assurance that future results will meet expectations, estimates orprojections. Further information regarding these and other risks is included inthis Report on Form 10-K under the “Risk Factors,” and “Business”sections, elsewhere in this Report and in our other filings with the SEC.

The consolidated statementof operations for the interim periods in 2005 have been restated to reflect theeffects of a derivative embedded in the redeemable preferred stock issued inconnection with the acquisition of Vidus and the correction of an error in thetax provision relating to the reversal of the valuation allowance. See “Note 17—QuarterlyFinancial Data” to our consolidated financial statements, included elsewhere inthis Report, for further discussion.

**Overview**

We are a leading provider of mobile resourcemanagement (“MRM”) solutions, a category of business productivity solutionsdesigned to enable the effective management of mobile resources. Our MRMsolutions allow customers to improve productivity by enabling the effectivemanagement of the activities of their mobile workers, assets, goods andservices. Currently, we market and sell our solutions to a range of customersin North America and Europe. We offer Field Force Management (“FFM”) solutions,such as GeoManager, Pathway and Portico, designed to help companies bettermanage their mobile workers; Field 

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Service Management (“FSM”)solutions, such as our Taskforce software, designed to help companies bettermanage their mobile workers’ work; and Field Asset Management (“FAM”) solutions,such as Vehicle Diagnostics and StatusSensors, designed to help companiesbetter manage their mobile workers’ assets in the field. At December 31,2005, 188,000 mobile resources were enabled with our solutions, on either asubscription or a per seat license basis.

We report the results ofour operations in two segments: Hosted and Licensed. The segments are managedseparately because each offers different products and serves different segmentsof the market. The Hosted segment provides the FFM and FAM solutions thatconnect mobile workers in the field to corporate data on demand, help measureoverall mobile workforce performance and manage mobile assets. The Licensedsegment provides customers with our FSM solution, which is designed to enable apredictable and reliable customer experience from commitment to servicefulfillment; and to help synchronize the call center and field serviceoperation.

On February 18, 2005, we completed theacquisition of Vidus, a provider of dynamic field service optimization software.The financial results of Vidus are reflected in our consolidated results from February 19,2005, the first day after the closing. The aggregate purchase price for theacquisition was $46.3 million. We accounted for the acquisition as apurchase transaction and, accordingly, the acquisition price has been allocatedto the tangible and intangible assets acquired and liabilities assumed on thebasis of the respective estimated fair values on the acquisition date. Acquiredintangible assets related to the purchases totaled $33.1 million and goodwillresulting from the acquisition totaled $13.3 million. See “Note 1—Organizationand Summary of Significant Accounting Policies” and “Note 3—BusinessCombinations, Goodwill and Intangible Assets” to our consolidated financialstatements, included elsewhere in this Report on Form 10-K.

For the year endedDecember 31, 2005, it was determined that a valuation allowance reportedagainst our deferred tax assets was no longer necessary based on our evaluationof current evidence and its effect on our estimate of future taxable income.Accordingly, we reversed our deferred tax valuation allowance with respect toapproximately $42.9 million of our deferred tax assets, of which approximately$36.1 million was recorded as a benefit in the statement of operations and $6.8million related to excess tax benefits from stock option deductions for whichthe benefit was recognized as a component of stockholders’ equity.

**CriticalAccounting Policies, Judgments and Estimates**

***General***

The accompanyingdiscussion and analysis of our financial condition and results of operationsare based on our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. We believe there are several accounting policies that are criticalto understanding our consolidated financial statements as these policies affectthe reported amounts of revenue and expenses and involve management’s judgmentregarding significant estimates. We have based our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Our senior management has reviewed ourcritical accounting policies and their application in the preparation of ourfinancial statements and related disclosures and discussed the development,selection and disclosure of significant estimates with the Audit Committee ofour Board of Directors. To the extent that actual results differ from thoseestimates, our future results of operations may be affected.

***Revenue Recognition***

We follow specific and detailed guidelines inrecognizing revenue in accordance with the provisions of AICPA Statement ofPosition 97-2,*Software RevenueRecognition*, as amended by Statement of Position 

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98-4, *Deferral of the Effective Date of a Provision of SOP 97-2*and Statement of Position 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*,as well as Accounting Research Bulletin No. 45,*Long-Term Construction-Type Contracts* and Statement ofPosition 81-1*, Accounting forPerformance of Construction-Type and Certain Production-Type Contracts.***We recognize revenue when the price is fixed anddeterminable, persuasive evidence of an agreement exists, our obligations underany such agreement are fulfilled and collectibility is probable.

Our revenues are comprised of hosted revenue andlicensed revenue. Hosted revenue is derived from monthly fees for our FFM andFAM solutions and monthly or upfront fees for in-vehicle hardware devicesenabling a mobile resource to utilize these FFM or FAM solutions. Licensedrevenue is comprised of license fees,installation, training and related post-contract customer support (“PCS”) service fees relating to our FSM solution.

Monthly fees for our hosted solutions are recognizedratably over the contract period, which commences (a) upon installation ofour proprietary hardware devices in our customer’s mobile worker vehicles or (b) uponthe creation of subscription licenses and a customer account on our websitewhere customers have elected to use our solution with a mobile telephone. Upfrontfees for our hosted solution primarily consist of amounts for the in-vehicleenabling hardware device and peripherals, if any. We defer upfront fees atinstallation and recognize them ratably over the minimum service contractperiod, generally one to five years. Product costs are also deferred andamortized over such period. Renewal rates for our hosted solutions are notconsidered priced at a bargain in comparison to the upfront fees (as describedin Staff Accounting Bulletin No. 104,*Revenue Recognition*). If we cannot objectively determine the fairvalue of any undelivered element included in hosted arrangements, we deferrevenue until all elements are delivered, all services have been performed orfair value can objectively be determined.

Licensed revenue associated with the fees for thelicense of our Taskforceproduct and related customization and installation services is generallyrecognized using the percentage-of-completion method of accounting over theperiod that services are performed. For agreements accounted for under thepercentage-of-completion method, we determine progress to completion based onactual direct labor hours incurred to date as a percentage of the estimatedtotal direct labor hours required to complete the project. We periodicallyevaluate the actual status of each project to ensure that the estimates tocomplete each contract remain accurate. A provision for estimated losses oncontracts is made in the period in which the loss becomes probable and can bereasonably estimated. To date, we have not incurred any such losses.

If the amount of licensed revenue recognized under thepercentage of completion method exceeds the amount billed to customers, theexcess amount is recorded as unbilled accounts receivable. If the amount billedexceeds the amount of revenue recognized, the excess amount is recorded ascustomer deposits. Revenue recognized in any period is dependent on ourprogress toward completion of projects in progress.

Forprojects that were not complete as of December 31, 2005, 2004 and 2003,the following table illustrates the total direct labor hours incurred as apercentage of estimated total direct labor hours required to complete theseprojects.

| ** **                                                                                                             | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Total direct  labor hours incurred to date as a % of estimated total direct labor hours  required to complete projects |       |                                    | 9.4        | % |   |   | — |   |   |   | — |   |   |
|                                                                                                                        |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 

Significantmanagement judgment and discretion are used to estimate total direct laborhours. Any changes in or deviations from these estimates could have a materialeffect on the amount of revenue we recognize in any period. Based on ourresults for the year ended December 31, 2005, a ten percent deviation fromour estimated total direct labor hours required to complete projectsuncompleted at 

26

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December31, 2005 would have resulted in an insignificant increase or decrease in netincome attributable to common stockholders.

We derive PCS fees from PCS agreements, which aregenerally initially purchased at the same time as a license for our**Taskforceproduct. PCS can include telephone and email support and the right to receiveunspecified upgrades on a when-and-if-available basis. PCS agreements may generallybe renewed on an annual basis. We recognize revenue for PCS, based on vendorspecific objective evidence (“VSOE”) of fair value ratably over the term of thePCS period. We generally determine VSOE of PCS based on the stated fees for PCSrenewal set forth in the original license agreement. If we are unable toestablish VSOE of fair value, we recognize the entire arrangement fee ratablyover the term of the PCS, when the only undelivered element is PCS.

For arrangements withmultiple elements, such as licenses, customization services and PCS services,we allocate revenue to each element based upon its fair value as determined byVSOE. VSOE for each element is based on normal pricing and discountingpractices when the element is sold separately. VSOE for PCS services ismeasured by the stated renewal rate. If we cannot objectively determine thefair value of any undelivered element included in license arrangements, wedefer revenue until the earliest to occur of the following: (a) allelements are delivered, (b) all services have been performed or only PCSservices remain to be delivered, or (c) fair value can objectively be determined.When the fair value of a delivered element has not been established, we use theresidual method to record license revenue if the fair value of all undeliveredelements is determinable. Under the residual method, the fair value of theundelivered elements is deferred and the remaining portion of the fee isallocated to the delivered elements and is recognized as revenue assuming allother criteria have been met.

***Valuation of Intangible Assets and Goodwill***

In accordance with the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 141, *Business Combinations*(“SFAS141”), the purchase price of an acquired company is allocated betweenintangible assets and the net tangible assets of the acquired business with theresidual of the purchase price recorded as goodwill. The determination of thevalue of the intangible assets acquired and their expected lives involvescertain judgments and estimates. These judgments can include, but are notlimited to, the cash flows that an asset is expected to generate in the futureand the appropriate weighted average cost of capital.

At December 31, 2005,our goodwill totaled $13.3 million and our identifiable intangible assetstotaled $27.3 million. In accordance with the provisions of SFAS 142, *Goodwill and Other IntangibleAssets*, we assess the impairment of goodwill and indefinite livedidentifiable intangible assets of our reportable units at least annually, ormore often if events or changes in circumstances indicate that the carryingvalue may not be recoverable. This assessment is based upon a discounted cashflow analysis and analysis of our market capitalization. The estimate of cashflow is based upon, among other things, certain assumptions about expectedfuture operating performance and an appropriate discount rate determined by ourmanagement. Our estimates of discounted cash flows may differ from actual cashflows due to, among other things, economic conditions, changes to the businessmodel or changes in operating performance. Significant differences betweenthese estimates and actual cash flows could materially affect our futurefinancial results. We conducted our initial annual impairment test as of August 31,2005 and determined there was no impairment. Duringthe fourth quarter of 2005, we determined that the acquired Vidus trade namewas impaired and as a result, reduced the carrying value of the trade name tozero. There were no other events or circumstances, except for theimpairment of the Vidus trade name, from August 31, 2005 through December 31,2005 indicating that a further assessment was necessary.

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***Allowance for Doubtful Accounts***

Historically, we have had a significant number ofsmall- to medium-sized companies utilizing our solutions. These customers areinvolved in diverse businesses. Our payment arrangements with customersgenerally provide 30 to 45 day payment terms. When customers contract with us,we assess their creditworthiness.

Thenature of our relationship with customers is inherently long-term and we haveextended and may extend payment terms on an exception basis. We regularlyreview our customers’ ability to satisfy their payment obligations and providean allowance for doubtful accounts for specific receivables that we believe arenot collectible. When these conditions arise, we suspend recognition of revenueuntil collection becomes probable or cash is collected. Beyond these specificcustomer accounts, we record an allowance based on the size and age of allreceivable balances against which we have not established a specific allowance,current economic trends and historical experience with collections. Thefollowing table illustrates the allowance for doubtful accounts as a percentageof gross accounts receivable for 2005, 2004 and 2003 (in thousands, except percentages).

| ** **                                                           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gross accounts  receivable                                           |       | $                                           | 12,851     |   | $ | 9,026 |   | $ | 8,530 |   |
| Allowance for  doubtful accounts                                     |       | 376                                         |       | 1,066 |   | 1,421 |   |
| Allowance for doubtful  accounts as a % of gross accounts receivable |       | 2.9                                         | %          | 11.8 | % | 16.7 | % |
|                                                                      |            |                                             |            |  |  |  |  |  |  |  |

 

Historically,our actual losses and credits have been consistent with these provisions. Webelieve that we can make reliable estimates for doubtful accounts; however, thesize and diversity of our customer base, as well as overall economicconditions, may affect our ability to accurately estimate bad debt expense. Basedon our results for the year ended December 31, 2005, a ten basis pointdeviation in the allowance for doubtful accounts as a percentage of grossaccounts receivable would have resulted in an insignificant increase ordecrease in net income attributable to common stockholders.

***Deferredtax assets***

We have substantialdeferred tax assets that relate to prior periods’ losses, primarily in theUnited States and the United Kingdom. We evaluate these deferred tax assets ineach tax jurisdiction by estimating the likelihood of generating future profitsto realize these assets. In both jurisdictions, we have concluded that it ismore likely than not that we will generate sufficient future taxable income torealize these deferred tax assets. A valuation allowance has been establishedfor deferred tax assets which we do not believe meet the more likely than notcriteria established by Statement of Financial Account Standards No. 109, *Accounting for Income Taxes* This evaluation of whether it ismore likely than not that such deferred tax assets will be realized must becontinuously evaluated due to changes in market conditions, changes in taxlaws, tax planning strategies or other factors. To the extent we establish avaluation allowance or change the allowance in a period, we reflect the changewith a corresponding increase or decrease in our tax provision in ourconsolidated statement of operations. At December 31, 2005, we maintainedan allowance on certain state net operating losses and state tax credits basedon our assessment that it is more likely than not that the deferred tax assetrelated to these items will not be realized. The deferred tax asset, net of avaluation allowance of $334,000, totaled $47.8 million as of December 31,2005 and was offset by deferred tax liabilities of $6.2 million.

 

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**Results ofOperations for the Years Ending December 31, 2005, 2004 and 2003**

Thefollowing table sets forth selected statements of operations data as apercentage of our total revenues:

| ** **                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                         |       |                                        |       |   |   |   |   |
| Hosted                                                                            |       | 86.1                                        | %          | 100.0 | % | 100.0 | % |
| Licensed                                                                          |       | 13.9                                        |       | — |   | — |   |
| Total revenues                                                                    |       | 100.0                                       |       | 100.0 |   | 100.0 |   |
| Costs and expenses:                                                               |       |                                        |       |   |   |   |   |
| Cost of hosted revenue (excluding intangibles  amortization included below)  |       | 42.7                                        |       | 46.3 |   | 56.1 |   |
| Cost of licensed revenue (excluding intangibles  amortization included below)     |       | 5.3                                         |       | — |   | — |   |
| Intangibles amortization                                                          |       | 3.8                                         |       | — |   | 0.7 |   |
| In-process research and development                                               |       | 6.1                                         |       | — |   | — |   |
| Impairment of intangible assets                                                   |       | 2.4                                         |       | — |   | — |   |
| Sales and marketing                                                               |       | 23.0                                        |       | 16.4 |   | 18.1 |   |
| Research and development                                                          |       | 14.0                                        |       | 8.2 |   | 8.6 |   |
| General and administrative                                                        |       | 18.9                                        |       | 16.0 |   | 15.0 |   |
| Terminated acquisition costs                                                      |       | —                                      |       | 2.8 |   | — |   |
| Total costs and expenses                                                          |       | 116.2                                       |       | 89.7 |   | 98.5 |   |
| (Loss) income  from operations                                                    |       | (16.2                                       | )          | 10.3 |   | 1.5 |   |
| Total other  income (expense), net                                                |       | 5.6                                         |       | 2.0 |   | 1.1 |   |
| Net (loss) income  before income taxes                                            |       | (10.6                                       | )          | 12.3 |   | 2.6 |   |
| Benefit from  income taxes                                                        |       | 41.4                                        |       | — |   | — |   |
| Net income                                                                        |       | 30.8                                        |       | 12.3 |   | 2.6 |   |
| Preferred stock  dividends                                                        |       | (0.5                                        | )          | — |   | — |   |
| Net income attributable  to common stockholders                                   |       | 30.3                                        | %          | 12.3 | % | 2.6 | % |

 

***Hosted Revenue, Cost of Hosted Revenue, Hosted GrossMargin***

Hostedgross margin is calculated as follows:

| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                   | ** ** | **(In thousands, except percentages)** | ** ** |
| Hosted revenue                                               |       | $                                           | 79,945     |   | $ | 75,234 |   | $ | 63,363 |   |
| Cost of hosted  revenue (excluding intangibles amortization) |       | 39,657                                      |       | 34,825 |   | 35,516 |   |
| Intangibles  amortization                                    |       | —                                      |       | 28 |   | 455 |   |
| Total cost of hosted revenue                                 |       | 39,657                                      |       | 34,853 |   | 35,971 |   |
| Hosted gross  margin                                         |       | $                                           | 40,288     |   | $ | 40,381 |   | $ | 27,392 |   |
| Hosted gross margin  percentage                              |       | 50                                          | %          | 54 | % | 43 | % |

 

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*Hosted Revenue*

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Hosted revenue                     |       | $                                           | 79,945     |   |   | 6 | % |   | $ | 75,234 |   |   | 19 | % |   | $ | 63,363 |   |
| As a percentage of total  revenues |       | 86                                          | %          |   |   |   |   | 100 | % |   |   |   |   | 100 | % |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Hosted revenue is comprised of monthly fees for ourFFM and FAM solutions, and monthly or upfront fees for in-vehicle hardwaredevices enabling a mobile resource to utilize these FFM and FAM solutions. Ourhosted revenue is affected by a number of factors, including subscriber growth,the rate at which service features or add-ons are adopted, the pricingassociated with the size and term of subscriber contracts and purchases of ourin-vehicle hardware devices. Given the generally fixed nature of ourarrangements with our subscribers and ratable revenue recognition, the impacton revenues of changes in current prices for hosted solutions is tempered. Thisis because revenues from new pricing are layered on top of revenues fromexisting subscribers.

As new subscribers purchase our in-vehicle hardwaredevices or as existing subscribers choose to purchase new in-vehicle hardwaredevices, the amount of deferred revenue recognized ratably over the expectedlife of the subscriber increases. This effect is tempered by subscriberspurchasing solutions that are deployed through the use of a mobile telephoneinstalled with our software application because we do not sell those devicesand, therefore, do not recognize any revenues from sales of mobile telephones. Asimilar tempering effect may occur when a subscriber exceeds its expected lifebecause recognition of deferred revenue is complete.

We describe the arrangements in which customers contractdirectly with wireless carriers for the wireless airtime component of oursolutions as “unbundled”. Conversely, we describe arrangements in which wecontract directly with customers for the wireless airtime portion as “bundled”.The nature of our relationship with the wireless carriers dictates whether wewill be entering into a bundled or unbundled arrangement with a customer.Selection of the appropriate protocol is related primarily to optimal wirelesscoverage for a specific subscriber area of operation. We have observed anincrease in the proportion of new subscribers being added on an unbundledbasis, resulting in decreased revenue from such subscribers. Unbundledsubscribers represented approximately 65%, 54% and 47% of our total subscribersat December 31, 2005, 2004 and 2003, respectively. We expect that thistrend will continue through the next 12 to 18 months.

From 2004 to 2005, hosted revenue increased primarilyas a result of an increase in the number of subscribers using our solutions,partially offset by a decrease in revenue per subscriber. The total number of subscribers using oursolutions was approximately 156,000 and 133,000 at December 31, 2005 and2004, respectively. Average monthly hosted revenue per subscription wasapproximately $46.69 for the year ended December 31, 2005, down from $48.56for the same period in 2004. The decrease of $1.87 is primarily the result ofnew subscribers being added utilizing an unbundled arrangement.

From 2003 to 2004, hostedrevenue increased primarily as a result of an increase in the number ofsubscribers using our solutions, partially offset by a decrease in revenue persubscriber. The total number of subscribersusing our solutions was approximately 133,000 and 125,000 at December 31,2004 and 2003, respectively. Average monthly hosted revenue persubscription was approximately $48.56 for the year ended December 31,2004, down from $49.19 for the same period in 2003. The decrease of $0.63 isprimarily the result of new subscribers being added utilizing an unbundledarrangement.

30

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*Cost of Hosted Revenue (excluding intangiblesamortization)*

| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                                                   | ** ** | **(In thousands, except percentages)** | ** ** |
| Cost of hosted  revenue (excluding intangibles amortization) |       | $                                           | 39,657     |   |   | 14 | % |   | $ | 34,825 |   |   | -2% |   |   | $35,516 |   |
| As a percentage of  hosted revenues                          |       | 50                                          | %          |   |   |   |   | 46 | % |   |   |   |   | 56 | % |
|                                                              |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of hosted revenue consists of the amortization ofthe deferred cost of the in-vehicle enabling hardware devices; costs associatedwith the final assembly, testing, provision, delivery and installation ofhardware and other costs such as provisions for inventory and repair costs; andexpenses related to the delivery and support of our solutions. From 2004 to2005, cost of hosted revenue increased primarily as a result of increases indirect product costs of $2.6 million, employee-related expenses of $2.4million, facilities and communication expenses of $916,000, equipment anddepreciation expenses of $459,000, cost of product returns of $238,000,inventory obsolescence of $152,000, warranty expense of $125,000, and travelexpenses of $122,000, partially offset by a decrease in airtime costs of $2.5million as the number of bundled subscribers decreased from the prior year andthe reversal of an accrual in relation to telecommunication taxes. The increasein employee compensation expense was associated with an increase in averageheadcount. Cost of hosted revenue headcount increased to 205 at December 31,2005 from 163 at December 31, 2004. We expect cost of hosted revenue toincrease during the next 12 months, primarily resulting from headcountincreases.

From 2003 to 2004, cost ofhosted revenue decreased primarily as a result of decreases in the provisionfor inventory obsolescence of $1.2 million, other cost of products of $692,000associated with lower product returns and direct service delivery expenses of$243,000, partially offset by an increase in employee-related expenses of $1.0million and deferred cost of revenues recognized of $805,000, consistent withgrowth in subscribers using our solutions.

*Hosted Gross Margin*

| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Hosted gross  margin                |       | $                                           | 40,288     |   |   | 0 | % |   | $ | 40,381 |   |   | 47 | % |   | $ | 27,392 |   |   |
| As a percentage of  hosted revenues |       | 50                                          | %          |   |   |   |   | 54 | % |   |   |   |   | 43 | % |   |
|                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

From 2004 to 2005, hostedgross margin decreased due to sales of new in-vehicle hardware devices at promotionalprices in connection with AT&T Wireless and Verizon Wireless ceasingoperations of their CDPD network, which necessitated that subscribers usingthese networks migrate to alternate wireless networks. To use an alternatenetwork, existing in-vehicle hardware devices were replaced for subscribers thatsought to migrate to alternative wireless networks.

From 2003 to 2004, hostedgross margin increased by 11%, primarily resulting from realizing highermargins on new sales of our in-vehicle hardware devices, which accounted for 7%of the increase; hosted cost of revenues, which includes fixed indirectexpenses that generally increase at a rate slower than the growth in subscribersusing our solutions which accounted for 3% of the increase; and intangiblesbecoming fully amortized which accounted for 1% of the increase.

Direct expenses generallyincrease at a rate proportional to the growth in our subscribers. Personnelcosts and depreciation expense generally increase at a rate slower than thegrowth rate of our subscribers. As a result, we expect that our hosted grossmargin will increase during the next 12 months.

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***Licensed Revenue,Cost of Licensed Revenue and Licensed Gross Margin***

Licensedgross margin is calculated as follows:

| ** **                                                       | ** ** | **Years Ended December 31,**      | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                       | ** ** | **(In thousands, except percentages)** | ** ** |
| Licensed revenue                                                 |       | $                                                | 12,911     |   |   | $ | — |   |   |   | $ | — |   |   |
| Cost of licensed  revenue (excluding   intangibles amortization) |       | 4,949                                            |       |   | — |   |   |   | — |   |   |
| Intangibles  amortization                                        |       | 3,487                                            |       |   | — |   |   |   | — |   |   |
| Total cost of  licensed revenue                                  |       | 8,436                                            |       |   | — |   |   |   | — |   |   |
| Licensed gross  margin                                           |       | $                                                | 4,475      |   |   | — |   |   |   | — |   |   |
| Licensed gross margin percentage                                 |       | 35                                               | %          |   | — |   |   |   | — |   |   |

 

*Licensed Revenue*

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Licensed revenue                   |       | $                                           | 12,911     |   |   | 100 | % |   |   | $ | — |   |   |   | 0 | % |   |   | $ | — |   |   |
| As a percentage of total  revenues |       | 14                                          | %          |   |   |   |   |   | 0 | % |   |   |   |   |   |   | 0 | % |   |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Licensed revenue is comprisedof license fees, installation, training and PCS service fees relating to ourFSM solution, acquired in connection with our acquisition of Vidus in February2005. The number of licensed users of our FSM solution totaled approximately32,000 at December 31, 2005.

