**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-KSB**


**(Mark
      One)**




**ý**
            
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934****FOR
                THE FISCAL YEAR ENDED AUGUST 31, 2006****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 0-26140**









**Remote
      Dynamics, Inc.**


(Exact
      name of registrant as specified in its charter)




**DELAWARE**
            
            **51-0352879**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)**1155
                KAS DRIVE, SUITE 100 RICHARDSON, TEXAS**
            
            **75081**(Address
                of principal executive offices)
            
            (Zip
                Code)




Registrant’s
      telephone number, including area code: **(972) 301-2000**




Securities
      registered pursuant to Section 12(b) of the Act:


**None**




Securities
      registered pursuant to Section 12(g) of the Act:




**Common
      Stock, $0.01 par value**


(Title
      of
      class)









Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




Check
      whether the issuer (1)  filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 12 months (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past
      90 days.  Yes ý No o









Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B
      is not contained herein, and will not be contained, to the best of the
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. ý




State
      the
      issuer’s revenues for its most recent fiscal year:  $5,900,000




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





State
      the
      aggregate market value of the voting and non-voting equity held by
      non-affiliates of the Registrant computed by reference to the price at which
      the
      common equity was last sold, or the average bid and asked price of such common
      equity, as of January 16, 2007:  $196,007.





Check
      whether the issuer filed all documents and reports required to be filed by
      Section 12, 13 or 15(d) of the Exchange Act after the distribution of
      securities under a plan confirmed by a
      court.  Yes ý No o





As
      of
      January 16, 2007, 63,228,182 shares of the Registrant’s Common Stock were
      outstanding.





Transitional
      Small Business Disclosure Format (Check one): Yes o No ý









**Remote
      Dynamics, Inc.**





**FORM
      10-KSB**


**For
      the Fiscal Year Ended August 31, 2006**





**INDEX**




**PART
                I**
            
            
            1Item
                1.
            
            Description
                of Business
            21Item
                2.
            
            Description
                of Properties
            22Item
                3.
            
            Legal
                Proceedings
            22Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            22**PART
                II**Item
                5.
            
            Market
                for Common Equity and Related Stockholder Matters
            22Item
                6.
            
            Management’s
                Discussion and Analysis or Plan of Operations
            23Item
                7.
            
            Financial
                Statements
            34Item
                8.
            
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            34Item
                8A.
            
            Controls
                and Procedures
            34Item
                8B.
            
            Other
                Information
            36**PART
                III**Item
                9.
            
            Directors
                and Executive Officers of Remote Dynamics, Inc.
            37Item
                10.
            
            Executive
                Compensation
            39Item
                11.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            42Item
                12.
            
            Certain
                Relationships and Related Transactions
            43Item
                13.
            
            Exhibits
            44Item
                14.
            
            Principal
                Accountant Fees and Services
            46Signatures




i


**PART
      I**




**Item
      1.********Description
      of Business.**




In
      addition to the historical information contained herein, the discussion in
      this
      Form 10-KSB contains certain forward-looking statements, within the meaning
      of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934, that involve risks and uncertainties, such
      as
      statements concerning: growth and anticipated operating results; developments
      in
      our markets and strategic focus; new products and product enhancements;
      potential acquisitions and the integration of acquired businesses, products
      and
      technologies; strategic relationships and future economic and business
      conditions. The cautionary statements made in this Form 10-KSB should be
      read as being applicable to all related forward-looking statements whenever
      they
      appear in this Form 10-KSB. Our actual results could differ materially from
      the results discussed in the forward-looking statements. Factors that could
      cause or contribute to such differences include, but are not limited to, those
      discussed under the section captioned “Factors That May Affect Future
      Results of Operations” in Item 1 of this Form 10-KSB as well as those
      cautionary statements and other factors set forth elsewhere herein.





**General**




We
      market, sell and support automatic vehicle location (“AVL”) and mobile resource
      management solutions targeting companies that operate private vehicle fleets.
      We
      believe that the REDIviewTM family of solutions is ideal for metro, short-haul
      fleets within diverse industry vertical markets such as field services,
      distribution, courier, limousine, electrical/plumbing, waste management, and
      government. Our core technology, telematics, combines wireless communications,
      GPS location technology, geospatial solutions and vehicle data integration
      with
      an easy-to-use web-accessible application that aids in the optimization of
      remote business solutions. Our state of the art fleet management solution
      contributes to higher customer revenues and improved operator efficiency by
      improving the productivity of mobile workers through real-time position reports,
      route-traveled information, and exception based reporting designed to highlight
      mobile workforce inefficiencies. This in-depth reporting enables our customers
      to correct those inefficiencies and deliver significant savings to the bottom
      line.




Historically,
      much of our revenues have been derived from products sold to the long-haul
      trucking industry and to member companies of SBC Communications, Inc. (“SBC”).
      Revenues from these legacy customers have ceased as of December 31, 2005. SBC
      selected an alternative vendor to supply its next generation AVL product, and,
      as of December 31, 2005, had deactivated all of its subscriber units. For us
      to
      sustain ongoing business operations and ultimately achieve profitability, we
      must substantially increase our sales and penetration into the marketplace
      with
      next generation products and services.




We
      commercially introduced our next generation AVL product, REDIview, in January
      of
      2005. REDIview was designed with a flexible architecture to accommodate expected
      additional functional requirements that will be required to effectively compete
      in the marketplace.




Our
      new
      REDIview product line forms the basis of our business plan for fiscal year
      2007
      and beyond. We
      expect
      this product line to provide the foundation for a growth in revenues and, if
      our
      revenues grow as we anticipate, ultimately profitability. In
      addition, the REDIview product line allows us to move to a recurring revenue
      model for all of its current product offerings, an important and necessary
      change to our revenue model to achieve overall sustained revenue growth and
      cash
      flow positive operations. In implementing our new business plan, we are
      completing a significant cost and operational-based restructuring, reducing
      our
      workforce at all levels, including senior management. We are focusing our
      efforts on enhancing the existing REDIview product line. As a result, in
      addition to significantly reducing projected operational costs, we have
      significantly reduced our projected sales targets and associated cash flows
      from
      our previous business plan which included multiple product offerings sold
      through both a direct sales force and third-party distributors.




We
      currently do not expect to achieve profitability during the 2007 fiscal year
      since we will be building our sales force and channels, completing our cost
      reduction plans and continuing to transition our customer base to a monthly
      recurring revenue model. Based on our latest revised pricing structure and
      cost
      structure, we currently estimate that to achieve profitability, we will need
      to
      have approximately $600,000 in monthly revenues. However, there can be no
      assurances that we will achieve our REDIview sales targets or
      our
      targeted operating cost reductions and
      failure to do so may have a material adverse effect upon our business, financial
      condition and results of operations.




1




We
      currently believe that with the expected proceeds from our November 2006 private
      placement described below, and assuming the achievement of our revised REDIview
      sales targets and expected operating cost reductions, we have sufficient capital
      to fund our ongoing operations through the remainder of our 2007 fiscal year.
      The sufficiency of our cash resources depends to a certain extent on general
      economic, financial, competitive or other factors beyond our control. Moreover,
      despite actions to reduce costs and improve profitability, our operating losses
      and net operating cash outflows will continue through at least June 2007. As
      a
      result, we may not be able to achieve the revenue and gross margin objectives
      necessary to achieve positive cash flow or profitability without obtaining
      additional debt or equity financing. We do not currently have any arrangements
      for additional financing and we may not be able to secure additional debt or
      equity financing on terms acceptable to us, or at all, at the time when we
      need
      such funding. Further, our ability to secure certain types of additional
      financings is restricted under the terms of our existing financing arrangements.
      There can be no assurance that we will be able to consummate a transaction
      for
      additional capital prior to substantially depleting our available cash reserves,
      and our failure to do so may force us to file for bankruptcy protection and/or
      cease operations.




Our
      principal executive offices are located at 1155 Kas Drive, Suite 100,
      Richardson, Texas 75081, and our telephone number is (972) 301-2000. 
Our website URL is www.remotedynamics.com.  References to “we”, “us”,
“our”, “Remote Dynamics, Inc.”, or “REDI” refer to Remote Dynamics, Inc. and its
      subsidiary.  REDIviewTM is a registered trademark of Remote Dynamics,
      Inc.




**Company
      History**





We
      were
      originally incorporated in February, 1994. Our initial product offering, the
      Series 5000, was developed for, and sold to, companies operating in the
      long-haul trucking market.





In
      June,
      2001, we effected a 1-for-5 reverse stock split of our common
      stock.





In
      June,
      2001, we issued 30,000,000 shares of our common stock (shares not adjusted
      for
      our December 2003, 1-for-5 reverse stock split) in a change of control
      transaction to Minorplanet Systems PLC, a United Kingdom public limited company
      which was our majority stockholder prior to the October 2003 stock transfer
      to
      The Erin Mills Investment Corporation discussed below. In exchange for this
      stock issuance, Minorplanet Systems PLC paid us $10,000,000 in cash and
      transferred to us all of the shares of its wholly-owned subsidiary, Minorplanet
      Limited and its wholly-owned subsidiary, Mislex (302) Limited, now known
      as, Minorplanet Systems USA Limited, which held certain licensing rights to
      Minorplanet Systems PLC’s vehicle management information technology.





In
      March,
      2002, we completed the sale to Aether Systems, Inc. of certain assets and
      licenses related to our long-haul trucking and asset-tracking businesses. In
      addition, we agreed to form a strategic relationship with Aether, with respect
      to our long-haul customer products, pursuant to which we assigned to Aether
      all
      service revenues generated post-closing from our HighwayMaster Series 5000
      customer base. Aether, in turn, agreed to reimburse us for the network and
      airtime service costs related to providing the HighwayMaster Series 5000
      service. In the Aether transaction, we received $3 million in cash and a note
      for $12,000,000.





In
      July,
      2002, we amended our Certificate of Incorporation to change our corporate name
      to Minorplanet Systems USA, Inc.





