**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-K/A**

**(Amendment #1)**
| **(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. This determinationof affiliate status is not necessarily a conclusive determination for otherpurposes.

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/A is incorporated hereinby reference from the definitive proxy statement filed in connection with theregistrant’s 2006 annual meeting of stockholders.

 

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**EXPLANATORY NOTE**

This Annual Report on Form 10-K/A (“Form 10-K/A”) isbeing filed as Amendment No. 1 to our Annual Report on Form 10-K for the yearended December 31, 2005, which was filed with the Securities and ExchangeCommission (the “SEC”) on March 22, 2006 (the “Original Filing”). We are filingthis Amendment No. 1 to reflect restatements of our consolidated balance sheetat December 31 2005, and our consolidated statements of operations,stockholders’ equity and cash flows for the year ended December 31, 2005, andthe related notes thereto to correct an error in the benefit for income taxesrelated to the treatment of interest received on investments in government homeloan securities as tax-exempt when it was in fact taxable (the “Restatement”).For a more detailed description of the Restatement, see “Note 17—Restatement ofFinancial Statements” to the Consolidated Financial Statements. We have alsoamended “Note 12 — Segment Reporting” to the Consolidated Financial Statementsto exclude deferred tax assets from the distribution of long-lived assets bygeographic area. In addition, we have amended “Note 1—Organization and Summaryof Significant Accounting Policies” to the Consolidated Financial Statements toinclude an adjustment to correct for the deductibility of stock options grantedto employees in the United Kingdom.

This Form 10-K/A amends and restates “Item 1.Business” of Part I; “Item 1A. Risk Factors” of Part I; “Item 6. Selected FinancialData,” and “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” of Part II; and Item 15 “Exhibits and FinancialStatement Schedules” of Part IV of the Original Filing, as amended, in eachcase, solely as a result of, and to reflect, the Restatement. Pursuant to therules of the SEC, Item 15 of Part IV of the Original Filing has been amended tocontain the consent of our independent registered public accountant andcurrently-dated certifications from our principal executive officer andprincipal financial officer, as required by Sections 302 and 906 of theSarbanes-Oxley Act of 2002. The consent of our independent registered publicaccountant is attached to this Form 10-K/A as Exhibit 23.1. The certificationsof our principal executive officer and our principal financial officer areattached to this form 10-K/A as Exhibits 31.1, 31.2, 32.1 and 32.2.

Except for the foregoing amended information, thisForm 10-K/A continues to describe conditions as of the date of the OriginalFiling, and we have not updated the disclosures contained herein to reflectevents that have occurred subsequent to that date. Other events occurring afterthe date of the Original Filing or other information necessary to reflectsubsequent events have been disclosed in reports filed with the SEC subsequentto the Original Filing.

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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 (As Restated) and 2004                                                            |   | 54     |
|             |   | Consolidated Statements of Operations—Years ended  December 31, 2005 (As Restated), 2004 and 2003                                               |   | 55     |
|             |   | Consolidated Statements of Stockholders’ Equity and  Comprehensive Income—Years ended December 31, 2005 (As Restated),  2004 and 2003 |   | 56     |
|             |   | Consolidated Statements of Cash Flows—Years ended  December 31, 2005 (As Restated), 2004 and 2003                                               |   | 57     |
|             |   | Notes to Consolidated Financial Statements                                                                                                                     |   | 58     |

 

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Except for the historical information contained inthis Annual Report on Form 10-K/A, the matters discussed in this Reportare forward-looking statements involving risks and uncertainties thatcould cause actual results to differ materially from those in such forward-lookingstatements. Potential risks and uncertainties include, but are not limited to,fluctuations in quarterly results, customer acceptance of our products andservices, our ability to adapt to rapid technological change, our dependence onwireless networks, network infrastructure and positioning systems owned andcontrolled by others and general economic and political conditions. Furtherinformation regarding these and other risks is included in this Report and inour other filings with the Securities and Exchange Commission (“SEC”).

**PART I**

**Item 1.**                          *Business*

**Overview**

@Road® , Inc.is a leading provider of mobile resource management (“MRM”) solutions, acategory of business productivity solutions designed to enable the effectivemanagement of mobile resources. Currently, we market and sell our solutions toa range of customers in North America and Europe.

@Road, Inc. was incorporated in 1996 under thelaws of the State of Delaware. From July 1996 through June 1998, ouroperations consisted primarily of various start-up activities relating to ourMRM solutions, including development of global positioning system (“GPS”)technologies, recruiting personnel and raising capital. We did not recognizeany revenue prior to June 1998, and our expenses consisted of research anddevelopment, sales and marketing, and general and administrative expenses. In1998, we expanded our strategy to provide location-relevant and time-sensitiveinformation solutions to companies managing mobile resources. In the second halfof 1998, we introduced the first version of a MRM solution that is now called@Road GeoManagerSM iLM®, which provides location, reporting,dispatch, messaging, and other management services to help companies managetheir mobile resources more efficiently. Subsequent to the introduction of@Road GeoManager iLM, we introduced 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 calledTaskforceTM primarily 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.

In 2004, we were selected by SBC Services, Inc.(now AT&T), to provide mobile resource management solutions for up to35,000 of their field service technicians. At December 31, 2005, we had 

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deployed our solutions toapproximately 32,000 field service technicians under our agreement 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:

·       *Furtherpenetrate vertical markets in which we have or are developing leading referencecustomers.  *We have developed relationships with leadingcompanies in selected vertical markets, such as telecommunications, utilitiesand construction. We seek to leverage our relationships with these customersand our knowledge of their MRM needs to attract other potential medium-to large-sized customers in these markets. In other vertical markets, weintend to replicate the model of deploying our solutions with a leadingreference customer and leveraging this relationship and our MRM marketexpertise to attract other customers in those markets.

·       *Create newvalue-added services for our customers.  *We intend tocontinue to add new features and functionality to our solutions and develop newplatforms that take advantage of advancements in hosted applications, businessanalytics, optimization, data processing and wireless communications. We expectto continue to release new features that synthesize the information currentlyretrieved by our existing solutions and which arise from working closely withour customers. We expect some of these features to be incorporated into our solutionsas free enhancements, while others will be offered for additional fees. Weintend to continue to use our international capabilities to help develop andsupport new features and functionality for our solutions. In addition, weintend to continue to develop an open platform architecture to allow ourcustomers and partners to integrate third-party applications with oursolutions.

·       *Expand oursolutions internationally.  *We intend to identify newgeographic markets for which our solutions can satisfy evolving customerdemands. We currently market all our solutions in the United States and Canada,and certain of our solutions in Europe. We intend to expand the set ofsolutions offered in Europe in future periods. We believe that leveraging ourtechnology 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 andtechnologies.

**@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-basedtechnologies, software applications, transaction processing and the Internet, oursolutions offer a secure, scalable, upgradeable, enterprise-class platform,available in hosted, on-premise or hybrid environments, that connect mobileworkers in the field to corporate data on-demand.

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

·       *Hosted*—Customersmanage their mobile resources over the Internet by logging on to our websiteand using certain of our applications that are hosted by us at data centers inthe United States.

·       *Licensed*—Customerscan manage their mobile resources by installing certain of our software attheir premises and using the applications with their internal informationtechnology infrastructure.

·       *Hybrid*—Customerscan manage their mobile resources by deploying MRM solutions that contain bothHosted and Licensed elements in a configuration 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 ForceManagement (“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.

·       *FieldService 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:

·       Improved productivity ofmobile resources;

·       Decreased costs ofoperations of mobile resources;

·       Improved efficiency of acustomer’s overall operations; and

·       Improved responsiveness toour customers’ customers.

In addition, we offer multi-year subscriptioncontracts that allow our customers to pay us on a monthly basis and minimizeupfront cash commitments. We believe a monthly payment subscription modelfurther accelerates a customer’s return on investment 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 generally contract to receive our FFMsolutions for terms of one to five years and are provided the option topurchase value-added service features for additional fees. Upon the completionof the initial term of a customer’s contract, the customer’s services continueon a month-to-month basis. Our revenue is derived from monthly fees for our FFMsolutions and any purchased value-added features, and monthly or upfront feesfor the in-vehicle hardware devices enabling the mobile resource to utilize ourFFM solutions.

*@Road GeoManager*

@Road GeoManager is our flagship FFM solution and is designedto provide comprehensive MRM for customers in all our target markets. Wecommence implementation of the GeoManager solution with the deployment of ahardware device to each of the customer’s mobile resources, such as servicevehicles or trucks. We refer to each mobile resource with such a hardwaredevice as a ‘‘subscriber.’’ The GeoManager solution operates with in-vehiclehardware and mobile telephones. Our proprietary Internet Location Manager (“*i*LM”) hardware device is installed in a vehicle andintegrates a GPS receiver and a wireless modem with our operating anddiagnostic 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 solution provides customers a varietyof features and reports, including a MapView feature that allows them to locatemobile workers in real-time using an on-screen map. Users are able to establishpersonal “Landmarks” on the map representing their customers’ sites, commonstops and other locations, in order to more easily view arrival and departuretimes to and from desired locations. Our two-way messaging service featurepermits text communication between a field worker such as a technician ordriver, and a user of our solution connected to the Internet, such as anoperations 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 is deployed in substantially thesame manner as our GeoManager solution, which requires either the installationof a hardware device in each of the customer’s vehicles or installation of oursoftware 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 is deployed in substantially thesame manner as the GeoManager option that requires the installation of a hardwaredevice 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 software solution and expect to offer iton a managed services basis and hosted basis in the future. Our customerscontract to receive our FSM solution on a licensed basis, which generallyincludes licensing, installation, training and support and maintenance fees.

*Taskforce*

Taskforce is an intelligent software application thatenables customers to automatically schedule their mobile workers, such astechnicians or telecommunications engineers. The software allocates workers tothe jobs in the field in a manner designed to reduce operational inefficiencies.This is achieved by reducing travel and other non-productive time and ensuringthat the mobile worker has the necessary skills and equipment to complete thejob allocated to that worker. Taskforce can adapt to changing and unpredictablecircumstances, such as traffic delays, as the schedule produced by the softwareis constantly updated during the day. This dynamic responsiveness to changingconditions helps to ensure that an appropriate worker arrives at the customer’spremises when expected.

***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 generally contract to receive our FAMsolutions in connection with the purchase of our FFM solutions. Upon thecompletion of the initial term of a customer’s contract, the customer’sservices continue on a month-to-month basis. Our revenue is derived frommonthly fees for our FAM solutions, and monthly or upfront fees for thein-vehicle hardware device, if any, enabling the mobile resource to utilize ourFAM solutions.

*VehicleDiagnostics*

Our Vehicle Diagnostics solution for both heavy(J1708) and light-duty (OBD II) vehicles is an add-on option to our GeoManagersolution. This service is designed to connect with the vehicle’s data bus andretrieve engine and other vehicle diagnostic data so our customers can remotelymonitor engine performance for proactive intervention and prevention of vehicledowntime.

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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 solution monitors and reports on thetemperature in a compartment of a vehicle, such as a refrigeration compartment.This solution is designed for segments in which the temperature of a vehicle’scompartment is important, such as the food and chemical distribution markets.

**Customers**

We market and sellour solutions to a broad range of customers in the United States, Europe andCanada. The number of mobile resources enabled with our solutions on either asubscription or a per seat license basis has grown from 135 as of December 31,1998, to approximately 188,000 as of December 31, 2005. We categorize acustomer in a small, medium or large-sized customer group by reference tothe total number of subscribers to our services or user licenses relating toour software for that customer. Small-sized customers have 100 or fewer subscribersor user licenses, medium-sized customers have 101 to 1,000 subscribers oruser licenses, and large-sized customers have more than 1,000 subscribersor user licenses. Currently, we have customers 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, VerizonCommunications, represented 13%, 17% and 17% of total revenues, respectively. Noother customer comprised 10% or more of total revenues during any of thoseperiods. We do not expect revenues from Verizon Communications to exceed 10% ofour total revenues in 2006. During 2006, we expect that revenues from AT&Tmay comprise more than 10% of our total revenues.