*Cost of Licensed Revenue (excluding intangiblesamortization)*

| ** **                                                     | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except percentages)** | ** ** |
| Cost of licensed  revenue (excluding intangibles amortization) |       | $                                           | 4,949      |   |   | 100 | % |   |   | $ | — |   |   |   | 0 | % |   |   | $ | — |   |   |
| As a percentage of  licensed revenues                          |       | 38                                          | %          |   |   |   |   |   | 0 | % |   |   |   |   |   |   | 0 | % |   |
|                                                                |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of licensed revenue (excludingintangibles amortization) consists of employee related expenses in relation toinstallation services and the support of our ongoing PCS commitments. We expectthe cost of licensed revenue to increase over the next twelve months asheadcount increases and we continue to invest in fixed assets andinfrastructure to support this segment.

*Licensed Gross Margin*

| ** **                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Licensed gross  margin                |       | $                                           | 4,475      |   |   | 100 | % |   |   | $ | — |   |   |   | 0 | % |   |   | $ | — |   |   |
| As a percentage of  licensed revenues |       | 35                                          | %          |   |   |   |   |   | 0 | % |   |   |   |   |   |   | 0 | % |   |
|                                       |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Licensed gross margin was35% in 2005 due in part to the amortization of intangible assets (discussedbelow). Direct expenses generally increase at a rate proportional to the growthin our end users. Personnel costs and depreciation expenses generally increaseat a rate slower than the growth rate of our end users. 

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Amortizationof intangible assets is expected to increase in 2006 and 2007 to approximately$4.0 million, after which it is expected to decrease as the intangible assetsbecomes fully amortized. We expect our licensed gross margin to increase duringthe next twelve months.

***Intangibles Amortization***

| ** **                         | ** ** | **Years Ended December 31,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                              | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Intangibles  amortization          |       | $                                                     | 3,487      |   | 12,354 | % |   | $ | 28 |   |   |   | -94% |   |   | $ | 455 |   |
| As a percentage of total  revenues |       | 4                                                     | %          |   |   |   | 0 | % |   |   |   |   |   | 1 | % |
|                                    |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In 2005, intangibles amortization related to theintangible assets acquired in connection with the purchase of Vidus inFebruary 2005. These costs are being amortized over their estimated usefullives of three to ten years.

In 2004 and 2003,intangibles amortization related to the intangible assets purchased fromDifferential Corrections, Inc. in April 2000 and ConnectBusiness.com, Inc.in September 2002. The costs were amortized over their estimated usefullives of three and two years, respectively. As of December 31, 2004, theseintangibles were fully amortized.

***In-process Researchand Development***

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentages)** | ** ** |
| In-process  research and development |       | $                                           | 5,640      |   |   | 100 | % |   |   | $ | — |   |   |   | 0 | % |   |   | $ | — |   |   |
| As a percentage of total  revenues   |       | 6                                           | %          |   |   |   |   |   | 0 | % |   |   |   |   |   |   | 0 | % |   |
|                                      |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the year ended December 31,2005, in-process research and development consisted of research projects undertakenby Vidus prior to its acquisition by us that had not reached technologicalfeasibility and had no alternative future use at the time of the acquisition ofVidus. In order to achieve technological feasibility, we estimated the time requiredto complete the projects to cost approximately $5.7 million. We estimated thefair value assigned to in-process research and development using the incomeapproach, which discounts to present value the cash flows expected to be attributableto the technology once it reaches technological feasibility using a discountrate of 40%. The stages of completion were determined by estimating the costsand time incurred to date relative to the costs and time expected to beincurred to develop the in-process technology into a commercially viabletechnology or product, while considering the relative difficulty of completingthe various tasks and overcoming the obstacles necessary to attaintechnological feasibility. The weighted average stage of completion for allprojects, in the aggregate, was approximately 80% as of the acquisition date. Cashflows from sales of products incorporating those technologies commenced in 2005.In 2005 expenditures to complete the acquired in-process research anddevelopment approximated the original estimates.

***Impairment ofIntangible Assets***

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Impairment of  intangible assets   |       | $                                           | 2,270      |   |   | 100 | % |   |   | $ | — |   |   |   | 0 | % |   |   | $ | — |   |   |
| As a percentage of total  revenues |       | 2                                           | %          |   |   |   |   |   | 0 | % |   |   |   |   |   |   | 0 | % |   |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

33

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During the fourth quarterof 2005, management determined that Vidus would officially change its name to@Road, Ltd. As a result, we reduced the carrying value of the Vidus trade nameto zero resulting in an impairment charge of $2.3 million. The impairmentcharge is included in Impairment of Intangible Assets in our Statement ofOperations.

***Sales and Marketing***

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Sales and marketing                |       | $                                           | 21,398     |   |   | 73 | % |   | $ | 12,336 |   |   | 8 | % |   | $ | 11,433 |   |
| As a percentage of total  revenues |       | 23                                          | %          |   |   |   |   | 16 | % |   |   |   |   | 18 | % |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses consist of employeesalaries, sales commissions, and marketing and promotional expenses. From 2004to 2005, sales and marketing expenses increased primarily as a result ofincreases in employee-related expenses of $4.5 million, sales commissionsof $1.3 million, marketing expenses of $864,000, consultant expenses of$757,000, facilities and communication expenses of $653,000, travel expenses of$550,000 and equipment and depreciation expense of $175,000. The increase inemployee compensation expense was associated with an increase in the averageheadcount. Sales and marketing headcount increased to 117 at December 31,2005 from 103 at December 31, 2004. We anticipate that sales and marketingexpenses will increase in future periods as we expand our sales and marketingefforts, including, but not limited to, headcount growth and promotionalexpenses related to new solutions.

From 2003 to 2004, salesand marketing expenses increased primarily as a result of increases inemployee-related expenses of $1.3 million and travel expenses of $238,000,partially offset by decreases in sales commission of $420,000 and promotionalexpenses of $324,000. Sales and marketing headcount increased to 103 at December 31,2004 from 86 at December 31, 2003.

***Research andDevelopment***

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Research and  development          |       | $                                           | 13,024     |   |   | 110 | % |   | $ | 6,192 |   |   | 13 | % |   | $ | 5,472 |   |
| As a percentage of total  revenues |       | 14                                          | %          |   |   |   |   | 8 | % |   |   |   |   | 9 | % |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research and development expenses consist of employeesalaries and expenses related to development personnel and consultants, as wellas expenses associated with software and hardware development. From 2004 to2005, research and development expenses increased primarily as a result ofincreases in employee-related expenses of $4.8 million, consultantexpenses of $1.3 million, equipment and depreciation of $406,000, travelexpenses of $270,000 and facilities and communications expenses of $121,000,partially offset by a decrease in prototype costs of $301,000. The increase inemployee compensation expense was associated with an increase in the averageheadcount. Research and development headcount increased to 137 at December 31,2005 from 84 at December 31, 2004. We anticipate that research anddevelopment expenses will increase in future periods as we develop andintroduce new solutions and as a result of increases in employee-relatedexpenses associated with those introductions.

34

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From 2003 to 2004,research and development expenses increased primarily as a result of increasesin employee-related expenses of $454,000 and external development expenses of$387,000. Research and development headcount increased to 84 at December 31,2004 from 56 at December 31, 2003.

***General andAdministrative***

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| General and  administrative        |       | $                                           | 17,506     |   |   | 46 | % |   | $ | 12,022 |   |   | 26 | % |   | $ | 9,516 |   |
| As a percentage of total  revenues |       | 19                                          | %          |   |   |   |   | 16 | % |   |   |   |   | 15 | % |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

General and administrative expenses consist ofemployees salaries and related expenses for executive and administrative costs,accounting and professional fees, recruiting costs and allowance for doubtfulaccounts. From 2004 to 2005, general and administrative expenses increasedprimarily as a result of increases in employee-related expenses of $3.0million, accounting and audit fees of $905,000, equipment and depreciationexpense of $693,000, facilities and communications expenses of $330,000, legalfees of $294,000 and travel expenses of $283,000, partially offset by decreasesin consulting fees of $379,000 and temporary employee-related expenses of$201,000. The increase in employee compensation expense was associated with anincrease in the average headcount. General and administrative headcountincreased to 88 at December 31, 2005 from 81 at December 31, 2004. Weanticipate that general and administrative expenses will remain relatively flatin future periods.

From 2003 to 2004, general and administrative expensesincreased primarily as a result of increases in Sarbanes-Oxley compliance costsof $2.2 million, employee-related expenses of $1.2 million and recruiting feesof $292,000, partially offset by decreases in the allowance for doubtfulaccounts of $597,000 and lower franchise and minimum state taxes of $278,000.General and administrative headcount increased to 81 at December 31, 2004from 53 at December 31, 2003.

The allowance for doubtfulaccounts decreased $674,000, $724,000 and $127,000 in 2005, 2004 and 2003,respectively. The decreases in the allowance are primarily due to non-recurringfavorable adjustments as a result of improvements in the collection history inour customer base that occurred during 2005, 2004 and 2003. We anticipate thatthe allowance for doubtful accounts will remain relatively stable in futureperiods.

***TerminatedAcquisition Costs***

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Terminated  acquisition costs      |       |                                        | $          | — |   |   |   | (100 | )% |   | $ | 2,138 |   |   | 0 | % |   |   | $ | — |   |   |
| As a percentage of total  revenues |       |                                        | 0          | % |   |   |   |   |   | 3 | % |   |   |   |   |   | 0 | % |   |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On April 12, 2004, weentered into a Combination Agreement with MDSI Mobile Data Solutions, Inc.(“MDSI”) providing for the acquisition of MDSI. On July 27, 2004, theparties mutually agreed to terminate the Combination Agreement. As a result,for the year ended December 31, 2004, we expensed approximately $2.1 millionof acquisition-related costs.

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***Other Income (Expense),Net***

| ** **                                 | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                                 | ** ** | **(In thousands, except percentages)** | ** ** |
| Interest income                            |       | $                                           | 3,039      |   |   | 98 | % |   | $ | 1,532 |   |   | 123 | % |   | $ | 686 |   |
| Interest expense                           |       | —                                      |       |   | 0 | % |   | — |   |   | -100 | % |   | (11 | ) |
| Change in derivative  instrument liability |       | 2,256                                       |       |   | 100 | % |   | — |   |   | — |   |   | — |   |
| Other income  (expense), net               |       | (103                                        | )          |   | 2,475 | % |   | (4 | ) |   | -125 | % |   | 16 |   |
| Total other  income (expense), net         |       | $                                           | 5,192      |   |   | 240 | % |   | $ | 1,528 |   |   | 121 | % |   | $ | 691 |   |
| As a percentage of total  revenues         |       | 6                                           | %          |   |   |   |   | 2 | % |   |   |   |   | 1 | % |

 

From 2004 to 2005 and from2003 to 2004, total other income (expense), net increased primarily due tolarger invested balances and higher rates of return in 2004 and 2005. In 2005,we also recorded benefits of $2.3 million in relation to a derivativeinstrument embedded in the redeemable preferred stock issued as part of theVidus acquisition. In 2003, interest expense consists primarily of interestexpense related to the financing of directors’ and officers’ insurance costs. In2005, 2004 and 2003, other income (expense), net consisted primarily ofimmaterial net foreign currency exchange losses and gains resulting fromtransactions with our wholly-owned subsidiaries in India and in the UnitedKingdom. We conduct operations primarily within the United States whereinflation during 2005, 2004 and 2003 has been low and has not materiallyimpacted our operating results. Foreign currency exchange gains were expensedas incurred.

***Benefit from Income Taxes***

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Benefit from  income taxes         |       | $                                           | 38,482     |   |   | 100 | % |   |   | $ | — |   |   |   | 0 | % |   |   | $ | — |   |   |
| As a percentage of total  revenues |       | 41                                          | %          |   |   |   |   |   | 0 | % |   |   |   |   |   |   | 0 | % |   |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The benefit from income taxes differs from the amountcomputed by applying the statutory U.S. federal rate primarily due to thereversal of the valuation allowance in the United States. For the year endedDecember 31, 2005, it was determined that a valuation allowance reportedagainst our deferred tax assets was no longer necessary based on our evaluationof current evidence and its effect on our estimate of future taxable income. Accordingly,we reversed our deferred tax valuation allowance with respect to approximately$42.9 million of our deferred tax assets, of which approximately $36.1 millionwas recorded as a benefit in the statement of operations and $6.8 million relatedto excess tax benefits from stock option deductions for which the benefit wasrecognized as a component of stockholders’ equity. An income tax benefit of$3.3 million was recorded for the operating losses in the United Kingdom.

Through December 31, 2002, we incurred net losses forfederal and state tax purposes, and except for only minimum state and franchisetaxes recorded within general and administrative expenses, we have notrecognized any tax provision or benefit. Net income earned for the years endedDecember 31, 2004 and 2003 was offset by the utilization of prior years’ netoperating loss carry forwards; therefore, no income tax expense was provided.

Historically, we haveadequately provided for actual tax liabilities. Unexpected or significantfuture changes in trends could result in a material impact to futureconsolidated statements of operations and cash flows.

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***Preferred StockDividends***

| ** **                         | ** ** | **Years Ended December 31,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                              | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Preferred stock  dividends         |       | $                                                     | 436        |   |   | 100 | % |   |   | $ | — |   |   |   | 0 | % |   |   | $ | — |   |   |
| As a percentage of total  revenues |       | 0                                                     | %          |   |   |   |   |   | 0 | % |   |   |   |   |   |   | 0 | % |   |
|                                    |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Preferred stock dividendsconsist of dividends on redeemable preferred stock issued by us in connection withthe acquisition of Vidus. The holders of our preferred stock are entitled toreceive dividends at the rate of $6.50 per share annually. The dividends accrueday to day, whether or not earned or declared, from the date of theacquisition. The dividends are payable when and if declared by the Board ofDirectors or upon redemption of the preferred stock. Any accumulation of unpaiddividends on the preferred stock does not bear interest.

37

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**Quarterly Results of Operations (unaudited)**

Thefollowing table presents certain unaudited consolidated statement of operationsdata for our eight most recent fiscal quarters. The information for each ofthese quarters is unaudited and has been prepared on the same basis as ouraudited consolidated financial statements appearing elsewhere in this Report. Inthe opinion of our management, all necessary adjustments, consisting only ofnormal recurring adjustments, have been included to present fairly theunaudited quarterly results when read in conjunction with our consolidatedfinancial statements and related notes included elsewhere in this Report. Webelieve that results of operations for interim periods should not be reliedupon as any indication of the results to be expected or achieved in any futureperiod or any fiscal year as a whole.

| ** **                                      | ** ** | **Quarters Ended**     | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 31,  2004** | ** ** |
| ** **                                      | ** ** | **(2)**                     | ** ** | **(2)** | ** ** | **(2)** | ** ** | **(2)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **(In thousands)**     | ** ** |
| **Consolidated Statements of Operations Data:** |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:                                       |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| Hosted                                                                        |   |   | $      | 21,805 |   |   |   | $      | 18,965 |   |   |   | $      | 19,685 |   |   |   | $      | 19,490 |   |   |   | $      | 19,909 |   |   |   | $      | 19,102 |   |   |   | $      | 18,331 |   |   |   | $ | 17,892 |   |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|--------|--------|--------|
| Licensed                                                                      |   |   | 5,464  |   |   |   | 6,004  |   |   |   | 941    |   |   |   | 502    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total revenues                                                                |   |   | 27,269 |   |   |   | 24,969 |   |   |   | 20,626 |   |   |   | 19,992 |   |   |   | 19,909 |   |   |   | 19,102 |   |   |   | 18,331 |   |   |   | 17,892 |   |   |
| Costs and expenses:                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of hosted revenue (excluding intangibles  amortization included below)   |   |   | 10,668 |   |   |   | 10,238 |   |   |   | 9,227  |   |   |   | 9,524  |   |   |   | 9,206  |   |   |   | 8,582  |   |   |   | 8,669  |   |   |   | 8,368  |   |   |
| Cost of licensed revenue (excluding intangibles  amortization included below) |   |   | 1,295  |   |   |   | 1,481  |   |   |   | 1,473  |   |   |   | 700    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Intangibles amortization                                                      |   |   | 1,010  |   |   |   | 1,010  |   |   |   | 1,010  |   |   |   | 457    |   |   |   | — |   |   |   | 7      |   |   |   | 11     |   |   |   | 10     |   |   |
| In-process research and  development                                          |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,640  |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Impairment of intangible assets                                               |   |   | 2,270  |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Sales and marketing                                                           |   |   | 5,423  |   |   |   | 5,496  |   |   |   | 5,832  |   |   |   | 4,647  |   |   |   | 3,213  |   |   |   | 2,929  |   |   |   | 3,082  |   |   |   | 3,112  |   |   |
| Research and development                                                      |   |   | 3,113  |   |   |   | 3,487  |   |   |   | 3,849  |   |   |   | 2,575  |   |   |   | 1,698  |   |   |   | 1,695  |   |   |   | 1,431  |   |   |   | 1,368  |   |   |
| General and administrative                                                    |   |   | 4,393  |   |   |   | 4,724  |   |   |   | 3,942  |   |   |   | 4,447  |   |   |   | 4,227  |   |   |   | 3,240  |   |   |   | 2,371  |   |   |   | 2,184  |   |   |
| Terminated acquisition costs                                                  |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (18    | )      |   |   | 139    |   |   |   | 2,017  |   |   |   | — |   |   |
| Total costs and expenses                                                      |   |   | 28,172 |   |   |   | 26,436 |   |   |   | 25,333 |   |   |   | 27,990 |   |   |   | 18,326 |   |   |   | 16,592 |   |   |   | 17,581 |   |   |   | 15,042 |   |   |
| (Loss) income from operations                                                 |   |   | (903   | )      |   |   | (1,467 | )      |   |   | (4,707 | )      |   |   | (7,998 | )      |   |   | 1,583  |   |   |   | 2,510  |   |   |   | 750    |   |   |   | 2,850  |   |   |
| Other income, net:                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                               |   |   | 911    |   |   |   | 781    |   |   |   | 729    |   |   |   | 618    |   |   |   | 523    |   |   |   | 426    |   |   |   | 329    |   |   |   | 254    |   |   |
| Change in derivative instrument liability(1)                                  |   |   | 1,484  |   |   |   | 4,845  |   |   |   | (3,332 | )      |   |   | (741   | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other income (expense), net                                                   |   |   | 32     |   |   |   | 17     |   |   |   | (154   | )      |   |   | 2      |   |   |   | 9      |   |   |   | (6     | )      |   |   | (13    | )      |   |   | 6      |   |   |
| Total other income, net(1)                                                    |   |   | 2,427  |   |   |   | 5,643  |   |   |   | (2,757 | )      |   |   | (121   | )      |   |   | 532    |   |   |   | 420    |   |   |   | 316    |   |   |   | 260    |   |   |
| Net income (loss) before income taxes(1)                                      |   |   | 1,524  |   |   |   | 4,176  |   |   |   | (7,464 | )      |   |   | (8,119 | )      |   |   | 2,115  |   |   |   | 2,930  |   |   |   | 1,066  |   |   |   | 3,110  |   |   |
| Benefit from income taxes(1)                                                  |   |   | 1,465  |   |   |   | 33,822 |   |   |   | 3,195  |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)(1)                                                          |   |   | 2,989  |   |   |   | 37,998 |   |   |   | (4,269 | )      |   |   | (8,119 | )      |   |   | 2,115  |   |   |   | 2,930  |   |   |   | 1,066  |   |   |   | 3,110  |   |   |
| Preferred stock dividends                                                     |   |   | (131   | )      |   |   | (124   | )      |   |   | (124   | )      |   |   | (57    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)  attributable to common stockholders(1)                     |   |   | $      | 2,858  |   |   |   | $      | 37,874 |   |   |   | $      | (4,393 | )      |   |   | $      | (8,176 | )      |   |   | $      | 2,115  |   |   |   | $      | 2,930  |   |   |   | $      | 1,066  |   |   |   | $ | 3,110  |   |   |

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(1)        Theconsolidated statement of operations for the periods ended September 30,2005, June 30, 2005 and March 31, 2005 have been restated to reflectthe effects of a derivative embedded in the redeemable preferred stock issuedin connection with the acquisition of Vidus, and the correction of an error inthe tax provision relating to the reversal of the valuation allowance for theperiod ending September 30, 2005. See “Note 17—Quarterly FinancialData” to our consolidated financial statements included elsewhere in thisReport, for further discussion.

(2)        OnFebruary 18, 2005, we completed the acquisition of Vidus. Financialinformation, including the results of operations, for Vidus is included fromthe date of acquisition.

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**Liquidityand Capital Resources**

| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| **(In thousands, except percentages)**           | ** ** | **2005**                                    | ** ** | **Percent  change** | ** ** | **2004** | ** ** | **Percent  change** | ** ** | **2003** | ** ** |
| Net income                                            |       | $                                           | 28,599     |   | 210 | % | $ | 9,221 |   |   | 455 | % |   | $ | 1,662 |   |
| Non-cash  (benefits) charges                          |       | (26,854                                     | )          | (1,514 | )% | 1,899 |   |   | (51 | )% |   | 3,890 |   |
| Change in working capital assets and liabilities      |       | (7,371                                      | )          | (7,778 | )% | 96 |   |   | (98 | )% |   | 3,902 |   |
| Net cash (used  in) provided by operating activities  |       | (5,626                                      | )          | (150 | )% | 11,216 |   |   | 19 | % |   | 9,454 |   |
| Net cash provided  by (used in) investing  activities |       | 14,645                                      |       | (114 | )% | (104,053 | ) |   | 8,055 | % |   | (1,276 | ) |
| Net cash provided  by financing activities            |       | 2,260                                       |       | (38 | )% | 3,662 |   |   | (94 | )% |   | 59,832 |   |
| Net increase (decrease)  in cash and cash equivalents |       | $                                           | 11,279     |   | (113 | )% | $ | (89,175 | ) |   | (231 | )% |   | $ | 68,010 |   |

 

As of December 31, 2005, we had$25.8 million of cash and cash equivalents and $77.6 million ofshort-term investments. Working capital was $109.8 million.

During 2005, cash used inoperating activities was less than our net income. While in 2004 and 2003, thecash provided by operating activities was greater than net income. The resultsin 2005 are primarily due to a non-cash benefit to earnings of $45.3 millionrelated to the reversal of a valuation allowance and a non-cash benefit inrelation to the change in the fair value of the derivative instrument liability,partially offset by non-cash charges for depreciation and amortization, the taxbenefit on the exercise of employee stock options resulting from the reversalof a tax valuation allowance, in-process research and development charges andthe impairment of intangible assets. In addition, the operating cash flows for2005 were also negatively impacted by the year-over-year changes in workingcapital assets and liabilities. The results in 2004 and 2003 were driven primarilyby non-cash charges to earnings. Non-cash charges to earnings included thewrite-off of deferred acquisition costs, depreciation and amortization,investment impairment charge, amortization of deferred stock compensation andthe provision for inventory valuation. In 2003, operating cash flows were alsopositively impacted by the net cash amounts provided by year-over-year changesin working capital assets and liabilities.