In
      October, 2003, Minorplanet Systems PLC transferred 42.1% (approximately
      4,100,000 shares) of our outstanding common shares beneficially owned by
      Minorplanet Systems PLC to Erin Mills Investment Corporation, ending Minorplanet
      Systems PLC’s majority ownership of our common stock. Following the share
      transfer, Erin Mills beneficially owned 46% (approximately 4,400,000 shares)
      of
      our outstanding common stock, while Minorplanet Systems PLC retained 19.9%
      (approximately 1,900,000 shares) of our outstanding common stock.




2




In
      December, 2003, we effected a 1-for-5 reverse stock split of our common stock.




*Voluntary
      Bankruptcy Filing and Reorganization*




In
      February, 2004, we and two of our wholly-owned subsidiaries, Caren
      (292) Limited and Minorplanet Systems USA Limited, filed voluntary
      petitions for relief under Chapter 11 of the United States Bankruptcy Code
      in the United States Bankruptcy Court for the Northern District of Texas, in
      order to facilitate the restructuring of our debt, trade liabilities, and other
      obligations. During the bankruptcy, we remained in possession of our assets
      and
      operated as “debtors-in-possession” under the jurisdiction of the Bankruptcy
      Court and in accordance with the applicable provisions of Bankruptcy Code,
      the
      Federal Rules of Bankruptcy Procedure and applicable court orders.





In
      June,
      2004, the Bankruptcy Court entered an order confirming our Third Amended Joint
      Plan of Reorganization, as modified. The Bankruptcy Court set our enterprise
      value at $25,300,000 for purposes of distributions of new common stock under
      the
      plan of reorganization. We set the effective date of the plan of reorganization
      as July 2, 2004. Caren (292) Limited and Minorplanet Systems USA
      Limited, as a matter of law, were merged with and into Remote Dynamics, Inc.,
      ceasing to exist as separate entities as of July 2, 2004. The plan of
      reorganization was substantially consummated on July 8, 2004. On
      August 25, 2005, the Bankruptcy Court signed the final decree and closed
      our bankruptcy case. In connection with our Chapter 11 reorganization, we
      applied “Fresh Start Accounting” which resulted in approximately
      $19.7 million of excess reorganizational value which we recorded as
      goodwill. Goodwill was subsequently determined to be impaired; thus, goodwill
      was written off by $9.6 million during the fiscal year ended August 31,
      2005 to its estimated fair value of $10.1 million at August 31, 2005. We have
      since determined that our goodwill was further impaired during the fiscal year
      ended August 31, 2006 by an estimated $7.7 million. Goodwill was thus
      further written off by $7.7 million representing the full amount of the
      estimated impairment. At August 31, 2006, the remaining carrying value of
      our goodwill was $2.4 million.





In
      July
      2004, we changed our name to “Remote Dynamics, Inc.” in connection with our exit
      from bankruptcy.




*2005
      Financings*




On
      October 1, 2004, we closed the sale of 5,000 shares of Series A convertible
      preferred stock, with each preferred share having a face value of $1,000, for
      a
      total purchase price of $5,000,000. Net cash proceeds were $4,651,000 after
      payment of expenses. The Series A convertible preferred stock was convertible
      into shares of our common stock at a conversion price of $2.00 per share. We
      sold the Series A convertible preferred stock to SDS Capital Group SPC, Ltd
      (“SDS”). The Series A convertible preferred stock was issued to SDS pursuant to
      the exemption from the registration requirements of the Securities Act of 1933
      as amended, provided by Regulation D promulgated thereunder.




On
      May
      31, 2005, we consummated a bridge loan and security agreement with SDS in which
      we issued a promissory note in the amount of $1.75 million to SDS (the “Bridge
      Note”). The Bridge Note was secured by our assets, accrued interest at 8% per
      annum and was due and payable on September 30, 2005. The Bridge Note
      automatically exchanged into a common stock purchase warrant with a 5-year
      term
      to purchase 1,666,667 shares of common stock at an exercise price of $0.01
      per
      share and a common stock purchase warrant with a 5-year term to purchase 700,000
      shares of common stock at an exercise price of $1.75 per share (the “Bridge
      Warrants”) upon approval of our stockholders. Our stockholders approved the
      exchange of the Bridge Note into the Bridge Warrants, and on September 2, 2005,
      the Bridge Note was extinguished and exchanged for the Bridge
      Warrants.




3




On
      September 2, 2005, we closed the sale of $6.5 million of preferred stock and
      common stock purchase warrants in a private placement transaction with SDS
      previously entered into on May 31, 2005. In consideration for the issuance
      of
      the Series B convertible preferred stock, SDS paid us $750,000 and returned
      to
      us all of the outstanding Series A convertible preferred stock with a face
      vaule
      of $5 million which was held by SDS. We incurred an early redemption penalty
      of
      $750,000 related to the Series A convertible preferred stock. Net cash proceeds
      received by us were approximately $443,000 after deduction of brokers’
commissions, accrued interest on the bridge note and other expenses. The Series
      B convertible preferred stock is convertible into common stock at an original
      conversion price of $1.55 per share. SDS also received a common stock purchase
      warrant with a 5-year term to purchase 2 million shares at an exercise price
      of
      $1.75 per share. We used the net proceeds from the financing transaction to
      fund
      our business plan. We are obligated to register the common stock issuable upon
      conversion of the Series B convertible preferred stock or exercise of the common
      stock purchase warrants for public resale under the Securities and Exchange
      Act
      of 1933.




On
      December 16, 2005, in consideration of our reducing the exercise price on
      certain warrants held by SDS from $0.67 to $0.30 per share, SDS exercised the
      warrants for the purchase of 1,125,000 shares of our common stock resulting
      in
      the receipt by us of cash proceeds in the amount of $337,500. This repricing
      resulted in an increase in the net loss attributable to common shareholders
      of
      approximately $69,000.




On
      December 23, 2005, we consummated the sale and assignment of certain of our
      patents and pending patent applications to Vehicle IP LLC in exchange for the
      payment by Vehicle IP LLC to us of $500,000.




*Series
      A Note Financing*




On
      February 24, 2006, we closed a Note and Warrant Purchase Agreement with certain
      institutional investors pursuant to which we sold $5.75 million of our series
      A
      senior secured convertible notes and original issue discount series A notes
      (“Series A Notes”) in a private placement transaction. In the private placement,
      we received proceeds of approximately $4.1 million in cash (after deducting
      brokers’ commission but before payment of legal and other professional fees, the
      15% original issue discount of $750,000 and the tendering of 50 shares of their
      650 shares Series B preferred convertible stock with
      an
      aggregate face
      value of $500,000 by our sole series B preferred convertible
      stockholder).




The Series
      A
      Notes are secured by substantially all of our assets. There exists no material
      relationship between us and these investors other than in respect of the Series
      A Note purchase agreement. The Series A Notes mature 24 months from issuance
      and
      are convertible at the option of the holder into our common stock at a fixed
      conversion price of $0.20 per share (which adjusted to $0.016 per share upon
      the
      issuance of series B subordinated secured convertible notes discussed below).
      Beginning on September 1, 2006 and continuing thereafter on the first business
      day of each month, we must pay an amount to each holder of a Series A Note
      equal
      to 1/18th of the original principal payment of the note; provided, that if
      on
      any principal payment date the outstanding principal amount of the note is
      less
      than such principal installment amount, then we must pay to the holder of the
      note the lesser amount. We may make such principal installment amounts in cash
      or in registered shares of our common stock. If paid in common stock, certain
      conditions must be satisfied, and the number of registered shares to be paid
      to
      the holder must be an amount equal to the principal installment amount divided
      by eighty percent (80%) of the average of the closing bid price for the ten
      (10)
      trading days immediately preceding the principal payment date.




The
      purchasers of the Series A Notes (and the placement agent in the transaction)
      received the following common stock purchase warrants:





·
            Series A-7
                warrants to purchase 20,625,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.40 per sharesubject to adjustment for stock splits and combinations, certain
                dividends
                and distributions, reclassification, exchange or substitution,
                reorganization, merger, consolidation or sales of assets; issuances
                of
                additional shares of common stock, and issuances of common stock
                equivalents. The exercise price of the series A-7 warrants adjusted
                to
                $0.016 per share upon the issuance of our series B subordinated secured
                convertible notes discussed below. The series A-7 warrants are exercisable
                for a seven-year period from the date of issuance. 1.9 million of
                these
                shares are exercisable over 5
                years.




4




·
            Series B-4
                warrants to purchase 13,750,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.90 per sharesubject to adjustment for stock splits and combinations, certain
                dividends
                and distributions, reclassification, exchange or substitution,
                reorganization, merger, consolidation or sales of assets; issuances
                of
                additional shares of common stock, and issuances of common stock
                equivalents. The exercise price of the series B-4 warrants adjusted
                to
                $0.016 per share upon the issuance of our series B subordinated secured
                convertible notes discussed below. The series B-4 warrants are exercisable
                for a four-year period beginning on the date a resale registration
                statement for the shares underlying the warrants is declared effective
                by
                the Securities and Exchange Commission. 1.3 million of these shares
                are
                exercisable over 5 years.





·
            Series C-3
                warrants to purchase 27,500,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.21 per sharesubject to adjustment for stock splits and combinations, certain
                dividends
                and distributions, reclassification, exchange or substitution,
                reorganization, merger, consolidation or sales of assets; issuances
                of
                additional shares of common stock, and issuances of common stock
                equivalents. The exercise price of the series C-3 warrants adjusted
                to
                $0.016 per share upon the issuance of our series B subordinated secured
                convertible notes discussed below. The series C-3 warrants are exercisable
                for a three-year period from the date of issuance. 2.5 million of
                these
                shares are exercisable over 5
                years.





·
            Series
                D-1 warrants (callable only at our option) to purchase 19,250,000
                shares
                in the aggregate of common stock at an exercise price per share equal
                to
                the lesser of: (a) $0.35 and (b) 90% of the average of the 5 day
                volume weighted average price of our common stock on the OTC Bulletin
                Board preceding the call notice, as defined in the
                warrant.