**Research and Development**

We concentrate ourresearch and development activities on software development, services anddevice engineering. Our research and development resources and personnel arelocated in the United States, the United Kingdom and India. To enhance ourexisting solutions and to introduce new solutions to our existing and potentialcustomers, we focus on the following key areas:

·       *Software*.*  *We intend to continue to develop our softwaresolutions by offering new releases enhancing our existing software applications.In addition to other offerings announced in 2005, we announced the release ofTaskforce 7, which includes a Microsoft .Net architecture and enables endusers to use Internet-based tools to book appointments directly with ourcustomers’ appointment booking systems.

·       *Services.  *Weintend to continue to develop our services by offering new features and optionswhile enhancing existing features. In addition to other offerings announced in2005, we announced a vehicle diagnostics service, which provides our customersaccess to their vehicle diagnostic information over the Internet. This serviceis designed to help remote field asset managers quickly identify engineproblems and diagnose such problems to better utilize maintenance and repairresources.

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·       *Devices.  *Weintend to continue to develop and release devices to add new features as wellas to enhance existing features. In addition to other offerings announced in2005, we announced our *i*LM 3100-Wseries device, which adds third generation wireless data communications such asEDGE and EvDO and a Wi-Fi hotspot connectivity to our line of Internet LocationManager devices.

We spent $13.0 million, $6.2 million and $5.5 millionon research and development activities in 2005, 2004 and 2003, respectively. Asof December 31, 2005, we had 137 employees in research and development.

**Technology**

Our technologyefforts focus on creating new solutions and enhancing the reliability,availability and features of our existing solutions while maintaining ascalable and cost-effective architecture. Our proprietary technologies aredesigned to work with technologies from other companies. We expect to continueto develop additional proprietary technology where feasible and to purchase orlicense technology where cost-effective. Our technology efforts focus on thefollowing areas:

·       *Access andInternet technology.  *The delivery of our solutions can becomplex in part because it involves the continuous collection, storage andprocessing of data from subscribers in the field and from work order andcustomer service systems deployed by our customers, as well as the processing ofrequests 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.

·       *Softwareapplications.  *We have a software development organization thatdesigns, builds and tests new software for use with our solutions. Thisorganization includes personnel and other resources in Fremont, California,Ipswich, England and Chennai, India. We have created a specially designedenvironment that is intended to accelerate the development and testing of newsoftware 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.

·       *Wirelesstechnology.  *Our hosted solutions currently operate on severalwireless networks offered by a number of wireless carriers, including GPRS,CDMA 1XRTT, EDGE, EvDO, and IntegratedDigital Enhanced Network (“iDEN”). Certain of our hosted solutions also aredesigned 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 andRelationships**

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:

·       *Wirelesscarriers.  *We have established relationships with BellMobility, Cingular Wireless (which acquired AT&T Wireless, and thereforeour 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:

·       *Strategicsales force.  *We have a team of sales employees focused onmarketing and selling our solutions to enterprise accounts. Enterprise accountsare defined as prospects with greater than 1,000 mobile resources. The salesprocess with enterprise accounts often requires many months of activity, iscompetitive and requires a pilot test of our solutions. This sales forceincludes personnel in the United States, Europe and Australia.

·       *Majoraccount sales force.  *We have a team of sales employees focusedon marketing and selling our solutions to major accounts. Major accounts aredefined as customers with 101 to 1,000 mobile resources. This sales force isgeographically dispersed throughout the United States and in the UnitedKingdom.

·       *Inside salesforce.  *We have a team of sales employees focused on marketingand selling our solutions to small business customers and selling additionalsolutions to existing customers. This sales force is located in Fremont,California.

·       *Agent salesforce.  *We have a team of sales employees who manage a networkof sales agents focused on marketing and selling our solutions. These salesagents are geographically dispersed throughout the United States. Participantsin the agent sales program are compensated for the sales of our solutions. Salesagents facilitate sales of our solutions through their own efforts and workwith wireless carrier alliances to increase our customer base.

·       *Wirelesscarrier sales force.  *We have a team of sales employees focusedon marketing and selling our solutions with the sales personnel of wirelesscarriers. These wireless carriers include Cingular Wireless, Sprint and VerizonWireless. These carrier alliances market or facilitate sales of our 

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solutions throughtheir own sales channels or work with our dedicated wireless carrier salesforce to increase 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 $11.4million on sales and marketing activities in 2005, 2004 and 2003, respectively.As of December 31, 2005, our sales and marketing team consisted of 117employees.

**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 unableto compete 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:

·       Solutions developedinternally by our prospective customers’ information technology staffs,particularly by large companies;

·       Discrete means ofcommunication with mobile workers, such as pagers, two-way radios, hand-helddevices and wireless telephones;

·       Solutions targeted atspecific vertical markets, such as services offered by Qualcomm that monitorassets in the long-haul transportation sector;

·       Solutions designed to helpcompanies schedule and route their mobile workers; and

·       Solutions offered bysmaller market entrants.

Many of our existing and potential competitors havesubstantially greater financial, technical, marketing and distributionresources than we do. Additionally, many of these companies have greater namerecognition and more established relationships with our target customers. Furthermore,these competitors may be able to adopt more aggressive pricing policies andoffer customers more attractive terms than we can.

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**Raw Materials**

See the risk factor under Item 1A below entitled“We depend on a limited number of third parties to manufacture and supplycertain components of our solutions,” which is incorporated herein by thisreference.

**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 ourhosted solutions 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 ourproprietary rights may not be adequate.

Third parties may claim that our current or futureproducts or services infringe their proprietary rights or assert other claimsagainst us. As the number of entrants into our market increases, thepossibility of an intellectual property or other claim against us grows. Anyintellectual property or other claim, with or without merit, would betime-consuming and expensive to litigate or settle and could divert managementattention from focusing on our core business. As a result of such a dispute, wemay have to pay damages, incur substantial legal fees, develop costlynon-infringing technology, if possible, or enter into license agreements, whichmay not be available on terms acceptable to us, if at all. Any of these resultswould increase our expenses and could decrease the functionality of our solutions,which would make our solutions less attractive to our current or potentialcustomers. We have agreed in some of our agreements, and may agree in thefuture, to indemnify other parties for any expenses or liabilities resultingfrom claimed infringements of the proprietary rights 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 segments aremanaged separately because each offers different products and 

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serves different segments of the market. The Hostedsegment provides FFM and FAM solutions that connect mobile workers in the fieldto corporate data on demand, help measure overall mobile workforce performanceand manage mobile assets. The Licensed segment provides customers with our FSMsolution, which is designed to enable a predictable and reliable customerexperience from commitment to service fulfillment; and to help synchronize thecall center and field service operations.

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 of financial information aboutgeographic areas as well as our segments, see “Note 12—Segment Reporting”to our consolidated financial statements incorporated herein.

**Available Information**

Our primary Internet address is *www.road.com*.We make our periodic SEC reports (Forms 10-Q and Forms 10-K) andcurrent reports (Forms 8-K) available free of charge through our websiteas soon as reasonably practicable after they are filed electronically with theSEC. We may from time to time provide important disclosures to investors byposting them in the investor relations section of our website, as allowed bySEC 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 potential impairment charge could have amaterial impact on the combined company’s results of operations and could havea material adverse effect on the market value 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 consuming migrationfrom CDPD, to the protocols set forth above, after wireless communicationsproviders abandoned their CDPD networks in favor of newer technology. Ifwireless communications providers abandon the protocols upon which oursolutions now function in favor of other types of wireless technology, we maynot be able to provide services to our customers, or we may be forced to incurconsiderable costs in order to adapt our solutions to new protocols. Inaddition, if cellular carriers do not expand their coverage areas, we will beunable to meet the needs of customers who may wish to use our services outsidethe 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 internalcontrol over our financial reporting, we identified two internal controldeficiencies that constituted material weaknesses. The first material weaknessconcerned our interpretation and implementation of various complex accounting principlesin the 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:

·       quarterly variations inoperating results;

·       failure to achieveoperating results anticipated by securities analysts and investors;

·       changes in estimates of ourfinancial performance or changes in recommendations by securities analysts;

·       announcements oftechnological or competitive developments;

·       the gain or loss of asignificant customer or order;

·       disposition of shares ofour common stock held by large investors; and

·       acquisitions or strategicalliances 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:

·       solutions developedinternally by our prospective customers’ information technology staff,particularly by large customer prospects;

·       discrete means ofcommunication with mobile workers, such as pagers, two-way radios, handhelddevices and cellular telephones;

·       solutions targeted atspecific vertical markets, such as a service offered by Qualcomm that monitorsassets in the long-haul transportation sector;

·       solutions designed to helpcompanies schedule and route their mobile workers; and

·       solutions offered bysmaller market entrants, many of which are privately held and operate on aregional 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 andresources.  *Many of our current and potential competitors haveaccess to substantially greater financial, marketing, distribution, engineeringand manufacturing resources than we do, which may enable them to react moreeffectively to new market opportunities and customer requirements. Furthermore,these competitors may be able to adopt more aggressive pricing policies andoffer more attractive terms than we can.

·       *Namerecognition.  *Many of our current and potential competitorshave greater name recognition and market presence than we do, which may allowthem to more effectively market and sell solutions to our current and potentialcustomers.

·       *Limits ofproduct and service offerings.  *Although we offer a broad rangeof mobile resource management solutions, a customer prospect may requirefunctionality that we do not offer, which may enable current and potentialcompetitors to exploit the areas in which we do not develop solutions.

·       *Customerrelationships.  *Many of our current and potential competitorshave pre-existing relationships with our large customer prospects, which mayallow them to more effectively market and sell competitive MRM 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 terminationfee if it chooses to terminate the contract before the contract period expires.Once the 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:

·       changes in the market forMRM solutions;

·       delays in market acceptanceor implementation of our solutions by customers;

·       changes in length of salescycles of, or demand by, our customers for existing and additional solutions;

·       changes in the productivityof our distribution channels;

·       introduction of newsolutions by us or our competitors;

·       changes in our pricingpolicies or those of our competitors or suppliers;

·       changes in our mix ofsources of revenues;

·       general economic andpolitical conditions;

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·       wireless networks,positioning systems and Internet infrastructure owned and controlled by others;and

·       any need to migrate to newwireless networks, which could cause our solutions to be incompatible with newwireless 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 oursolutions, and our business and operating results will be adversely affected. Ifour enhancements to existing solutions do not deliver the functionality thatour customer base demands, our customers may choose not to renew theiragreements with us when they reach the end of their initial contract periods,and our business 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 orincrease profitability 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 $79.1 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 inour pricing 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:

·       diversion of management’sattention from our core business objectives and other business concerns;

·       failure to integrateefficiently businesses or technologies acquired in the future with ourpre-existing business or technologies;

·       potential loss of keyemployees from either our pre-existing business or the acquired business;

·       dilution of our existingstockholders as a result of issuing equity securities; and

·       assumption of liabilitiesof 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 or adverselyimpact the operations of our customers, we could be subject to claims,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 the transmission of data to and fromwireless modems used with our solutions. These effects could make our servicesless reliable and less useful, and customer satisfaction 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.