In 2005, the net cash provided by investing activitieswas comprised of $153.0 million in proceeds from the sale of short-terminvestments, partially offset by $127.4 million used to purchase short-terminvestments, $6.9 million used for the acquisition of Vidus, net of cashacquired and $4.2 million used to purchase property and equipment. Cash used ininvesting activities in 2004 and 2003 were due primarily to the movement ofcash between cash and investments and the purchase of property and equipment. Purchasesof property and equipment totaled $2.7 million and $1.5 million in2004 and 2003, respectively. Purchases of property and equipment related mainlyto purchases of computer equipment and software to support our growth inoperations, infrastructure and headcount. We currently do not have any materialcommitments for capital expenditures, although we anticipate increases incapital expenditures and lease commitments with our expected growth inoperations and infrastructure over the next twelve months. We also may establishadditional operations as we expand globally.

The net cash flows provided by financing activities in2005, 2004 and 2003 were due primarily to proceeds from the sale of our commonstock. Proceeds from the sale of our common stock totaled $2.3 million,$3.6 million and $57.9 million in 2005, 2004 and 2003, respectively.Proceeds from the sale of our common stock in 2005 and 2004 primarily relatedto the exercise of stock options and purchases under our employee stockpurchase plan. Proceeds from the sale of our common stock in 2003 primarilyrelated to the proceeds from our secondary offering of $51.9 million. Ourfuture cash flows from stock options are difficult to project as such amountsare a function of our stock price, the number of options outstanding 

39

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and decisions by theholders to exercise stock options. In general, we expect proceeds from stockoption exercises to increase during periods in which our stock price hasincreased relative to historical levels.

We believe that existingcash, cash equivalents and short-term investments, together with any cashgenerated from operations, will be sufficient to fund our operating activities,capital expenditures and other obligations for at least the next twelve months.

**Commitments and Contingencies**

Wehave certain fixed contractual obligations and commitments that include futureestimated payments. Changes in our business needs, cancellation provisions,changing interest rates, and other factors may result in actual paymentsdiffering from the estimates. We cannot provide certainty regarding the timingand amounts of all payments. We have presented below, a summary of the mostsignificant assumptions used in our determination of amounts presented in thetables in order to assist in the review of this information within the contextof our consolidated financial position, results of operations and cash flows. Thefollowing table summarizes our fixed contractual obligations as of December 31,2005 (in thousands):

| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Operating lease  obligations(1)    |       | $                                         | 5,964      |   |   | $ | 1,582 |   |   |   | $ | 3,906 |   |   |   | $ | 476 |   |   |   | — |   |   |
| Capital lease  obligations(2)      |       | 103                                       |       |   | 65 |   |   |   | 38 |   |   |   | — |   |   |   | — |   |   |
| Financing lease  obligations(2)    |       | 15                                        |       |   | 15 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other purchase  obligations(3)     |       | 2,830                                     |       |   | 2,778 |   |   |   | 52 |   |   |   | — |   |   |   | — |   |   |
| Inventory  purchase obligations(4) |       | 4,789                                     |       |   | 4,789 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                               |       | $13,701                                   |       |   | $ | 9,229 |   |   |   | $3,996 |   |   |   | $ | 476 |   |   |   | $ | — |   |   |
|                                    |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Operating leasecommitments include minimum rental payments under our non-cancelable operatingleases for office facilities, as well as limited office equipment that weutilize under lease arrangements. The amounts presented are consistent withcontractual terms and are not expected to differ significantly unless asubstantial change in our headcount needs requires us to exit an officefacility early or expand our occupied space.

(2)          Capital leaseobligations and financing lease obligations are included in the balance sheetunder property, plant and equipment, net and primarily include minimum rentalpayments under our non-cancelable leases for office equipment and furniture.

(3)          Other purchaseobligation amounts include minimum purchase commitments for marketing, computerequipment, software applications, engineering development services and othergoods and services that were entered into in the ordinary course of business. Purchaseobligations include agreements that are cancelable without penalty. Certain of thesecontractual arrangements contain significant performance requirements. Giventhe significance of the performance requirements, actual payments could differsignificantly from these estimates.

(4)          Inventory purchasecommitments include minimum payments under non-cancelable commitments for goodsthat were entered into in the ordinary course of business.

Excluded from the table above is the fair value of aderivative instrument for which the ultimate settlement amount is not yet knownand which is payable only upon redemption of the outstanding redeemablepreferred stock to which it relates. See “Item 7A—Quantitative andQualitative Disclosures About Market Risk, Equity Price Risk” for further discussion.

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**Off-Balance Sheet Arrangements**

As of December 31,2005, we had no off-balance sheet arrangements that have had, or are reasonablylikely to have, a current or future material effect on our consolidatedfinancial condition, results of operations, liquidity, capital expenditures orcapital resources.

**Impactof Recently Issued Accounting Standards**

In November 2005, the Financial AccountingStandards Board (“FASB”) issued FASB Staff Position (“FSP”) Nos. SFAS 115-1and SFAS 124-1, *The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments*.This FSP addresses the determination as to when an investment is consideredimpaired, whether that impairment is other than temporary and the measurementof an impairment loss. This FSP also includes accounting considerationssubsequent to the recognition of other-than-temporary impairments. The adoptionof the FSP did not have a material impact on our consolidated statement ofoperations and financial condition.

On June 7, 2005, the FASB issued SFAS No. 154,*Accounting Changes and Error Corrections, a replacementof APB Opinion No. 20, Accounting Changes, and Statement No. 3,Reporting Accounting Changes in Interim Financial Statements* (“SFAS154”). SFAS 154 changes the requirements for accounting and reporting a changein accounting principle. Previously, most voluntary changes in accountingprinciples were required to be recognized by way of a cumulative effectadjustment within net income during the period of the change. SFAS 154 requiresretrospective application to prior periods’ financial statements, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 is effective for accounting changes made infiscal years beginning after December 15, 2005; however, SFAS 154does not change the transition provisions of any existing accountingpronouncements.

In December 2004, the FASB issued SFAS No. 123(revised 2004),*Share-Based Payment* (“SFAS 123R”),that addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for either equity instrumentsof the enterprise or liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments.

The statement eliminates the ability to account forshare-based compensation transactions using the intrinsic value method asprescribed by Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*, and generallyrequires that such transactions be accounted for using a fair value basedmethod and recognized as expense in the consolidated statement of operations. Thestatement requires companies to assess the most appropriate model to calculatethe value of the options. We currently use the Black-Scholes option pricingmodel to value options and are assessing which model we may use upon adoptionof such standard. The use of an alternative model to value options may resultin a different fair value than the use of the Black-Scholes option pricingmodel.

There are a number of other requirements under the newstandard that will result in a different accounting treatment than currentlyrequired. These differences include, but are not limited to, the accounting forthe tax benefit on employee stock options and for stock issued under ouremployee stock purchase plan.

We will also be required to determine the transitionmethod to be used at the date of adoption. The allowed transition methodsinclude modified prospective and modified retroactive adoption alternatives. Underthe modified retroactive method, prior periods may be restated either as of thebeginning of the year of adoption or for all periods presented. This methodwould record compensation expense for all unvested stock options and restrictedstock beginning with the first period restated. The modified prospective methodrequires that compensation expense be recorded for all unvested stock optionsand 

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restricted stock at thebeginning of the first quarter of adoption of SFAS 123R. In April 2005,the SEC deferred the effective date of SFAS 123R. The effective date ofSFAS 123R for our consolidated financial statements is January 1, 2006.

While we have not completed our assessment of theimpact of SFAS 123R, we expect that this statement will have a significantimpact on our consolidated financial statements as we will be required toexpense the fair value of our stock option grants and stock purchases under ouremployee stock purchase plans rather than disclose the impact on our consolidatednet income attributable to common stockholders within our footnotes, as is ourcurrent practice.

In November 2004, theFASB issued SFAS No. 151, *Inventory Costs, anamendment of APB No. 43, Chapter 4* (“SFAS 151”). SFAS 151clarifies that abnormal inventory costs such as the costs of idle facilities,excess freight and handling costs, and wasted materials (spoilage) are requiredto be recognized as current period charges. The provisions of SFAS 151 areeffective for fiscal years beginning after July 1, 2005. We do not expectthat the adoption of SFAS 151, which we will implement beginning on January 1,2006, will have a material impact on our consolidated statement of operationsand financial condition.

**Item 7A.**                *Quantitative and Qualitative Disclosures About Market Risk*

**Interest Rate Risk**

We are exposed to the impact of interest rate changesand changes in the market values of our marketable securities. We have not usedderivative financial instruments in our investment portfolio. We invest ourexcess cash in debt instruments of high-quality corporate issuers and theUnited States government or its agencies. Our investment policy limits theamount of credit exposure to any one issuer and limits our investments tomaturity dates of less than one year. We are averse to principal loss and seekto preserve our invested funds by limiting default risk, market risk andreinvestment risk. We mitigate default risk by investing in high credit qualitysecurities and by positioning our portfolio to respond appropriately to asignificant reduction in a credit rating of any investment issuer or guarantor.The portfolio includes only marketable securities with active secondary orresale markets to provide portfolio liquidity.

Cash, cash equivalents and marketable securities inboth fixed and floating rate interest-earning instruments carry a degreeof interest rate risk. Fixed rate securities may have their fair market valueadversely impacted due to rising interest rates, while floating rate securitiesmay produce less income than expected if interest rates fall. Due in part tothese factors, our future interest income may fall short of expectations due tochanges in interest rates or we may suffer losses if forced to sell securitiesthat have declined in market value due to changes in interest rates.

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Thetable below presents the carrying value and related weighted average rate ofreturn for our cash, cash equivalents and debt securities. The carrying valuesapproximate fair values as of December 31, 2005 and December 31,2004. As of December 31, 2005, debt securities consisted of$25.8 million with original maturity dates of 90 days or less and $77.6million with original maturity dates of greater than 90 days. As of December 31,2004, debt securities consisted of $14.5 million with original maturitydates of 90 days or less and $103.2 million with original maturitydates of greater than 90 days.

| ** **                                                                  | ** ** | **Carrying  value at  December 31,  2005** | ** ** | **Average  rate of  return at  December 31,  2005** | ** ** | **Carrying  value at  December 31,  2004** | ** ** | **Average  rate of  return at  December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **(in thousands)**                              | ** ** | **(annualized)**                                                   | ** ** | **(in thousands)**                              | ** ** | **(annualized)**                                                   | ** ** |
| **Cash, cash equivalents and short-term  investments:** |       |                                                 |       |                                                               |       |                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents—variable rate                               |       |                                                 | $          | 8,984                                                              |       |                                                 |       | 2.8                                                                | %          |   |   | $ | 3,022 |   |   |   | 1.3 | % |   |
| Money market  funds—variable rate                                      |       |                                                 | 7,030      |                                                               |       |                                                 | 3.6        | %                                                                  |       |   | 951 |   |   |   | 2.0 | % |   |
| Cash and cash  equivalents—fixed rate                                  |       |                                                 | 9,759      |                                                               |       |                                                 | 4.2        | %                                                                  |       |   | 10,521 |   |   |   | 2.3 | % |   |
| Total cash and  cash equivalents                                            |       |                                                 | 25,773     |                                                               |       |                                                 | 3.6        | %                                                                  |       |   | 14,494 |   |   |   | 2.1 | % |   |
| Debt securities—fixed  rate                                            |       |                                                 | 77,643     |                                                               |       |                                                 | 4.1        | %                                                                  |       |   | 103,222 |   |   |   | 2.0 | % |   |
| Total cash, cash  equivalents and short-term investments                    |       |                                                 | $          | 103,416                                                            |       |                                                 |       | 4.0                                                                | %          |   |   | $ | 117,716 |   |   |   | 2.0 | % |   |

 

**Foreign Currency Exchange**

We transact businessprimarily in United States dollars. We are subject, however, to adversemovements in foreign currency exchange rates in those countries where weconduct business. To date, the effect of fluctuations in foreign currencyexchange rates on expenses has not been material. Operating expenses incurredby our subsidiary in India are denominated in Indian rupees. This subsidiarywas formed in November 1999 primarily to perform research and developmentand customer support services. Operating expenses incurred by our subsidiary inthe United Kingdom are denominated in British pounds and euros. This subsidiarywas acquired as part of the Vidus acquisition and performs research anddevelopment, sales and marketing, and customer service activities. Operatingexpenses incurred in British pounds and Indian rupees exceed revenues generatedin these currencies, which we do not hedge. A ten percent increase in theaverage exchange rates of these currencies would decrease our operating incomeby approximately 4.7 percent.

We hold fixed-price agreements denominated inUnited States dollars with certain of our foreign-based suppliers: OrientSemiconductor Electronics, in Taiwan, which manufactures the Internet LocationManager; Siemens AG, in Germany, which provides the modem for some versions ofthe *i*LM; Taiwan Semiconductor ManufacturingCompany, in Taiwan, which manufactures our GPS digital receiver chips; andMicronet, in Israel, which supplies our *i*DT. Shouldthere be a sustained increase in average exchange rates for the local currencyin any of the foregoing countries, our suppliers may request increased pricingon any new agreements. If this were to occur for all of these currencies andwith each of these suppliers, a ten percent increase in average exchangerates could increase our product costs by approximately 2.3 percent.

We do not use derivativefinancial instruments for speculative trading purposes, nor do we currentlyhedge any foreign currency exposure to offset the effects of changes in foreignexchange rates. Similarly, we do not use financial instruments to hedgeoperating expenses of our subsidiaries in India or the United Kingdom.

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**Equity Price Risk**

The Series B-1 and B-2 redeemable preferred stock,issued in connection with the Vidus acquisition, included an embeddedderivative instrument, the “top-up amount”, which is indexed to our commonstock. The top-up amount is payable upon the redemption of preferredstock after September 25, 2006 and is calculated as follows: $54.2 million lessthe greater of (i) $38.0 million or (ii) 5.6 million, multiplied by the highestaverage closing sale price of our common stock for any ten consecutive tradingday period from September 25, 2005 to September 25, 2006 plus $15.0 million.

The derivative instrument was valued at fair value atthe acquisition date, February 18, 2005, at $5.2 million and at December31, 2005 at $ 2.9 million. The change in the derivative instrument liability of$2.3 million was recorded as a benefit to income for the year ended December 31,2005.

Based on the highest tenconsecutive trading days average closing price of our common stock of $5.44 pershare through December 31, 2005, the aggregate top-up amount, as if determinedon December 31, 2005, is $8.7 million. The top-up amount will furtherdecrease if, and to the extent that, the average closing price of our commonstock for any ten consecutive trading day period ending on or before September25, 2006 is greater than $5.44 per share.

**Item 8.**                        *Financial Statements and Supplementary Data*

See Part IV, Item 15of this Report.

**Item 9.        *Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure***

None.

**Item 9A.     *Controls and Procedures***

**DISCLOSURE CONTROLS**

Within 90 days prior to the date of this Report,we carried out an evaluation, under the supervision and with the participationof our management, including our principal executive officer and principalfinancial officer, of the effectiveness of our disclosure controls andprocedures as defined in Rule 13a-15(e) of the SecuritiesExchange Act of 1934 as amended (“Exchange Act”). As part of our evaluation, weconsidered factors such as whether data, if any, concerning significant changesto our business, new agreements entered into during the quarter, changes inrelationships with suppliers and customers, new resource commitments,litigation matters, the material weaknesses described below and changes inaccounting interpretations were disclosed in connection with the disclosurecommittee’s investigation of such matters. In addition, we considered thecomments, if any, of process owners regarding their awareness of any mattersthat could give rise to additional disclosure. 

Based upon that evaluation, as of December 31, 2005,our principal executive officer and principal financial officer concluded that,as a result of the material weaknesses in our internal control over financialreporting described below, our disclosure controls and procedures were noteffective in recording, processing, summarizing and reporting, on a timelybasis, information required to be disclosed by us in the reports that we fileor submit under the Exchange Act, and were not effective in ensuring thatinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is accumulated and communicated to our management,including our principal executive officer and principal financial officer, orpersons performing similar functions, as appropriate to allow timely decisionsregarding required disclosure.

A disclosure controlsystem, no matter how well conceived and implemented, can provide onlyreasonable assurance that the objectives of such control system are satisfied.Because of the inherent 

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limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues, if any, within the company have beendetected. The Company did design into its process safeguards to reduce, thoughnot eliminate, this risk.

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rule 13a-15(f). Our internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples in the United States. However, all internal control systems, nomatter how well conceived and implemented, have inherent limitations. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and reporting. Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

As part of our first quarter 2005 closing process andassessment of internal control over financial reporting, we identified aninternal control deficiency that constituted a “material weakness,” as definedby the Public Company Accounting Oversight Board Auditing Standard No. 2.The material weakness occurred during the first quarter of 2005 and hascontinued through the fourth quarter of 2005. The material weakness concernsour interpretation and implementation of various complex accounting principlesin the area of non-recurring transactions, specifically (a) ouracquisition of Vidus and (b) certain significant customer contracts.

With respect to the Vidus acquisition, the complexaccounting principles included (i) accounting for acquisition andintegration costs incurred by Vidus as a result of its acquisition by us, (ii) thevaluation of Vidus’ deferred revenue, (iii) revenue recognition of apre-existing customer contract, (iv) deferred tax liability, asset andvaluation allowance and (v) embedded derivatives. The phrase “certainsignificant customer contracts” refers to the pre-existing Vidus customercontract noted above and a customer contract to provide our mobile resourcemanagement solutions, which included more complex contractual elements than aretypically found in our customer agreements. The material weakness relates tothese transactions, including the process of determining the proper accountingto be applied to activities occurring under the agreements and, with respect tothe Vidus acquisition, certain estimates and assumptions.

With respect to such non-recurring transactions, weperformed additional analysis relating to the accounting for such agreements inthe context of preparing our financial statements. After dialogues with ourindependent registered public accountants and independent valuationspecialists, we revised our accounting treatment and conclusions and estimatesand made adjustments to the balances that we ultimately used in preparing ourfinancial statements. Upon a determination that it was appropriate to make suchadjustments, we concluded that we have a material weakness in our internalcontrols over financial reporting.

In addition, as part of our fourth quarter 2005closing process and assessment of internal control over financial reporting, aninternal control deficiency was identified that constituted a materialweakness. Specifically, we did not accurately calculate, or perform a timelyreview of, the annual tax provision for 2005. This deficiency in operation ofinternal control over financial reporting does not affect any prior periods andthe resulting adjustments were identified and made to the annual financialstatements as of December 31, 2005.

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Management’s assessment of the effectiveness of ourinternal control over financial reporting as of December 31, 2005 excludedcertain assets, liabilities, revenues and costs and expenses for Vidus. Weacquired Vidus on February 18, 2005. Vidus’ revenue and costs and expensesexcluded from the assessment of internal control over financial reportingrepresents 14% and 17% of our consolidated revenues and costs and expenses,respectively, for the year ended December 31, 2005. Assets and liabilitiesexcluded from the assessment constituted 2% and 13% of our consolidated assetsand liabilities, respectively, as of December 31, 2005. SEC guidelines permitcompanies to exclude acquisitions from their assessment of internal controlover financial reporting during the first year of an acquisition. 

A material weakness in internal control over financialreporting is a control deficiency, or combination of control deficiencies, thatresults in there being more than a remote likelihood that a material misstatementof the annual or interim financial statements will not be prevented ordetected.

As a result of the material weaknesses in internalcontrol over financial reporting described above, management has concluded thatas of December 31, 2005, our internal control over financial reporting was noteffective to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States. 

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2005 has been audited by Deloitte &Touche LLP, an independent registered public accounting firm, as stated in itsreport which is included herein.

**CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING**

There have been changes implemented to our internalcontrols over financial reporting during the second, third and fourth quartersof 2005.

As of December 31, 2005, we had not fullyremediated the material weakness related to the accounting for non-recurring transactions.During the second quarter of 2005, we commenced implementation of a remediationplan to supplement our existing processes to (a) identify internally suchtransactions occurring during a reporting period and (b) assess theaccounting treatment to be used in connection with those transactions. Thesesupplemental elements include (i) additional internal reviews of theunderlying transactions and related accounting conclusions and (ii) theuse of external consulting expertise to provide additional advice relating toour accounting interpretations. The phrase “external consulting expertise”means that the Company would engage the services of an independent registeredpublic accounting firm or third party with appropriate accounting knowledge andexpertise.

During the fourth quarter of 2005 we supplemented ourexisting processes relating to tax transactions to include the use of externaltax consulting expertise to provide additional quality assurance. Subsequent toDecember 31, 2005 and as a result of the material weakness identifiedabove, we developed a remediation plan to increase the level of review anddiscussion of significant tax matters and supporting documentation with seniorfinance management.

To date, the Company has not incurred, nor does itexpect to incur in the future, any material costs in connection with theseremediation plans.

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders and Board of Directors of @Road, Inc.:

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that @Road, Inc. and its subsidiaries (collectively the “Company”)did not maintain effective internal control over financial reporting as of December 31,2005, because of the effect of the material weaknesses identified inmanagement’s assessment based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.As described in Management’s Report on Internal Control Over Financial Reporting,management’s assessment of the effectiveness of internal control over financialreporting as of December 31, 2005 excluded certain assets, liabilities,revenues and costs and expenses related to Vidus Limited (“Vidus”) that wasacquired on February 18, 2005. Such assets, liabilities, revenues andcosts and expenses related to Vidus represented approximately 2%, 13%, 14% and17%, respectively, of the related consolidated financial statement amounts asof, and for, the year ended December 31, 2005. Accordingly, our audit did notinclude the internal control over financial reporting relating to such assets,liabilities, revenues and costs and expenses at Vidus. The Company’s managementis responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and proceduresthat (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

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A material weaknessis a significant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of the annualor interim financial statements will not be prevented or detected. Thefollowing material weaknesses have been identified and included in management’sassessment:

1.                As of December 31,2005, the Company did not maintain effective control over the financial closingand reporting process with respect to the interpretation and application ofvarious complex accounting principles in the area of non-recurring transactions.Specifically, the Company did not properly account for the acquisition of Vidusor certain significant customer contracts. This deficiency in operation of the controlsover financial reporting for non-recurring transactions resulted in adjustmentsto the Company’s consolidated financial statements and the restatement of theCompany’s condensed consolidated financial statements for the interim periodsended September 30, 2005, June 30, 2005 and March 31, 2005.

2.                As ofDecember 31, 2005, the Company did not maintain effective control over thecalculation and review of the income tax provision and disclosures. Thisdeficiency in operation of the controls over financial reporting for incometaxes resulted in certain adjustments to the Company’s income tax benefit,deferred income tax balances and disclosures in the notes to the consolidatedfinancial statements.

These material weaknesses were considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the consolidatedfinancial statements and financial statement schedule as of and for the yearended December 31, 2005, of the Company and this report does not affectour reports on such consolidated financial statements and financial statementschedule.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof December 31, 2005, is fairly stated, in all material respects, based onthe criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. Also in our opinion, because of the effect of the materialweaknesses described above on the achievement of the objectives of the controlcriteria, the Company has not maintained effective internal control overfinancial reporting as of December 31, 2005, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule of the Company as of and for the year ended December 31, 2005,and our reports dated March 22, 2006 expressed unqualified opinions onthose consolidated financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

San Jose, CaliforniaMarch 22,2006

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**Item 9B.**               *Other Information*

None.

**PART III**

The information requiredto be included in Part III is omitted from this Report because we willfile a definitive proxy statement within 120 days after the end of ourfiscal year pursuant to Regulation 14A (“Proxy Statement”) for our 2006annual meeting of stockholders, and the information included in the ProxyStatement is incorporated herein by reference.