*Series
      B Note Financing*




On
      November 30, 2006, we entered into a Note and Warrant Purchase Agreement with
      Bounce Mobile Systems, Inc. (“BMSI”) and other accredited investors. Pursuant to
      the Note and Warrant Purchase Agreement, we will receive up to $1,754,000 in
      gross proceeds (of which BMSI has committed to provide $1,200,000) from the
      sale
      of up to (i) $1,754,000 principal amount of our series B subordinated secured
      convertible promissory notes (“Series B Notes’), (ii) $701,600 principal amount
      of our original issue discount series B subordinated secured convertible
      promissory notes (“Series B OID Notes”), (iii) our series E-7 warrants (“E-7
      Warrants”) to purchase 82,218,750 shares of our common stock and (iv) our series
      F-4 warrants (“F-4 Warrants”) to purchase 82,218,750 shares of our common stock.





·
            The
                Series B Notes and the Series B OID Notes are secured by all of our
                assets, subject to existing liens, are due December 4, 2009 and begin
                amortization of principal (in nine quarterly installments) on August
                1,
                2007. We may make principal installment payments in cash or in registered
                shares of our common stock. If paid in common stock, certain conditions
                must be satisfied, and the number of registered shares to be paid
                to the
                holder must be an amount equal to the principal installment amount
                divided
                by the greater of (i) $0.02 and (ii) 90% of the average of the volume
                weighted average trading prices of the common stock for the ten trading
                days immediately preceding the principal payment. The Series B Notes
                and
                Series B OID Notes are convertible into our common stock at an initial
                conversion price of $0.016 per share, subject to reduction if we
                fail to
                achieve specified financial and operating milestones and subject
                to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock
                equivalents.




5




·
            The
                E-7 Warrants have an exercise price of $0.02 per share, subject to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents. The E-7
                Warrants are exercisable for a seven-year period from the date of
                issuance.





·
            The
                F-4 Warrants have an exercise price of $0.03 per share, subject to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents. The F-4
                Warrants are exercisable for a four-year period beginning on the
                date a
                resale registration statement for the shares underlying the warrants
                is
                declared effective by the Securities and Exchange
                Commission.





The
      private placement is structured to occur in four closings, each providing
      $438,500 in gross proceeds to us. The first closing occurred on December 4,
      2005
      and the second closing occurred on January 10, 2007. The third closing will
      occur within five business days after the date that we file an amendment to
      our
      Certificate of Incorporation making effective an increase in the number of
      our
      authorized shares of common stock to 575,000,000 and a one-for-fifty reverse
      stock split of our common stock. The fourth closing will occur within five
      business days after the date that an initial resale registration statement
      for
      the shares underlying the notes and warrants issued in the private placement
      is
      declared effective by the Securities and Exchange Commission. Each closing
      is
      subject to certain other conditions being satisfied, including (i) our
      representations and warranties in the agreement being true and correct in all
      material respects as of each closing date, (ii) our having performed, satisfied
      and complied in all material respects with all covenants, agreements and
      conditions required by the agreement to be performed, satisfied or complied
      with
      by us at or prior to each closing date, and (iii) no material adverse effect
      on
      the business, operations, properties, prospects, or financial condition of
      us
      and our subsidiaries having occurred.





As
      a
      result of the private placement and pursuant to the terms of "most favored
      nations" rights granted to investors in our February 2006 private placement
      of
      our Series A Notes, we issued to certain of our February 2006 private placement
      investors, in exchange for $1,652,111 principal amount of the Series A Notes,
      an
      additional (i) $1,784,111 principal amount of Series B Notes, (ii) $713,644
      principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase
      83,690,203 shares of our common stock and (iv) F-4 Warrants to purchase
      83,690,203 shares of our common stock. We received no additional proceeds from
      the exchange.





In
      connection with the private placement, we agreed to pay to the placement agent
      for the transaction consideration consisting of (a) a cash sales commission
      of
      $150,480, (b) warrants to purchase 23,021,250 shares of common stock, with
      each
      warrant having an exercise price of $0.016 per share and being exercisable
      for
      ten years, (c) E-7 Warrants to purchase 12,332,813 shares of common stock,
      and
      (d) F-4 Warrants to purchase 12,332,813 shares of common stock. We also agreed
      to pay legal fees in the amount of $35,000 to legal counsel for the investors
      in
      the private placement.





The
      issuance of the Series B Notes triggered anti-dilution adjustments to the
      conversion price of our Series A Notes and the exercise price of the common
      stock purchase warrants issued in connection with the Series A Notes as follows:
      (a) the conversion price of the Series A Notes changed from $0.20 to $0.016
      per
      share, (b) the exercise price of our Series A-7 warrants changed from $0.40
      to
      $0.016 per share, (c) the exercise price of our Series B-4 warrants changed
      from
      $0.90 to $0.016, and (d) the exercise price of our Series C-3 warrants changed
      from $0.21 to $0.016 per share. In addition, the transaction triggered an
      anti-dilution adjustment to certain warrants issued to SDS in September 2005
      in
      connection with the Series B preferred stock transaction, by changing the
      exercise price from $1.75 to $0.0966 per share and increasing the number of
      shares of common stock for which the warrants can be exercised from 750,000
      to
      12,683,191.




6




*BounceGPS
      Acquisition*




On
      November 30, 2006, we entered into a Share Exchange Agreement with Bounce Mobile
      Systems, Inc. (“BMSI”).  Pursuant
      to the Share Exchange Agreement, we agreed to acquire from BMSI 100% of the
      capital stock of BounceGPS, Inc., a provider of mobile asset management
      solutions, in exchange for:




·
            5,000
                shares of our newly authorized series C convertible preferred stock




·
            A
                Series B Note in the principal amount of
                $660,000




·
            A
                Series B OID Note in the principal amount of
                $264,000




·
            An
                E-7 Warrant to purchase 30,937,500 shares of common
                stock




·
            A
                F-4 Warrant to purchase 30,937,500 shares of common
                stock




As
      part
      of the acquisition of BounceGPS, Inc., we acquired approximately 600 mobile
      subscribers, executive management and marketing expertise. Total assets acquired
      were approximately $380,000, consisting primarily of inventory and other current
      assets in the amount of $149,000, and $231,000 in fixed and other assets. Total
      liabilities acquired were approximately $380,000 consisting of accounts payable
      and other current liabilities of $103,000 and notes payable of $277,000. We
      anticipate that cash flows from operations from BounceGPS to be
      minimal.




The
      transactions contemplated by the Share Exchange Agreement closed on December
      4,
      2006.




The
      series C convertible preferred stock issued under the Share Exchange Agreement
      has a face amount of $1,000 per share ($5,000,000 in the aggregate), ranks
      junior to the Company’s series B convertible preferred stock and senior to its
      common stock with respect to payment of dividends and amounts upon any
      liquidation, dissolution or winding up of the Company, and is entitled to
      receive cumulative dividends in an amount equal to 8% per year (payable at
      the
      election of the holder in cash or additional shares).




The
      series C convertible preferred stock issued under the Share Exchange Agreement
      is initially convertible into 51% of the number of our fully diluted shares,
      as
      defined to include, without limitation:




·
            Shares
                of common stock outstanding on the date of issuance of the Series
                C
                Preferred Stock;




·
            Shares
                of common stock issuable upon conversion, exercise or exchange of
                any
                convertible security or purchase right outstanding on the date of
                issuance
                (including, without limitation, the series C convertible preferred
                stock,
                the Company’s series B convertible preferred stock, the Series A Notes,
                the Series B Notes, the Series B OID Notes, the E-7 Warrants and
                the F-4
                Warrants);




·
            Shares
                of common stock issuable upon conversion, exercise or exchange of
                any
                convertible security or purchase right issued after the issuance
                date of
                the series C convertible preferred stock in conversion, exercise
                or
                exchange of securities outstanding as of the issuance date or as
                a
                dividend, interest payment, liquidated damages, penalty, compromise,
                settlement or other payment of certain securities or pursuant to
                or in
                connection with any agreement, indebtedness or other obligation of
                the
                Company existing as of the issuance date, or with respect to any
                amendment, waiver or modification thereto or extension thereof;




·
            Shares
                of common stock issued after the issuance date of the series C convertible
                preferred stock as a dividend, interest payment, liquidated damages,
                penalty, compromise, settlement or other payment of certain securities
                or
                pursuant to or in connection with any agreement, indebtedness or
                other
                obligation of the Company existing as of the issuance date, or with
                respect to any amendment, waiver or modification thereto or extension
                thereof; and




·
            Shares
                of common stock authorized for issuance from time to time under the
                Company’s equity incentive plans.




The
      series C convertible preferred stock generally has the right to vote on all
      matters before the common stockholders on an as-converted basis voting together
      with the common stockholders as a single class. In addition, the holders of
      a
      majority of the Series C Preferred Stock, voting as a separate class, have
      the
      right to appoint a majority of the members of our Board of Directors (as long
      as
      we have not exercised our limited rights to redeem series C convertible
      preferred stock).




7




As
      a
      result of the Share Exchange Agreement and Note and Warrant Purchase Agreement
      transactions, BMSI, as the sole holder of our series C convertible preferred
      stock, currently holds approximately 94.2% of the voting power of our
      outstanding securities and beneficially owns approximately 61.5% of our common
      stock (calculated on a fully diluted basis).




**Products
      and Services**




We
      market
      and sell products and services in the AVL market in the United States. Our
      AVL
      products are designed to maximize the productivity of a mobile workforce as
      well
      as reduce vehicle mileage and fuel-related expenses.




*REDIview
      Product Line*




We
      commercially launched our current product offering, REDIview, during January
      of
      2005. REDIview is an Internet and service bureau-based software application
      that
      provides an extensive array of real-time and accurate mapping, trip replay,
      and
      vehicle activity reports. REDIview includes a series of exception-based reports
      designed to highlight inefficiencies in the operations of a vehicle fleet.
      Utilizing GPRS technology and our proven, high-capacity network service center,
      customers may access their information securely through the Internet from any
      personal computer or certain other devices.




REDIview
      incorporates technologies that allow for fast and effective integration into
      legacy applications operated by companies with vehicle fleets and mobile
      workers. This design allows companies to easily extend their existing supply
      chain management systems to the mobile workforce for transaction processing
      and
      customer fulfillment. REDIview was also designed to be hardware and network
      agnostic to provide the maximum flexibility in designing solutions that best
      fit
      the customer’s specific needs.