**The productionor reporting of inaccurate information could cause the loss of customers andexpose 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 retain qualifiedpersonnel with expertise in wireless communications, GPS technologies, hostedsoftware applications, transaction processing and the Internet. Competitors andothers have recruited our employees in the past and may attempt to do so in thefuture. In addition, new employees generally require substantial training,which requires significant resources and management attention. Even if weinvest significant resources to recruit, train and retain qualified personnel,there can be no assurances that we will be successful 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 to certainsubscriber information, or safety standards, for example with respect to humanexposure 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 the applicationof existing laws may expose us to significant liabilities and additionaloperational requirements, which could decrease the demand for our solutions andincrease our cost of doing business. Wireless communications providers whosupply us with airtime are subject to regulation by the Federal CommunicationsCommission, and regulations that affect them could also increase our costs orlimit 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 incur currency exchange costs. Inaddition, some of our transactions denominated in United States dollars may besubject to currency exchange rate risk. We cannot predict the effect ofexchange rate fluctuations on our future operating results. Should there be asustained increase in average exchange rates for the local currencies in thesecountries, our suppliers and manufacturers may request a price increase at theend 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:

·       establishing a classifiedboard in which only a portion of the total board members will be elected ateach annual meeting;

·       authorizing the board toissue preferred stock;

·       prohibiting cumulativevoting in the election of directors;

·       limiting the persons whomay call special meetings of stockholders;

·       prohibiting stockholderaction by written consent; and

·       establishing advance noticerequirements for nominations for election to the board of directors or forproposing matters that can be acted on by stockholders at stockholder meetings.

We have adopted a certificate of incorporation thatpermits our board to issue shares of preferred stock without stockholderapproval, which means that our board could issue shares with special votingrights or other provisions that could deter a takeover. In addition to delayingor preventing an acquisition, the issuance of a substantial number of shares ofpreferred stock could adversely affect the price of our common stock and diluteexisting stockholders.

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

None.

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**Item 2.**                          *Properties*

We have offices inCalifornia, 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 the accounting treatment of ourleased properties, see “Note 13—Commitments and Contingencies” to ourconsolidated financial statements, included elsewhere in this Report.

**Item 3.**                          *LegalProceedings*

From time to time, we institute or are subject toclaims in legal proceedings arising in the normal course of our business. We donot believe that we are party to any pending legal action that could reasonablybe expected to have a material adverse effect on our business, financialcondition, or operating results.

**Item 4.**                          *Submissionof 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**

Our common stockhas been listed for quotation on the NASDAQ National Market under the symbol“ARDI” since our initial public offering on September 28, 2000. Thefollowing 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 our common stock has been and maycontinue to be subject to wide fluctuations in response to a number of eventsand factors, such as quarterly variations in our operating results,announcements of technological innovations or new products or services orcustomers by us or our competitors, changes in financial estimates andrecommendations by securities analysts, the operating and stock performance ofother companies that investors may deem comparable to us, and news reportsrelating to trends in our markets. In addition, the stock market in recentyears 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**

On February 18, 2005, we issued (a) approximately5,454,000 shares of our common stock, par value $0.0001 per share, (b) approximately24,000 shares of our Series A 1 Redeemable Preferred Stock, $0.001 par valueper share, (c) approximately 44,000 shares of our Series A 2 RedeemablePreferred Stock, $0.001 par value per share, (d) approximately 5,000shares of our Series B 1 Redeemable Preferred Stock, $0.001 par value pershare, and (e) approximately 5,000 shares of our Series B 2 RedeemablePreferred Stock, $0.001 par value per shares, all in connection with ouracquisition of all the outstanding capital stock of Vidus. The fair values ofissued common and non-convertible redeemable preferred stock as purchaseconsideration for Vidus stock were $24.7 million and $12.9 million,respectively. These issuances were 

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made in reliance onRegulation S promulgated under the Securities Act of 1933, as amended (the“Securities Act”) and on Section 4(2) of the Securities Act, and weremade without general solicitation or advertising. Shares issued in reliance onSection 4(2) of the Securities Act were issued only to accreditedinvestors. Shares issued in reliance on Regulation S were issued in an“offshore transaction’’ as defined under Regulation S, to persons otherthan “U.S. Persons.’’ Such persons represented to us that they would resell theshares only in compliance with Regulation S. The certificates evidencingthose shares bear a legend restricting transfer except pursuant toRegulation S.

**IssuerPurchases of Equity Securities**

We did not repurchase any of our equity securitiesduring the quarter ended December 31, 2005.

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

The selectedconsolidated financial data set forth below should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, the consolidated financial statements, the related notes and otherinformation contained in this Report. The information as of and for the year endedDecember 31, 2005 has been restated to reflect corrections to the OriginalFiling that are further discussed in the section entitled “Explanatory Note” inthe forepart of this Annual Report on Form 10-K/A and “Note 17—Restatementof Financial Statements” to the Consolidated Financial Statements inPart IV, Item 15 of this Annual Report on Form 10-K/A.

|                                                                               | ** ** | **Years Ended December 31,**                           | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005(1)**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                    | ** ** | **(As Restated)**                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **(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                                                    |       | 37,794                                                                |       | — |   | — |   | — |   | — |   |
| Net income (loss)                                                             |       | 27,911                                                                |       | 9,221 |   | 1,662 |   | (14,237 | ) | (38,647 | ) |
| Preferred stock  dividends                                                    |       | (436                                                                  | )          | — |   | — |   | — |   | — |   |
| Net income (loss)  attributable to common stockholders                        |       | $                                                                     | 27,475     |   | $ | 9,221 |   | $ | 1,662 |   | $ | (14,237 | ) | $ | (38,647 | ) |
| Net income (loss) per  share:                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                         |       | $                                                                     | 0.46       |   | $ | 0.17 |   | $ | 0.03 |   | $ | (0.31 | ) | $ | (0.88 | ) |
| Diluted                                                                       |       | $                                                                     | 0.45       |   | $ | 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 |   |

 

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|                                                       | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2005(1)**                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                            | ** ** | **As Restated**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(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                                          |       | 246,286                               |       | 152,210 |   | 139,016 |   | 70,550 |   | 78,474 |   |
| Redeemable preferred  stock                           |       | 8,184                                 |       | — |   | — |   | — |   | — |   |
| Total stockholders’  equity                      |       | $                                     | 186,172    |   | $ | 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 | ) |

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

**Item 7.**                          *Management’sDiscussion and Analysis of Financial Condition and Results of 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 Annual Report on Form 10-K/A under the “Risk Factors,” and “Business”sections, elsewhere in this Report and in our other filings with the SEC.

**Restatement**

We have restated our consolidated financial statementsfor the year ended December 31, 2005 to correct an error in the benefit forincome taxes related to the treatment of interest received on investments ingovernment home loan securities as tax-exempt when it was in fact taxable. Theimpact of the restatements on our consolidated financial statements for theyear ended December 31, 2005 is discussed in “Note 17—Restatement of FinancialStatements” to the Consolidated Financial Statements included elsewhere in thisAnnual Report on Form 10-K/A. All information included in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations has been correspondingly corrected to give effect to suchrestatement.

In addition, the consolidated financial statements forthe interim periods in 2005 have been restated to reflect the effects of aderivative embedded in the redeemable preferred stock issued in connection withthe acquisition of Vidus, the correction of an error in the tax provision relatingto the reversal of the valuation allowance and the correction of theaforementioned error in the treatment of interest received on certaininstruments. See “Note 18—Quarterly Financial Data” to our consolidatedfinancial statements, included elsewhere in this Report, for furtherdiscussion.

**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 companiesbetter manage 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 of our operations in twosegments: Hosted and Licensed. The segments are managed separately because eachoffers different products and serves different segments of the market. TheHosted segment provides the FFM and FAM solutions that connect mobile workersin the field to corporate data on demand, help measure overall mobile workforceperformance and manage mobile assets. The Licensed segment provides customerswith our FSM solution, which is designed to enable a predictable and reliablecustomer experience from commitment to service fulfillment; and to helpsynchronize the call center and field service operation.

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 goodwill resultingfrom the acquisition totaled $13.3 million. See “Note 1—Organization andSummary of Significant Accounting Policies” and “Note 3—Business Combinations,Goodwill and Intangible Assets” to our consolidated financial statements,included elsewhere in this Annual Report on Form 10-K/A.

For the year ended December 31, 2005, it wasdetermined that a valuation allowance reported against our deferred tax assetswas no longer necessary based on our evaluation of current evidence and itseffect on our estimate of future taxable income. Accordingly, we reversed ourdeferred tax valuation allowance with respect to approximately $42.9 million ofour deferred tax assets, of which approximately $36.1 million was recorded as abenefit in the statement of operations and $6.8 million related to excess taxbenefits from stock option deductions for which the benefit was recognized as acomponent of stockholders’ equity.

**CriticalAccounting Policies, Judgments and Estimates**

***General***

The accompanying discussion and analysis of ourfinancial condition and results of operations are based on our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. We believe thereare several accounting policies that are critical to understanding ourconsolidated financial statements as these policies affect the reported amountsof revenue and expenses and involve management’s judgment regarding significantestimates. We have based our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Our senior management has reviewed our critical accounting policiesand their application in the preparation of our financial statements andrelated disclosures and discussed the development, selection and disclosure ofsignificant estimates with the Audit Committee of our Board of Directors. Tothe extent that actual results differ from those estimates, our future resultsof 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.

For projects thatwere not complete as of December 31, 2005, 2004 and 2003, the followingtable illustrates the total direct labor hours incurred as a percentage ofestimated total direct labor hours required to complete these projects.

|                                                                                                                       | ** ** | **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 

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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 with multiple elements, such aslicenses, customization services and PCS services, we allocate revenue to eachelement based upon its fair value as determined by VSOE. VSOE for each elementis based on normal pricing and discounting practices when the element is soldseparately. VSOE for PCS services is measured by the stated renewal rate. If wecannot objectively determine the fair value of any undelivered element includedin license arrangements, we defer revenue until the earliest to occur of thefollowing: (a) all elements are delivered, (b) all services have beenperformed or only PCS services remain to be delivered, or (c) fair valuecan objectively be determined. When the fair value of a delivered element hasnot been established, we use the residual method to record license revenue ifthe fair value of all undelivered elements is determinable. Under the residualmethod, the fair value of the undelivered elements is deferred and theremaining portion of the fee is allocated to the delivered elements and isrecognized as revenue assuming all other 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 not limitedto, the cash flows that an asset is expected to generate in the future and theappropriate weighted average cost of capital.

At December 31, 2005, our goodwill totaled $13.3 millionand our identifiable intangible assets totaled $27.3 million. In accordancewith the provisions of SFAS 142, *Goodwilland Other Intangible Assets*, we assess the impairment of goodwilland indefinite lived identifiable intangible assets of our reportable units atleast annually, or more often if events or changes in circumstances indicatethat the carrying value may not be recoverable. This assessment is based upon adiscounted cash flow analysis and analysis of our market capitalization. Theestimate of cash flow is based upon, among other things, certain assumptionsabout expected future operating performance and an appropriate discount ratedetermined by our management. Our estimates of discounted cash flows may differfrom actual cash flows due to, among other things, economic conditions, changesto the business model or changes in operating performance. Significantdifferences between these estimates and actual cash flows could materiallyaffect our future financial results. We conducted our initial annual impairmenttest as of August 31, 2005 and determined there was no impairment. During the fourth quarter of 2005, we determinedthat the acquired Vidus trade name was impaired and as a result, reduced thecarrying value of the trade name to zero. There were no other events orcircumstances, except for the impairment of the Vidus trade name, from August 31,2005 through December 31, 2005 indicating that a further assessment wasnecessary.

27

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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.