**PART IV**

**Item 15.**                 *Exhibits and Financial Statement Schedules*

(a)           The following documentsare filed as part of this Report:

  1.           Indexto Consolidated Financial Statements

Thefollowing Consolidated Financial Statements of @Road, Inc. and itssubsidiaries are filed as part of this Report on Form 10-K:

|                                                                                                                                       | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm                                                                              |       | 53       |
| Consolidated  Balance Sheets—December 31, 2005 and 2004                                                                     |       | 54       |
| Consolidated Statements of Operations—Years ended  December 31, 2005, 2004 and 2003                                         |       | 55       |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Income—Years ended December 31, 2005, 2004 and 2003 |       | 56       |
| Consolidated Statements of Cash Flows—Years ended  December 31, 2005, 2004 and 2003                                         |       | 57       |
| Notes to Consolidated Financial Statements                                                                                            |       | 58       |

 

  2.           ConsolidatedFinancial Statement Schedules

|                                                          | ** ** | **Page** |
|----------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm |       | 84       |
| Schedule II—Valuation and Qualifying Accounts  |       | 85       |

 

Schedules notlisted above have been omitted because the matter or conditions are not presentor the information required to be set forth therein is included in theConsolidated Financial Statements.

  3.           Exhibits(numbered in accordance with Item 601 of Regulation S-K)

(b)          Exhibits
| 2.1 |   | Acquisition Agreement  dated as of December 15, 2004 by and among Registrant, Vidus Limited and  NV Partners III-BT LP. (Incorporated herein by reference to our  Report on Form 8-K filed on December 21, 2004.) |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.4 |   | Amended and Restated  Bylaws of the Registrant, as amended. (Incorporated herein by reference to  our registration statement on Form S-1 (File No. 333-41372)  initially filed on July 13, 2000.)                      |

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| 3.5         |   | Amended and Restated Certificate of Incorporation of  the Registrant. (Incorporated herein by reference to our registration  statement on Form S-1 (File No. 333-41372) initially  filed on July 13, 2000.)                                                                                                                                  |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.6         |   | Certificate of  Designations, Rights and Preferences of Series A-1 and  Series A-2 Redeemable Preferred Stock and Series B-1  and Series B-2 Redeemable Preferred Stock. (Incorporated herein by  reference to our Report on Form 8-K filed on February 22,  2005.)                                                           |
| 4.1         |   | Specimen Stock  Certificate. (Incorporated herein by reference to our registration statement  on Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                                                                                           |
| 10.2†  |   | Form of Wireless  Network Services Agreement and Form of Purchase Agreement for Goods.  (Incorporated herein by reference to our registration statement on  Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                      |
| 10.12       |   | 1996 Stock Option Plan.  (Incorporated herein by reference to our registration statement on  Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                                                                                               |
| 10.13       |   | 2000 Stock Option Plan.  (Incorporated herein by reference to our registration statement on  Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                                                                                               |
| 10.14       |   | 2000 Employee Stock  Purchase Plan. (Incorporated herein by reference to our registration  statement on Form S-1 (File No. 333-41372) initially  filed on July 13, 2000.)                                                                                                                                                                    |
| 10.15       |   | 2000 Directors’ Stock  Option Plan. (Incorporated herein by reference to our registration statement  on Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                                                                               |
| 10.16       |   | Form of  Indemnification Agreement. (Incorporated herein by reference to our  registration statement on Form S-1 (File No. 333-41372)  initially filed on July 13, 2000.)                                                                                                                                                               |
| 10.20† |   | CDPD Data National  Service Agreement between the Registrant and GTE Wireless Incorporated dated  May 5, 2000. (Incorporated herein by reference to our registration  statement on Form S-1 (File No. 333-41372) initially  filed on July 13, 2000.)                                                                                    |
| 10.27† |   | Cellular Digital Packet  Data Reseller Agreement between the Registrant and TELUS Mobility dated  January 19, 2001. (Incorporated herein by reference to our Report on  Form 10-K filed on March 28, 2002.)                                                                                                                                  |
| 10.28† |   | Co-Marketing  Agreement between the Registrant and Nextel Partners Operating Corp. dated  March 14, 2001. (Incorporated herein by reference to our Report on  Form 10-K filed on March 28, 2002.)                                                                                                                                            |
| 10.29† |   | Co-Marketing  Agreement between the Registrant and Nextel Financing Company dated  December 15, 2000. (Incorporated herein by reference to our Report on  Form 10-K filed on March 28, 2002.)                                                                                                                                                |
| 10.30† |   | Cellular Digital Packet  Data Reseller Agreement between the Registrant and Ameritech Mobile  Communications LLC dated January 10, 2002. (Incorporated herein by  reference to our Report on Form 10-K filed on March 28,  2002.)                                                                                                            |
| 10.32† |   | Integrator Agreement  between the Registrant and Symbol Technologies, Inc. dated July 31,  2001, as amended by Amendment to Agreement with Integrator between the  Registrant and Symbol Technologies, Inc. dated December 28, 2001.  (Incorporated herein by reference to our Report on Form 10-K filed  on March 28, 2002.) |
| 10.37† |   | Reseller Agreement  between the Registrant and AT&T Wireless dated February 24, 2003.  (Incorporated herein by reference to our Report on Form 10-K/A  filed on July 29, 2003.)                                                                                                                                                          |

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| 10.41 |   | Agreement between the  Registrant and Elnet Technologies Ltd., dated December 10, 2003.  (Incorporated herein by reference to our Report on Form 10-K filed  on March 12, 2004.)                                                                                                                  |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.42 |   | Sublease between the  Registrant and VA Software Corporation, dated June 8, 2004.  (Incorporated herein by reference to our Report on Form 10-Q filed  on August 9, 2004.)                                                                                                                        |
| 10.43 |   | Consent to Sublease  Agreement between the Registrant, VA Software Corporation and Renco Investment  Company, dated June 9, 2004. (Incorporated herein by reference to our  Report on Form 10-Q filed on August 9, 2004.)                                                                         |
| 10.44 |   | Deed of Warranty and  Indemnity in relation to Vidus Limited dated December 15, 2004.  (Incorporated herein by reference to our Report on Form 8-K filed  on December 21, 2004.)                                                                                                                  |
| 10.49 |   | 2005 Stock Option Plan. (Incorporated herein by  reference to our Report on Form 8-K filed on February 22,  2005.)                                                                                                                                                                                     |
| 10.50 |   | Agreement between the  Registrant and Elnet Technologies Ltd., dated April 28, 2004. (Incorporated  herein by reference to our Report on Form 10-K filed on  March 15, 2005.)                                                                                                                     |
| 10.51 |   | Form of Change in  Control Agreement between the Registrant and its executive officers.  (Incorporated herein by reference to our Report on Form 10-K filed  on March 15, 2005.)                                                                                                                  |
| 10.52 |   | Offer Letter between the  Registrant and Michael Martini dated June 14, 2005. (Incorporated herein  by reference to our Report on Form 8-K filed on June 22,  2005.)                                                                                                                              |
| 10.53 |   | Lease agreement among a  subsidiary of Registrant, Prime Holdings Limited and Melbourne Business Court  Management Company Limited, dated October 15, 2003. (Incorporated herein by reference to our Report  on Form 10-Q filed on August 9, 2005.)                                               |
| 10.54 |   | Lease agreement among a  subsidiary of Registrant, Felaw Maltings Ipswich (No. 1) Limited, Felaw  Maltings Ipswich (No. 2) Limited and Mars Pension Trustees Limited,  dated December 9, 2004. (Incorporated herein by  reference to our Report on Form 10-Q filed on August 9,  2005.) |
| 10.55 |   | Lease agreement among a  subsidiary of Registrant, Felaw Maltings Ipswich (No. 1) Limited, Felaw  Maltings Ipswich (No. 2) Limited and Mars Pension Trustees Limited,  dated December 9, 2004. (Incorporated herein by  reference to our Report on Form 10-Q filed on August 9,  2005.) |
| 10.56 |   | Lease agreement between  a subsidiary of Registrant and Riverdale Estates Limited, dated July 12,  2004. (Incorporated herein by reference to our Report on Form 10-Q  filed on August 9, 2005.)                                                                                                  |
| 10.57 |   | Lease agreement between  a subsidiary of Registrant and Riverdale Estates Limited, dated July 12,  2004. (Incorporated herein by reference to our Report on Form 10-Q  filed on August 9, 2005.)                                                                                                  |
| 10.58 |   | Form of  Notice of Stock Option Acceleration. (Incorporated herein by reference to our  Report on Form 8-K filed on October 27, 2005.)                                                                                                                                                            |
| 10.59 |   | Lease Deed dated  February 1, 2006, between Transpacific Business Service Private Limited  and @Road Software India Private Limited.                                                                                                                                                                        |
| 21.1  |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                            |
| 23.1  |   | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                       |
| 24.1  |   | Power of Attorney (see  page 86).                                                                                                                                                                                                                                                                           |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                    |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                    |

51

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| 32.1 |   | Certification pursuant  to 18 U.S.C. Section 1350 of Chief Executive Officer. |
|------|--------|------------------------------------------------------------------------------------|
| 32.2 |   | Certification pursuant  to 18 U.S.C. Section 1350 of Chief Financial Officer. |

----

†                    Certaininformation in this Exhibit has been omitted and filed separately with theSEC. Confidential treatment has been requested or granted with respect to theomitted portions.

52

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders and Board of Directors of @Road, Inc.:

We have audited the accompanying consolidated balancesheets of @Road, Inc. and its subsidiaries (collectively the “Company”) asof December 31, 2005 and 2004, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income and cash flows foreach of the three years in the period ended December 31, 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyat December 31, 2005 and 2004, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2005,in conformity with accounting principles generally accepted in the UnitedStates of America.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated March 22, 2006 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an adverse opinion onthe effectiveness of the Company’s internal control over financial reportingbecause of material weaknesses.

/s/ Deloitte & Touche LLP

San Jose, CaliforniaMarch 22,2006

53

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**@ROAD, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)**

| ** **                                                                                                                                                                         | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                  |       |   |   |
| Current assets:                                                                                                                                                                    |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                         |       | $                     | 25,773     |   | $ | 14,494 |   |
| Short-term  investments                                                                                                                                                            |       | 77,643                |       | 103,222 |   |
| Accounts receivable (net  of allowances of $376 and $1,066)                                                                                                                        |       | 12,475                |       | 7,960 |   |
| Inventories                                                                                                                                                                        |       | 6,087                 |       | 3,593 |   |
| Deferred product costs                                                                                                                                                             |       | 16,187                |       | 11,104 |   |
| Deferred tax assets                                                                                                                                                                |       | 1,448                 |       | — |   |
| Prepaid expenses and  other                                                                                                                                                        |       | 2,566                 |       | 1,542 |   |
| Total current assets                                                                                                                                                               |       | 142,179               |       | 141,915 |   |
| Property and equipment,  net                                                                                                                                                       |       | 6,195                 |       | 3,668 |   |
| Deferred product costs                                                                                                                                                             |       | 16,995                |       | 5,947 |   |
| Deferred tax assets                                                                                                                                                                |       | 40,531                |       | — |   |
| Goodwill                                                                                                                                                                           |       | 13,341                |       | — |   |
| Intangible assets, net                                                                                                                                                             |       | 27,333                |       | — |   |
| Other non-current assets                                                                                                                                                           |       | 400                   |       | 680 |   |
| Total assets                                                                                                                                                                       |       | $                     | 246,974    |   | $ | 152,210 |   |
| **LIABILITIES,  REDEEMABLE PREFERRED STOCK  AND STOCKHOLDERS’ EQUITY**                                                                                                        |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                               |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                   |       | $                     | 6,653      |   | $ | 5,666 |   |
| Accrued liabilities                                                                                                                                                                |       | 8,751                 |       | 5,529 |   |
| Deferred revenue and  customer deposits                                                                                                                                            |       | 15,495                |       | 11,347 |   |
| Derivative instrument                                                                                                                                                              |       | 1,457                 |       | — |   |
| Total current  liabilities                                                                                                                                                         |       | 32,356                |       | 22,542 |   |
| Deferred revenue                                                                                                                                                                   |       | 17,333                |       | 4,830 |   |
| Deferred tax liabilities                                                                                                                                                           |       | 323                   |       | — |   |
| Derivative  instrument                                                                                                                                                             |       | 1,457                 |       | — |   |
| Other long-term  liabilities                                                                                                                                                       |       | 461                   |       | 2 |   |
| Total liabilities                                                                                                                                                                  |       | 51,930                |       | 27,374 |   |
| Commitments and contingencies (Note 13)                                                                                                                                       |       |                  |       |   |   |
| Preferred stock, $0.001  par value, 10,000 shares authorized, 98 shares designated as redeemable  preferred stock, shares issued and outstanding: 78 in 2005 and none in 2004 |       | 8,184                 |       | — |   |
| Stockholders’ equity:                                                                                                                                                         |       |                  |       |   |   |
| Common stock, $0.0001  par value, 250,000 shares authorized, shares issued and outstanding: 61,154  in 2005 and 54,805 in 2004                                                     |       | 265,347               |       | 232,016 |   |
| Notes receivable from  stockholders                                                                                                                                                |       | (7                    | )          | — |   |
| Accumulated other  comprehensive loss                                                                                                                                              |       | (78                   | )          | (179 | ) |
| Accumulated deficit                                                                                                                                                                |       | (78,402               | )          | (107,001 | ) |
| Total stockholders’  equity                                                                                                                                                   |       | 186,860               |       | 124,836 |   |
| Total liabilities, redeemable preferred stock and stockholders’  equity                                                                                                       |       | $                     | 246,974    |   | $ | 152,210 |   |

 

See notes to consolidated financial statements.

54

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**@ROAD, INC.CONSOLIDATED STATEMENTSOF OPERATIONS(In thousands, except per share data)**

| ** **                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                     |       |                                        |       |   |   |   |   |
| Hosted                                                                        |       | $                                           | 79,945     |   | $ | 75,234 |   | $ | 63,363 |   |
| Licensed                                                                      |       | 12,911                                      |       | — |   | — |   |
| Total revenues                                                                |       | 92,856                                      |       | 75,234 |   | 63,363 |   |
| Costs and expenses:                                                           |       |                                        |       |   |   |   |   |
| Cost of hosted revenue (excluding intangibles  amortization included below)   |       | 39,657                                      |       | 34,825 |   | 35,516 |   |
| Cost of licensed revenue (excluding intangibles  amortization included below) |       | 4,949                                       |       | — |   | — |   |
| Intangibles amortization                                                      |       | 3,487                                       |       | 28 |   | 455 |   |
| In-process research and development                                           |       | 5,640                                       |       | — |   | — |   |
| Impairment of intangible assets                                               |       | 2,270                                       |       | — |   | — |   |
| Sales and marketing                                                           |       | 21,398                                      |       | 12,336 |   | 11,433 |   |
| Research and development                                                      |       | 13,024                                      |       | 6,192 |   | 5,472 |   |
| General and administrative                                                    |       | 17,506                                      |       | 12,022 |   | 9,516 |   |
| Terminated acquisition costs                                                  |       | —                                      |       | 2,138 |   | — |   |
| Total costs and expenses                                                      |       | 107,931                                     |       | 67,541 |   | 62,392 |   |
| (Loss) income  from operations                                                |       | (15,075                                     | )          | 7,693 |   | 971 |   |
| Other income, net:                                                            |       |                                        |       |   |   |   |   |
| Interest income                                                               |       | 3,039                                       |       | 1,532 |   | 686 |   |
| Interest expense                                                              |       | —                                      |       | — |   | (11 | ) |
| Change in derivative instrument liability                                     |       | 2,256                                       |       | — |   | — |   |
| Other (expense) income, net                                                   |       | (103                                        | )          | (4 | ) | 16 |   |
| Total other income, net                                                       |       | 5,192                                       |       | 1,528 |   | 691 |   |
| Net (loss) income  before income taxes                                        |       | (9,883                                      | )          | 9,221 |   | 1,662 |   |
| Benefit from income  taxes                                                    |       | 38,482                                      |       | — |   | — |   |
| Net income                                                                    |       | 28,599                                      |       | 9,221 |   | 1,662 |   |
| Preferred stock  dividends                                                    |       | (436                                        | )          | — |   | — |   |
| Net income  attributable to common stockholders                               |       | $                                           | 28,163     |   | $ | 9,221 |   | $ | 1,662 |   |
| Net income per share:                                                         |       |                                        |       |   |   |   |   |
| Basic                                                                         |       | $                                           | 0.47       |   | $ | 0.17 |   | $ | 0.03 |   |
| Diluted                                                                       |       | $                                           | 0.46       |   | $ | 0.16 |   | $ | 0.03 |   |
| Shares used in  calculating net income per share:                             |       |                                        |       |   |   |   |   |
| Basic                                                                         |       | 59,928                                      |       | 54,296 |   | 49,978 |   |
| Diluted                                                                       |       | 61,353                                      |       | 57,435 |   | 54,282 |   |

 

See notes to consolidated financial statements.

55

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**@ROAD, INC.CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITYAND COMPREHENSIVE INCOMEYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003(In thousands)**

| ** **                                                                                                | ** ** | **Common Stock** | ** ** | **Deferred  Stock** | ** ** | **Notes  Receivable  from** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------------|------------|---------------------------------------|------------|-----------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                | ** ** | **Shares**            | ** ** | **Amount**          | ** ** | **Compensation**            | ** ** | **Stockholders**                      | ** ** | **Loss**        | ** ** | **Deficit**            | ** ** | **Equity**        | ** ** | **Income** | ** ** |
| BALANCES,  January 1, 2003                                                                           |       |                  | 47,747     |                |       | $                           | 170,610    |                                  |       | $               | (491       | )                      |       |              | $          | (2,068 | ) |   |   | $ | — |   |   |   | $ | (117,884 | ) |   |   | $ | 50,167 |   |   |   |   |   |   |
| Net income                                                                                                |       |                  |       |                |       |                        |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   | 1,662 |   |   |   | 1,662 |   |   |   | $ | 1,662 |   |   |
| Common stock  issued through secondary public offering, net of issuance costs                             |       |                  | 4,000      |                |       | 51,889                      |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 51,889 |   |   |   |   |   |   |
| Shares issued  under employee stock purchase plan                                                         |       |                  | 563        |                |       | 1,484                       |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 1,484 |   |   |   |   |   |   |
| Exercise of stock  options                                                                                |       |                  | 1,390      |                |       | 4,478                       |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 4,478 |   |   |   |   |   |   |
| Collection of  notes receivable from stockholders                                                         |       |                  |       |                |       |                        |       |                                  |       |            |       |                   | 1,981      |              |       |   |   |   |   |   |   |   |   |   | 1,981 |   |   |   |   |   |   |
| Deferred stock  compensation                                                                              |       |                  |       |                |       | 5                           |       |                                  | (5         | )               |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   |
| Reversal of  deferred stock compensation due to employee terminations                                     |       |                  |       |                |       | (25                         | )          |                                  | 25         |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   |
| Amortization of  deferred stock compensation                                                              |       |                  |       |                |       |                        |       |                                  | 467        |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 467 |   |   |   |   |   |   |
| BALANCES,  December 31, 2003                                                                         |       |                  | 53,700     |                |       | 228,441                     |       |                                  | (4         | )               |       |                   | (87        | )                 |       |   | — |   |   |   | (116,222 | ) |   |   | 112,128 |   |   |   |   |   |   |
| Net income                                                                                                |       |                  |       |                |       |                        |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   | 9,221 |   |   |   | 9,221 |   |   |   | $ | 9,221 |   |   |
| Change in  unrealized (loss) on short-term investments                                               |       |                  |       |                |       |                        |       |                                  |       |            |       |                   |       |              |       |   | (179 | ) |   |   |   |   |   |   | (179 | ) |   |   | (179 | ) |   |
| Comprehensive  income                                                                                     |       |                  |       |                |       |                        |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 9,042 |   |   |
| Shares issued  under employee stock purchase plan                                                         |       |                  | 464        |                |       | 2,135                       |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 2,135 |   |   |   |   |   |   |
| Exercise of stock  options                                                                                |       |                  | 641        |                |       | 1,440                       |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 1,440 |   |   |   |   |   |   |
| Collection of  notes receivable from stockholders                                                         |       |                  |       |                |       |                        |       |                                  |       |            |       |                   | 87         |              |       |   |   |   |   |   |   |   |   |   | 87 |   |   |   |   |   |   |
| Amortization of  deferred stock compensation                                                              |       |                  |       |                |       |                        |       |                                  | 4          |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 4 |   |   |   |   |   |   |
| BALANCES,  December 31, 2004                                                                         |       |                  | 54,805     |                |       | 232,016                     |       |                                  | —     |            |       |                   | —     |              |       |   | (179 | ) |   |   | (107,001 | ) |   |   | 124,836 |   |   |   |   |   |   |
| Net income                                                                                                |       |                  |       |                |       |                        |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   | 28,599 |   |   |   | 28,599 |   |   |   | $ | 28,599 |   |   |
| Change in unrealized  gain on short-term investments                                                      |       |                  |       |                |       |                        |       |                                  |       |            |       |                   |       |              |       |   | 101 |   |   |   |   |   |   |   | 101 |   |   |   | 101 |   |   |
| Comprehensive  income                                                                                     |       |                  |       |                |       |                        |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 28,700 |   |   |
| Shares issued upon  acquisition of Vidus, net of issuance costs of $478                                   |       |                  | 5,454      |                |       | 24,228                      |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 24,228 |   |   |   |   |   |   |
| Fully vested  options issued upon acquisition of Vidus                                               |       |                  |       |                |       | 531                         |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 531 |   |   |   |   |   |   |
| Shares issued  under employee stock purchase plan                                                         |       |                  | 580        |                |       | 1,678                       |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 1,678 |   |   |   |   |   |   |
| Exercise of stock  options                                                                                |       |                  | 315        |                |       | 578                         |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 578 |   |   |   |   |   |   |
| Issuance of note  receivable from stockholder                                                             |       |                  |       |                |       |                        |       |                                  |       |            |       |                   | (11        | )                 |       |   |   |   |   |   |   |   |   |   | (11 | ) |   |   |   |   |   |
| Collection of note  receivable from stockholder                                                           |       |                  |       |                |       |                        |       |                                  |       |            |       |                   | 4          |              |       |   |   |   |   |   |   |   |   |   | 4 |   |   |   |   |   |   |
| Dividends on  preferred stock                                                                             |       |                  |       |                |       | (436                        | )          |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | (436 | ) |   |   |   |   |   |
| Excess tax benefit  on the exercise of employee stock options (See “Note 15—Income Taxes”) |       |                  |       |                |       | 6,752                       |       |                                  |       |            |       |                   |       |              |       |   |   |   |   |   |   |   |   |   | 6,752 |   |   |   |   |   |   |
| BALANCES,  December 31, 2005                                                                         |       |                  | 61,154     |                |       | $                           | 265,347    |                                  |       | $               | —     |                   |       |              | $          | (7 | ) |   |   | $ | (78 | ) |   |   | $ | (78,402 | ) |   |   | $ | 186,860 |   |   |   |   |   |   |

 

See notes to consolidated financial statements.