The
      REDI
      2000TM mobile data logging unit combines global positioning system (GPS)
      technologies along with the latest in wireless, Internet protocol-based
      communications to deliver, throughout the day, real-time location, speed, and
      other conditions of the vehicle on a minute-by-minute basis. In addition, the
      units may be configured to accept additional sensor inputs regarding operations
      of the vehicle and vehicle equipment.




*Vehicle
      Management Information (VMI)*





On
      June
      21, 2001, we acquired an exclusive, royalty-free, 99-year license to market,
      sell and operate Minorplanet System PLC’s VMI technology in  the
      United States, Canada and Mexico. VMI is designed to maximize the productivity
      of a mobile workforce as well as reduce vehicle mileage and fuel related
      expenses. The VMI technology consists of: (i) a data control unit or DCU that
      continually monitors and records a vehicle’s position, speed and distance
      traveled; (ii) a command and control center or CCC which receives and stores
      in
      a database information downloaded from the DCU’s; and (iii) software used for
      communication, messaging and detailed reporting. VMI uses satellite-based Global
      Positioning System location technology to acquire a vehicle location on a
      minute-by-minute basis, and a global system for mobile communications based
      cellular network to transmit data between the DCU’s and the CCC. GSM is a
      digital technology developed in Europe and has been adapted for North America.
      GSM is the most widely used digital standard in the world. The VMI application
      was targeted to small and medium sized fleets based in major metropolitan
      areas.




VMI
      provides minute-by-minute visibility into the activities of a mobile workforce
      via an extensive reporting system that provides real-time and  exception-based
      reporting. Real-time reports provide information regarding a vehicle’s location,
      idling, stop time, speed and distance traveled. With  real-time
      reporting, the customer can determine when an employee starts or finishes work,
      job site arrival times and site visit locations. In addition, exception reports allow the customer to set various parameters within
      which vehicles
      must operate, and the system will report exceptions including speeding, extended
      stops, unscheduled stops, route deviations, visits to barred locations and excessive idling.




8




During
      our bankruptcy proceedings, we notified Minorplanet Systems PLC that we intended
      to reject the VMI license as part of our Plan of Reorganization.
      In order to ensure a smooth transition to its REDIview products and services,
      we
      initiated negotiations with Minorplanet Systems PLC for a
      temporary use license to market and sell the VMI product until our REDIview
      products and services were commercially available.




On
      June
      14, 2004, the Bankruptcy Court approved a compromise and settlement agreement
      between Remote Dynamics, Minorplanet Limited and Minorplanet
      Systems PLC regarding the license agreement for the VMI technology which allowed
      Remote Dynamics to use, market and sell the VMI technology until December 31, 2004. The material terms of the settlement
      agreement include the following:




·
            On
                June 30, 2004, the VMI license agreement converted to a nonexclusive
                license until December 31, 2004 when it would
                terminate.




·
            From
                the period beginning June 30, 2004 through December 31, 2004, the
                territory in which Remote Dynamics could market, sell and usethe
                VMI system was reduced to the following metropolitan areas: Los Angeles,
                California; Atlanta, Georgia; Dallas, Texas; and Houston,Texas.




·
            On
                July 31, 2004, we could no longer use the name, “Minorplanet,” nor any
                derivative thereof, and shall remove and refrain from using any references
                to said name.




·
            We
                provided Minorplanet Limited, at no cost, 100 AEM 3000 VMI units
                to USA
                specifications with accompanying special tariff SIM’s for
                T-Mobile.




·
            Subsequent
                to December 31, 2004, we retained the right to use the VMI software
                internally for the sole purpose of satisfying its warranty, service
                and
                support obligations to our existing VMI customer
                base.




·
            Minorplanet
                Limited was allowed a general unsecured claim in the amount of $1,000,000
                in Limited’s bankruptcy case no. 04-3 1202-SAF-11.
                On the effective date, Minorplanet Limited released and waived its
                administrative claim and, as of such date, waived any future
                researchand development fees due under Section 16.4 of the VMI license
                agreement.




·
            We
                provided to Minorplanet Limited and Minorplanet UK a general release
                of
                any and all claims which could have been asserted against Minorplanet
                Limited or Minorplanet Systems PLC by Remote
                Dynamics.




On
      January 6, 2005, Remote Dynamics and Minorplanet Limited entered into an
      Addendum to Compromise and Settlement Agreement which granted
      us the right to continue to market and sell the VMI product line to our existing
      VMI customers. Although we have ceased actively marketing and
      selling the VMI product, the Addendum allows us to fulfill VMI product orders
      from existing VMI customers.




**Competition**




We
      believe that our primary competitors in the automatic vehicle location market
      include:




·
            **@Road
                -**@Road
                currently sells an Internet-based solution using the CDPD or GPRS
                networks
                of Nextel, Cingular Wireless, Verizon, and other carriers. @Road's
                mobile
                resource management system enables vehicle location, wireless voice
                and
                text communications, and remote transaction processing with signature
                capture using a PDA. On December 10, 2006, @Road announced that it
                was
                being acquired by Trimble, another of our
                competitors.




·
            **Teletrac
                -**Teletrac currently sells an Internet-based solution and offers service
                on
                GPRS, CDPD, and Cellemetry wireless networks as well as Teletrac’s own
                proprietary TDOA network.




·
            **Trimble**-
                In addition to providing advanced GPS components, Trimble augments
                GPS
                with other positioning technologies as well as wireless communications
                and
                software to create complete customer solutions. Trimble focuses on
                emerging applications including surveying, automobile navigation,
                machine
                guidance, asset tracking, wireless platforms, and telecommunications
                infrastructures.




9




·
            **Other
                Regional Competitors**-
                There are numerous smaller regional companies vying for a local
                presence.




**Employees**




At
      August
      31, 2006, we had 34 employees. Our employees are not represented by a collective
      bargaining agreement. None of our employees are represented by a labor
      organization, and we are not a party to any collective bargaining agreement.
      We
      have not experienced any work stoppages and consider our relations with our
      employees to be good.




Competition
      in the recruiting of personnel in the AVL industry is intense. We believe that
      our future success will depend in part on our continued ability to hire,
      motivate and retain qualified management, sales and marketing, and technical
      personnel. To date, we have not experienced significant difficulties in
      attracting or retaining qualified employees.




**Infrastructure
      And Operations**




***Networks*** *.* We
      use
      wireless data and/or voice technologies, combined with GPS satellite technology,
      for all of our products. Our strategy is to select and use wireless networks
      that provide the “best fit” for each product and application or specific
      customer need.




***REDIview
      and VMI Products*** .
      The VMI
      technology uses a GSM digital network. The REDIview product utilizes the general
      packet radio service (“GPRS”) bearer channel of the GSM network to provide
      Internet protocol based wireless data transmission. Currently, there are two
      major carriers providing GSM/GPRS coverage in the United States: T-Mobile and
      Cingular, both of which provide coverage in the major metropolitan areas in
      the
      United States. These carriers have announced joint arrangements to continue
      to
      expand GSM/GPRS coverage in the United States, including interoperability among
      the two carriers. We believe the coverage, bandwidth and price of the GSM/GPRS
      network make it best suited for the next generation technology.




***Navigation
      Technology*** *.* GPS
      technology allows customers to identify the location of any mobile asset at
      any
      time via satellite. GPS is operated by the United States government, and
      broadcasts navigational information from a network of dedicated satellites
      orbiting the earth. GPS navigational receivers interpret signals from multiple
      satellites to determine the receiver’s geographical coordinates, elevation and
      velocity. GPS navigational signals can be received worldwide, without adaptation
      of the receiver unit to foreign standards. The Company believes that the network
      of GPS navigational satellites will be maintained by the United States Defense
      Department in an operational status for the foreseeable future. Although
      stand-alone GPS units are available for purchase by any consumer at relatively
      low cost, the Company believes that raw navigational information is of little
      use in tracking assets unless the GPS receiver is integrated with a computer
      system, such as the Company’s mobile communication units, to record routes
      traveled relative to mapped roadways or to transmit position reports to a
      central dispatcher.




**Strategic
      Service Alliances of the Company**




***T-Mobile*** .
      The
      Company also resells T-Mobile GSM data services to the Company’s VMI customers
      pursuant to a reseller agreement with T-Mobile. The reseller agreement had
      an
      initial term of one year which continues on a month-to-month basis following
      the
      expiration of such initial term unless terminated by either party on written
      notice. The initial term of the reseller agreement has expired and the reseller
      agreement is currently on a month-to-month term. If the Company is unable to
      renew such agreements with T-Mobile and other U.S. wireless carriers refuse
      to
      support circuit-switched data on their GSM networks for our VMI units, such
      failures could have a material adverse effect on the Company’s business,
      financial condition and results of operations.




10




***Cingular
      Wireless LLC*** *.* The
      Company provides GSM/GPRS data services to its REDIview customers pursuant
      to a
      data reseller agreement with AT&T Wireless now known as Cingular Wireless
      LLC (“Cingular”) effective as of November 1, 2004 and a messaging agreement
      effective September 27, 2004. The data reseller agreement and messaging
      agreement have an initial term of two years and automatically renews for
      successive one year terms unless either party provides the other party with
      written notice of termination at least 30 days prior to the end of the initial
      term or any renewal term. However, the data reseller agreement and the messaging
      agreement may be terminated by Cingular or the Company for convenience upon
      90
      days prior written notice.





If
      Cingular terminates the data reseller agreement and messaging agreement and
      ceases to provide GSM/GPRS services to the Company for resale to its customers,
      the REDIview units in the Company’s base of installed REDIview customers would
      no longer be able to send or receive data messages until the Company could
      reach
      an agreement with another provider and retrofit such units to utilize the
      GSM/GPRS service of such alternative provider. There can be no assurances that
      the Company would be able to reach an agreement with another wireless carrier
      for GSM/GPRS service and/or retrofit its existing REDIview customer base to
      utilize the GSM/GPRS service of such alternative provider the failure to do
      so
      would have a material adverse effect on the Company’s business, financial
      condition and results of operations.