The nature of ourrelationship with customers is inherently long-term and we have extended andmay extend payment terms on an exception basis. We regularly review ourcustomers’ ability to satisfy their payment obligations and provide anallowance 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, exceptpercentages).

|                                                                      | ** ** | **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, ouractual 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 substantial deferred tax assets that relate toprior periods’ losses, primarily in the United States and the United Kingdom.We evaluate these deferred tax assets in each tax jurisdiction by estimatingthe likelihood of generating future profits to realize these assets. In bothjurisdictions, we have concluded that it is more likely than not that we willgenerate sufficient future taxable income to realize these deferred tax assets.A valuation allowance has been established for deferred tax assets which we donot believe meet the more likely than not criteria established by Statement ofFinancial Account Standards No. 109, *Accounting for IncomeTaxes* This evaluation of whether it is more likely than not thatsuch deferred tax assets will be realized must be continuously evaluated due tochanges in market conditions, changes in tax laws, tax planning strategies orother factors. To the extent we establish a valuation allowance or change theallowance in a period, we reflect the change with a corresponding increase ordecrease in our tax provision in our consolidated statement of operations. AtDecember 31, 2005, we maintained an allowance on certain state netoperating losses and state tax credits based on our assessment that it is morelikely than not that the deferred tax asset related to these items will not berealized. The deferred tax asset, net of a valuation allowance of $334,000,totaled $47.2 million as of December 31, 2005 and was offset by deferredtax liabilities of $6.2 million.

 

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

The followingtable sets forth selected statements of operations data as a percentage of ourtotal 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                                                    |       | 40.7                                        |       | — |   | — |   |
| Net income                                                                    |       | 30.1                                        |       | 12.3 |   | 2.6 |   |
| Preferred stock  dividends                                                    |       | (0.5                                        | )          | — |   | — |   |
| Net income attributable  to common stockholders                               |       | 29.6                                        | %          | 12.3 | % | 2.6 | % |

 

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

Hosted grossmargin 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$48.56 for the same period in 2004. The decrease of $1.87 is primarily theresult of new subscribers being added utilizing an unbundled arrangement.

From 2003 to 2004, 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 133,000 and 125,000 at December 31, 2004 and2003, respectively. Average monthly hosted revenue per subscription wasapproximately $48.56 for the year ended December 31, 2004, down from$49.19 for the same period in 2003. The decrease of $0.63 is primarily theresult of new subscribers being added utilizing an unbundled arrangement.

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*Cost of HostedRevenue (excluding intangibles amortization)*

|                                                              | ** ** | **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 of hosted revenue decreasedprimarily as a result of decreases in the provision for inventory obsolescenceof $1.2 million, other cost of products of $692,000 associated with lowerproduct returns and direct service delivery expenses of $243,000, partiallyoffset by an increase in employee-related expenses of $1.0 million and deferredcost of revenues recognized of $805,000, consistent with growth in subscribersusing our solutions.

*Hosted GrossMargin*

|                                    | ** ** | **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 insubscribers using our solutions which accounted for 3% of the increase; andintangibles becoming 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,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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,**           | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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 (excluding intangiblesamortization) consists of employee related expenses in relation to installationservices and the support of our ongoing PCS commitments. We expect the cost oflicensed revenue to increase over the next twelve months as headcount increasesand we continue to invest in fixed assets and infrastructure to support thissegment.

*Licensed GrossMargin*

|                                       | ** ** | **Years Ended December 31,**           | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                            | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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 was 35% in 2005 due in part tothe amortization of intangible assets (discussed below). Direct expensesgenerally increase at a rate proportional to the growth in our end users.Personnel costs and depreciation expenses generally increase at a rate slowerthan the growth rate of our end users.

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Amortization ofintangible 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,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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 tothe intangible assets purchased from Differential Corrections, Inc. in April 2000and ConnectBusiness.com, Inc. in September 2002. The costs wereamortized over their estimated useful lives of three and two years,respectively. As of December 31, 2004, these intangibles were fullyamortized.

***In-process Research and Development***

|                                      | ** ** | **Years Ended December 31,**           | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                           | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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-processresearch and development consisted of research projects undertaken by Vidusprior to its acquisition by us that had not reached technological feasibilityand had no alternative future use at the time of the acquisition of Vidus. Inorder to achieve technological feasibility, we estimated the time required tocomplete the projects to cost approximately $5.7 million. We estimated the fairvalue 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 in2005. In 2005 expenditures to complete the acquired in-process research anddevelopment approximated the original estimates.

***Impairment of Intangible Assets***

|                                    | ** ** | **Years Ended December 31,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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 quarter of 2005, managementdetermined that Vidus would officially change its name to @Road, Ltd. As aresult, we reduced the carrying value of the Vidus trade name to zero resultingin an impairment charge of $2.3 million. The impairment charge is included inImpairment of Intangible Assets in our Statement of Operations.

***Sales and Marketing***

|                                    | ** ** | **Years Ended December 31,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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, sales and marketing expensesincreased primarily as a result of increases in employee-related expenses of$1.3 million and travel expenses of $238,000, partially offset by decreases insales commission of $420,000 and promotional expenses of $324,000. Sales andmarketing headcount increased to 103 at December 31, 2004 from 86 at December 31,2003.

***Research and Development***

|                                    | ** ** | **Years Ended December 31,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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 expensesincreased primarily as a result of increases in employee-related expenses of$454,000 and external development expenses of $387,000. Research anddevelopment headcount increased to 84 at December 31, 2004 from 56 at December 31,2003.

***General and Administrative***

|                                    | ** ** | **Years Ended December 31,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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 doubtful accounts decreased$674,000, $724,000 and $127,000 in 2005, 2004 and 2003, respectively. The decreasesin the allowance are primarily due to non-recurring favorable adjustments as aresult of improvements in the collection history in our customer base thatoccurred during 2005, 2004 and 2003. We anticipate that the allowance fordoubtful accounts will remain relatively stable in future periods.

***TerminatedAcquisition Costs***

|                                    | ** ** | **Years Ended December 31,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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, we entered into a CombinationAgreement with MDSI Mobile Data Solutions, Inc. (“MDSI”) providing for theacquisition of MDSI. On July 27, 2004, the parties mutually agreed toterminate the Combination Agreement. As a result, for the year endedDecember 31, 2004, we expensed approximately $2.1 million ofacquisition-related costs.

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

|                                            | ** ** | **Years Ended December 31,**           | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **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 from 2003 to 2004, total otherincome (expense), net increased primarily due to larger invested balances andhigher rates of return in 2004 and 2005. In 2005, we also recorded benefits of$2.3 million in relation to a derivative instrument embedded in theredeemable preferred stock issued as part of the Vidus acquisition. In 2003,interest expense consists primarily of interest expense related to thefinancing of directors’ and officers’ insurance costs. In 2005, 2004 and 2003,other income (expense), net consisted primarily of immaterial net foreigncurrency exchange losses and gains resulting from transactions with ourwholly-owned subsidiaries in India and in the United Kingdom. We conductoperations primarily within the United States where inflation during 2005, 2004and 2003 has been low and has not materially impacted our operating results.Foreign currency exchange gains were expensed as incurred.

***Benefitfrom Income Taxes***

|                                    | ** ** | **Years Ended December 31,**           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**                                              | ** ** | **change** | ** ** | **2004** | ** ** | **change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentages)** | ** ** |
| Benefit from  income taxes         |       | $                                                     | 37,794     |   | 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 toapproximately $42.9 million of our deferred tax assets, of whichapproximately $36.1 million was recorded as a benefit in the statement ofoperations and $6.8 million related to excess tax benefits from stockoption deductions for which the benefit was recognized as a component ofstockholders’ equity. An income tax benefit of $3.3 million was recordedfor 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’ net operatingloss carry forwards; therefore, no income tax expense was provided.

Historically, we have adequately provided for actualtax liabilities. Unexpected or significant future changes in trends couldresult in a material impact to future consolidated statements of operations andcash flows.

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***Preferred StockDividends***

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

 

Preferred stock dividends consist of dividends onredeemable preferred stock issued by us in connection with the acquisition ofVidus. The holders of our preferred stock are entitled to receive dividends atthe rate of $6.50 per share annually. The dividends accrue day to day, whetheror not earned or declared, from the date of the acquisition. The dividends arepayable when and if declared by the Board of Directors or upon redemption ofthe preferred stock. Any accumulation of unpaid dividends on the preferredstock does not bear interest.

37

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**Quarterly Results of Operations (unaudited)**

The followingtable presents certain unaudited consolidated statement of operations data forour eight most recent fiscal quarters. The information for each of thesequarters is unaudited and has been prepared on the same basis as our auditedconsolidated financial statements appearing elsewhere in this Report. In theopinion of our management, all necessary adjustments, consisting only of normalrecurring adjustments, have been included to present fairly the unauditedquarterly results when read in conjunction with our consolidated financialstatements and related notes included elsewhere in this Report. We believe thatresults of operations for interim periods should not be relied upon as anyindication of the results to be expected or achieved in any future period orany fiscal year as a whole.

|                                                                               | ** ** | **Quarters Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                    | ** ** | **December 31,**   | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
| ** **                                                                    | ** ** | **2005**                | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** | **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)(3)                                               |       | 777                     |       | 33,822 |   | 3,195 |   | — |   | — |   | — |   | — |   | — |   |
| Net income (loss)(1)(3)                                                       |       | 2,301                   |       | 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)(3)                  |       | $                       | 2,170      |   | $ | 37,874 |   | $ | (4,393 | ) | $ | (8,176 | ) | $ | 2,115 |   | $ | 2,930 |   | $ | 1,066 |   | $ | 3,110 |   |

----

(1)                The consolidated statement of operations forthe periods ended September 30, 2005, June 30, 2005 andMarch 31, 2005 have been restated to reflect the effects of a derivativeembedded in the redeemable preferred stock issued in connection with theacquisition of Vidus, and the correction of an error in the tax provision relatingto the reversal of the valuation allowance for the period endingSeptember 30, 2005. See “Note 18—Quarterly Financial Data” to ourconsolidated financial statements included elsewhere in this Report, forfurther discussion.

(2)                On February 18, 2005, we completedthe acquisition of Vidus. Financial information, including the results ofoperations, for Vidus is included from the date of acquisition.

(3)                The consolidated financial statements forthe period ended December 31, 2005 have been restated to reflect the effect ofthe error resulting from the improper treatment of interest income ongovernment home loan securities as tax-exempt when it was in fact taxable. See“Note 17—Restatement of Financial Statements” to our consolidated financialstatements included elsewhere in this Report, for further discussion.

38

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**Liquidity and Capital Resources**

|                                                       | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                  | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| **(In thousands, except percentages)** | ** ** | **2005**                                    | ** ** | **change** | ** ** | **2004** | ** ** | **change** | ** ** | **2003** | ** ** |
| Net income                                            |       | $                                           | 27,911     |   | 203 | % | $ | 9,221 |   | 455 | % | $ | 1,662 |   |
| Non-cash  (benefits) charges                          |       | (26,166                                     | )          | (1,478 | )% | 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 millionof cash and cash equivalents and $77.6 million of short-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 $44.7 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 purchaseshort-term investments, $6.9 million used for the acquisition of Vidus,net of cash acquired and $4.2 million used to purchase property andequipment. Cash used in investing activities in 2004 and 2003 were dueprimarily to the movement of cash between cash and investments and the purchaseof property and equipment. Purchases of property and equipment totaled $2.7 millionand $1.5 million in 2004 and 2003, respectively. Purchases of property andequipment related mainly to purchases of computer equipment and software tosupport our growth in operations, infrastructure and headcount. We currently donot have any material commitments for capital expenditures, although weanticipate increases in capital expenditures and lease commitments with ourexpected growth in operations and infrastructure over the next twelve months. Wealso may establish additional 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 existing cash, cash equivalents andshort-term investments, together with any cash generated from operations, willbe sufficient to fund our operating activities, capital expenditures and otherobligations for at least the next twelve months.