56

 

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**@ROAD, INC.CONSOLIDATED STATEMENTSOF CASH FLOWS(In thousands)**

| ** **                                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating  activities:                                                              |       |                                        |       |   |   |   |   |
| Net income                                                                                          |       | $                                           | 28,599     |   | $ | 9,221 |   | $ | 1,662 |   |
| Adjustments to reconcile net income to net cash (used  in) provided by operating activities:        |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                                       |       | 6,095                                       |       | 1,286 |   | 2,168 |   |
| Excess tax benefit on the exercise of employee stock  options                                       |       | 6,752                                       |       | — |   | — |   |
| In-process research and development                                                                 |       | 5,640                                       |       | — |   | — |   |
| Impairment of intangible assets                                                                     |       | 2,270                                       |       | — |   | — |   |
| Change in derivative instrument liability                                                           |       | (2,256                                      | )          | — |   | — |   |
| Provision for inventory valuation                                                                   |       | 365                                         |       | 214 |   | 1,375 |   |
| Provision for product return costs                                                                  |       | 238                                         |       | — |   | — |   |
| Loss on disposal of property and equipment                                                          |       | 65                                          |       | 24 |   | 7 |   |
| Write-off of deferred acquisition costs                                                             |       | —                                      |       | 1,095 |   | — |   |
| Amortization of deferred stock compensation                                                         |       | —                                      |       | 4 |   | 467 |   |
| Allowance (reduction) for doubtful accounts                                                         |       | (674                                        | )          | (724 | ) | (127 | ) |
| Deferred taxes                                                                                      |       | (45,349                                     | )          | — |   | — |   |
| Change  in assets and liabilities, net of effect of acquisition:                                    |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                                 |       | (2,172                                      | )          | (127 | ) | 425 |   |
| Inventories                                                                                         |       | (2,859                                      | )          | (1,382 | ) | 1,599 |   |
| Deferred product costs                                                                              |       | (16,369                                     | )          | 2,140 |   | (4,331 | ) |
| Prepaid expenses and other                                                                          |       | (332                                        | )          | (1,021 | ) | (296 | ) |
| Accounts payable                                                                                    |       | 447                                         |       | 609 |   | 1,649 |   |
| Accrued and other liabilities                                                                       |       | 1,533                                       |       | 33 |   | 1,438 |   |
| Deferred revenue and customer deposits                                                              |       | 12,381                                      |       | (156 | ) | 3,418 |   |
| Net cash (used in) provided by operating activities                                                 |       | (5,626                                      | )          | 11,216 |   | 9,454 |   |
| Cash flows from investing  activities:                                                              |       |                                        |       |   |   |   |   |
| Purchase of property and equipment                                                                  |       | (4,178                                      | )          | (2,652 | ) | (1,519 | ) |
| Proceeds from sale of property and equipment                                                        |       | —                                      |       | — |   | 2 |   |
| Purchases of short-term investments                                                                 |       | (127,367                                    | )          | (161,836 | ) | (2,000 | ) |
| Proceeds from maturities of short-term  investments                                                 |       | 153,047                                     |       | 60,435 |   | 2,241 |   |
| Acquisition of Vidus, net of cash acquired                                                          |       | (6,857                                      | )          | — |   | — |   |
| Net cash provided by (used in) investing activities                                                 |       | 14,645                                      |       | (104,053 | ) | (1,276 | ) |
| Cash flows from financing  activities:                                                              |       |                                        |       |   |   |   |   |
| Proceeds from sale of common stock                                                                  |       | 2,256                                       |       | 3,575 |   | 57,851 |   |
| Proceeds from payments on note receivable issued to  stockholders                                   |       | 4                                           |       | 87 |   | 1,981 |   |
| Net cash provided by financing activities                                                           |       | 2,260                                       |       | 3,662 |   | 59,832 |   |
| Net increase (decrease) in cash and cash equivalents                                                |       | 11,279                                      |       | (89,175 | ) | 68,010 |   |
| Cash and cash equivalents:                                                                          |       |                                        |       |   |   |   |   |
| Beginning of year                                                                                   |       | 14,494                                      |       | 103,669 |   | 35,659 |   |
| End of year                                                                                         |       | $                                           | 25,773     |   | $ | 14,494 |   | $ | 103,669 |   |
| Supplemental disclosure  of cash flow information:                                                  |       |                                        |       |   |   |   |   |
| Cash paid for interest expense                                                                      |       | $                                           | —     |   | $ | — |   | $ | 11 |   |
| Cash paid for income taxes                                                                          |       | $                                           | 55         |   | $ | — |   | $ | — |   |
| Dividends accrued on preferred stock                                                                |       | $                                           | 436        |   | $ | — |   | $ | — |   |
| Change in unrealized gain (loss) on short-term  investments, net of tax effects                     |       | $                                           | 101        |   | $ | (179 | ) | $ | — |   |
| Reversal of deferred stock compensation                                                             |       | $                                           | —     |   | $ | — |   | $ | 25 |   |
| Deferred stock compensation                                                                         |       | $                                           | —     |   | $ | — |   | $ | 5 |   |
| Non-cash investing  and financing activities:                                                       |       |                                        |       |   |   |   |   |
| Issuance of common  stock, preferred stock and options in connection with the acquisition of  Vidus |       | $                                           | 38,155     |   | $ | — |   | $ | — |   |

 

See notes to consolidated financial statements.

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**@ROAD, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**Note 1.Organization and Summary of Significant Accounting Policies**

***Organization***

@Road, Inc. commencedoperations on July 1, 1996 and is a leading provider of mobile resourcemanagement (“MRM”).

***Principles of Consolidation***

The consolidated financialstatements include @Road, Inc. and its wholly-owned subsidiaries(collectively, the “Company”). Intercompany accounts and transactions areeliminated upon consolidation.

***Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues and expenses during the reporting period. On an on-going basis, theCompany evaluates its estimates, including those related to revenue recognition,intangible assets and goodwill, allowance for doubtful accounts, income taxesand legal and other contingencies. The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results could differ from thoseestimates.

***Cash Equivalents***

The Company considers allhighly liquid debt instruments purchased with a remaining maturity at purchaseof 90 days or less to be cash equivalents.

***Investments***

Investments representhighly liquid debt instruments purchased with a remaining maturity date atpurchase of greater than 90 days and are stated at fair value. Thedifferences between amortized cost (cost adjusted for amortization of premiumsand accretion of discounts which are recognized as adjustments to interestincome) and fair value representing unrealized holding gains or losses, arerecorded separately as accumulated other comprehensive income withinstockholders’ equity, net of related estimated tax provisions or benefits. Additionally,the Company assesses whether an other-than-temporary impairment loss on itsinvestments has occurred due to declines in fair value or other marketconditions. The Company did not consider any declines in fair value to be otherthan temporary. While the Company’s intent is to hold debt securities tomaturity or reset date, they are classified as available-for-sale because thesale of such securities may be required prior to maturity or reset. Any gainsand losses on the sale of debt securities are determined on a specificidentification basis.

***Concentration of Credit Risk***

Financial instruments, which potentially subject theCompany to concentrations of credit risk, consist primarily of cashequivalents, short-term investments and accounts receivable. The Company’s cashequivalents and short-term investments consist of checking and savingsaccounts, money market accounts and highly liquid debt instruments with fourfinancial institutions. The Company sells its products and services primarilyto companies in the United States and Europe. The Company does not requirecollateral 

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or other security tosupport accounts receivable. To reduce credit risk, management performs ongoingevaluations of its customers’ financial condition. The Company maintains anallowance for doubtful accounts receivable based upon its historical experience.Unexpected or significant future changes in trends could result in a materialimpact to future statements of operations or cash flows. The allowance fordoubtful accounts is recorded as a charge to operating expense, while theprovision for sales returns is recognized as a reduction of revenues.

At December 31, 2005,SBC Services comprised 43% of outstanding accounts receivable. At December 31,2004, SBC Services, Waste Management and Verizon Communications comprised 20%,19% and 11% of outstanding accounts receivable, respectively.

***Inventories***

Inventories consist of rawmaterials, work in process and finished goods, and are stated at the lower of averagecost or market. Inventories are accounted for on an average cost basis and theadequacy of inventory reserves is reviewed on a quarterly basis. The Companywrites down inventory based on forecasted demand and technological obsolescence.These factors are impacted by market and economic conditions, technologychanges, new product introductions and changes in strategic direction and requireestimates that may include uncertain elements. Actual demand may differ fromforecasted demand and such differences may have a material effect on recordedinventory values.

***Property and Equipment***

Property and equipment arestated at cost and depreciated using the straight-line method over estimateduseful lives of approximately three to five years. Leasehold improvements andcapital lease assets are amortized over the shorter of the lease term or theirestimated useful lives.

***Intangible Assets and Goodwill***

Intangible assets resulting from the acquisitions ofentities accounted for using the purchase method of accounting are estimated bymanagement based on the fair value of assets received. Identifiable intangibleassets are comprised of core developed technology, order backlog, customerrelationships, trademarks and trade names, and other intangible assets. Identifiableintangible assets that have finite useful lives are being amortized over theiruseful lives of ten years for core developed technology, three years for orderbacklog and ten years for customer relationships. Trademarks and trade nameshave indefinite lives and as such are not amortized but are tested at leastannually for impairment.

Goodwill represents theexcess of the purchase price over the fair value of the net tangible andidentifiable intangible assets acquired in a business combination. The Companyfollows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142,*Goodwill and Other Intangible Assets* (“SFAS142”), under which goodwill is no longer subject to amortization.

***Impairment of Long-Lived Assets***

The Company evaluates long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof a long-lived asset may not be recoverable in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. An asset is considered impaired if its carryingamount exceeds the future net cash flow that the asset is expected to generate.If an asset is considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the asset exceeds itsfair market value. The Company assesses the recoverability of long-lived andintangible assets by determining whether the unamortized balances can berecovered through undiscounted future net cash flows of the related assets. Theamount of impairment if any, is measured based on projected discounted futurenet cash flows.

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The Company evaluatesgoodwill, at a minimum, on an annual basis and whenever events and changes incircumstances suggest that the carrying amount may not be recoverable. Impairmentof goodwill is tested at the reporting unit level by comparing the reportingunit’s carrying amount, including goodwill, to the fair value of the reportingunit. The fair values of the reporting units are estimated using a combinationof the income, or discounted cash flows, approach and the market approach,which utilize comparable companies’ data. If the carrying amount of thereporting unit exceeds its fair value, goodwill is considered impaired and asecond step is performed to measure the amount of impairment loss, if any. TheCompany conducted its initial annual impairment test as of August 31, 2005and determined there was no impairment. There were no events or circumstances,except for the impairment of the Vidus trade name, from that date through December 31,2005 indicating that a further assessment was necessary.

***Income Taxes***

The Company accounts forincome taxes under an asset and liability approach. Deferred income taxesreflect the impact of temporary differences between assets and liabilities recognizedfor financial reporting purposes and such amounts recognized for income taxreporting purposes, net operating loss carry forwards and other tax creditsmeasured by applying currently enacted tax laws. Valuation allowances areprovided when necessary to reduce deferred tax assets to an amount that is morelikely than not to be realized.

***Revenue Recognition***

The Company follows specific and detailed guidelinesin recognizing revenue in accordance with the provisions of AICPA Statement ofPosition 97-2, *Software RevenueRecognition*, as amended by Statement of Position 98-4, *Deferral of the Effective Date of a Provision of SOP 97-2*and Statement of Position 98-9, *Modification of SOP 97-2*,as well as Accounting Research Bulletin No. 45, *Long-TermConstruction-Type Contracts* and Statement of Position 81-1, *Accounting for Performance of Construction-Type and CertainProduction-Type Contracts*. The Company recognizes revenue when theprice is fixed and determinable, persuasive evidence of an agreement exists,the obligations under any such agreement are fulfilled and collectibility isprobable.

The Company’s revenues are comprised of hosted revenueand licensed revenue. Hosted revenue is derived from monthly fees for theCompany’s Field Force Management (“FFM”) and Field Asset Management (“FAM”)solutions and monthly or upfront fees for in-vehicle hardware devices enabling amobile resource to utilize these FFM or FAM solutions. Licensed revenue is comprisedof license fees, installation, training and related post-contract customersupport (“PCS”) services fees relating to our Field Service Management (“FSM”) Taskforce software solution.

Monthly fees for the Company’s hosted solutions arerecognized ratably over the contract period, which commences (a) uponinstallation of our proprietary hardware devices in our subscriber’s mobileworker vehicles, or (b) upon the creation of subscription licenses and asubscriber account on its website where subscribers have elected to use itssolution with a mobile telephone. Upfront fees for the Company’s hostedsolution primarily consist of amounts for the in-vehicle enabling hardwaredevice and peripherals, if any. The Company defers upfront fees at installationand recognizes them ratably over the minimum service contract period, generallyone to five years. Product costs are also deferred and amortized over suchperiod. Renewal rates for its hosted solutions not considered priced at abargain in comparison to the upfront fees (as described in Staff AccountingBulletin No. 104, *Revenue Recognition*).If the Company cannot objectively determine the fair value of any undeliveredelement included in hosted arrangements, it defers revenue until all elementsare delivered, all services have been performed or fair value can objectivelybe determined.

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Licensed revenue associated with the fees for thelicense of the Company’s FSM *taskforce*product and related customization and installation services is generallyrecognized using the percentage-of-completion method of accounting over theperiod that services are performed. For agreements accounted for under thepercentage-of-completion method, the Company determines progress to completionbased on actual direct labor hours incurred to date as a percentage of theestimated total direct labor hours required to complete the project. TheCompany periodically evaluates the actual status of each project to ensure thatthe estimates to complete each contract remain accurate. A provision forestimated losses on contracts is made in the period in which the loss becomesprobable and can be reasonably estimated. To date, the Company has not incurredany such losses. If the amount of revenue recognized exceeds the amount billedto customers, the excess amount is recorded as unbilled accounts receivable. Ifthe amount billed exceeds the amount of revenue recognized, the excess amountis recorded as customer deposits.

The Company derives PCS fees from PCS agreements,which are generally initially purchased at the same time as a license for its *taskforce* product. PCS can include telephone and emailsupport and the right to receive unspecified upgrades on awhen-and-if-available basis. PCS agreements may generally be renewed on anannual basis. The Company recognizes revenue for PCS, based on vendor specificobjective evidence (“VSOE”) of fair value, ratably over the term of the PCSperiod. It generally determines VSOE of PCS based on the stated fees for PCSrenewal set forth in the original license agreement. If the Company is unableto establish VSOE of fair value, it recognizes all fees ratably over the termof the PCS, when the only undelivered element is PCS.

For arrangements withmultiple elements, such as licenses, customization services and PCS services,the Company allocates revenue to each element based upon its fair value asdetermined by VSOE. VSOE for each element is based on normal pricing anddiscounting practices when the element is sold separately. VSOE for PCSservices is measured by the stated renewal rate. If the Company cannot objectivelydetermine the fair value of any undelivered element included in licensearrangements, it defers revenue until the earliest of either: (a) allelements are delivered, (b) all services have been performed or only PCSservices remain to be delivered, or (c) fair value can objectively bedetermined. When the fair value of a delivered element has not beenestablished, we use the residual method to record license revenue if the fairvalue of all undelivered elements is determinable. Under the residual method,the fair value of the undelivered elements is deferred and the remainingportion of the fee is allocated to the delivered elements and is recognized asrevenue, assuming all other criteria have been met.

***Advertising Costs***

All advertising costs areexpensed as incurred. Advertising costs, which are included in sales andmarketing expenses, were approximately $1.1 million, $370,000 and $301,000 in2005, 2004 and 2003, respectively. Advertising costs consist primarily of adcampaigns, catalog brochures, promotional items and trade show expenses.

***Research and Development Expenses***

In accordance with Statement of Financial AccountingStandards No. 86, *Accounting for Costs of Computer Software tobe Sold, Leased or Otherwise Marketed,* costs incurred in the researchand development of new products and enhancements to existing products areexpensed as incurred until technological feasibility has been established. TheCompany believes its current process for developing products is essentiallycompleted concurrently with the establishment of technological feasibilitywhich is evidenced by a working model; accordingly, research and developmentcosts incurred after the establishment of technological feasibility have notbeen significant and, therefore, no costs have been capitalized to date.

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Costs related to softwareacquired, developed or modified solely to meet the Company’s internalrequirements and for which there is no substantive plan to market the softwareare capitalized in accordance with the provisions of SOP 98-1, *Accounting for the Costs of Computer Software Developed or Obtained forInternal Use* (“SOP 98-1”). Costs incurred after the preliminaryplanning stage of the project and after management has authorized and committedfunds to the project are capitalized. During 2005, 2004 and 2003 no costs werecapitalized in accordance with SOP 98-1.

***Foreign Currency Transactions***

The functional currency ofthe Company and its foreign subsidiaries is the United States dollar.Accordingly, all monetary assets and liabilities are translated at the currentexchange rate at the end of the year, non-monetary assets and liabilities aretranslated at historical rates and revenues and expenses are translated ataverage exchange rates in effect during the period. Transaction gains andlosses have not been significant to date and are included in *Other income, net* on the Company’s Consolidated Statement ofOperations.

***Derivative financial instruments***

The Company does not use derivative instruments tohedge exposures to cash flow, market, or foreign currency risks.

In accordance with SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities* (“SFAS 133”), certain derivatives areembedded in our Series B preferred stock that must be bifurcated andaccounted for separately. The original host instruments were initially reported,at fair value, as Preferred Stock and the embedded derivatives were initially reported,at fair value, as liabilities. Because these derivatives do not qualify ashedging instruments, changes in fair values of such derivatives are reported ascharges or credits to income.

***Stock-Based Compensation***

The Company accounts for stock-based employee compensationissued under compensatory plans using the intrinsic value method, whichcalculates compensation expense based on the difference, if any, on the date ofthe grant, between the fair value of the Company’s stock and the optionexercise price.

Accounting principles generally accepted in the UnitedStates of America require companies who choose to account for stock optiongrants using the intrinsic value method to also determine the fair value ofoption grants using an option pricing model, such as the Black-Scholesmodel, and to disclose the impact of fair value accounting in a note to thefinancial statements.

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Theimpact of recognizing the fair value of option grants and stock grants underthe Company’s employee stock purchase plan as an expense under SFAS 123*, Share-Based Payment* would have substantially reduced theCompany’s operating results, as follows (in thousands, except per shareamounts):

| ** **                                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as  reported                                                                                       |       | $                                           | 28,599     |   | $ | 9,221 |   | $ | 1,662 |   |
| Add: stock-based  employee compensation expense included in reported net income, net of tax  effect           |       | —                                      |       | 4 |   | 462 |   |
| Less: stock-based  employee compensation expense determined under fair value based method, net  of tax effect |       | (4,794                                      | )          | (7,451 | ) | (9,422 | ) |
| Pro forma net  income (loss)                                                                                  |       | 23,805                                      |       | 1,774 |   | (7,298 | ) |
| Preferred stock  dividends                                                                                    |       | 436                                         |       | — |   | — |   |
| Pro forma net  income (loss) attributable to common stockholders                                              |       | $                                           | 23,369     |   | $ | 1,774 |   | $ | (7,298 | ) |
| Basic net income (loss)  per share:                                                                           |       |                                        |       |   |   |   |   |
| As reported                                                                                                   |       | $                                           | 0.47       |   | $ | 0.17 |   | $ | 0.03 |   |
| Pro forma                                                                                                     |       | $                                           | 0.39       |   | $ | 0.03 |   | $ | (0.15 | ) |
| Diluted net income  (loss) per share:                                                                         |       |                                        |       |   |   |   |   |
| As reported                                                                                                   |       | $                                           | 0.46       |   | $ | 0.16 |   | $ | 0.03 |   |
| Pro forma                                                                                                     |       | $                                           | 0.38       |   | $ | 0.03 |   | $ | (0.15 | ) |

 

On October 27, 2005, the Company accelerated thevesting of 811,000 stock options with exercise prices ranging from $6.40 to$14.58, being priced above the closing stock price on such date. The Companyrecognized pro forma compensation expense of $5.0 million related to thisacceleration. The Company accelerated vesting of these stock options to reducethe compensation expense associated with these options in future periodsresulting from the adoption of SFAS No. 123 (revised 2004), *Share-Based Payment*.

The weighted average fairvalue of options granted in the years ended December 31, 2005, 2004 and2003, were $2.26, $3.79 and $7.31, respectively. The Company calculated thefair value of each option award on the date of grant using the Black-Scholesoption pricing model. The Company’s calculations are based on a single optionvaluation approach and forfeitures are recognized as they occur. The followingweighted average assumptions were used for each respective period:

| ** **                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Stock Option  Plans:**          |       |                                        |       |   |   |   |   |
| Risk free interest rate           |       | 3.97                                        | %          | 3.41 | % | 2.91 | % |
| Expected volatility               |       | 84                                          | %          | 106 | % | 114 | % |
| Expected life (in years)          |       | 3.22                                        |       | 5 |   | 5 |   |
| Expected dividend                 |       | $                                           | 0.00       |   | $ | 0.00 |   | $ | 0.00 |   |
| **Employee Stock Purchase Plan:** |       |                                        |       |   |   |   |   |
| Risk free interest rate           |       | 3.16                                        | %          | 1.32 | % | 1.14 | % |
| Expected volatility               |       | 73                                          | %          | 78 | % | 92 | % |
| Expected life (in years)          |       | 0.5                                         |       | 0.5 |   | 0.5 |   |
| Expected dividend                 |       | $                                           | 0.00       |   | $ | 0.00 |   | $ | 0.00 |   |

 

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On April 1, 2005, theCompany changed its estimate of its expected life by reference to the Company’shistorical data. Through March 31, 2005, the Company’s estimate was basedon an industry average due to a lack of sufficient company specific historicalevidence on which to base its estimates.

The Company accounts forstock-based arrangements issued to non-employees using the fair valuebased method, which calculates compensation expense based on the fair value ofthe stock option granted using the Black-Scholes option pricing model atthe date of grant, or over the period of performance, as appropriate. See also “Note11—Employee Benefit Plans”.

***Certain Significant Risks and Uncertainties***

The Company participates in a dynamic high-technologyindustry and believes that adverse changes in any of the following areas couldhave a material adverse effect on its future financial position, results ofoperations or cash flows: the ability of @Road to integrate Vidus operationssuccessfully; the ability of @Road to accelerate or continue to grow as aresult of its investment initiatives; the ability of @Road and its alliances tomarket, sell and support @Road solutions; the timing of purchasing andimplementation decisions by prospects and customers; competition; thedependence of @Road on mobile data systems technology, wireless networks,network infrastructure and positioning systems owned and controlled by others;advances and trends in new technologies and industry standards; marketacceptance of the Company’s existing or new solutions; development of sales channels;changes in third-party manufacturers, key suppliers, certain strategic orcustomer relationships; litigation or claims against the Company based onintellectual property, product, regulatory or other factors; and the Company’sability to attract and retain employees necessary to support its growth.

Motorola is the solesupplier of microcontrollers and certain modems used in the Company’s products.Micronet is the sole supplier of our Internet Data Terminal (“*i*DT”). Everex is the sole supplier of our Internet LocationManager—WiFi (“*i*LM-W”). The Company expects torely on these suppliers as the sole source for these components and devices forthe next several years.

***Comprehensive Income***

SFAS No. 130, *Reporting Comprehensive Income*, requiresthat an enterprise report, by major components and as a single total, thechange in its net assets during the period from non-owner sources. Accumulatedother comprehensive loss was comprised of unrealized gains (losses) of $78,000,$(179,000) and $0 on short-term investments at December 31, 2005, 2004 and2003, respectively.

***Major Customers***

In 2005, 2004 and 2003,Verizon Communications, represented 13%, 17% and 17% of total revenues. Noother customers comprised 10% or more of total revenues.

***Recently Issued Accounting Standards***

In November 2005, the FASB issued FASB StaffPosition (“FSP”) Nos. SFAS 115-1 and SFAS 124-1, *The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments*. This FSP addresses the determination as to whenan investment is considered impaired, whether that impairment is other thantemporary and the measurement of an impairment loss. This FSP also includesaccounting considerations subsequent to the recognition of other-than-temporaryimpairments. The adoption of the FSP did not have a material impact on theCompany’s consolidated statement of operations and financial condition.

On June 7, 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, and Statement No. 3, Reporting Accounting 

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Changes in InterimFinancial Statements (“SFAS 154”). SFAS 154 changes the requirements foraccounting and reporting, a change in accounting principle. Previously, mostvoluntary changes in accounting principles were required to be recognized byway of a cumulative effect adjustment within net income during the period ofthe change. SFAS 154 requires retrospective application to prior periods’financial statements, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154 iseffective for accounting changes made in fiscal years beginning after December 15,2005; however, SFAS 154 does not change the transition provisions of anyexisting accounting pronouncements.

In December 2004, the FASB issued SFAS No. 123(revised 2004),*Share-Based Payment* (“SFAS 123R”),that addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for either equity instrumentsof the enterprise or liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments.

The statement eliminates the ability to account forshare-based compensation transactions using the intrinsic value method asprescribed by Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*, and generallyrequires that such transactions be accounted for using a fair value basedmethod and recognized as expenses in the consolidated statement of operations. Thestatement requires companies to assess the most appropriate model to calculatethe value of the options. The Company currently uses the Black-Scholes optionpricing model to value options and is assessing which model it may use uponadoption of such standard. The use of an alternative model to value options mayresult in a different fair value than the use of the Black-Scholes optionpricing model.