** ***Key
      Manufacturers*** *.* The
      Company does not manufacture or assemble its products but subcontracts for
      the
      manufacture of its products from various suppliers. The Company depends upon
      Enfora, Inc. as its sole source of manufacturing for its REDIview product line.
      The Company does not have a long-term manufacturing agreement with Enfora,
      Inc.
      If Enfora, Inc. fails to perform its obligations under the Company’s outstanding
      purchase orders issued to Enfora, Inc. for the manufacture of the Company’s
      REDIview product line, or if Enfora, Inc. ceases to manufacture the Company’s
      REDIview products, the Company would have to immediately engage an alternative
      manufacturer to manufacture the Company’s REDIview product line. There can be no
      assurances that the Company would be able to engage an alternative manufacturer
      before the Company would deplete its existing inventory for the REDIview product
      line, or that the Company would be able to engage an alternative manufacturer
      on
      commercially reasonable terms or at all and the failure to do so would have
      a
      material adverse effect on the Company’s business, results of operation and
      financial condition.





**Factors
      That May Affect Future Results of Operations**




In
      addition to the other information in this Form 10-KSB, the following
      factors should be considered in evaluating Remote Dynamics, Inc. and our
      business.




***We
      have operated at a significant loss in recent periods and may not have adequate
      funds to continue as a going concern.***





For
      the
      year ended August 31, 2006, our independent registered public accounting
      firm issued an opinion on our financial statements which included an explanatory
      paragraph expressing substantial doubt about our ability to continue as a going
      concern. We have incurred significant operating losses since our inception,
      and
      these losses will continue for the near future. We may not ever achieve
      profitability. Even if we do achieve profitability, we may not be able to
      sustain or increase profits on a quarterly or annual basis.





We
      currently do not expect to achieve profitability during the 2007 fiscal year
      since we will be building our sales force and channels, completing our cost
      reduction plans and continuing to transition our customer base to a monthly
      recurring revenue model. Based on our latest revised pricing and cost
      structures, we currently estimate that for us to achieve profitability, we
      will
      need to have approximately $600,000 in monthly revenues. However, there can
      be
      no assurance that we will achieve our REDIview sales targets or our targeted
      operating cost reductions and failure to do so may have a material adverse
      effect on our business, financial condition and results of
      operations.




11




We
      currently believe that with the expected proceeds from our November 2006 private
      placement, and assuming the achievement of our revised REDIview sales targets
      and expected operating cost reductions, we have sufficient capital to fund
      our
      ongoing operations through the remainder of our fiscal year ending August 31,
      2007. The sufficiency of our cash resources depends to a certain extent on
      general economic, financial, competitive or other factors beyond our control.
      Moreover, despite actions to reduce costs and improve profitability, our
      operating losses and net operating cash outflows will continue through at least
      June 2007. As a result, we may not be able to achieve the revenue and gross
      margin objectives necessary to achieve positive cash flow or profitability
      without obtaining additional debt or equity financing. We do not currently
      have
      any arrangements for additional financing and we may not be able to secure
      additional debt or equity financing on terms acceptable to us, or at all, at
      the
      time when we need such funding. Further, our ability to secure certain types
      of
      additional financings is restricted under the terms of our existing financing
      arrangements. There can be no assurance that we will be able to consummate
      a
      transaction for additional capital prior to substantially depleting our
      available cash reserves, and our failure to do so may force us to file for
      bankruptcy protection and/or cease operations.





Critical
      success factors in our plans to achieve positive cash flow from operations
      include:





·
            Ability
                to increase sales of the REDIview product line to lessen the amount
                of
                capital resources necessary to fund our operations until such time
                that
                revenues from the REDIview product line are sufficient to fund ongoing
                operations.




·
            Ability
                to further reduce our operating costs in accordance with our latest
                revised business plan.




·
            Ability
                to complete development of additional features and functionality
                for the
                REDIview product line.




·
            Significant
                market acceptance of our product offerings from new customers, including
                our REDIview product line, in the United
                States.




·
            Maintaining
                and expanding our direct sales channel. New salespersons will require
                training and time to become productive. In addition, there is significant
                competition for qualified sales personnel, and we must continue to
                offer
                attractive compensation plans and opportunities to attract qualified
                salespersons.




·
            Expansion
                into new markets not currently served by
                us.




·
            Increasing
                sales production from existing channel
                partners;




·
            Obtaining
                new channel partners to distribute our product
                lines;




·
            Maintenance
                and expansion of indirect distribution channels for our REDIview
                product
                line.




·
            The
                securing and maintenance of adequate third party leasing sources
                for
                customers who purchase our
                products.




There
      can
      be no assurances that any of these success factors will be realized or
      maintained.





***Our
      goodwill and other intangible assets have been
      impaired.***





We
      account for goodwill, the vehicle management information license right, and
      other intangibles in accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) and
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets” (“SFAS 144”). SFAS 144 requires us to review for impairment of our
      long-lived assets, whenever events or changes in circumstances indicate that
      the
      carrying amount of an asset might not be recoverable and exceeds its fair value.
      Impairment evaluations involve our estimates of asset useful lives and future
      cash flows. When this event occurs, we estimate the future cash flows expected
      to result from the use of the asset and its eventual disposition. If the
      undiscounted expected future cash flows are less than the carrying amount of
      the
      asset and the carrying amount of the asset exceeds its fair value, we recognize
      an impairment loss. We generally utilize an income approach, a discounted future
      cash flow analysis and an analysis of market multiples to estimate fair value
      of
      the asset. Actual useful lives and cash flows could be different from those
      estimated. This could have a material affect on our operating results and
      financial position. We test goodwill for impairment on an annual basis, or
      between annual tests if we determine that a significant event or change in
      circumstances warrants such testing in accordance with the provisions of SFAS
      142 which requires a comparison of the carrying value of goodwill to the fair
      value of the reporting unit. If the fair value of the reporting unit is less
      than the carrying value of goodwill, an adjustment to the carrying value of
      goodwill is required.




12




Since
      our
      launch of the REDIview product line in January of 2005, we have experienced
      significant competition in the marketplace which has eroded our price points
      and
      prevented us from achieving our sales targets with sales cycles for large
      accounts proving to be much longer and complex than originally anticipated.
      Thus, in response to current market conditions, we further revised our business
      plan modifying our pricing structure, our sales and marketing approach and
      added
      new feature sets to our REDIview product line to ensure that we remain
      competitive in the marketplace. We have significantly reduced our future
      projected cash flows from previous projections. During the fiscal year ended
      August 31, 2005, we performed our annual test for goodwill impairment
      utilizing an income approach, a discounted future cash flow analysis and an
      analysis of market multiples and determined that our goodwill was impaired
      by an
      estimated $9.6 million. Goodwill was written off by $9.6 million
      representing the full amount of the estimated impairment.





Based
      on
      our failure to achieve our forecasted sales targets for the fiscal year ended
      August 31, 2006, we began analyzing and revising our current and long-term
      business plans with the goal of optimizing our sales and marketing strategy
      in
      order to maximize our revenues and further reduce our operating costs. As a
      result, we materially modified our existing business plan. In implementing
      our
      new business plan, we completed a significant cost and operational-based
      restructuring, downsizing our workforce at all levels, including senior management and ceased our development efforts to launch two new product lines
      during the fiscal year ended August 31, 2006 instead focusing our efforts on
      enhancing our existing REDIview product line. As a result, in addition to
      significantly reducing our projected operational costs, we significantly reduced
      our projected sales targets and associated cash flows from our previous business
      plan which included multiple product offerings sold through both a direct sales
      force and third-party distributors.





As
      a
      result and in accordance with SFAS 142, we performed interim and annual tests
      of
      our goodwill utilizing a discounted future cash flow analysis based on our
      new
      projected sales targets and the estimated impact of our cost savings. We have
      determined that our goodwill was further impaired during the fiscal year ended
      August 31, 2006 by an estimated $7.7 million. Goodwill was thus further
      written off by $7.7 million representing the full amount of the estimated
      impairment. At August 31, 2006, the remaining carrying value of our
      goodwill was $2.4 million. There can be no assurances that we will achieve
      our REDIview sales targets and targeted cost reductions and our failure to
      do so
      may have a material adverse effect upon our Goodwill.





***We
      have pledged all of our assets to existing creditors.***





Our
      secured convertible notes are secured by a lien on substantially all of our
      assets. A default by us under the secured convertible notes would enable the
      holders of the notes to take control of substantially all of our assets. The
      holders of the secured convertible notes have no operating experience in our
      industry and if we were to default and the note holders were to take over
      control of our Company, they could force us to substantially curtail or cease
      our operations. If this happens, you could lose your entire investment in our
      common stock.





In
      addition, the existence of our asset pledges to the holders of the secured
      convertible notes will make it more difficult for us to obtain additional
      financing required to repay monies borrowed by us, continue our business
      operations and pursue our growth strategy.





***Our
      secured convertible notes become immediately due and payable upon default and
      we
      may be required to pay an amount in excess of the outstanding amount due under
      of the secured convertible notes, and we may be forced to sell all of our
      assets.***




Our
      secured convertible notes become immediately due and payable upon an event
      of
      default including:




·
            our
                failure to make the principal installment amount on a designated
                principal
                payment date;




·
            our
                failure to comply with our registration obligations with respect
                to shares
                of our common stock issuable upon conversion of the note or exercise
                of
                warrants issued to the note investors;




13




·
            the
                suspension from listing or failure of our common stock to be listed
                on the
                OTC Bulletin Board or one of the major
                exchanges;




·
            our
                notice to the holder of our inability to comply or intention not
                to comply
                with proper requests for conversion of the
                notes;




·
            our
                default in the performance of any material covenant in the notes,
                the
                purchase agreement for the notes, the registration rights agreement
                relating to the notes or any other ancillary documents relating to
                the
                notes;




·
            our
                making of a false or incorrect representation or warranty in the
                purchase
                agreement for the notes, the registration rights agreement relating
                to the
                notes or any other ancillary documents relating to the
                notes;




·
            our
                default in any payment of principal or interest on the indebtedness
                represented by the notes, or default in the observance or performance
                of
                any other agreement relating to such indebtedness in excess of
                $100,000;




·
            our
                application for appointment of a receiver or liquidator or filing
                a
                petition in bankruptcy or other similar relief which is not dismissed
                within 30 days; and




·
            the
                filing of a proceeding against us seeking the liquidation, reorganization,
                or dissolution of us or similar relief which is not dismissed within
                30
                days.