**Commitments and Contingencies**

We have certainfixed contractual obligations and commitments that include future estimatedpayments. Changes in our business needs, cancellation provisions, changinginterest rates, and other factors may result in actual payments differing fromthe estimates. We cannot provide certainty regarding the timing and amounts ofall payments. We have presented below, a summary of the most significantassumptions used in our determination of amounts presented in the tables inorder to assist in the review of this information within the context of our consolidatedfinancial position, results of operations and cash flows. The following tablesummarizes our fixed contractual obligations as of December 31, 2005 (inthousands):

|                                    | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                         | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **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)             Operatinglease commitments include minimum rental payments under our non-cancelableoperating leases for office facilities, as well as limited office equipmentthat we utilize under lease arrangements. The amounts presented are consistentwith contractual 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)             Capitallease obligations and financing lease obligations are included in the balancesheet under property, plant and equipment, net and primarily include minimumrental payments under our non-cancelable leases for office equipment andfurniture.

(3)             Otherpurchase obligation amounts include minimum purchase commitments for marketing,computer equipment, software applications, engineering development services andother goods and services that were entered into in the ordinary course ofbusiness. Purchase obligations include agreements that are cancelable withoutpenalty. Certain of these contractual arrangements contain significantperformance requirements. Given the significance of the performancerequirements, actual payments could differ significantly from these estimates.

(4)             Inventorypurchase commitments include minimum payments under non-cancelable commitmentsfor goods that 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 furtherdiscussion.

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**Off-Balance Sheet Arrangements**

As of December 31, 2005, we had no off-balancesheet arrangements that have had, or are reasonably likely to have, a currentor future material effect on our consolidated financial condition, results ofoperations, liquidity, capital expenditures or capital 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, areplacement of 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 as prescribedby Accounting Principles Board (“APB”) Opinion No. 25,*Accountingfor Stock Issued to Employees*, and generally requires that suchtransactions be accounted for using a fair value based method and recognized asexpense in the consolidated statement of operations. The statement requirescompanies to assess the most appropriate model to calculate the value of theoptions. We currently use the Black-Scholes option pricing model to valueoptions and are assessing which model we may use upon adoption of such standard.The use of an alternative model to value options may result in a different fairvalue than the use of the Black-Scholes option pricing model.

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 ourconsolidated net income attributable to common stockholders within ourfootnotes, as is our current practice.

In November 2004, the FASB issued SFAS No. 151,*Inventory Costs, an amendment of APB No. 43,Chapter 4* (“SFAS 151”). SFAS 151 clarifies that abnormal inventorycosts such as the costs of idle facilities, excess freight and handling costs,and wasted materials (spoilage) are required to be recognized as current periodcharges. The provisions of SFAS 151 are effective for fiscal years beginningafter July 1, 2005. We do not expect that the adoption of SFAS 151, whichwe will implement beginning on January 1, 2006, will have a materialimpact on our consolidated statement of operations and financial condition.

**Item 7A.**                 *Quantitative andQualitative 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 and reinvestmentrisk. We mitigate default risk by investing in high credit quality securitiesand by positioning our portfolio to respond appropriately to a significantreduction in a credit rating of any investment issuer or guarantor. Theportfolio includes only marketable securities with active secondary or resalemarkets 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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The table belowpresents the carrying value and related weighted average rate of return for ourcash, cash equivalents and debt securities. The carrying values approximatefair values as of December 31, 2005 and December 31, 2004. As of December 31,2005, debt securities consisted of $25.8 million with original maturitydates of 90 days or less and $77.6 million with original maturity dates ofgreater than 90 days. As of December 31, 2004, debt securitiesconsisted of $14.5 million with original maturity dates of 90 days orless and $103.2 million with original maturity dates of greater than90 days.

|                                                                             | ** ** | ** **              | ** ** | **Average**           | ** ** | ** **              | ** ** | **Average**           | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **Carrying**            | ** ** | **rate of**      | ** ** | **Carrying**            | ** ** | **rate of**      | ** ** |
| ** **                                                                  | ** ** | **value at**       | ** ** | **return at**    | ** ** | **value at**       | ** ** | **return at**    | ** ** |
| ** **                                                                  | ** ** | **December 31,**   | ** ** | **December 31,** | ** ** | **December 31,**   | ** ** | **December 31,** | ** ** |
| ** **                                                                  | ** ** | **2005**                | ** ** | **2005**              | ** ** | **2004**                | ** ** | **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 derivative financial instruments forspeculative trading purposes, nor do we currently hedge any foreign currencyexposure to offset the effects of changes in foreign exchange rates. Similarly,we do not use financial instruments to hedge operating expenses of oursubsidiaries 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 millionless the greater of (i) $38.0 million or (ii) 5.6 million, multipliedby the highest average closing sale price of our common stock for any tenconsecutive trading day period from September 25, 2005 to September 25, 2006plus $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 instrumentliability of $2.3 million was recorded as a benefit to income for the yearended December 31, 2005.

Based on the highest ten consecutive trading daysaverage closing price of our common stock of $5.44 per share through December31, 2005, the aggregate top-up amount, as if determined on December 31,2005, is $8.7 million. The top-up amount will further decrease if, and tothe extent that, the average closing price of our common stock for any tenconsecutive trading day period ending on or before September 25, 2006 isgreater than $5.44 per share.

**Item 8.**                          *FinancialStatements and Supplementary Data*

See Part IV, Item 15 of 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 and proceduresas defined in Rule 13a-15(e) of the Securities Exchange Act of1934 as amended (“Exchange Act”). As part of our evaluation, we consideredfactors such as whether data, if any, concerning significant changes to ourbusiness, 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 control system, no matter how wellconceived and implemented, can provide only reasonable assurance that theobjectives of such control system are satisfied. Because of the inherent

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limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues, if any, within the company have been detected. The Companydid design into its process safeguards to reduce, though not eliminate, thisrisk.

**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) the valuation of Vidus’ deferred revenue, (iii) revenuerecognition of a pre-existing customer contract, (iv) deferred taxliability, asset and valuation allowance and (v) embedded derivatives. Thephrase “certain significant customer contracts” refers to the pre-existingVidus customer contract noted above and a customer contract to provide ourmobile resource management solutions, which included more complex contractualelements than are typically found in our customer agreements. The materialweakness relates to these transactions, including the process of determiningthe proper accounting to be applied to activities occurring under theagreements and, with respect to the Vidus acquisition, certain estimates andassumptions.

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. Additionally, in the course ofpreparing our federal income tax returns for 2005 during the quarter endedJune 30, 2006, we determined that our audited consolidated financialstatements for the year ended December 31, 2005 contained an error in thebenefit from income taxes resulting from the improper treatment of interestincome on government home loan securities as tax-exempt when it was in fact taxable.This deficiency in operation of internal control over financial reporting doesnot affect any periods prior to the fourth quarter of 2005 and the resultingadjustments were made in our financial statements for the period endedDecember 31, 2005 in this Annual Report on Form 10-K/A.

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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 materialmisstatement of the annual or interim financial statements will not beprevented or detected.

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’s assessment of the effectiveness ofour internal control over financial reporting as of December 31, 2005 hasbeen audited by Deloitte & Touche LLP, an independent registeredpublic accounting firm, as stated in its report 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-recurringtransactions. During the second quarter of 2005, we commenced implementation ofa remediation plan to supplement our existing processes to (a) identifyinternally such transactions occurring during a reporting period and(b) assess the accounting treatment to be used in connection with thosetransactions. These supplemental elements include (i) additional internalreviews of the underlying transactions and related accounting conclusions and(ii) the use of external consulting expertise to provide additional advicerelating to our accounting interpretations. The phrase “external consultingexpertise” means that the Company would engage the services of an independentregistered public accounting firm or third party with appropriate accountingknowledge and expertise.

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 andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal controlover financial reporting, including the possibility of collusion or impropermanagement override of controls, material misstatements due to error or fraudmay not be prevented or detected on a timely basis. Also, projections of anyevaluation 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 materialweakness is a significant deficiency, or combination of significantdeficiencies, that results in more than a remote likelihood that a material misstatementof the annual or interim financial statements will not be prevented ordetected. The following material weaknesses have been identified and includedin management’s assessment:

1.                 Asof December 31, 2005, the Company did not maintain effective control over thefinancial closing and reporting process with respect to the interpretation andapplication of various complex accounting principles in the area ofnon-recurring transactions. Specifically, the Company did not properly accountfor the acquisition of Vidus or certain significant customer contracts. Thisdeficiency in operation of the controls over financial reporting fornon-recurring transactions resulted in adjustments to the Company’sconsolidated financial statements and the restatement of the Company’scondensed consolidated financial statements for the interim periods endedSeptember 30, 2005, June 30, 2005 and March 31, 2005.

2.                 Asof December 31, 2005, the Company did not maintain effective control overthe calculation 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 indetermining the nature, timing, and extent of audit tests applied in our auditof the consolidated financial statements and financial statement schedule as ofand for the year ended December 31, 2005, of the Company and this reportdoes not affect our reports on such consolidated financial statements andfinancial statement schedule.

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 (August 8, 2006 as to the effectsof the restatement discussed in Note 17) expressed unqualified opinions onthose consolidated financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

San Jose, CaliforniaMarch 22,2006 (August 8, 2006 as to the effects of the materialweakness relating to the income tax provision described in the fifth paragraphof Management’s Report on Internal Control Over Financial Reporting (as revised))

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

None.

**PART III**

The information required to be included in Part IIIis omitted from this Report because we will file a definitive proxy statementwithin 120 days after the end of our fiscal year pursuant toRegulation 14A (“Proxy Statement”) for our 2006 annual meeting ofstockholders, and the information included in the Proxy Statement isincorporated herein by reference.

**PART IV**

**Item 15.**                   *Exhibits and FinancialStatement Schedules*

(a)             Thefollowing documents are filed as part of this Report:

  1.            Index to Consolidated Financial Statements

The followingConsolidated Financial Statements of @Road, Inc. and its subsidiaries arefiled as part of this Annual Report on Form 10-K/A:

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

 

  2.            Consolidated FinancialStatement Schedules

|                                                          | ** ** | **Page** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm |       | 85       |       |
| Schedule II—Valuation  and Qualifying Accounts |       | 86       |       |

 

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 Item601 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 (Previously filed. See page 86 of our Report on Form 10-K  filed March 22, 2006.).                                                                                                                                                                                             |   |
| 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, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 31,2005, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 22,2006 (August 8, 2006 as to the effects of the material weakness relatingto the income tax provision described in the fifth paragraph of Management’sReport on Internal Control Over Financial Reporting (as revised)) 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.

As discussed in Note 17,the accompanying consolidated financial statements for 2005 have been restated.