There are a number of other requirements under the newstandard that will result in a different accounting treatment than thatcurrently required. These differences include, but are not limited to, theaccounting for the tax benefit on employee stock options and for stock issuedunder the Company’s employee stock purchase plan.

The Company will also be required to determine thetransition method to be used at the date of adoption. The allowed transitionmethods include modified prospective and modified retroactive adoptionalternatives. Under the modified retroactive method, prior periods may berestated either as of the beginning of the year of adoption or for all periodspresented. This method would record compensation expense for all unvested stockoptions and restricted stock beginning with the first period restated. Themodified prospective method requires that compensation expense be recorded forall unvested stock options and restricted stock at the beginning of the firstquarter of adoption of SFAS 123R. In April 2005, the SEC deferred theeffective date of SFAS 123R. The effective date of SFAS 123R for theCompany’s consolidated financial statements is January 1, 2006.

While the Company has not completed its assessment ofthe impact of SFAS 123R, it expects that this statement will have a significantimpact on its consolidated financial statements as the Company will be requiredto expense the fair value of its stock option grants and stock purchases underits employee stock purchase plans rather than disclose the impact on itsconsolidated net income attributable to common stockholders within itsfootnotes, as is its current practice.

In November 2004, the FASB issued SFASNo. 151, *Inventory Costs, an Amendment of APBNo. 43, Chapter 4* (“SFAS 151”). SFAS 151 clarifies thatabnormal inventory costs such as the costs of idle facilities, excess freightand handling costs, and wasted materials (spoilage) are required to berecognized as current period charges. The provisions of SFAS 151 are effectivefor fiscal years beginning after July 1, 2005. The Company does not expectthat the adoption of SFAS 151, which it will implement beginning onJanuary 1, 2006, will have a material impact on its consolidated financialstatements.

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**Note 2.Basic and Diluted Net Income Per Share**

Basic net income per share is computed bydividing the net income attributable to common stockholders for the period bythe weighted average number of common shares outstanding during the period.Diluted net income per share is computed by dividing the net incomeattributable to common stockholders for the period by the weighted averagenumber of common shares and potentially dilutive common shares outstandingduring the period. Potentially dilutive common shares, composed of unvestedrestricted common stock and incremental common shares issuable upon theexercise of stock options, are included in diluted net income per share(using the treasury stock method) to the extent such shares are dilutive.Potentially dilutive shares that are anti-dilutive, as calculated based on theweighted average closing price of the Company’s common stock for the period,are excluded from the calculation of diluted net income per share. Commonshare equivalents are excluded from the computation in loss periods, as theireffect would be anti-dilutive.

Thefollowing table sets forth the computation of basic and diluted net income pershare for the periods indicated (in thousands, except per share amounts):

| ** **                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income  attributable to common shareholders (numerator)       |       | $                                           | 28,163     |   | $ | 9,221 |   | $ | 1,662 |   |
| Shares (denominator):                                             |       |                                        |       |   |   |   |   |
| Basic                                                             |       |                                        |       |   |   |   |   |
| Weighted average common shares outstanding                        |       | 59,928                                      |       | 54,299 |   | 50,140 |   |
| Weighted average common shares outstanding subject  to repurchase |       | —                                      |       | (3 | ) | (162 | ) |
| Shares used in computation                                        |       | 59,928                                      |       | 54,296 |   | 49,978 |   |
| Diluted                                                           |       |                                        |       |   |   |   |   |
| Dilution impact from option equivalent shares                     |       | 1,416                                       |       | 3,134 |   | 3,932 |   |
| Dilution impact from employee stock purchase plan                 |       | 9                                           |       | 2 |   | 210 |   |
| Add back weighted average common shares subject to   repurchase   |       | —                                      |       | 3 |   | 162 |   |
| Shares used in computation                                        |       | 61,353                                      |       | 57,435 |   | 54,282 |   |
| Net income per share:                                             |       |                                        |       |   |   |   |   |
| Basic                                                             |       | $                                           | 0.47       |   | $ | 0.17 |   | $ | 0.03 |   |
| Diluted                                                           |       | $                                           | 0.46       |   | $ | 0.16 |   | $ | 0.03 |   |

 

Forthe periods presented, the Company had securities outstanding which couldpotentially dilute basic income per share in the future, but which wereexcluded from the computation of diluted net income per share in the periodspresented, as their effect would have been anti-dilutive due to shares beingsubject to repurchase by the Company on outstanding options with exerciseprices greater than the average fair market value for the respective periodspresented. Such outstanding securities consist of the following (shares inthousands):

| ** **                                              | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Outstanding  options                                    |       | 4,475                                       |       | 1,820 |   | 751 |   |
| Weighted average  exercise price of outstanding options |       | $                                           | 7.31       |   | $ | 10.89 |   | $ | 10.79 |   |
|                                                         |            |                                             |            |  |  |  |  |  |  |  |

 

**Note 3.Business Combinations, Goodwill and Intangible Assets**

On February 18, 2005, the Company completed theacquisition of Vidus Limited (“Vidus”) in a transaction accounted for as abusiness combination using the purchase method. As consideration for the 

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acquisition, the Companyissued approximately 5.5 million shares of its common stock valued at $24.7million, newly created redeemable preferred stock (“preferred stock”) valued atapproximately $12.9 million, extinguished for cash existing debt ofapproximately $5.5 million in exchange for all of the outstanding shares ofVidus capital stock, and issued approximately 146,000 vested options with afair value of $531,000. Under the terms of the stock option grants, each optionhas been classified as a non-qualified stock option, is fully vested, has anexercise price ranging from $0.67 to $2.00 per share and has a one-year term.The Company incurred acquisition related costs of $2.6 million, of which$478,000 was allocated to the issuance of common stock. The purchase price ofapproximately $46.3 million was allocated among the tangible andidentifiable intangible assets acquired and liabilities assumed on the basis oftheir estimated fair values on the acquisition date.

The shares of common stock issued in the acquisitionwere valued in accordance with Emerging Issues Task Force Issue No. 99-12, *Determination of the Measurement Date for the Market Price of AcquirerSecurities Issued in a Purchase Business Combination* (“EITF 99-12”).In accordance with EITF 99-12, the Company established the first date on whichthe number of the Company’s shares and the amount of other consideration becamefixed as of February 18, 2005. Accordingly, the Company valued the transactionusing the average closing price of the Company’s common stock for the two-dayperiod ending on February 18, 2005, or $4.53 per share.

The shares of redeemable preferred stock issued in theacquisition contain a provision whereby the redemption value may be increasedbased on the future price of the Company’s common stock (the “top-up”amount) and were recorded at fair value as required by SFAS No. 141, *Business Combinations* (“SFAS 141”) and Emerging IssuesTask Force Issue No. 97-8, *Accounting for ContingentConsideration Issued in a Purchase Business Combination* (“EITF 97-8”).The fair value of the redeemable preferred stock was determined to be theaggregate of the redemption value of the preferred stock discounted at 6.5%,plus the estimated value of the embedded put and call options and the estimatedtop-up, discounted at the Company’s estimated cost of equity of 14.87%. See“Note 8—Derivative Financial Instrument Liability” and “Note 9—Redeemable PreferredStock” for further discussion of the top-up.

The fair value of the stock options was determinedusing the Black-Scholes option pricing model with the following assumptions: nodividend yield, expected volatility of 96%, expected life of one year and arisk-free interest rate of 3.09%.

The Vidus acquisition was accounted for under SFASNo. 141, and certain specified provisions of SFAS 142. The results ofoperations of Vidus are included in the Company’s Condensed ConsolidatedStatement of Operations beginning February 19, 2005.

Thefollowing table summarizes the estimated fair values of the tangible assetsacquired and the liabilities assumed at the date of acquisition (in thousands):

| Cash                                |   | $      | 1,269  |   |
|-------------------------------------|--------|--------|--------|--------|
| Accounts  receivable                |   | 1,669  |   |
| Prepaid expenses  and other         |   | 412    |   |
| Property and  equipment             |   | 1,022  |   |
| Notes receivable  from stockholder  |   | 11     |   |
| Total tangible  assets acquired     |   | 4,383  |   |
| Accounts payable                    |   | (540   | )      |
| Accrued  liabilities                |   | (2,148 | )      |
| Deferred revenue                    |   | (4,270 | )      |
| Total tangible  liabilities assumed |   | (6,958 | )      |
| Net tangible liabilities  assumed   |   | $      | (2,575 | )      |

 

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Under the purchase method of accounting, the Companyallocated the total purchase price to the acquired net tangible and intangibleassets based upon their estimated fair market value as of the date ofacquisition, February 18, 2005. The intangible assets recognized, apartfrom goodwill, represented contractual or other legal rights of Vidus and thoseintangible assets of Vidus that could be clearly identified. These intangibleassets were identified and valued through interviews and analysis of dataprovided by Vidus concerning development projects, their stage of development,the time and resources needed to complete them and, if applicable, theirexpected income generating ability. There were no other contractual or otherlegal rights of Vidus clearly identifiable by management, other than thoseidentified below.

Theallocation of the purchase price to the tangible and identifiable intangibleassets acquired and liabilities assumed was as follows (in thousands):

| Fair value of net  liabilities assumed  |   | $      | (2,575 | )      |
|-----------------------------------------|--------|--------|--------|--------|
| Intangible assets  acquired:            |   |   |   |
| Core developed technology               |   | 18,410 |   |
| Order backlog                           |   | 5,500  |   |
| Customer relationships                  |   | 3,660  |   |
| Trademarks                              |   | 3,250  |   |
| Trade names                             |   | 2,270  |   |
|                                    |   | 33,090 |   |
| In-process research and development     |   | 5,640  |   |
| Costs allocated  to common stock issued |   | 478    |   |
| Deferred tax  liability, net            |   | (3,693 | )      |
| Goodwill                                |   | 13,341 |   |
| Purchase price                          |   | $      | 46,281 |   |

 

***Core Developed Technology***

Core developed technologyof approximately $18.4 million relates to the *taskforce*technology. At the date of acquisition, the developed technology was completeand had reached technological feasibility. Any costs to be incurred in thefuture will relate to the ongoing maintenance of the developed technology andwill be expensed as incurred. To estimate the fair value of the developedtechnology, an income approach was used with a discount rate of 35%, whichincluded an analysis of future cash flows and the risks associated withachieving such cash flows. The developed technology is being amortized over itsestimated useful life of ten years.

***Order Backlog and Customer Relationships***

The order backlog ofapproximately $5.5 million and the customer relationships of approximately $3.7million represented the fair value of the PCS obligations and existing customerrelationships. To estimate the fair value of the order backlog and the customerrelationships, an income approach was used with a discount rate of 30%. Theorder backlog and customer relationships are amortized over their estimateduseful lives of three and ten years, respectively.

***Trademarks***

The*taskforce*solutionhas strong name recognition in European field service management,telecommunications, cable and utilities markets. To estimate the fair value ofthe trademark an income approach was used with a discount rate of 40%. TheCompany expects to continue to produce and market the *taskforce*product. Therefore, an analysis of various economic factors indicated there wasno limit to the 

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periodof time the trademark would contribute to future cash flows. Because cash flowis expected to continue indefinitely, the trademark is not being amortized, butis tested for impairment at least annually and whenever events or changes incircumstances indicate that the carrying value may not be recoverable.

***Trade Names***

The Vidus trade name hadstrong name recognition in European markets. At the time of the acquisition,the Company expected to continue to utilize the Vidus trade name in Europe. Thefair value was determined using an income approach with a discount rate of 40%and based on an analysis of various economic factors the Company determinedthat the useful life of the trade name was indefinite. During the fourthquarter of 2005, management determined that the acquired Vidus trade name wouldno longer be utilized. As a result, the Company recorded an impairment chargeof $2.3 million.

***In-Process Research and Development***

Development projects thathad reached technological feasibility were classified as developed technology,and the value assigned to developed technology was capitalized. In-processresearch and development of approximately $5.6 million reflected researchprojects that had not reached technological feasibility or had no alternativefuture use at the time of the acquisition and was immediately expensed. Inorder to achieve technological feasibility, the Company estimated the hoursrequired to complete the projects would cost approximately $5.7 million. TheCompany estimated the fair value assigned to in-process research anddevelopment using the income approach, which discounts to present value thecash flows attributable to the technology once it had reached technologicalfeasibility using a discount rate of 40%. The stages of completion weredetermined by estimating the costs and time incurred to date relative to thecosts and time expected to be incurred to develop the in-process technologyinto a commercially viable technology or product, while considering therelative difficulty of completing the various tasks and overcoming theobstacles necessary to attain technological feasibility. The weighted averagestage of completion for all projects, in the aggregate, was approximately 80%as of the acquisition date. Cash flows from sales of products incorporatingthose technologies commenced in fiscal 2005. Expenditures to complete theacquired in-process research and development approximated the originalestimates.

***Goodwill***

Goodwill of approximately $13.3 million represents theexcess of the purchase price over the fair value of the net tangible andintangible assets acquired. The acquisition allows the Company to integrate itstechnology with Vidus’ technology for dynamic scheduling, dispatching, routingand appointment booking of mobile workers, cross-sell the companies’ solutionsand further develop the combined technologies to provide customers withseamlessly integrated solutions. The acquisition also creates the ability toexpand the Company’s business to Europe and other international markets. Theseopportunities, along with the ability to hire the Vidus workforce, weresignificant contributing factors to the establishment of the purchase price,resulting in the recognition of a significant amount of goodwill. The goodwilland intangible assets were allocated to the licensed reporting segment. Thegoodwill is not deductible for tax purposes.

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Theresults of operations of Vidus are included in the Company’s ConsolidatedStatement of Operations from the date of the acquisition. If the Company hadacquired Vidus at the beginning of the periods presented, the Company’sunaudited pro forma revenue, net income (loss), net income (loss) attributableto common stockholders and net income (loss) per share would have been asfollows (in thousands, except per share amount):

| ** **                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Revenue                                                               |       | $                                          | 93,549     |   | $ | 82,089 |   |
| Net income (loss)                                                     |       | $                                          | 25,914     |   | $ | (9,529 | ) |
| Net income (loss)  attributable to common stockholders                |       | $                                          | 25,409     |   | $ | (10,192 | ) |
| Net income (loss)  per share (basic)                                  |       | $                                          | 0.42       |   | $ | (0.16 | ) |
| Net income (loss)  per share (diluted)                                |       | $                                          | 0.41       |   | $ | (0.16 | ) |
| Shares used in  computing net income (loss) per share  (basic)        |       | 60,645                                     |       | 59,750 |   |
| Shares used in computing  net income (loss) per share (diluted)  |       | 62,071                                     |       | 59,750 |   |

 

These results are notnecessarily indicative of what the actual results of operations would have beenif the acquisition of Vidus had in fact occurred on the dates or for theperiods indicated, nor do they purport to project the results of operations forany future periods or as of any date. These results do not give effect to anycost savings, operating synergies, and revenue enhancements which may resultfrom the acquisition of Vidus or the costs of achieving these cost savings,operating synergies, and revenue enhancements. The in-process research anddevelopment charge of approximately $5.6 million is included in the net lossattributable to common stockholders for the year ended December 31, 2005.

***Intangible Assets***

SFAS 142 requirespurchased intangible assets other than goodwill to be amortized over theirexpected useful lives unless these lives are determined to be indefinite.Purchased intangible assets are carried at cost less accumulated amortization.Amortization is computed over the estimated useful lives of the respectiveassets, generally two to ten years.

Intangibleassets were as follows (in thousands):

| ** **                      | ** ** | **As of December 31, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **Carrying  Amount**                            | ** ** | **Accumulated  Amortization**                   | ** ** | **Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Amortized intangible  assets:   |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Core developed technology       |       | $                                               | 23,462     |                                            |       | $ | (6,641 | ) |   | $ | 16,821 |   |   | $ | 5,052 |   |   |   | $ | (5,052 | ) |   | $ | — |   |
| Order backlog                   |       | 5,500                                           |       |                                            | (1,582     | ) |   | 3,918 |   |   | — |   |   |   | — |   |   | — |   |
| Customer relationships          |       | 3,660                                           |       |                                            | (316       | ) |   | 3,344 |   |   | — |   |   |   | — |   |   | — |   |
| Total                           |       | 32,622                                          |       |                                            | (8,539     | ) |   | 24,083 |   |   | 5,052 |   |   |   | (5,052 | ) |   | — |   |
| Unamortized  intangible assets: |       |                                            |       |                                            |       |   |   |   |   |   | — |   |   |   | — |   |   | — |   |
| Trademarks                      |       | 3,250                                           |       |                                            | —     |   |   | 3,250 |   |   | — |   |   |   | — |   |   | — |   |
| Total intangible assets         |       | $                                               | 35,872     |                                            |       | $ | (8,539 | ) |   | $ | 27,333 |   |   | $ | 5,052 |   |   |   | $ | (5,052 | ) |   | $ | — |   |

 

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During the fourth quarter of 2005, managementdetermined that Vidus Limited would officially change its name to @Road, Ltd.Therefore, the acquired Vidus trade name will no longer be utilized. The namechange is intended to leverage the @Road brand equity and more closely reflectthe Company’s objective of adding end-to-end MRM solutions offerings in Europe.As a result, the Company reduced the carrying value to zero resulting in animpairment charge of $2.3 million. The impairment charge is included in Impairmentof Intangible Assets in the Company’s Statement of Operations and in thelicensed revenue segment in “Note 12—Segment Reporting”.

Forthe years ended December 31, 2005, 2004 and 2003, amortization ofintangible assets was $3.5 million, $28,000 and $455,000 million, respectively.The estimated future amortization expense of purchased intangible assets as of December 31,2005 is as follows (in thousands):

| 2006       |   | $     | 4,040  |   |
|------------|--------|-------|--------|--------|
| 2007       |   | 4,040 |   |
| 2008       |   | 2,458 |   |
| 2009       |   | 2,207 |   |
| 2010       |   | 2,207 |   |
| Thereafter |   | 9,131 |   |
| Total      |   | $     | 24,083 |   |

 

**Note 4. Short-TermInvestments**

Short-terminvestments included the following available-for-sale securities at December 31,2005 and 2004 (in thousands):

| ** **                                | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Amortized  Cost**             | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| United States  government debt securities |       |                            | $          | 39,276 |   |   |   | $ | — |   |   |   | $ | (72 | ) |   |   | $ | 39,204 |   |   |
| Municipal debt  securities                |       |                            | 36,802     |   |   |   | — |   |   |   | (6 | ) |   |   | 36,796 |   |   |
| Corporate debt  securities                |       |                            | 1,643      |   |   |   | — |   |   |   | — |   |   |   | 1,643 |   |   |
| Total                                     |       |                            | $          | 77,721 |   |   |   | $ | — |   |   |   | $ | (78 | ) |   |   | $ | 77,643 |   |   |

 

| ** **                                | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Amortized  Cost**             | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| United States  government debt securities |       | $                               | 51,782     |   |   | $ | — |   |   |   | $ | (124 | ) |   | $ | 51,658 |   |
| Municipal debt  securities                |       | 31,354                          |       |   | 2 |   |   |   | (4 | ) |   | 31,352 |   |
| Corporate debt  securities                |       | 20,265                          |       |   | — |   |   |   | (53 | ) |   | 20,212 |   |
| Total                                     |       | $                               | 103,401    |   |   | $ | 2 |   |   |   | $ | (181 | ) |   | $ | 103,222 |   |

 

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Inaccordance with EITF 03-1, *The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments*,the following table shows gross unrealized losses and fair value for thoseinvestments that were in an unrealized loss position as of December 31,2005 and 2004, aggregated by investment category and the length of time thatindividual securities have been in a continuous loss position (in thousands):

| ** **                                      | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | **Less than 12 Months**          | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **Fair  Value**                                 | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| United States  government debt securities  |       | $                                               | 39,204     |   |   | $ | (72 | ) |   |   | $ | — |   |   |   | $ | — |   |   | $ | 39,204 |   |   | $ | (72 | ) |   |
| Municipal debt  securities                      |       | 36,796                                          |       |   | (6 | ) |   |   | — |   |   |   | — |   |   | 36,796 |   |   | (6 | ) |   |
| Corporate debt  securities                      |       | 1,643                                           |       |   | — |   |   |   | — |   |   |   | — |   |   | 1,643 |   |   | — |   |   |
| Total                                           |       | $                                               | 77,643     |   |   | $ | (78 | ) |   |   | $ | — |   |   |   | $ | — |   |   | $ | 77,643 |   |   | $ | (78 | ) |   |

 

| ** **                                | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                | ** ** | **Less than 12 Months**          | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **Fair  Value**                                 | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| United States  government debt securities |       | $                                               | 51,658     |   |   | $ | (124 | ) |   |   | $ | — |   |   |   | $ | — |   |   | $ | 51,658 |   |   | $ | (124 | ) |   |
| Municipal debt  securities                |       | 31,352                                          |       |   | (4 | ) |   |   | — |   |   |   | — |   |   | 31,352 |   |   | (4 | ) |   |
| Corporate debt  securities                |       | 20,212                                          |       |   | (53 | ) |   |   | — |   |   |   | — |   |   | 20,212 |   |   | (53 | ) |   |
| Total                                     |       | $                                               | 103,222    |   |   | $ | (181 | ) |   |   | $ | — |   |   |   | $ | — |   |   | $ | 103,222 |   |   | $ | (181 | ) |   |

 

The Company reviewsinvestments in debt securities for other than temporary impairment whenever thefair value of an investment is less than amortized cost and evidence indicatesthat an investment’s carrying amount is not recoverable within a reasonableperiod of time. The decline in value of these investments is primarily relatedto changes in interest rates and is considered to be temporary in nature. Whenevaluating the investments, the Company considers whether it has the abilityand the intent to hold the investment until a market price recovery andconsiders whether evidence indicating the cost of the investment is recoverableoutweighs evidence to the contrary. Evidence considered in this assessmentincludes the reasons for the impairment, compliance with the Company’sinvestment policy, the severity and duration of the impairment, changes in thevalue subsequent to year-end and forecasted performance of the investee. TheCompany has reviewed those securities with unrealized losses as of December 31,2005 and 2004 for other-than-temporary impairment, and has concluded that noother-than-temporary impairment existed as of December 31, 2005 and 2004.

**Note 5. Inventories**

Inventoriesconsist of (in thousands):

| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|
| ** **      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Raw materials   |       | $                     | 1,796      |   | $ | 1,025 |   |
| Work in process |       | 2,013                 |       | 746 |   |
| Finished goods  |       | 2,278                 |       | 1,822 |   |
|            |       | $                     | 6,087      |   | $ | 3,593 |   |

 

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**Note 6. Property andEquipment**

Propertyand equipment consist of (in thousands):

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Computers and  software                    |       | $                     | 14,424     |   | $ | 13,196 |   |
| Manufacturing and  office equipment        |       | 663                   |       | 352 |   |
| Furniture and  fixtures                    |       | 455                   |       | 494 |   |
| Leasehold  improvements                    |       | 695                   |       | 307 |   |
| Total                                      |       | 16,237                |       | 14,349 |   |
| Accumulated  depreciation and amortization |       | (10,042               | )          | (10,681 | ) |
| Property and equipment,  net               |       | $                     | 6,195      |   | $ | 3,668 |   |

 

Depreciation expense for December 31, 2005, 2004and 2003 was $2.6 million, $1.3 million and $1.7 million, respectively.

As of December 31,2005, the Company has capital lease assets for office equipment and furniturewith a net book value in the amount of $209,000. The accumulated amortizationrelated to these capital leases is $87,000 as of December 31, 2005.