If
      we
      default on our secured convertible notes, the holders may (a) declare
      the entire unpaid principal balance of the notes due and it will be accelerated;
      (b) demand prepayment of the notes as described below, (c) demand that the
      principal amount of the notes then outstanding be converted into shares of
      our
      common stock at the conversion price discussed in more detail below; and/or
      (d)
      exercise any of the holder’s other rights or remedies under the transaction
      documents or applicable law.





If
      the
      holders require us to prepay all or a portion
      of the notes, the prepayment price would equal the greater of (x) 125% of the
      principal amount of the notes and (y) if the holder cannot get the benefit
      of
      its conversion rights and the ability to effect the resale of shares of our
      common stock issuable upon conversion, (i) the aggregate principal amount of
      the
      notes divided by (ii) the conversion price on: the date the prepayment price
      is
      demanded or due, or the date the prepayment price is paid in full, whichever
      is
      less, multiplied by (iii) the volume weighted average price on: the date the
      prepayment price is demanded or otherwise due; or the date the prepayment price
      is paid in full, whichever is greater. The holders would also recover all other
      costs or expenses due in respect of the notes and the other transaction
      documents.




We
      currently are not in compliance with certain of our obligations relating to
      our
      series A senior secured convertible notes, including our failure to maintain
      sufficient authorized shares to permit conversion of the notes and our failure
      to register the resale of the shares of common stock issuable upon conversion
      of
      the notes. To date, we have obtained waivers of compliance of these obligations
      from all of the note holders, other than one holder of $100,000 principal amount
      of the notes. If
      we are
      unable to comply with our obligations in the future, there can be no assurance
      that we will be able to obtain waivers from the note holders on acceptable
      terms
      or at all.





We
      do not
      currently have the cash on hand to repay amounts due under our secured
      convertible notes if an event of default occurred and the note holders elected
      to exercise their repayment remedies. If we are unable to raise enough money
      to
      cover these amounts we may be forced to restructure, file for bankruptcy, sell
      assets or cease operations.





***Potential
      future offerings could dilute the interest of our common
      stockholders.***





We
      expect
      in the future to increase our capital resources by making additional offerings
      of equity and debt securities, including classes of preferred stock and common
      stock. However, there can be no assurances that we will be able to obtain any
      such financing on terms acceptable to us or at all. The effect of additional
      equity offerings may be the dilution of the equity of our stockholders or the
      reduction of the price of shares of our common stock, or both. We are unable
      to
      estimate the amount, timing or nature of additional offerings as they will
      depend upon market conditions and other factors.





14




***Bounce
      Mobile Systems, Inc. can vote an aggregate of 94.2% of the voting power of
      our
      common stock and can exercise control over corporate decisions including the
      appointment of directors.***




Bounce
      Mobile Systems, Inc. can vote an aggregate of 1,094,676,315 shares (or 94.2%)
      of
      the voting power of our common stock. Accordingly, BMSI will exercise control
      in
      determining the outcome of all corporate transactions or other matters,
      including the election of directors, mergers, consolidations, the sale of all
      or
      substantially all of our assets, and also the power to prevent or cause a change
      in control. Our other stockholders will be minority shareholders and as such
      will have little to no say in the direction of the Company and the election
      of
      directors. Additionally, it will be difficult if not impossible for investors
      to
      remove designees of BMSI as directors of the Company, which will mean BMSI
      will
      remain in control of who serves as officers of the Company as well as whether
      any changes are made in the Board of Directors. As a potential investor in
      the
      Company, you should keep in mind that even if you own shares of our common
      stock
      and wish to vote them at annual or special shareholder meetings, your shares
      will likely have little effect on the outcome of corporate
      decisions.




***The
      certificates of designation for our Series C and Series B convertible
      preferred stock contain restrictions on our ability to take certain actions
      without the approval of the Series C and Series B convertible preferred
      stockholders, including entering into mergers or issuing additional debt or
      equity, and also contains certain mandatory redemption events which could force
      us to redeem shares when we do not have the funds to do
      so.***





We
      are
      prohibited from taking numerous actions without the approval of the holders
      of
      at least a majority of our series C and, in certain cases, our series B
      convertible preferred stock, including, without limitation:





·  amending
      our certificate of incorporation or bylaws;




·  redeeming securities;




·  entering
      into an asset sale, merger or similar transaction;




·  creating
      or issuing senior or pari passu securities; or




·  issuing
      equity or debt securities.





Accordingly,
      we may not be able to obtain the approval of our convertible preferred
      stockholders needed to complete a necessary or advisable financing transaction,
      or necessary to effect any other transaction that our board of directors deems
      to be in the best interests of our stockholders.





The
      certificate of designations for our convertible preferred stock also contain
      numerous redemption events, including any breach by us of any of the transaction
      documents pursuant to which we issued the securities. If any of these redemption
      events were to occur, the holders of our convertible preferred stock could
      force
      us to redeem their shares. We may not have the funds available to effect a
      forced redemption and the holders could take further actions such as forcing
      us
      into involuntary bankruptcy.





***We
      face significant competition in the automatic vehicle location
      marketplace.***





Our
      REDIview product faces significant competition from internal development teams
      of customers and potential customers and from several other suppliers of similar
      products, many of which may have greater name recognition and greater financial
      and technological resources. As the demand by business for mobile tracking
      services increase, the quality, functionality and breadth of competing products
      and services will likely improve and new competitors may enter the market.
      Further, the adoption of widespread industry standards may make it easier for
      new market entrants or existing competitors to improve their existing services,
      to offer some or all of the services we presently offer or may offer in the
      future, or to offer new services that we do not offer. We can provide no
      assurance that our products will compete successfully with the products of
      our
      competitors or that we will adapt to changes in the business, regulatory or
      technological environment as successfully as our competitors. If we are unable
      to compete successfully, our ability to acquire or retain customers may be
      limited which could result in a material adverse effect on our business,
      financial condition and results of operations.




15




***We
      may be unable to adapt to shifts in technology in the wireless communications
      industry.***





Technology
      in the wireless communications industry is in a rapid and continuing state
      of
      change as new technologies and enhancements to existing technologies continue
      to
      be introduced. Our future success will depend upon our ability to develop and
      market products and services that meet changing customer needs and that
      anticipate or respond to technological changes on a timely and cost-effective
      basis. We can offer no assurance that we will be able to keep pace with
      technological developments. Our failure to develop and market products and
      services that meet changing customer needs and that anticipate or respond to
      technological changes on a timely and cost-effective basis could result in
      a
      material adverse effect on our business, financial condition and results of
      operations.





***If
      wireless carriers on which we depend for services decide to abandon or do not
      continue to expand their wireless networks, we may lose subscribers and our
      revenues could decrease.***





Currently,
      our automatic vehicle location products rely on GSM/GPRS networks. GPRS is
      the
      internet protocol-based dedicated high speed wireless data channel for the
      Global Systems for Mobile Communications (GSM) wireless network. If
      wireless carriers abandon these protocols in favor of other types of wireless
      technology, we may not be able to provide services to our customers. In
      addition, if wireless carriers do not expand their coverage areas, we will
      be
      unable to meet the needs of our customers who may wish to use some of our
      services outside the current coverage area.




***We
      rely primarily on Cingular Wireless for the provision of GSM/GPRS data services
      to our REDIview customers and our inability to renew our agreements with
      Cingular Wireless may require us to retrofit our installed base of REDIview
      units.***





We
      provide GSM/GPRS data services to our REDIview customers pursuant to a data
      reseller agreement with AT&T Wireless now known as Cingular Wireless LLC
      effective as of November 1, 2004 and a messaging agreement effective
      September 27, 2004. The data reseller agreement and messaging agreement
      have an initial term of 2 years and automatically renews for successive one
      year terms unless either party provides the other party with written notice
      of
      termination at least 30 days prior to the end of the initial term or any
      renewal term. However, the data reseller agreement and the messaging agreement
      may be terminated by Cingular or by us for convenience upon 90 days prior
      written notice.





If
      Cingular terminates the data reseller agreement and messaging agreement and
      ceases to provide GSM/GPRS services to us for resale to our customers, the
      REDIview units in our base of installed REDIview customers would no longer
      be
      able to send or receive data messages until we could reach an agreement with
      another provider and retrofit such units to utilize the GSM/GPRS service
      of this alternative provider. There can be no assurances that we would be able
      to reach an agreement with another wireless carrier for GSM/GPRS service and/or
      retrofit our existing REDIview customer base to utilize the GSM/GPRS service
      of
      the alternative provider. The failure to do so would have a material adverse
      effect on our business, financial condition and results of
      operations.





***We
      rely primarily on T-Mobile for the provision of GSM data services to our vehicle
      management information customers and our inability to renew our agreements
      with
      T-Mobile may increase our costs of providing GSM data services to our vehicle
      management information customers, result in a decrease in GSM coverage for
      our
      vehicle management information customers or may require us to retrofit our
      installed base of vehicle management information units with mobile units which
      utilize GSM/GPRS.***





We
      market
      and sell T-Mobile GSM data services to our vehicle management information
      customers as an agent of T-Mobile pursuant to a National Premier Dealer
      Agreement entered into with T-Mobile USA, Inc. on January 1, 2003 so that
      our vehicle management information customers have a direct contractual
      relationship for the purchase of GSM data services with T-Mobile. This agreement
      has an initial term of 2 years and automatically terminates unless we
      provide written notice of our intent to renew to T-Mobile at least 60 days
      prior to the end the term.




16




We
      also
      resell T-Mobile GSM data services to our vehicle management information
      customers pursuant to a reseller agreement with T-Mobile. The reseller agreement
      has an initial term of one year which continues on a month-to-month basis
      following the expiration of this initial term unless terminated by either party
      on written notice. The initial term of the reseller agreement has expired and
      the reseller agreement is currently on a month-to-month term.