/s/ Deloitte & Touche LLP

San Jose, CaliforniaMarch 22,2006 (August 8, 2006 as to the effects of the restatement discussed in Note 17)

53

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**@ROAD, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)**
| ** **                                                                                                                                                                         | ** ** | **December 31,**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                         | ** ** | **(As Restated)** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                         | ** ** | **(See Note 17)**      | ** ** | ** ** | ** ** |
| **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                                                                                                                                                                |       | 39,843                 |       | — |   |
| Goodwill                                                                                                                                                                           |       | 13,341                 |       | — |   |
| Intangible assets, net                                                                                                                                                             |       | 27,333                 |       | — |   |
| Other non-current  assets                                                                                                                                                          |       | 400                    |       | 680 |   |
| Total assets                                                                                                                                                                       |       | $                      | 246,286    |   | $ | 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                                                                                                                                                                |       | (79,090                | )          | (107,001 | ) |
| Total stockholders’  equity                                                                                                                                                   |       | 186,172                |       | 124,836 |   |
| Total liabilities, redeemable preferred stock and  stockholders’ equity                                                                                                       |       | $                      | 246,286    |   | $ | 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** | ** ** |
| ** **                                                                    | ** ** | **(As Restated)**                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **(See Note 17)**                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| 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                                                    |       | 37,794                                      |       | — |   | — |   |
| Net income                                                                    |       | 27,911                                      |       | 9,221 |   | 1,662 |   |
| Preferred stock  dividends                                                    |       | (436                                        | )          | — |   | — |   |
| Net income  attributable to common stockholders                               |       | 27,475                                      |       | $ | 9,221 |   | $ | 1,662 |   |
| Net income per share:                                                         |       |                                        |       |   |   |   |   |
| Basic                                                                         |       | $                                           | 0.46       |   | $ | 0.17 |   | $ | 0.03 |   |
| Diluted                                                                       |       | $                                           | 0.45       |   | $ | 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 (As Restated)  (See Note 17)                                                                   |       |                  |       |                |       |                        |       |                                  |       |            |       | 27,911                 |       | 27,911            |       | $ | 27,911 |   |
| Change in unrealized  gain on short-term investments                                                      |       |                  |       |                |       |                        |       |                                  |       | 101             |       |                   |       | 101               |       | 101 |   |
| Comprehensive income (As  Restated) (See Note 17)                                                         |       |                  |       |                |       |                        |       |                                  |       |            |       |                   |       |              |       | $ | 28,012 |   |
| 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 (As Restated) (See Note 17)                                              |       | 61,154                |       | $                   | 265,347    |                        | $          | —                                |       | $               | (7         | )                      | $          | (78               | )          | $ | (79,090 | ) | $ | 186,172 |   |   |   |

 

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** | ** ** |
| ** **                                                                                          | ** ** | **(As Restated)**                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                          | ** ** | **(See Note 17)**                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                                              |       |                                        |       |   |   |   |   |
| Net income                                                                                          |       | $                                           | 27,911     |   | $ | 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                                                                                      |       | (44,661                                     | )          | — |   | — |   |
| 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**

**Note1. Organization and Summary of Significant Accounting Policies**

***Organization***

@Road, Inc. commenced operations on July 1,1996 and is a leading provider of mobile resource management (“MRM”).

***Principles of Consolidation***

The consolidated financial statements include @Road, Inc.and its wholly-owned subsidiaries (collectively, the “Company”). Intercompanyaccounts and transactions are eliminated upon consolidation.

***Estimates***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses during the reportingperiod. On an on-going basis, the Company evaluates its estimates, includingthose related to revenue recognition, intangible assets and goodwill, allowancefor doubtful accounts, income taxes and legal and other contingencies. TheCompany bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances. Actualresults could differ from those estimates.

***Cash Equivalents***

The Company considers all highly liquid debtinstruments purchased with a remaining maturity at purchase of 90 days orless to be cash equivalents.

***Investments***

Investments represent highly liquid debt instrumentspurchased with a remaining maturity date at purchase of greater than90 days and are stated at fair value. The differences between amortizedcost (cost adjusted for amortization of premiums and accretion of discountswhich are recognized as adjustments to interest income) and fair valuerepresenting unrealized holding gains or losses, are recorded separately asaccumulated other comprehensive income within stockholders’ equity, net ofrelated estimated tax provisions or benefits. Additionally, the Companyassesses whether an other-than-temporary impairment loss on its investments hasoccurred due to declines in fair value or other market conditions. The Companydid not consider any declines in fair value to be other than temporary. Whilethe Company’s intent is to hold debt securities to maturity or reset date, theyare classified as available-for-sale because the sale of such securities may berequired prior to maturity or reset. Any gains and losses on the sale of debtsecurities are determined on a specific identification 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% ofoutstanding accounts receivable, respectively.

***Inventories***

Inventories consist of raw materials, work in processand finished goods, and are stated at the lower of average cost or market.Inventories are accounted for on an average cost basis and the adequacy ofinventory reserves is reviewed on a quarterly basis. The Company writes downinventory based on forecasted demand and technological obsolescence. Thesefactors are impacted by market and economic conditions, technology changes, newproduct introductions and changes in strategic direction and require estimatesthat may include uncertain elements. Actual demand may differ from forecasteddemand and such differences may have a material effect on recorded inventoryvalues.

***Property and Equipment***

Property and equipment are stated at cost anddepreciated using the straight-line method over estimated useful lives ofapproximately three to five years. Leasehold improvements and capital leaseassets are amortized over the shorter of the lease term or their estimateduseful 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 the excess of the purchase priceover the fair value of the net tangible and identifiable intangible assetsacquired in a business combination. The Company follows the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets* (“SFAS 142”), underwhich 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 evaluates goodwill, at a minimum, on anannual basis and whenever events and changes in circumstances suggest that thecarrying amount may not be recoverable. Impairment of goodwill is tested at thereporting unit level by comparing the reporting unit’s carrying amount,including goodwill, to the fair value of the reporting unit. The fair values ofthe reporting units are estimated using a combination of the income, ordiscounted cash flows, approach and the market approach, which utilizecomparable companies’ data. If the carrying amount of the reporting unitexceeds its fair value, goodwill is considered impaired and a second step isperformed to measure the amount of impairment loss, if any. The Companyconducted its initial annual impairment test as of August 31, 2005 anddetermined 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 for income taxes under an assetand liability approach. Deferred income taxes reflect the impact of temporarydifferences between assets and liabilities recognized for financial reportingpurposes and such amounts recognized for income tax reporting purposes, netoperating loss carry forwards and other tax credits measured by applyingcurrently enacted tax laws. Valuation allowances are provided when necessary toreduce deferred tax assets to an amount that is more likely than not to berealized.

***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 with multiple elements, such aslicenses, customization services and PCS services, the Company allocatesrevenue to each element based upon its fair value as determined by VSOE. VSOEfor each element is based on normal pricing and discounting practices when theelement is sold separately. VSOE for PCS services is measured by the statedrenewal rate. If the Company cannot objectively determine the fair value of anyundelivered element included in license arrangements, it defers revenue untilthe earliest of either: (a) all elements are delivered, (b) allservices have been performed or only PCS services remain to be delivered, or (c) fairvalue can objectively be determined. When the fair value of a delivered elementhas not been established, we use the residual method to record license revenueif the fair value of all undelivered elements is determinable. Under theresidual method, the fair value of the undelivered elements is deferred and theremaining portion of the fee is allocated to the delivered elements and isrecognized as revenue, assuming all other criteria have been met.

***Advertising Costs***

All advertising costs are expensed as incurred. Advertisingcosts, which are included in sales and marketing expenses, were approximately$1.1 million, $370,000 and $301,000 in 2005, 2004 and 2003, respectively. Advertisingcosts consist primarily of ad campaigns, catalog brochures, promotional itemsand 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 theresearch and development of new products and enhancements to existing productsare expensed as incurred until technological feasibility has been established.The Company 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 software acquired, developed ormodified solely to meet the Company’s internal requirements and for which thereis no substantive plan to market the software are capitalized in accordancewith the provisions of SOP 98-1, *Accounting for the Costsof Computer Software Developed or Obtained for Internal Use* (“SOP98-1”). Costs incurred after the preliminary planning stage of the project andafter management has authorized and committed funds to the project arecapitalized. During 2005, 2004 and 2003 no costs were capitalized in accordancewith SOP 98-1.

***Foreign Currency Transactions***

The functional currency of the Company and its foreignsubsidiaries is the United States dollar. Accordingly, all monetary assets andliabilities are translated at the current exchange rate at the end of the year,non-monetary assets and liabilities are translated at historical rates andrevenues and expenses are translated at average exchange rates in effect duringthe period. Transaction gains and losses have not been significant to date andare included in *Other income, net* on the Company’sConsolidated Statement of Operations.

***Derivative financial instruments***

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

In accordance with SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*(“SFAS 133”), certain derivatives are embedded in our Series B preferredstock that must be bifurcated and accounted for separately. The original hostinstruments were initially reported, at fair value, as Preferred Stock and theembedded derivatives were initially reported, at fair value, as liabilities.Because these derivatives do not qualify as hedging instruments, changes infair values of such derivatives are reported as charges or credits to income.

***Stock-Based Compensation***

The Company accounts for stock-based employeecompensation issued under compensatory plans using the intrinsic value method,which calculates compensation expense based on the difference, if any, on thedate of the 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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The impact of recognizing the fair value of optiongrants and stock grants under the Company’s employee stock purchase plan as anexpense under SFAS 123*, Share-Based Payment*would have substantially reduced the Company’s operating results, as follows(in thousands, except per share amounts):

|                                                                                                               | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as  reported                                                                                       |       | $                                           | 27,911     |   | $ | 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 |       | (4,692                                      | )          | (7,451 | ) | (9,422 | ) |
| Pro forma net  income (loss)                                                                                  |       | 23,219                                      |       | 1,774 |   | (7,298 | ) |
| Preferred stock  dividends                                                                                    |       | 436                                         |       | — |   | — |   |
| Pro forma net  income (loss) attributable to common stockholders                                              |       | $                                           | 22,783     |   | $ | 1,774 |   | $ | (7,298 | ) |
| Basic net income  (loss) per share:                                                                           |       |                                        |       |   |   |   |   |
| As reported                                                                                                   |       | $                                           | 0.46       |   | $ | 0.17 |   | $ | 0.03 |   |
| Pro forma                                                                                                     |       | $                                           | 0.38       |   | $ | 0.03 |   | $ | (0.15 | ) |
| Diluted net  income (loss) per share:                                                                         |       |                                        |       |   |   |   |   |
| As reported                                                                                                   |       | $                                           | 0.45       |   | $ | 0.16 |   | $ | 0.03 |   |
| Pro forma                                                                                                     |       | $                                           | 0.37       |   | $ | 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 Company recordedpro forma compensation expense of $5.0 million related to this acceleration.The Company accelerated vesting of these stock options to reduce thecompensation expense associated with these options in future periods resultingfrom the adoption of SFAS No. 123 (revised 2004), *Share-BasedPayment*.

The weighted average fair value of options granted inthe years ended December 31, 2005, 2004 and 2003, were $2.26, $3.79 and$7.31, respectively. The Company calculated the fair value of each option awardon the date of grant using the Black-Scholes option pricing model. TheCompany’s calculations are based on a single option valuation approach andforfeitures are recognized as they occur. The following weighted averageassumptions 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, the Company changed its estimate ofits expected life by reference to the Company’s historical data. ThroughMarch 31, 2005, the Company’s estimate was based on an industry averagedue to a lack of sufficient company specific historical evidence on which tobase its estimates.

The Company accounts for stock-basedarrangements issued to non-employees using the fair value based method, whichcalculates compensation expense based on the fair value of the stock optiongranted using the Black-Scholes option pricing model at the date ofgrant, or over the period of performance, as appropriate. See also “Note 11—EmployeeBenefit 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; the dependenceof @Road on mobile data systems technology, wireless networks, networkinfrastructure and positioning systems owned and controlled by others; advancesand trends in new technologies and industry standards; market acceptance of theCompany’s existing or new solutions; development of sales channels; changes inthird-party manufacturers, key suppliers, certain strategic or customerrelationships; litigation or claims against the Company based on intellectualproperty, product, regulatory or other factors; and the Company’s ability toattract and retain employees necessary to support its growth.