**Note 7. AccruedLiabilities**

Accruedliabilities consist of (in thousands):

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Accrued compensation  and related benefits |       | $                     | 3,629      |   | $ | 2,855 |   |
| Other accrued  expenses                    |       | 5,122                 |       | 2,674 |   |
| Total                                      |       | $                     | 8,751      |   | $ | 5,529 |   |

 

**Note 8. DerivativeFinancial Instrument Liabilities**

In connection with the Vidus acquisition, the Companyissued shares of its Series B-1 and B-2 redeemable preferred stock with anembedded feature indexed to the Company’s common stock, the top-up amount thatis payable to the holders of the redeemable preferred stock upon redemption.See “Note 9—Redeemable Preferred Stock” for further discussion. Inaccordance with SFAS 133, the top-up amount is considered a derivativeinstrument that should be bifurcated from the preferred stock host and recognizedas either an asset or liability, depending on the rights and obligations underthe contract, and should be measured at fair value. The Company accounted forchanges in the fair value of the derivative instrument which is not designatedas a hedging instrument through the current period earnings.

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TheCompany uses the Monte Carlo simulation of its stock price with the movementsin its stock price following a geometric Brownian motion to value thederivative instrument that is recorded as derivative liabilities. In valuingthe embedded derivative, the Company used the market price of its common stockon the date of valuation, a historical volatility and the expected remainingperiod to the expiration date of the top-up period. The Company used thefollowing valuation assumptions:

| ** **                                   | ** ** | **As of**        | ** ** | **As of**        | ** ** |
|----------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **December 31,** | ** ** | **February 18,** | ** ** |
| ** **                                   | ** ** | **2005**              | ** ** | **2005**              | ** ** |
| Historical  volatility                       |       |                  | 54         | %                     |       | 88 | % |
| Expected  remaining period                   |       |                  | 9 months   |                  |       | 15 months |   |
| Valuation date  market price of common stock |       |                  | $          | 5.23                  |       |   | $ | 4.50 |   |
| Risk-free  interest rate                     |       |                  | 4.33       | %                     |       | 3.07 | % |
| Discount rate                                |       |                  | 16.07      | %                     |       | 14.87 | % |
|                                              |            |                       |            |                       |            |  |  |  |  |

 

The fair value of this derivative instrument wasestimated at $5.2 million at February 18, 2005 and at $2.9 million at December31, 2005. The change in the fair value of $2.3 million was recorded in totalother income, net in the consolidated statement of operations.

Based on the highest tenconsecutive trading days average closing price of the Company’s common stock of$5.44 per share through December 31, 2005, the aggregate top-up, as ifdetermined on December 31, 2005, is $8.7 million. The top-up amount willfurther decrease if, and to the extent that, the average closing price of ourcommon stock for any ten consecutive trading day period ending on or beforeSeptember 25, 2006 is greater than $5.44 per share.

**Note 9. RedeemablePreferred Stock**

On February 18, 2005,the Board of Directors of the Company authorized the creation of four series ofpreferred stock and designated approximately 44,000, 44,000, 5,000 and 5,000shares as Series A-1, A-2, B-1 and B-2 preferredstock, respectively, of which approximately 24,000, 44,000, 5,000 and 5,000shares of Series A-1, A-2, B-1 and B-2 preferredstock, respectively, were issued and outstanding as of December 31, 2005.

***Dividends***

The holders of theSeries A-1, A-2, B-1 and B-2 preferred stock areentitled to receive dividends at the rate of $6.50 per share annually. Thedividends accrue day to day, whether or not earned or declared, fromFebruary 18, 2005. The dividends are payable when and if declared by theBoard of Directors or when shares are redeemed. Any accumulation of unpaiddividends on the preferred stock does not bear interest. Accrued dividendstotaled $436,000 as of December 31, 2005.

***Redemption***

The holders of theSeries A-1 and B-1 preferred stock may elect to redeem all ora portion of the shares on or after February 18, 2006, and the holders ofthe Series A-2 and B-2 preferred stock may elect to redeem allor a portion of the shares on or after February 18, 2007.

Each share ofSeries A-1 and A-2 preferred stock is redeemable for an amountequal to (i) $100 plus (ii) all declared or accumulated but unpaiddividends. Each share of Series B-1 and B-2 preferred stock isredeemable for an amount equal to (i) $100, plus (ii) all declared oraccumulated but unpaid dividends, plus (iii) the top-up amount, if thereis no consecutive ten trading day period from September 25, 2005 to September25, 2006 during which the average per share closing price of the Company’scommon stock is greater than or equal to $7.00. The top-up amount is calculatedas follows: $54.2 million less the greater of (i) $38.0 million and (ii) thesum of 5.6 million multiplied by the highest average closing price for the 

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Company’scommon stock for any ten consecutive trading day period from September 25, 2005to September 25, 2006 plus $15 million.

On or afterFebruary 18, 2009, the Company may redeem all or any portion of theSeries A-1, A-2, B-1, and B-2 preferred stock.

***Conversion***

None of the issued seriesof preferred stock is convertible.

***Liquidation***

Series A-1, A-2,B-1 and B-2 preferred stockholders are entitled to receive, uponliquidation, an amount equal to their respective redemption price. The holdersof the Series A-1, A-2, B-1 and B-2 preferredstock rank on a pari passu basis as to the receipt of such distributions and inpreference to the holders of common stock.

***Voting***

Each outstanding share ofpreferred stock is entitled to eleven (11) votes on all matters, votingwith the shares of common stock as a class.

Thefollowing table illustrates the activity for each series of preferred stockthrough December 31, 2005 (in thousands):

| ** **                                                                        | ** ** | **Series A-1** | ** ** | **Series A-2** | ** ** | **Series B-1** | ** ** | **Series B-2** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|-----------|------------|
| Issued at fair  value                                                             |       |                | $          | 2,352               |       |                |       | $                   | 4,424      |      |       |   | $ | 3,205 |   |   |   | $ | 2,937 |   |   | $ | 12,918 |   |
| Reclass of  bifurcated derivative instrument, at fair value at issuance      |       |                | —     |                |       |                | —     |                |       |      | (2,719     | ) |   |   | (2,451 | ) |   | (5,170 | ) |
| Amounts accrued  for dividends for the twelve months ended December 31, 2005 |       |                | 131        |                |       |                | 249        |                |       |      | 28         |   |   |   | 28 |   |   | 436 |   |
| Balance  December 31, 2005                                                   |       |                | $          | 2,483               |       |                |       | $                   | 4,673      |      |       |   | $ | 514 |   |   |   | $ | 514 |   |   | $ | 8,184 |   |

 

**Note 10.Common Stock**

The Company’s Certificateof Incorporation, as amended, authorizes it to issue 250,000,000 shares ofcommon stock. A portion of the shares outstanding was subject to repurchaseover a four-year period from the earlier of the issuance date or employee hiredate, as applicable. At December 31, 2005 and 2004 there were no sharessubject to repurchase rights.

At December 31, 2005,the Company had reserved approximately 14,227,000 shares of common stockavailable for future issuance under its stock option plans, includingapproximately 9,571,000 shares related to outstanding stock options. Inaddition, the Company had reserved approximately 1,522,000 shares of commonstock available for future issuance under the employee stock purchase plan.

**Note 11.Employee Benefit Plans**

***Employee StockPurchase Plan***

The Company has anemployee stock purchase plan for all eligible employees. Under the plan, sharesof its common stock may be purchased over an offering period with a maximumduration of two years at 85% of the lower of the fair market value on the firstday of the applicable offering period or on the last day of the six-monthpurchase period. Employees may purchase up to 1,800 shares having a value notexceeding 20% of their gross compensation during an offering period. During theyears ended December 31, 2005, 2004 and 2003, employees purchasedapproximately 580,000, 464,000 and 563,000 shares at average prices of $2.89,$4.60 and $2.63 per share, respectively. At December 31, 2005, 

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approximately1,522,000 shares of common stock were reserved for future issuance. Ouremployee stock purchase plan contains a provision that automatically increases,on each January 1, the number of shares reserved for issuance under theemployee stock purchase plan by the lesser of 900,000 or two percent of thetotal shares outstanding on the last day of the preceding year.

***Equity IncentivePlans***

The Company has equityincentive plans for directors, officers and employees. Stock options grantedunder these plans generally vest 25% one year from the date of grant and theremainder vest at a rate of 2.08% per month thereafter. Grants to existingemployees generally vest 25% per year on the anniversary of the grant. Non-employeedirectors upon becoming a director receive an initial grant of 40,000 sharesvesting over 4 years and annual grants of 10,000 shares vesting over oneyear. Options generally expire 10 years from the date of grant. Our equityincentive plans contain a provision that automatically increases through 2010,on each January 1, the number of shares reserved for issuance under theseplans by the lesser of 2,500,000 shares or four percent of the total sharesoutstanding on the last day of the preceding year.

The followingtable summarizes activity under our equity incentive plans (shares inthousands):

| ** **                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of period   |       |                         | 8,416      |   |   |   | $ | 5.23 |   |   |   | 7,415 |   |   |   | $ | 5.29 |   |   |   | 7,869 |   |   |   | $ | 4.04 |   |   |
| Granted                               |       |                         | 2,767      |   |   |   | 3.78 |   |   |   | 2,541 |   |   |   | 4.83 |   |   |   | 1,889 |   |   |   | 8.93 |   |   |
| Assumed                               |       |                         | 146        |   |   |   | 0.95 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Exercised                             |       |                         | (315       | ) |   |   | 1.84 |   |   |   | (641 | ) |   |   | 2.25 |   |   |   | (1,390 | ) |   |   | 3.22 |   |   |
| Canceled                              |       |                         | (1,443     | ) |   |   | 5.55 |   |   |   | (899 | ) |   |   | 6.70 |   |   |   | (953 | ) |   |   | 5.19 |   |   |
| Outstanding at  end of period         |       |                         | 9,571      |   |   |   | 4.81 |   |   |   | 8,416 |   |   |   | 5.23 |   |   |   | 7,415 |   |   |   | 5.29 |   |   |
| Options exercisable at  end of period |       |                         | 5,467      |   |   |   | $ | 5.50 |   |   |   | 3,790 |   |   |   | $ | 4.61 |   |   |   | 3,253 |   |   |   | $ | 3.86 |   |   |

 

Stock compensation related to options granted toemployees of $0, $4,000 and $462,000 was amortized to expense in 2005, 2004 and2003, respectively. At December 31, 2005, the Company had no deferredcompensation related to employee options. Stock compensation related to thegranting of options and purchase rights to employees having a fair valuegreater than the related exercise price during 2000 and 1999.

The Company recorded deferred stock compensation ofapproximately $5,000 as the change in fair value of non-statutory common stockoptions granted to non-employees in 2003. There were no outstanding optionsgranted to non-employees to purchase shares of common stock at December 31,2005 and 2004.

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Additionalinformation regarding options outstanding as of December 31, 2005 is asfollows (shares in thousands):

| ** **              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Exercise Price** | ** ** | ** **                   | ** ** | **Number**                   | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.07 -  1.63           |       |                         | 841        |                         |       |   | 4.21 |   |   |   | $ | 1.19 |   |   |   | 841 |   |   |   | $ | 1.19 |   |   |
|   1.97 - 2.00      |       |                         | 860        |                         |       |   | 5.65 |   |   |   | 2.00 |   |   |   | 860 |   |   |   | 2.00 |   |   |
|   2.07 - 3.02      |       |                         | 934        |                         |       |   | 9.09 |   |   |   | 2.78 |   |   |   | 115 |   |   |   | 2.16 |   |   |
|   3.40 - 3.69      |       |                         | 1,611      |                         |       |   | 7.86 |   |   |   | 3.54 |   |   |   | 607 |   |   |   | 3.61 |   |   |
|   3.85 - 4.36      |       |                         | 1,672      |                         |       |   | 8.97 |   |   |   | 4.07 |   |   |   | 222 |   |   |   | 4.13 |   |   |
|   4.48 - 5.20      |       |                         | 1,297      |                         |       |   | 7.30 |   |   |   | 4.91 |   |   |   | 645 |   |   |   | 4.99 |   |   |
|   5.30 - 6.38      |       |                         | 273        |                         |       |   | 7.09 |   |   |   | 5.90 |   |   |   | 94 |   |   |   | 5.90 |   |   |
|   6.40 - 9.00      |       |                         | 992        |                         |       |   | 6.36 |   |   |   | 7.69 |   |   |   | 992 |   |   |   | 7.69 |   |   |
|   9.90 - 14.58     |       |                         | 1,091      |                         |       |   | 6.81 |   |   |   | 11.56 |   |   |   | 1,091 |   |   |   | 11.56 |   |   |
|                    |       |                         | 9,571      |                         |       |   | 7.28 |   |   |   | $ | 4.81 |   |   |   | 5,467 |   |   |   | $ | 5.50 |   |   |
|                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31,2005, the closing price of the Company’s common stock was $5.23. The followingtable provides additional information regarding in-the-money andout-of-the-money options. In-the-money options are options with an exerciseprice lower than the $5.23 closing price. Out-of-the-money options are optionswith an exercise price greater than the $5.23 closing price.

| ** **                 | ** ** | **Options Exercisable** | ** ** | **Options Unexercisable**         | ** ** | **Total Options**     | ** ** |
|----------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| In-the-money               |       |                         | 3,290      |                                   |       |                       | $          | 2.83 |   |   |   | 3,925 |   |   |   | $ | 3.79 |   |   |   | 7,215 |   |   |   | $ | 3.35 |   |   |
| Out-of-the-money           |       |                         | 2,177      |                                   |       |                       | 9.56       |   |   |   | 179 |   |   |   | 5.90 |   |   |   | 2,356 |   |   |   | 9.28 |   |   |
| Total options  outstanding |       |                         | 5,467      |                                   |       |                       | $          | 5.50 |   |   |   | 4,104 |   |   |   | $ | 3.88 |   |   |   | 9,571 |   |   |   | $ | 4.81 |   |   |

 

***Receivable fromSales of Stock***

A number of officers andother employees were granted full recourse notes that were secured by commonstock and generally were due five years from the issue dates. The stock sold inconnection with certain of these notes and other stock sales for cash wassubject to repurchase by the Company at the original issuance price; this rightgenerally lapsed over a four-year period subject to continued employment. Thesenotes had been fully paid as of December 31, 2004. As a result of theVidus acquisition, the Company has one note receivable outstanding from anemployee that is secured by common stock. The note receivable totals $7,000 whichwill be fully paid by 2007.

***401(k) Savingand Retirement Plan***

The Company sponsors a 401(k) Savingand Retirement Plan (“Plan”) for all employees who meet certain eligibilityrequirements. Participants may contribute, on a pre-tax basis, between1 percent and 15 percent of their annual compensation, but not toexceed a maximum contribution amount pursuant to Section 401(k) ofthe Internal Revenue Code. The Company is not required to contribute, nor hasit contributed, to the Plan for any of the years presented.

**Note 12. SegmentReporting**

Reportable segments arebased upon the Company’s internal organization structure, the manner in whichthe operations are managed, the criteria used by the Company’s chief operatingdecision-maker to 

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evaluatesegment performance, the availability of separate financial information. TheCompany’s chief operating decision-maker is its Chief Executive Officer (“CEO”).

Effective with the acquisition of Vidus, the Companyreports the results of its operations in two segments: Hosted and Licensed. Thesegments are managed separately because each offers different products andserves different markets. The Hosted segment provides FFM and FAM solutionsthat connect mobile workers in the field to corporate data on demand, helpmeasure overall mobile workforce performance and manage mobile assets. TheLicensed segment provides customers with the Company’s**FSM*taskforce* solution which is designedto enable a predictable and reliable customer experience from commitment toservice fulfillment; and to help synchronize the call center and field serviceoperation.

The financial information used by the Company’s chiefoperating decision-maker includes net revenue from external customers, grossmargins and net income (loss) for each of these segments.

Informationabout operations by reporting segment is as follows (in thousands):

| ** **                          | ** ** | **Year Ended December 31, ** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **Hosted**                                       | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
| Net revenue from external customers |       | $                                                | 79,945     |   |   | $ | 12,911 |   |   |   | $ | 92,856 |   |   | $ | 75,234 |   |   | $ | — |   |   |   | $ | 75,234 |   |   | $ | 63,363 |   |   | — |   |   |   | $ | 63,363 |   |   |
| Cost of revenue                     |       | 39,657                                           |       |   | 4,949 |   |   |   | 44,606 |   |   | 34,825 |   |   | — |   |   |   | 34,825 |   |   | 35,516 |   |   | — |   |   |   | 35,516 |   |   |
| Intangibles amortization            |       | —                                           |       |   | 3,487 |   |   |   | 3,487 |   |   | 28 |   |   | — |   |   |   | 28 |   |   | 455 |   |   | — |   |   |   | 455 |   |   |
| Gross Margin                        |       | $                                                | 40,288     |   |   | $ | 4,475 |   |   |   | $ | 44,763 |   |   | $ | 40,381 |   |   | $ | — |   |   |   | $ | 40,381 |   |   | $ | 27,392 |   |   | $ | — |   |   |   | $ | 27,392 |   |   |
| Gross margin percentage             |       | 50                                               | %          |   | 35 | % |   |   | 48 | % |   | 54 | % |   | — |   |   |   | 54 | % |   | 43 | % |   | — |   |   |   | 43 | % |   |
| Income (loss) before income  taxes  |       | $                                                | 6,738      |   |   | $ | (16,621 | ) |   |   | $ | (9,883 | ) |   | $ | 9,221 |   |   | — |   |   |   | $ | 9,221 |   |   | $ | 1,662 |   |   | — |   |   |   | $ | 1,662 |   |   |
| Benefit from income taxes      |       | 35,112                                           |       |   | 3,370 |   |   |   | 38,482 |   |   | — |   |   |   |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |
| Net income (loss)                   |       | $                                                | 41,850     |   |   | $ | (13,251 | ) |   |   | $ | 28,599 |   |   | $ | 9,221 |   |   | — |   |   |   | $ | 9,221 |   |   | $ | 1,662 |   |   | — |   |   |   | $ | 1,662 |   |   |
| Depreciation                        |       | $                                                | 2,035      |   |   | $ | 573 |   |   |   | $ | 2,608 |   |   | $ | 1,258 |   |   | — |   |   |   | $ | 1,258 |   |   | $ | 1,713 |   |   | — |   |   |   | $ | 1,713 |   |   |
|                                     |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Revenuesare attributed to countries based on the location of the customer. Thedistribution of revenue by geographic area was summarized as follows (inthousands):

| ** **                                | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenue from unaffiliated  customers:** |       |                                   |       |   |   |   |   |
| United States and Canada                  |       | $                                      | 80,657     |   | $ | 75,234 |   | $ | 63,363 |   |
| Europe                                    |       | 12,199                                 |       | — |   | — |   |
|                                      |       | $92,856                                |       | $75,234 |   | $63,363 |   |
|                                           |            |                                        |            |  |  |  |  |  |  |  |

 

Long-livedassets are allocated among geographies based upon the country in which thelong-lived asset is located or owned. The distribution of long-lived assets bygeographic area was summarized as follows (in thousands):

| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Long-lived assets, net:** |       |                  |       |   |   |
| United States               |       | $                     | 45,715     |   | $ | 4,092 |   |
| United Kingdom              |       | 41,773                |       | — |   |
| India                       |       | 312                   |       | 256 |   |
|                        |       | $                     | 87,800     |   | $ | 4,348 |   |

 

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**Note 13. Commitments and Contingencies**

***Lease Commitments***

Thefollowing table represents the future minimum lease payments undernon-cancelable operating, capital and financing leases as of December 31,2005.

| Year Ending  December 31, |   |   |   |   |   |
|--------------------------------|--------|--------|--------|--------|--------|
| 2006                           |   |   | $      | 1,582  |   |   |
| 2007                           |   |   | 1,448  |   |   |
| 2008                           |   |   | 1,263  |   |   |
| 2009                           |   |   | 1,195  |   |   |
| 2010                           |   |   | 476    |   |   |
| Thereafter:                    |   |   | — |   |   |
| Total minimum lease  payments  |   |   | $5,964 |   |   |
|                                |        |        |        |        |        |  |

 

The Company recognizesrent expense on a straight-line basis over the lease period and has accrued forrent expense incurred but not paid. Rent expense was approximately $2.5 million,$1.7 million and $1.4 million (net of sublease income of approximately $37,000,$43,000 and $48,000) for 2005, 2004 and 2003, respectively.

The Company has futureminimum lease payments for capital and financing leases for office equipmentand furniture in the amount of $118,000 included in the table above.

On February 1, 2006,the Company entered into a lease for its future research and development andcustomer service center from February 2006 through January 2009,occupying 37,910 square feet in Chennai India. The total minimum future leasepayments excluded from the above table is $1.6 million.

***PurchaseCommitments***

At December 31, 2005,the Company had noncancelable inventory purchase commitments totalingapproximately $4.8 million and other purchase obligations totalingapproximately $2.8 million.

***Legal Proceedings***

From time to time, theCompany is subject to claims in legal proceedings arising in the normal courseof business. Based on evaluation of these matters, the Company believes thatthese matters will not have a material effect on the results of operations orfinancial position of the Company.

***Other Contingencies***

The Company from time totime enters into certain types of agreements that contingently require it toindemnify parties against third party claims. These agreements primarily relateto: (i) certain agreements with the Company’s officers, directors and employeesand third parties, under which the Company may be required to indemnify suchpersons for liabilities arising out of their duties to the Company and(ii) certain agreements under which the Company indemnifies customers andother third parties for claims such as those arising from intellectual propertyinfringement, personal injury, or non-performance under the agreement. Suchindemnification provisions are accounted for in accordance with SFASNo. 5,*Accounting for Contingencies*.To date, the Company has not incurred any costs related to any claims undersuch indemnification provisions.

The terms of suchobligations vary. Because the amounts of the obligation in these types ofagreements often are not explicitly stated, the overall maximum amount of theobligations cannot be reasonably estimated. Historically, the Company has notbeen obligated to make any payments for these obligations, and no liabilitieshave been recorded for these obligations on the Company’s balance sheet as ofDecember 31, 2005.

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In general, the Companyprovides its customers a 12-month limited warranty that the hardwarefurnished under the hosted agreements will be free from defects in materialsand workmanship and will substantially conform to the specifications for suchhardware. The Company’s policy is to expense such costs as incurred. To date,the Company has incurred minimal costs related to this limited warrantyobligation.

The Company also providesits European customers with the longer of the European Union statutory warrantyof 90 days or country specific warranty of up to 365 days. If the warranty isinvoked, the Company may be required to correct errors in its software ratherthan refund any fees under the arrangement. As of December 31, 2005, thiswarranty has not been invoked by any of the Company’s customers.

**Note 14. Terminated Acquisition Costs**

On April 12, 2004,the Company entered into a Combination agreement with MDSI Mobile DataSolutions, Inc. (“MDSI”) providing for the acquisition of MDSI. OnJuly 27, 2004, the parties mutually agreed to terminate the CombinationAgreement. As a result, for the year ended December 31, 2004, the Companyexpensed approximately $2.1 million of acquisition-related costs.

**Note 15. Income Taxes**

The benefitfrom income taxes consists of the following (in thousands):

| ** **                       | ** ** | ** **    | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|---------------|------------|--------------------------------------------|------------|
| ** **                       | ** ** | ** **    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal:                         |       | Current       |       | $                                          | 113        |   |   | $ | — |   |   |   | $ | — |   |   |
|                             |       | Deferred      |       | (31,501                                    | )          |   | — |   |   |   | — |   |   |
|                             |       | Total federal |       | (31,388                                    | )          |   | — |   |   |   | — |   |   |
| State:                           |       | Current       |       | 0                                          |       |   | — |   |   |   | — |   |   |
|                             |       | Deferred      |       | (3,800                                     | )          |   | — |   |   |   | — |   |   |
|                             |       | Total state   |       | (3,800                                     | )          |   | — |   |   |   | — |   |   |
| Foreign:                         |       | Current       |       | 0                                          |       |   | — |   |   |   | — |   |   |
|                             |       | Deferred      |       | (3,294                                     | )          |   | — |   |   |   | — |   |   |
|                             |       | Total foreign |       | (3,294                                     | )          |   | — |   |   |   | — |   |   |
| Total benefit  from income taxes |       | $             | (38,482    | )                                          |       | $ | — |   |   |   | $ | — |   |   |

 

Thepre-tax loss related to the Company’s foreign operations in 2005 was $16.7million. Only minimum state income and franchise taxes were provided for in 2004and 2003 due to the Company’s history of net operating losses. Such amountswere not significant and included in general and administrative expenses.