If
      we are
      unable to renew our agreements with T-Mobile and other U.S. wireless carriers
      refuse to support circuit-switched data on their GSM networks for our vehicle
      management information units, these failures could have a material adverse
      effect on our business, financial condition and results of
      operations.





***We
      depend on Global Positioning System technology owned and controlled by others.
      If we do not have continued access to GPS technology or satellites, our REDIview
      product line will cease to function.***





Our
      REDIview products depend upon signals from Global Positioning System satellites
      built and maintained by the U.S. Department of Defense. GPS satellites and
      their
      ground support systems are subject to electronic and mechanical failures and
      sabotage. If one or more satellites malfunction, there could be a substantial
      delay before they are repaired or replaced, if at all, and our products and
      services may cease to function.





In
      addition, the U.S. government could decide not to continue to operate and
      maintain GPS satellites over a long period of time or to charge for the use
      of
      the Global Positioning System. Furthermore, because of ever-increasing
      commercial applications of the Global Positioning System and international
      political unrest, U.S. government agencies may become increasingly involved
      in
      the administration or the regulation of the use of GPS signals in the future.
      If
      factors such as these affect the Global Positioning System, for example by
      affecting the availability, quality, accuracy or pricing of GPS technology,
      these factors could have a material adverse effect on our business, financial
      condition and results of operations.





***Any
      natural disaster, terrorist attack or other occurrence that renders our network
      service center inoperable could significantly hinder the delivery of our
      services to our customers because we lack an effective remote back-up
      communications system.***





Currently,
      our disaster recovery systems focus on internal redundancy and diverse routing
      within the network services center operated by us. We do not currently have
      a
      remote back-up communications system that would enable us to continue to provide
      mobile communications services to our customers in the event of a natural
      disaster, terrorist attack or other occurrence that rendered our network
      services center inoperable. Accordingly, our business is subject to the risk
      that this disaster, attack, security intrusion by a computer hacker or other
      occurrence could hinder or prevent us from providing services to some or all
      of
      our customers. The delay in the delivery of our services could cause some of
      our
      customers to discontinue business with us which could have a material adverse
      effect on our business, financial condition and results of
      operations.





***We
      depend on our key personnel, and the loss of one or more of these individuals
      could have a material adverse effect on our business, financial condition and
      results of operations.***





We
      are
      dependent on the efforts of Neil Read, our Vice President, Chief Financial
      Officer and Treasurer, and Erik Bailey, our Vice President, Sales and Marketing.
      We maintain 1-year term employment agreements with these executives which expire
      on October 23, 2007 (Mr. Read) and May 22, 2007 (Mr. Bailey).





After
      the
      expiration of the initial term, the employment contracts with these executives
      continue on a month-to-month basis, subject to termination by either the
      executive or by us upon notice. In addition, we are also dependent upon a group
      of our employees possessing valuable technical skills.




17




The
      loss
      of services of one or more of these individuals could materially and adversely
      affect our business and future prospects. We do not maintain key-man life
      insurance on any of our officers or employees. We can provide no assurance
      that
      we will be able to attract and retain additional management and technical
      personnel required in connection with the growth and development of our
      business.





***Increases
      in the wholesale rates for digital wireless service could reduce or eliminate
      our services margin.***





We
      currently purchase digital wireless service at wholesale rates to operate
      certain parts of our business. While we presently have no reason to belief
      that
      these rates will increase, these rates are outside of our control and any
      increase in the digital wireless serviced may have a material adverse effect
      on
      our costs which could decrease our profit margins and revenues.





***Product
      liability claims could have a material adverse effect on our business by
      creating additional costs related to the payment or settlement of these
      claims.***





It
      is
      possible that the operation of our products may give rise to product liability
      claims. Product liability claims present a risk of protracted litigation,
      substantial money damages, attorney’s fees, costs and expenses and diversion of
      our management’s attention. Product liability claims that exceed policy limits
      applicable to our liability insurance or that are excluded from the policy
      coverage could result in a material adverse effect on our business, financial
      condition and results of operations.





***We
      are aware of a potential claim involving us and our prior inventory
      vendor.***





We
      are
      aware of a potential claim involving us and our prior inventory vendor. This
      claim has not been asserted, but we have discussed the possibility of a dispute
      arising out of disposition of inventory manufactured by this vendor. We do
      not
      believe we are liable for future inventory purchases from this vendor. However,
      should this vendor be successful in asserting their potential claim, it may
      have
      a material adverse affect on our financial position, operating results and
      cash
      flows.





***Changes
      in industry-specific government regulations could require us to materially
      increase our expenses to pay compliance fees.***





We
      believe that our products and services are currently exempt from both Federal
      Communications Commission and state regulations. We rely on our long-distance
      providers and wireless providers to comply with any applicable regulatory
      requirements. In the event that our services are reclassified as
“telecommunications services,” we could be forced to expend substantial time,
      money and resources to comply with the applicable regulations and contribute
      to
      applicable universal services funds mandated by federal regulations. An event
      like this could result in a material adverse effect on our business, financial
      condition and results of operations owing to this increase in
      expenses.





***We
      may not be able to adequately protect our patents and other proprietary
      technology, and our intellectual property rights may be challenged by
      others.***





Our
      products and services are highly dependent upon our technology and the scope
      and
      limitations of our proprietary intellectual property rights. In order to protect
      our technology, we rely on a combination of patents, copyrights and trade secret
      laws, as well as certain customer licensing agreements, employee and third-party
      confidentiality and non-disclosure agreements and other similar arrangements.
      If
      our assertion of proprietary intellectual property rights is held to be invalid,
      or if another party’s use of our technology were to occur to any substantial
      degree, our business, financial condition and results of operations could be
      materially adversely affected.





Several
      of our competitors have obtained and can be expected to obtain patents that
      cover products or services directly or indirectly related to those which we
      offer. Our management attempts to be aware of patents containing claims that
      may
      pose a risk of infringement by our products or services. In addition, patent
      applications in the United States are confidential until a patent is issued;
      accordingly, our management cannot evaluate the extent to which our products
      or
      services may infringe on future patent rights being sought by others. In
      general, if it were determined that any of our products, services or planned
      enhancements infringed valid patent rights held by others, we would be required
      to obtain licenses to develop and market these products, services or
      enhancements from the holders of the patents, to redesign such products or
      services to avoid infringement, or to cease marketing such products or services
      or developing the enhancements. In this event, we also might be required to
      pay
      past royalties or other damages. We can provide no assurance that, should it
      become necessary, we would be able to obtain licenses on commercially reasonable
      terms, or that we would be able to design or redesign our products to
      incorporate alternative technologies, without a material adverse effect on
      our
      business, financial condition and results of operations.




18




***Our
      current business plan contemplates significant expansion, which we may be unable
      to manage.***





If
      our
      management successfully implements our business strategy, we may experience
      periods of expansion. We can provide no assurance that we will successfully
      maintain and improve our operating and financial systems, expand, train and
      manage our employee base, properly manage production and inventory levels to
      meet product demand and facilitate new product introductions in connection
      with
      the expansion of our business. In general, our management’s failure to manage
      the growth of our business effectively could result in a material adverse effect
      on our business, financial condition and results of operations.





***Our
      adoption of “Fresh Start Accounting” makes comparisons of our financial position
      and results of operations with those of prior fiscal periods more
      difficult.***





In
      connection with our emergence from bankruptcy, we implemented “Fresh Start
      Accounting” for periods following our reorganization. “Fresh Start Accounting”
required us to allocate our reorganization value to all of our assets and
      liabilities in accordance with Statement of Position 90-7 “Financial Reporting
      by Entities in Reorganization under the Bankruptcy Code.” As a result, the
      consolidated financial statements for periods after our emergence from
      bankruptcy are not comparable to our consolidated financial statements for
      the
      periods prior to our emergence from bankruptcy. The application of “Fresh Start
      Accounting” makes it more difficult to compare our post-emergence operations and
      results to those in pre-emergence periods and could therefore adversely affect
      trading in and the liquidity of our common stock.





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





We
      have
      adopted a certificate of incorporation and bylaws, which in addition to state
      law, may discourage, delay or prevent a merger or acquisition that any one
      of
      our stockholders may consider favorable. These provisions include the
      following:





·
            authorizing
                the board to issue blank check preferred stock on terms it deems
                advisable;




·
            prohibiting
                cumulative voting in the election of directors;
                and




·
            limiting
                the persons who may call special meetings of
                stockholders;




We
      have
      adopted a certificate of incorporation that permits our board to issue shares
      of
      preferred stock without stockholder approval (other than approvals of the series
      B and series C convertible preferred stockholders currently required), which
      means that our board could issue shares with special voting rights or other
      provisions that could deter a takeover. In addition to delaying or preventing
      an
      acquisition, the issuance of a substantial number of shares of preferred stock
      could adversely affect the price of our common stock and dilute existing
      stockholders.





***There
      are a large number of shares of common stock underlying our convertible
      preferred stock, secured convertible notes and warrants that may be available
      for future sale and the sale of these shares may depress the market price of
      our
      common stock.***




19




As
      of
      January 16, 2007, we had outstanding, (i) 547 shares of our series B convertible
      preferred stock (which were convertible into 3,690,323 shares of common stock),
      (ii) 5,000 shares of our series C convertible preferred stock (which were
      convertible into 1,094,676,315 shares of common stock), (iii) $3,789,031
      principal amount of our series A senior secured convertible promissory notes
      (which were convertible into 236,814,438 shares of common stock), (iv)
      $2,155,206 principal amount of our series B subordinated secured convertible
      promissory notes (which were convertible into 290,597,188 shares of common
      stock), (v) series A-7 warrants exercisable for 20,625,000 shares of common
      stock, (vi) series B-4 warrants exercisable for 13,750,000 shares of common
      stock, (vii) series C-3 warrants exercisable for 27,500,000 shares of common
      stock, (viii) series D-1 warrants exercisable for 19,250,000 shares of common
      stock, (ix) series E-7 warrants exercisable for 168,049,892 shares of common
      stock, (x) series F-4 warrants exercisable for 168,049,892 shares of common
      stock, and (xi) other warrants exercisable for 41,872,010 shares of common
      stock.