Motorola is the sole supplier of microcontrollers andcertain modems used in the Company’s products. Micronet is the sole supplier ofour Internet Data Terminal (“*i*DT”). Everexis the sole supplier of our Internet Location Manager—WiFi (“*i*LM-W”). The Company expects to rely on these suppliers asthe sole source for these components and devices for the next several years.

***Comprehensive Income***

SFAS No. 130, *ReportingComprehensive Income*, requires that an enterprise report, by majorcomponents and as a single total, the change in its net assets during theperiod from non-owner sources. Accumulated other comprehensive loss wascomprised of unrealized gains (losses) of $78,000, $(179,000) and $0 onshort-term investments at December 31, 2005, 2004 and 2003, respectively.

***Major Customers***

In 2005, 2004 and 2003, Verizon Communications,represented 13%, 17% and 17% of total revenues. No other customers comprised10% 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 option pricingmodel.

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.

The followingtable sets forth the computation of basic and diluted net income per share forthe periods indicated (in thousands, except per share amounts):

|                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income  attributable to common shareholders (numerator)       |       | $                                           | 27,475     |   | $ | 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                                                             |       | $                                           | 0.46       |   | $ | 0.17 |   | $ | 0.03 |   |
| Diluted                                                           |       | $                                           | 0.45       |   | $ | 0.16 |   | $ | 0.03 |   |

 

For the periodspresented, the Company had securities outstanding which could potentiallydilute basic income per share in the future, but which were excluded from thecomputation of diluted net income per share in the periods presented, as theireffect would have been anti-dilutive due to shares being subject to repurchaseby the Company on outstanding options with exercise prices greater than theaverage fair market value for the respective periods presented. Suchoutstanding securities consist of the following (shares in thousands):

|                                                         | ** ** | **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 of approximately$5.5 million in exchange for all of the outstanding shares of Vidus capitalstock, and issued approximately 146,000 vested options with a fair value of$531,000. Under the terms of the stock option grants, each option has beenclassified as a non-qualified stock option, is fully vested, has an exerciseprice ranging from $0.67 to $2.00 per share and has a one-year term. TheCompany incurred acquisition related costs of $2.6 million, of which $478,000was 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—RedeemablePreferred Stock” 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.

The followingtable summarizes the estimated fair values of the tangible assets acquired andthe 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.

The allocation ofthe purchase price to the tangible and identifiable intangible assets acquiredand 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 technology of approximately $18.4million 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 of approximately $5.5 million andthe customer relationships of approximately $3.7 million represented the fairvalue of the PCS obligations and existing customer relationships. To estimatethe fair value of the order backlog and the customer relationships, an incomeapproach was used with a discount rate of 30%. The order backlog and customerrelationships are amortized over their estimated useful lives of three and tenyears, 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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period of time thetrademark would contribute to future cash flows. Because cash flow is expectedto continue indefinitely, the trademark is not being amortized, but is testedfor 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 had strong name recognition inEuropean markets. At the time of the acquisition, the Company expected tocontinue to utilize the Vidus trade name in Europe. The fair value wasdetermined using an income approach with a discount rate of 40% and based on ananalysis of various economic factors the Company determined that the usefullife of the trade name was indefinite. During the fourth quarter of 2005,management determined that the acquired Vidus trade name would no longer beutilized. As a result, the Company recorded an impairment charge of $2.3million.

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

Development projects that had reached technologicalfeasibility were classified as developed technology, and the value assigned todeveloped technology was capitalized. In-process research and development ofapproximately $5.6 million reflected research projects that had not reachedtechnological feasibility or had no alternative future use at the time of theacquisition and was immediately expensed. In order to achieve technologicalfeasibility, the Company estimated the hours required to complete the projectswould cost approximately $5.7 million. The Company estimated the fair valueassigned to in-process research and development using the income approach,which discounts to present value the cash flows attributable to the technologyonce it had reached technological feasibility using a discount rate of 40%. Thestages of completion were determined by estimating the costs and time incurredto date relative to the costs and time expected to be incurred to develop thein-process technology into a commercially viable technology or product, whileconsidering the relative difficulty of completing the various tasks andovercoming the obstacles necessary to attain technological feasibility. Theweighted average stage of completion for all projects, in the aggregate, wasapproximately 80% as of the acquisition date. Cash flows from sales of productsincorporating those technologies commenced in fiscal 2005. Expenditures tocomplete the acquired in-process research and development approximated theoriginal estimates.

***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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The results ofoperations of Vidus are included in the Company’s Consolidated Statement ofOperations from the date of the acquisition. If the Company had acquired Vidusat the beginning of the periods presented, the Company’s unaudited pro formarevenue, net income (loss), net income (loss) attributable to commonstockholders and net income (loss) per share would have been as follows (inthousands, except per share amount):

|                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Revenue                                                         |       | $                                          | 93,549     |   | $ | 82,089 |   |
| Net income  (loss)                                              |       | $                                          | 25,226     |   | $ | (9,529 | ) |
| Net income  (loss) attributable to common stockholders          |       | $                                          | 24,721     |   | $ | (10,192 | ) |
| Net income  (loss) per share (basic)                            |       | $                                          | 0.41       |   | $ | (0.16 | ) |
| Net income  (loss) per share (diluted)                          |       | $                                          | 0.40       |   | $ | (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 not necessarily indicative of whatthe actual results of operations would have been if the acquisition of Vidushad in fact occurred on the dates or for the periods indicated, nor do theypurport to project the results of operations for any future periods or as of anydate. These results do not give effect to any cost savings, operatingsynergies, and revenue enhancements which may result from the acquisition ofVidus or the costs of achieving these cost savings, operating synergies, andrevenue enhancements. The in-process research and development charge ofapproximately $5.6 million is included in the net loss attributable to commonstockholders 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 respective assets,generally two to ten years.

Intangible assetswere 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”.

For the yearsended December 31, 2005, 2004 and 2003, amortization of intangible assetswas $3.5 million, $28,000 and $455,000 million, respectively. The estimatedfuture 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-Term Investments**

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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In accordance withEITF 03-1, *The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments*, the followingtable shows gross unrealized losses and fair value for those investments thatwere in an unrealized loss position as of December 31, 2005 and 2004,aggregated by investment category and the length of time that individualsecurities 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 reviews investments in debt securities forother than temporary impairment whenever the fair value of an investment isless than amortized cost and evidence indicates that an investment’s carryingamount is not recoverable within a reasonable period of time. The decline invalue of these investments is primarily related to changes in interest ratesand is considered to be temporary in nature. When evaluating the investments,the Company considers whether it has the ability and the intent to hold theinvestment until a market price recovery and considers whether evidenceindicating the cost of the investment is recoverable outweighs evidence to thecontrary. Evidence considered in this assessment includes the reasons for theimpairment, compliance with the Company’s investment policy, the severity andduration of the impairment, changes in the value subsequent to year-end andforecasted performance of the investee. The Company has reviewed thosesecurities with unrealized losses as of December 31, 2005 and 2004 forother-than-temporary impairment, and has concluded that no other-than-temporaryimpairment 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**

Property andequipment 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 capitallease assets for office equipment and furniture with a net book value in theamount of $209,000. The accumulated amortization related to these capitalleases 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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The Company usesthe Monte Carlo simulation of its stock price with the movements in its stockprice following a geometric Brownian motion to value the derivative instrumentthat is recorded as derivative liabilities. In valuing the embedded derivative,the Company used the market price of its common stock on the date of valuation,a historical volatility and the expected remaining period to the expirationdate of the top-up period. The Company used the following valuationassumptions:

|                                              | ** ** | **As of  December 31,  2005**                           | ** ** | **As of  February 18,  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 ten consecutive trading daysaverage closing price of the Company’s common stock of $5.44 per share throughDecember 31, 2005, the aggregate top-up, as if determined on December 31,2005, is $8.7 million. The top-up amount will further decrease if, and to theextent that, the average closing price of our common stock for any tenconsecutive trading day period ending on or before September 25, 2006 isgreater than $5.44 per share.

**Note 9.Redeemable Preferred Stock**

On February 18,2005, the Board of Directors of the Company authorized the creation of fourseries of preferred stock and designated approximately 44,000, 44,000, 5,000and 5,000 shares as Series A-1, A-2, B-1 and B-2preferred stock, respectively, of which approximately 24,000, 44,000, 5,000 and5,000 shares of Series A-1, A-2, B-1 and B-2preferred stock, respectively, were issued and outstanding as ofDecember 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’s common stock for any ten consecutive tradingday period from September 25, 2005 to 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 series of preferred stock isconvertible.

***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.

**Note11. 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-employee directors upon becoming a director receive an initial grant of40,000 shares vesting over 4 years and annual grants of 10,000 sharesvesting over one year. Options generally expire 10 years from the date ofgrant. Our equity incentive plans contain a provision that automaticallyincreases through 2010, on each January 1, the number of shares reservedfor issuance under these plans by the lesser of 2,500,000 shares or fourpercent of the total shares outstanding 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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Additional information regarding options outstandingas of December 31, 2005 is as follows (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 ofDecember 31, 2005, the closing price of the Company’s common stock was$5.23. The following table provides additional information regardingin-the-money and out-of-the-money options. In-the-money options are optionswith an exercise price lower than the $5.23 closing price. Out-of-the-moneyoptions are options with an exercise price greater than the $5.23 closingprice.

|                           | ** ** | **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 a401(k) Saving and Retirement Plan (“Plan”) for all employees who meetcertain eligibility requirements. Participants may contribute, on a pre-taxbasis, between 1 percent and 15 percent of their annual compensation,but not to exceed 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           |       | 34,424                                                                   |       | 3,370 |   | 37,794 |   | — |   |   |   | — |   | — |   | — |   | — |   |
| Net income (loss)                   |       | $         41,162            |       | $       (13,251 | ) | $         27,911 |   | $           9,221 |   | — |   | $           9,221 |   | $           1,662 |   | — |   | $           1,662 |   |
| Depreciation                        |       | $           2,035 |       | $              573 |   | $           2,608 |   | $           1,258 |   | — |   | $           1,258 |   | $           1,713 |   | — |   | $           1,713 |   |

 

Revenues areattributed to countries based on the location of the customer. The distributionof revenue by geographic area was summarized as follows (in thousands):

|                                           | ** ** | **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-lived assetsare allocated among geographies based upon the country in which the long-livedasset is located or owned. The distribution of long-lived assets by geographicarea was summarized as follows (in thousands):

|                             | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Long-lived assets, net:** |       |                  |       |   |   |
| United States               |       | $  5,184    |       | $  4,092 |   |
| United Kingdom              |       | 41,773                |       | — |   |
| India                       |       | 312                   |       | 256 |   |
|                        |       | $47,269               |       | $  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 $2.5million, $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 hadnoncancelable inventory purchase commitments totaling approximately $4.8million and other purchase obligations totaling approximately $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.