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TheCompany’s effective tax rate differs from the amount computed by applying thestatutory federal income tax rate to net (loss) income before income taxes asfollows:

| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal statutory  rate                    |       | 35.0                                       | %          | 35.0 | % | 35.0 | % |
| State taxes, net  of federal benefit       |       | 1.3                                        |       | 0.7 |   | 21.3 |   |
| Non-deductible  stock compensation charges |       | 0.2                                        |       | (1.5 | ) | (50.1 | ) |
| Research and  development credits          |       | 0.0                                        |       | (1.8 | ) | (16.2 | ) |
| Other                                      |       | (0.7                                       | )          | (0.3 | ) | 2.1 |   |
| Valuation  allowance                       |       | 364.2                                      |       | (32.1 | ) | 7.9 |   |
| Tax exempt  interest                       |       | 6.8                                        |       | — |   | — |   |
| Derivative                                 |       | 8.0                                        |       | — |   | — |   |
| Rate differential  on foreign losses       |       | (25.4                                      | )          | — |   | — |   |
| Effective tax rate                         |       | 389.4                                      | %          | — | % | — | % |

 

Significant components of the Company’s deferredtax assets and liabilities are as follows (in thousands):

| ** **                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Deferred  Tax Assets**                                        | ** ** | ** **            |       | ** ** | ** ** |
| Net operating  loss carry forwards                              |       | $                     | 40,047     |   | $ | 35,251 |   |
| Credit carry  forwards                                          |       | 3,297                 |       | 4,577 |   |
| Accruals and  reserves recognized in different periods          |       | 4,808                 |       | 3,410 |   |
| Total gross deferred tax assets before valuation  allowance     |       | 48,152                |       | 43,238 |   |
| Valuation allowance                                             |       | (303                  | )          | (43,238 | ) |
| Deferred tax assets                                             |       | 47,849                |       | — |   |
| **Deferred  Tax Liabilities**                                   | ** ** | ** **            |       | ** ** | ** ** |
| Acquired  intangibles                                           |       | (6,193                | )          | — | ** ** |
| Net deferred tax assets (liabilities) before  unrealized losses |       | 41,656                |       | — | ** ** |
| Unrealized losses  (gains) on:                                  | ** ** | ** **            |       | ** ** | ** ** |
| Securities available-for-sale                                   |       | 31                    |       | — | ** ** |
| Valuation allowance                                             |       | (31                   | )          | — | ** ** |
| Net unrealized losses (gains)                                   |       | —                |       | — |   |
| Net deferred tax  asset                                         |       | $                     | 41,656     |   | $ | — |   |

 

The valuation allowance for deferred tax assetsdecreased by $42.9 million for the year ended December 31, 2005 anddecreased by $402,000 for the year ended December 31, 2004. The Companyhas concluded, based on the standards set forth in SFAS No. 109, *Accounting for Income Taxes*, that it is more likely than notthat we will realize the benefits from the related deferred tax assets, basedon the Company’s evaluation of current evidence and its affect on the Company’sestimate of future taxable income. The Company receives tax deductions from thegains realized by employees on the exercise of certain non-qualified stockoptions and disqualifying dispositions of stock options. Approximately $6.8million of the reversal of the valuation allowance related to excess taxbenefits from these stock option deductions for which the benefit was recognizedas a component of stockholders’ equity for the year ended December 31,2005. Approximately $31,000 of the valuation allowance at December 31,2005, related to unrealized losses on available-for-sale securities and wascharged to other comprehensive income.

At December 31, 2005, the Company had federal,state and foreign net operating loss (“NOL”) carryforwards of approximately$89.8 million, $53.7 million, and $19.2 million respectively. If not used, thefederal NOL carryforwards will expire between 2018 and 2023 and the state NOLcarryforwards will expire between 2006 and 2023. The foreign NOL carryforwardsdo not expire.

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At December 31, 2005, the Company also hadfederal and state research credits of approximately $2.0 million and $1.6million, respectively. If not used, the federal research credit carryforwardswill expire between 2012 and 2023. The state research credit carryforwards donot expire.

**Note 16.**RelatedParty Transactions

The Company has entered into indemnification agreementswith each of its directors, executive officers and certain other officers.These agreements require the Company to indemnify such individuals, to thefullest extent permitted by Delaware law, for certain liabilities to which theymay become subject as a result of their affiliation with the Company.

The Company purchasedapproximately $2.3 million of inventory from a stockholder in 2003. During2003, the stockholder sold all the shares of the Company’s common stock itpreviously owned.

**Note 17.Quarterly Financial Data (restated and unaudited) (in thousands except pershare amounts)**

Subsequentto December 31, 2005, the Company determined that its condensedconsolidated financial statements contained errors resulting from the improperaccounting for the common and redeemable preferred stock issued in connectionwith the Vidus acquisition. The Company has also identified and restated tocorrect an error in the benefit for income taxes in the quarter endedSeptember 30, 2005 related to the reversal of the valuation allowance. Accordingly,the unaudited quarterly financial data for the periods ended September 30,2005, June 30, 2005 and March 31, 2005 presented herein has beenrestated. See “Note 8—Derivative Financial Instrument Liabilities” forfurther discussion.

| ** **                                                      | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| **2005**                                                        | ** ** | ** **             | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
| **Condensed Consolidated  Statements of Operations Data:**      |       |                   |       | * * |   |   | * * |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                  |       |                   | $          | 27,269 | * * |   |   | $ | 24,969 |   |   |   | $ | 20,626 |   |   |   | $ | 19,992 |   |   |
| (Loss) income  from operations                                  |       |                   | (903       | *)* |   |   | (1,467 | ) |   |   | (4,707 | ) |   |   | (7,998 | ) |   |
| Net income (loss)(1)                                            |       |                   | 2,989      | * * |   |   | 37,998 |   |   |   | (4,269 | ) |   |   | (8,119 | ) |   |
| Preferred stock  dividends                                      |       |                   | (131       | *)* |   |   | (124 | ) |   |   | (124 | ) |   |   | (57 | ) |   |
| Net income (loss)  attributable to common stockholders(1)  |       |                   | $          | 2,858 | * * |   |   | $ | 37,874 |   |   |   | $ | (4,393 | ) |   |   | $ | (8,176 | ) |   |
| Net income (loss) per  share:                                   |       |                   |       | * * |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic(1)                                                        |       |                   | $          | 0.05 | * * |   |   | $ | 0.62 |   |   |   | $ | (0.07 | ) |   |   | $ | (0.14 | ) |   |
| Diluted(1)                                                      |       |                   | $          | 0.05 | * * |   |   | $ | 0.61 |   |   |   | $ | (0.07 | ) |   |   | $ | (0.14 | ) |   |
| Shares used in  calculating net income (loss) per share:        |       |                   |       | * * |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                           |       |                   | 60,988     | * * |   |   | 60,740 |   |   |   | 60,551 |   |   |   | 57,385 |   |   |
| Diluted                                                         |       |                   | 63,121     | * * |   |   | 62,133 |   |   |   | 60,551 |   |   |   | 57,385 |   |   |
|                                                                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)   The unauditedquarterly financial data for the periods ended September 30, 2005,June 30, 2005 and March 31, 2005 has been restated to reflect the effectsof a derivative embedded in the redeemable preferred stock issued in connectionwith the acquisition of Vidus and the correction of an error in the taxprovision relating to the reversal of the valuation allowance for the periodending September 30, 2005.

82

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| ** **                                                 | ** ** | **Quarter Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| **2004**                                                   | ** ** | ** **             | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
| **Condensed Consolidated Statements of Operations  Data:** |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                             |       |                   | $          | 19,909 |   |   |   | $ | 19,102 |   |   | $ | 18,331 |   |   | $ | 17,892 |   |   |
| Income from operations                                     |       |                   | 1,583      |   |   |   | 2,510 |   |   | 750 |   |   | 2,850 |   |   |
| Net income                                                 |       |                   | 2,155      |   |   |   | 2,930 |   |   | 1,066 |   |   | 3,110 |   |   |
| Preferred stock  dividends                                 |       |                   | —     |   |   |   | — |   |   | — |   |   | — |   |   |
| Net income attributable  to common stockholders            |       |                   | $          | 2,155 |   |   |   | $ | 2,930 |   |   | $ | 1,066 |   |   | $ | 3,110 |   |   |
| Net income per share:                                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                      |       |                   | $          | 0.04 |   |   |   | $ | 0.05 |   |   | $ | 0.02 |   |   | $ | 0.06 |   |   |
| Diluted                                                    |       |                   | $          | 0.04 |   |   |   | $ | 0.05 |   |   | $ | 0.02 |   |   | $ | 0.05 |   |   |
| Shares used in calculating net income per share:           |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                      |       |                   | 54,709     |   |   |   | 54,498 |   |   | 54,185 |   |   | 53,771 |   |   |
| Diluted                                                    |       |                   | 57,124     |   |   |   | 56,199 |   |   | 57,414 |   |   | 58,298 |   |   |
|                                                            |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following is a summary of the significant effectsof the restatement (in thousands, except per share amounts):

| ** **                                                 | ** ** | **Quarter Ended**                | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **September 30, 2005** | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
| ** **                                                 | ** ** | **Previously  Reported**         | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed Consolidated  Statements of Operations Data:** |       |                             |       | * * |   | * * |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total other  income, net                                   |       |                             | $          | 798 | * * |   | $ | 5,643 |   |   | $ | 575 |   |   | $ | (2,757 | ) |   | $ | 620 |   |   | $ | (121 | ) |
| Net income (loss)  before income taxes                     |       |                             | (669       | ) |   | 4,176 |   |   | (4,132 | ) |   | (7,464 | ) |   | (7,378 | ) |   | (8,119 | ) |
| Benefit from  income taxes                                 |       |                             | 34,192     | * * |   | 33,822 |   |   | 3,195 |   |   | 3,195 |   |   | — |   |   | — |   |
| Net income (loss)                                          |       |                             | 33,523     | * * |   | 37,988 |   |   | (937 | ) |   | (4,269 | ) |   | (7,378 | ) |   | (8,119 | ) |
| Net income (loss)  attributable to common stockholders     |       |                             | $          | 33,399 | * * |   | $ | 37,874 |   |   | $ | (1,061 | ) |   | $ | (4,393 | ) |   | $ | (7,435 | ) |   | $ | (8,176 | ) |
| Net income (loss) per  share:                              |       |                             |       | * * |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                      |       |                             | $          | 0.55 | * * |   | $ | 0.62 |   |   | $ | (0.02 | ) |   | $ | (0.07 | ) |   | $ | (0.13 | ) |   | $ | (0.14 | ) |
| Diluted                                                    |       |                             | $          | 0.54 | * * |   | $ | 0.61 |   |   | $ | (0.02 | ) |   | $ | (0.07 | ) |   | $ | (0.13 | ) |   | $ | (0.14 | ) |

** **

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Stockholders andBoard of Directors of @Road, Inc.:

We have audited theconsolidated financial statements of @Road, Inc. and its subsidiaries(collectively the “Company”) as of December 31, 2005 and 2004, and foreach of the three years in the period ended December 31, 2005, management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005, and the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005, andhave issued our reports thereon dated March 22, 2006 (which report on theeffectiveness of the Company’s internal control over financial reportingexpresses an adverse opinion because of material weaknesses); such reports areincluded elsewhere in this Annual Report on Form 10-K for the yearended December 31, 2005. Our audits also included the consolidated financialstatement schedule of the Company listed in Item 15(a)(2). Thisconsolidated financial statement schedule is the responsibility of the Company’smanagement. Our responsibility is to express an opinion based on our audits. Inour opinion, such consolidated financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

/s/ Deloitte & Touche LLP

 

San Jose, California

March 22, 2006

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**SCHEDULE II**

**@ROAD, INC.**

**VALUATION AND QUALIFYING ACCOUNTS**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**(In thousands)**

| ** **                                  | ** ** | **Balance at  Beginning  of Year** | ** ** | **Additions  and  Charges to  Expenses** | ** ** | **Write-off  and  Deductions** | ** ** | **Balance at  End of  Year** | ** ** |
|---------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|
| **Year Ended December 31,  2005**      |       |                                         |       |                                          |       |                           |       |                                   |       |   |   |   |   |   |   |   |   |
| Provision for  doubtful accounts receivable |       |                                         | $          | 1,066                                         |       |                           |       | $                                      | (674       | ) |   |   | $ | 16 |   |   |   | $ | 376 |   |   |
| Deferred tax  valuation allowance           |       |                                         | 43,238     |                                          |       |                           | —     |                                   |       |   | (42,904 | ) |   |   | 334 |   |   |
| **Year Ended December 31,  2004**      |       |                                         |       |                                          |       |                           |       |                                   |       |   |   |   |   |   |   |   |   |
| Provision for  doubtful accounts receivable |       |                                         | $          | 1,421                                         |       |                           |       | $                                      | (724       | ) |   |   | $ | 369 |   |   |   | $ | 1,066 |   |   |
| Deferred tax  valuation allowance           |       |                                         | 43,640     |                                          |       |                           | —     |                                   |       |   | (402 | ) |   |   | 43,238 |   |   |
| **Year Ended December 31,  2003**      |       |                                         |       |                                          |       |                           |       |                                   |       |   |   |   |   |   |   |   |   |
| Provision for  doubtful accounts receivable |       |                                         | $          | 1,900                                         |       |                           |       | $                                      | (127       | ) |   |   | $ | (352 | ) |   |   | $ | 1,421 |   |   |
| Deferred tax valuation  allowance           |       |                                         | 41,946     |                                          |       |                           | —     |                                   |       |   | 1,694 |   |   |   | 43,640 |   |   |

 

85

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|        |   | @ROAD, INC. |
|--------|--------|-------------|
|   |   | By:         |   | /s/ KRISH PANU |
|   |   |        |   | Krish Panu*President and Chief Executive Officer* |

 

Date: March 22, 2006

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Krish Panu and MichaelMartini, jointly and severally, his attorneys-in-fact, each with the power ofsubstitution, for him in any and all capacities, to sign any amendments to thisReport on Form 10-K, and to file the same, with exhibits thereto andother documents in connection therewith with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of saidattorneys-in-fact, or his substitute or substitutes may do or cause to be doneby virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated have signed this Report below.
|                       | **Signature** | ** **                                             | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-----------------------|---------------|--------------------------------------------------------|------------|---------------------|-----------|------------|------------|--|----------|------------|
|                  |          |                                                   |       |                |
| /s/ KRISH PANU        |          | Chairman of the Board of  Directors, President and     |       | March 22, 2006 |
| Krish  Panu           |          | Chief Executive Officer  (Principal Executive Officer) |       |                |
|                  |          |                                                   |       |                |
| /s/ MICHAEL MARTINI   |          | Senior Vice President of  Finance and Chief Financial  |       | March 22, 2006 |
| Michael  Martini      |          | Officer (Principal  Financial and Accounting Officer)  |       |                |
|                  |          |                                                   |       |                |
| /s/ KRIS CHELLAM      |          | Director                                               |       | March 22, 2006 |
| Kris  Chellam         |          |                                                   |       |                |
|                  |          |                                                   |       |                |
| /s/ JAMES DAVIS       |          | Director                                               |       | March 22, 2006 |
| James  Davis          |          |                                                   |       |                |
|                  |          |                                                   |       |                |
| /s/ CHARLES E. LEVINE |          | Director                                               |       | March 22, 2006 |
| Charles  E. Levine    |          |                                                   |       |                |
|                  |          |                                                   |       |                |
| /s/ T. PETER THOMAS   |          | Director                                               |       | March 22, 2006 |
| T. Peter Thomas       |          |                                                   |       |                |

 

86

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**EXHIBIT INDEX**
| 2.1         |   | Acquisition Agreement  dated as of December 15, 2004 by and among Registrant, Vidus Limited and  NV Partners III-BT LP. (Incorporated herein by reference to our  Report on Form 8-K filed on December 21, 2004.)                                                             |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.4         |   | Amended and Restated  Bylaws of the Registrant, as amended. (Incorporated herein by reference to  our registration statement on Form S-1 (File No. 333-41372)  initially filed on July 13, 2000.)                                                                                  |
| 3.5         |   | Amended and Restated Certificate of Incorporation of  the Registrant. (Incorporated herein by reference to our registration  statement on Form S-1 (File No. 333-41372) initially  filed on July 13, 2000.)                                                                        |
| 3.6         |   | Certificate of  Designations, Rights and Preferences of Series A-1 and  Series A-2 Redeemable Preferred Stock and Series B-1  and Series B-2 Redeemable Preferred Stock. (Incorporated herein by  reference to our Report on Form 8-K filed on February 22,  2005.) |
| 4.1         |   | Specimen Stock  Certificate. (Incorporated herein by reference to our registration statement  on Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                                 |
| 10.2†  |   | Form of Wireless  Network Services Agreement and Form of Purchase Agreement for Goods.  (Incorporated herein by reference to our registration statement on  Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                            |
| 10.12       |   | 1996 Stock Option Plan.  (Incorporated herein by reference to our registration statement on  Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                                     |
| 10.13       |   | 2000 Stock Option Plan.  (Incorporated herein by reference to our registration statement on  Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                                     |
| 10.14       |   | 2000 Employee Stock  Purchase Plan. (Incorporated herein by reference to our registration  statement on Form S-1 (File No. 333-41372) initially  filed on July 13, 2000.)                                                                                                          |
| 10.15       |   | 2000 Directors’ Stock  Option Plan. (Incorporated herein by reference to our registration statement  on Form S-1 (File No. 333-41372) initially filed on  July 13, 2000.)                                                                                                     |
| 10.16       |   | Form of  Indemnification Agreement. (Incorporated herein by reference to our  registration statement on Form S-1 (File No. 333-41372)  initially filed on July 13, 2000.)                                                                                                     |
| 10.20† |   | CDPD Data National  Service Agreement between the Registrant and GTE Wireless Incorporated dated  May 5, 2000. (Incorporated herein by reference to our registration  statement on Form S-1 (File No. 333-41372) initially  filed on July 13, 2000.)                          |
| 10.27† |   | Cellular Digital Packet  Data Reseller Agreement between the Registrant and TELUS Mobility dated  January 19, 2001. (Incorporated herein by reference to our Report on  Form 10-K filed on March 28, 2002.)                                                                        |
| 10.28† |   | Co-Marketing  Agreement between the Registrant and Nextel Partners Operating Corp. dated  March 14, 2001. (Incorporated herein by reference to our Report on  Form 10-K filed on March 28, 2002.)                                                                                  |
| 10.29† |   | Co-Marketing  Agreement between the Registrant and Nextel Financing Company dated  December 15, 2000. (Incorporated herein by reference to our Report on  Form 10-K filed on March 28, 2002.)                                                                                      |

87

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| 10.30† |   | Cellular Digital Packet  Data Reseller Agreement between the Registrant and Ameritech Mobile  Communications LLC dated January 10, 2002. (Incorporated herein by reference  to our Report on Form 10-K filed on March 28, 2002.)                                                                                                             |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.32† |   | Integrator Agreement  between the Registrant and Symbol Technologies, Inc. dated July 31,  2001, as amended by Amendment to Agreement with Integrator between the  Registrant and Symbol Technologies, Inc. dated December 28, 2001.  (Incorporated herein by reference to our Report on Form 10-K filed  on March 28, 2002.) |
| 10.37† |   | Reseller Agreement  between the Registrant and AT&T Wireless dated February 24, 2003.  (Incorporated herein by reference to our Report on Form 10-K/A  filed on July 29, 2003.)                                                                                                                                                          |
| 10.41       |   | Agreement between the  Registrant and Elnet Technologies Ltd., dated December 10, 2003.  (Incorporated herein by reference to our Report on Form 10-K filed  on March 12, 2004.)                                                                                                                                                             |
| 10.42       |   | Sublease between the  Registrant and VA Software Corporation, dated June 8, 2004.  (Incorporated herein by reference to our Report on Form 10-Q filed  on August 9, 2004.)                                                                                                                                                                   |
| 10.43       |   | Consent to Sublease  Agreement between the Registrant, VA Software Corporation and Renco  Investment Company, dated June 9, 2004. (Incorporated herein by  reference to our Report on Form 10-Q filed on August 9,  2004.)                                                                                                                   |
| 10.44       |   | Deed of Warranty and  Indemnity in relation to Vidus Limited dated December 15, 2004.  (Incorporated herein by reference to our Report on Form 8-K filed  on December 21, 2004.)                                                                                                                                                             |
| 10.49       |   | 2005 Stock Option Plan. (Incorporated herein by  reference to our Report on Form 8-K filed on February 22,  2005.)                                                                                                                                                                                                                                |
| 10.50       |   | Agreement between the  Registrant and Elnet Technologies Ltd., dated April 28, 2004. (Incorporated  herein by reference to our Report on Form 10-K filed on  March 15, 2005.)                                                                                                                                                                |
| 10.51       |   | Form of Change in  Control Agreement between the Registrant and its executive officers. (Incorporated  herein by reference to our Report on Form 10-K filed on  March 15, 2005.)                                                                                                                                                             |
| 10.52       |   | Offer Letter between the  Registrant and Michael Martini dated June 14, 2005. (Incorporated herein  by reference to our Report on Form 8-K filed on June 22,  2005.)                                                                                                                                                                         |
| 10.53       |   | Lease agreement among a  subsidiary of Registrant, Prime Holdings Limited and Melbourne Business Court  Management Company Limited, dated October 15, 2003. (Incorporated herein by reference to our Report  on Form 10-Q filed on August 9, 2005.)                                                                                          |
| 10.54       |   | Lease agreement among a  subsidiary of Registrant, Felaw Maltings Ipswich (No. 1) Limited, Felaw  Maltings Ipswich (No. 2) Limited and Mars Pension Trustees Limited,  dated December 9, 2004. (Incorporated herein by  reference to our Report on Form 10-Q filed on August 9,  2005.)                                            |
| 10.55       |   | Lease agreement among a  subsidiary of Registrant, Felaw Maltings Ipswich (No. 1) Limited, Felaw  Maltings Ipswich (No. 2) Limited and Mars Pension Trustees Limited,  dated December 9, 2004. (Incorporated herein by  reference to our Report on Form 10-Q filed on August 9,  2005.)                                            |
| 10.56       |   | Lease agreement between  a subsidiary of Registrant and Riverdale Estates Limited, dated July 12,  2004. (Incorporated herein by reference to our Report on Form 10-Q  filed on August 9, 2005.)                                                                                                                                             |
| 10.57       |   | Lease agreement between  a subsidiary of Registrant and Riverdale Estates Limited, dated July 12,  2004. (Incorporated herein by reference to our Report on Form 10-Q filed  on August 9, 2005.)                                                                                                                                             |
| 10.58       |   | Form of Notice of  Stock Option Acceleration. (Incorporated herein by reference to our Report on  Form 8-K filed on October 27, 2005.)                                                                                                                                                                                                       |

88

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| 10.59 |   | Lease Deed dated  February 1, 2006, between Transpacific Business Service Private Limited  and @Road Software India Private Limited. |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1  |   | List of Subsidiaries.                                                                                                                     |
| 23.1  |   | Consent of Independent  Registered Public Accounting Firm.                                                                                |
| 24.1  |   | Power of Attorney (see  page 86).                                                                                                    |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                             |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                             |
| 32.1  |   | Certification pursuant  to 18 U.S.C. Section 1350 of Chief Executive Officer.                                                        |
| 32.2  |   | Certification pursuant  to 18 U.S.C. Section 1350 of Chief Financial Officer.                                                        |

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†                    Certaininformation in this Exhibit has been omitted and filed separately with theSEC. Confidential treatment has been requested or granted with respect to theomitted portions.

89

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