***OtherContingencies***

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 andemployees and third parties, under which the Company may be required to indemnifysuch persons 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 benefit fromincome taxes consists of the following (in thousands):

|                                 | ** **    | **Year Ended December 31,** | ** ** |
|---------------------------------|---------------|--------------------------------------------|------------|
| ** **                      | ** **    | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal:                   | Current       |                                       | $          | 113 |   | $ | — |   | $ | — |   |
|                            | Deferred      |                                       | (30,813    | ) | — |   | — |   |
|                            | Total federal |                                       | (30,700    | ) | — |   | — |   |
| 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 |          | $                                          | (37,794    | ) | $ | — |   | $ | — |   |

 

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                                      |       | (0.8                                       | )          | (0.3 | ) | 2.1 |   |
| Valuation  allowance                       |       | 364.2                                      |       | (32.1 | ) | 7.9 |   |
| Derivative                                 |       | 8.0                                        |       | — |   | — |   |
| Rate differential  on foreign losses       |       | (25.5                                      | )          | — |   | — |   |
| Effective tax rate                         |       | 382.4                                      | %          | — | % | — | % |

 

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

|                                                                 | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **As Restated**  | ** ** | ** ** | ** ** |
| **Deferred  Tax Assets**                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net operating  loss carry forwards                              |       | $                     | 39.359     |   | $ | 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     |       | 47,464                |       | 43,238 |   |
| Valuation allowance                                             |       | (303                  | )          | (43,238 | ) |
| Deferred tax assets                                             |       | 47,161                |       | — |   |
| **Deferred  Tax Liabilities**                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Acquired  intangibles                                           |       | (6,193                | )          | — |   |
| Net deferred tax assets (liabilities) before  unrealized losses |       | 40,968                |       | — |   |
| Unrealized  losses (gains) on:                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Securities available-for-sale                                   |       | 31                    |       | — |   |
| Valuation allowance                                             |       | (31                   | )          | — |   |
| Net unrealized losses (gains)                                   |       | —                |       | — |   |
| Net deferred tax  asset                                         |       | $                     | 40,968     |   | $ | — |   |

 

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 wasrecognized as a component of stockholders’ equity for the year endedDecember 31, 2005. Approximately $31,000 of the valuation allowance atDecember 31, 2005, related to unrealized losses on available-for-salesecurities and was charged to other comprehensive income.

At December 31, 2005, the Company had federal,state and foreign net operating loss (“NOL”) carryforwards of approximately $87.9million, $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 indemnificationagreements with each of its directors, executive officers and certain otherofficers. These agreements require the Company to indemnify such individuals,to the fullest extent permitted by Delaware law, for certain liabilities towhich they may become subject as a result of their affiliation with theCompany.

The Company purchased approximately $2.3 million ofinventory from a stockholder in 2003. During 2003, the stockholder sold all theshares of the Company’s common stock it previously owned.

**Note 17. Restatement ofFinancial Statements**

In the course ofpreparing its federal income tax returns for 2005 during the quarter ended June30, 2006, the Company determined that its audited consolidated financialstatements for the year ended December 31, 2005 contained an error in thebenefit from income taxes resulting from the improper treatment of interestincome on government home loan securities as tax-exempt when it was in facttaxable. As such, the accompanying consolidated financial statements for theyear ended December 31, 2005 have been restated from the amounts previouslyreported to correct for this error. The following is a summary of thesignificant effects of the restatement (in thousands, except per share data):

 

|                                                                              | ** ** | **As of December 31, 2005** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Consolidated Balance Sheet Data:**                          | ** ** | **As Previously  Reported**                | ** ** | **As Restated** | ** ** | **Change** | ** ** |
| Deferred tax assets  (long-term)                                             |       | $                                               | 40,531     |   | $ | 39,843 |   | $ | (688 | ) |
| Total assets                                                                 |       | 246,974                                         |       | 246,286 |   | (688 | ) |
| Accumulated deficit                                                          |       | (78,402                                         | )          | (79,090 | ) | (688 | ) |
| Total stockholders’  equity                                             |       | 186,860                                         |       | 186,172 |   | (688 | ) |
| Total liabilities, redeemable preferred stock and stockholders’  equity |       | $                                               | 246,974    |   | $ | 246,286 |   | $ | (688 | ) |

 

|                                                            | ** ** | **For the Year Ended  December 31, 2005** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **As Previously  Reported**                                   | ** ** | **As Restated** | ** ** | **Change** | ** ** |
| **Condensed Consolidated  Statements of Operations Data:** | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit from income  taxes                                 |       | $                                                                  | 38,482     |   | $ | 37,794 |   | $ | (688 | ) |
| Net income                                                 |       | 28,599                                                             |       | 27,911 |   | (688 | ) |
| Net income attributable  to common stockholders            |       | 28,163                                                             |       | 27,475 |   | (688 | ) |
| Net income per share:                                      |       |                                                               |       |   |   |   |   |
| Basic                                                      |       | $                                                                  | 0.47       |   | $ | 0.46 |   | $ | (0.01 | ) |
| Diluted                                                    |       | $                                                                  | 0.46       |   | $ | 0.45 |   | $ | (0.01 | ) |

 

**We have also amended “Note 12─Segment Reporting” tothe Consolidated Financial Statements to exclude deferred tax assets from thedistribution of long-lived assets by geographic area. This amendment resultedin a decrease in the long-lived assets in the United States of $39,843 for theyear ended December 31, 2005. There was no impact on the long-lived assets forthe year ended December 31, 2004. In addition, we have amended “Note1—Organization and Summary of Significant Accounting Policies” to theConsolidated Financial Statements to include an adjustment to correct for thedeductibility of stock options granted to employees in the United Kingdom.**

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**Note 18. Quarterly Financial Data (restated and unaudited)(in thousands except per share amounts)**

Subsequent toDecember 31, 2005, the Company determined that its condensed consolidatedfinancial statements contained errors resulting from the improper accountingfor the common and redeemable preferred stock issued in connection with the Vidusacquisition. See “Note 8—Derivative Financial Instrument Liabilities” forfurther discussion. The Company also identified and restated to correct anerror in the benefit for income taxes in the quarter ended September 30,2005 related to the reversal of the valuation allowance. In the course ofpreparing its federal income tax returns for 2005 during the quarter endedJune 30, 2006, the Company also determined that the December 31, 2005benefit from income taxes contained an error. See “Note 17—Restatement ofFinancial Statements” for further discussion. Accordingly, the unauditedquarterly financial data for the periods ended December 31, 2005, September 30,2005, June 30, 2005 and March 31, 2005 presented herein has beenrestated. 

|                                                              | ** ** | **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) before income taxes(1)                    |       | 1,524                  |       | 4,176 |   | (7,464 | ) | (8,119 | ) |
| Benefit from  income taxes(2)                                |       | 777                    |       | 33,822 |   | 3,195 |   | — |   |
| Net income  (loss)(1)(2)                                     |       | 2,301                  |       | 37,998 |   | (4,269 | ) | (8,119 | ) |
| Preferred stock  dividends                                   |       | (131                   | )          | (124 | ) | (124 | ) | (57 | ) |
| Net income (loss)  attributable to common stockholders(1)(2) |       | $                      | 2,170      |   | $ | 37,874 |   | $ | (4,393 | ) | $ | (8,176 | ) |
| Net income  (loss) per share:                                |       |                   |       |   |   |   |   |   |   |
| Basic(1)                                                     |       | $                      | 0.04       |   | $ | 0.62 |   | $ | (0.07 | ) | $ | (0.14 | ) |
| Diluted(1)                                                   |       | $                      | 0.03       |   | $ | 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 |   |
|                                                              |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)    The unauditedquarterly financial data for the periods ended September 30, 2005,June 30, 2005 and March 31, 2005 has 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 for theperiod ending September 30, 2005.

(2)    Theconsolidated financial statements for the period ended December 31, 2005 havebeen restated to reflect the effect of the error resulting from the improper treatmentof interest income on government home loan securities as tax-exempt when it wasin fact taxable. See “Note 17—Restatement of Financial Statements” for furtherdiscussion.

83

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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 |   |
|                                                            |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing is a summary of the significant effects of the restatements (inthousands, except per share amounts):

|                                                            | ** ** | **Quarter Ended**     | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                 | ** ** | **December 31, 2005** | ** ** | **September 30, 2005** | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
| ** **                                                 | ** ** | **Previously  Reported**   | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed  Consolidated Statements of Operations Data:** |       |                       |       |   |   |   | * * | * * |   |   |   |   |   |   |   |   |   |
| Total other  income, net                                   |       | $                          | 2,427      |   | $ | 2,427 |   | $ | 798 |   | $ | 5,643 |   | $ | 575 |   | $ | (2,757 | ) | $ | 620 |   | $ | (121 | ) |
| Net income  (loss) before income taxes                     |       | 1,524                      |       | 1,524 |   | (669 | ) | 4,176 |   | (4,132 | ) | (7,464 | ) | (7,378 | ) | (8,119 | ) |
| Benefit from  income taxes                                 |       | 1,465                      |       | 777 |   | 34,192 |   | 33,822 |   | 3,195 |   | 3,195 |   | — |   | — |   |
| Net income  (loss)                                         |       | 2,989                      |       | 2,301 |   | 33,523 |   | 37,988 |   | (937 | ) | (4,269 | ) | (7,378 | ) | (8,119 | ) |
| Net income  (loss) attributable to common stockholders     |       | $                          | 2,858      |   | $ | 2,170 |   | $ | 33,399 |   | $ | 37,874 |   | $ | (1,061 | ) | $ | (4,393 | ) | $ | (7,435 | ) | $ | (8,176 | ) |
| Net income  (loss) per share:                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                      |       | $                          | 0.05       |   | $ | 0.04 |   | $ | 0.55 |   | $ | 0.62 |   | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.13 | ) | $ | (0.14 | ) |
| Diluted                                                    |       | $                          | 0.05       |   | $ | 0.03 |   | $ | 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 and haveissued our report thereon dated March 22, 2006 (August 8, 2006 as tothe effects of the restatement discussed in Note 17). We have also auditedmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting as of December 31, 2005, and the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2005, and have issued our report thereon dated March 22, 2006(August 8, 2006 as to the effects of the material weakness relating to theincome tax provision described in the fifth paragraph of Management’s Report onInternal Control Over Financial Reporting (as revised)) (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/A 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

85

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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                                 |       |

 

86

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|        | @ROAD, INC. |
|--------|-------------|
|   |        |   |
|   | By:         | /s/ KRISH PANU |
|   |        | Krish Panu |
|   | * *    | *President and Chief Executive Officer* |

 

Date: August 9, 2006

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the following persons on behalf of the Registrant and inthe capacities and on the dates indicated have signed this Report below.
|                      | **Signature**                | ** **                                             | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------|------------------------------|--------------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
|                 |                         |                                                   |       |                 |
| /s/  KRISH PANU      |                         | Chairman of the Board  of Directors, President and     |       | August 9,  2006 |
| Krish  Panu          |                         | Chief Executive Officer  (Principal Executive Officer) |       |                 |
|                 |                         |                                                   |       |                 |
| /s/  MICHAEL MARTINI |                         | Senior Vice President  of Finance and Chief Financial  |       | August 9,  2006 |
| Michael  Martini     |                         | Officer (Principal  Financial and Accounting Officer)  |       |                 |
|                 |                         |                                                   |       |                 |
| *                    |                         | Director                                               |       | August 9,  2006 |
| Kris  Chellam        |                         |                                                   |       |                 |
|                 |                         |                                                   |       |                 |
| *                    |                         | Director                                               |       | August 9,  2006 |
| James  Davis         |                         |                                                   |       |                 |
|                 |                         |                                                   |       |                 |
| *                    |                         | Director                                               |       | August 9,  2006 |
| Charles  E. Levine   |                         |                                                   |       |                 |
|                 |                         |                                                   |       |                 |
| *                    |                         | Director                                               |       | August 9,  2006 |
| T. Peter Thomas      |                         |                                                   |       |                 |
|                 |                         |                                                   |       |                 |
| *By:            | /s/ KRISH PANU               |                                                   |       |                 |      |
|                 | Krish Panu, Attorney-in-Fact |                                                   |       |                 |      |
|                      |                              |                                                        |            |                      |           |            |            |            |          |            |  |

 

 

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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.)                                                                                      |   |

 

88

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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.)                                                                                                                                                                                                       |   |

 

89

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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 (Previously filed. See page 86 of our Report on Form 10-K  filed March 22, 2006.).                      |   |
| 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.

90

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