We
      have
      previously r egistered
      the resale of 40,000,000 shares of common stock, which includes shares issuable
      upon conversion of our series A senior secured convertible notes, upon exercise
      of certain of our warrants and upon conversion of the series B convertible
      preferred stock. We are obligated to register the resale of additional shares
      of
      common stock issuable upon conversion of our series A senior secured convertible
      notes, our series B secured convertible notes and our series C convertible
      preferred stock, and upon exercise of our outstanding warrants. Once registered
      for resale, these shares of common stock may therefore be sold into the public
      market without restriction upon their issuance.





Sales
      of
      significant amounts of common stock in the public market, or the perception
      that
      such sales may occur, could materially affect the market price of our common
      stock. These sales might also make it more difficult for us to sell equity
      or
      equity-related securities in the future at a time and price that we deem
      appropriate





***The
      issuance of shares of common stock upon conversion of our secured convertible
      notes and our convertible preferred stock and upon exercise of outstanding
      warrants may cause immediate and substantial dilution to our existing
      stockholders.***





As
      of
      January 16, 2007, we had outstanding 63,228,182 shares of our common stock,
      which would represent only 3% of our total issued and outstanding common stock
      upon conversion of all of our secured convertible notes, convertible preferred
      stock and upon exercise of all of our outstanding warrants. Although certain
      holders may not convert their secured convertible notes and/or exercise their
      warrants if such conversion or exercise would cause such holder to own more
      than
      4.99% of our outstanding common stock, this restriction does not prevent any
      holder from converting and/or exercising and selling some of its holdings and
      then converting the rest of its holdings. In this way, any such holder could
      sell more than this limit while never holding more than this limit at any one
      time. The issuance of shares of common stock upon conversion of our secured
      convertible notes, our convertible preferred stock and upon exercise of our
      outstanding warrants may result in substantial dilution to the interests of
      other stockholders.





***Because
      our secured convertible notes may be repaid, at our discretion, in shares of
      common stock valued at a discount of the common stock’s trading price, should
      the value of our common stock decrease, our election to repay the notes in
      shares of common stock could result in a significant issuance of new shares
      of
      common stock to the noteholders, causing***  ***material
      dilution to the then existing holders of our common
      stock.***





As
      of
      January 16, 2007, we had outstanding (a) $3,789,031 principal amount of our
      series A senior secured convertible notes (including original issue discount
      notes) and (b) $2,155,206 principal amount of our series B senior secured
      convertible notes (including original issue discount notes).





The
      series A senior secured convertible notes mature 24 months from issuance and
      beginning on September 1, 2006 and continuing thereafter on the first business
      day of each month, we must pay an amount to the holders of the notes equal
      to
      1/18th of the original principal amount of the notes; provided, that if on
      any
      principal payment date the outstanding principal amount of the notes is less
      than such principal installment amount, then we must pay to the holders of
      the
      notes the lesser amount. We may make such principal installment amounts in
      cash
      or in registered shares of common stock in our sole discretion. If paid in
      common stock, certain conditions must be satisfied, and the number of registered
      shares to be paid to the holders must be an amount equal to the principal
      installment amount divided by eighty percent (80%) of the average of the closing
      bid price for each of the ten (10) trading days immediately preceding the
      principal payment date.




20




The
      series B subordinated secured convertible notes are due December 4, 2009 and
      begin amortization of principal (in nine quarterly installments) on August
      1,
      2007. We may make principal installment payments in cash or in registered shares
      of our common stock. If paid in common stock, certain conditions must be
      satisfied, and the number of registered shares to be paid to the holder must
      be
      an amount equal to the principal installment amount divided by the greater
      of
      (i) $0.02 and (ii) 90% of the average of the volume weighted average trading
      prices of the common stock for the ten trading days immediately preceding the
      principal payment.





As
      a
      result, should we elect to repay the original principal amount of the notes
      in
      shares of common stock and should the trading price of our common stock
      decrease, the number of shares of common stock we would need to issue to satisfy
      the original principal amount could increase significantly, materially diluting
      the holdings of our then existing stockholders.





***The
      price of our common stock is volatile.***





Historically,
      market prices for securities of emerging companies in the telecommunications
      industry have been highly volatile. Future announcements concerning our
      business, the business of our competitors or our wireless providers, including
      results of technological innovations, new commercial products, financial
      transactions, government regulations, proprietary rights or product or patent
      litigation, may have a significant impact on the market price of shares of
      our
      common stock. The market price of our common stock and its trading volume have
      been highly volatile in recent periods and our common stock is often thinly
      traded.





***We
      do not expect to pay dividends on our common stock in the foreseeable
      future.***





We
      have
      never paid cash dividends on our common stock and have no plans to do so in
      the
      foreseeable future. We intend to retain earnings, if any, to develop and expand
      our business.





***Our
      common stock was recently delisted from trading on the Nasdaq SmallCap Market
      and it may be deemed to be a “penny stock.”***





As
      the
      closing bid for our common stock remained below $1.00 per share and we were
      no
      longer able to meet certain other tests, we voluntarily delisted our common
      stock from The Nasdaq SmallCap Market on February 10, 2006, and our common
      stock may now be deemed to be penny stock. If our common stock is considered
      penny stock, it will be subject to rules that impose additional sales practices
      on broker-dealers who sell our securities. For example, broker-dealers selling
      penny stock must make a special suitability determination for the purchaser
      and
      must have received the purchaser’s written consent to the transaction prior to
      sale. Also, a disclosure schedule must be prepared before any transaction
      involving a penny stock can be completed, including required disclosure
      concerning:





·
            sales
                commissions payable to both the broker-dealer and the registered
                representative; and




·
            current
                quotations for the securities.




Brokers
      are also required to send monthly statements disclosing recent price information
      for the penny stock held in the account and information on the limited market
      in
      penny stock. Because of these additional obligations, some brokers may not
      effect transactions in penny stock. This could have a material and adverse
      effect on the market for our common stock, and the ability of stockholders
      to
      sell shares.




**Item
      2.********Description
      of Properties.**




Our
      headquarters are located in Richardson, Texas.  We occupy approximately
      40,000 square feet of floor space in this facility. This facility includes
      our
      corporate administration, operations, marketing, research and development,
      sales
      and technical support personnel.  The lease for our headquarters facility
      extends through February 2007.




21




**Item
      3.********Legal
      Proceedings.**




On
      October 13, 2006, we entered into a Memorandum of Understanding with @Road,
      Inc.
      with respect to a settlement of a lawsuit brought by @Road, Inc. on August
      10,
      2005 alleging intentional interference with prospective economic advantage
      against us (@Road, Inc. v. Kierston Dowd, et al., Stanislaus County Superior
      Court). Under the Memorandum of Understanding, @Road agreed to dismiss their
      lawsuit with prejudice in exchange for a payment from us of the sum of $250,000,
      payable in 24 equal monthly installments beginning January 1, 2007 (subject
      to
      acceleration upon certain change of control and financing transactions) and
      accruing interest at the rate of 8% per annum. The settlement is subject to
      the
      approval of our Board of Directors and execution of a final settlement agreement
      and general release. This amount has been recorded as a liability at August
      31,
      2006.





We
      are
      aware of a potential claim involving us and our prior inventory vendor. This
      claim has not been asserted, but we have discussed the possibility of a dispute
      arising out of disposition of inventory manufactured by this vendor. We do
      not
      believe we are liable for future inventory purchases from this vendor and
      several months ago expressed our position to them. However, should this vendor
      be successful in asserting a claim, it may have a material adverse affect to
      our
      financial position, operating results and cash flows.





We
      are
      subject to legal proceedings and claims that arise in the ordinary course of
      business. We do not believe that any claims other than those described above
      exist where the outcome of such matters would have a material adverse affect
      on
      our consolidated financial position, operating results or cash flows. However,
      there can be no assurance such legal proceedings will not have a material impact
      on future results.





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




There
      were no matters submitted to a vote of our security holders during the fourth
      quarter of our fiscal year ended August 31, 2006.




**PART
      II**




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




Our
      Common Stock was initially offered to the public on June 22, 1995, and was
      quoted on the Nasdaq National Market (“Nasdaq NMS”) through close of business on
      February 1, 1999, after which time it began trading on the Nasdaq SmallCap
      Market (“Nasdaq SmallCap”) under the symbol “HWYM.” Our common stock next traded
      under the symbol “REDI” on the Nasdaq SmallCap until February 21, 2006, when
      began trading on the OTC Bulletin Board under the symbol “REDI.OB” following
      de-listing from the NAsdaq SmallCap The following table sets forth the range
      of
      high and low trading prices on the Nasdaq SmallCap Market or the OTC Bulletin
      Board, as applicable, for the Common Stock for the periods indicated. Such
      price
      quotations represent inter-dealer prices without retail markup, markdown or
      commission and may not necessarily represent actual transactions.




BID
                PRICESHIGH
            
            LOW**2005**Second
                Quarter
            
            $
            1.30
            
            $
            0.50Third
                Quarter
            
            $
            2.30
            
            $
            0.42Fourth
                Quarter
            
            $
            1.68
            
            $
            0.50**2006**First
                Quarter
            
            $
            1.46
            
            $
            0.41Second
                Quarter
            
            $
            1.10
            
            $
            0.20Third
                Quarter
            
            $
            0.22
            
            $
            0.05Fourth
                Quarter
            
            $
            0.17
            
            $
            0.04**2007**First
                Quarter
            
            $
            0.05
            
            $
            0.009




22




There
      were 86 registered holders of common stock and an estimated 2,700 broker/dealers
      who beneficially hold common stock on behalf of stockholders as of January
      12,
      2007 **.** The last
      sales price for our common stock as reported on January 12, 2007 was $0.0031





We
      did
      not pay dividends on our common stock for the fiscal year ended August 31,
      2006
      and have no plans to do so in the foreseeable future. Furthermore, covenants
      in
      the Certificates of Designation for our Series B convertible preferred stock
      and
      our Series C convertible preferred stock require the consent of a majority
      of
      the Series B convertible preferred stock and the Series C convertible preferred
      stock, voting as separate classes before may pay a dividend on our common
      stock.





We
      do not
      have an equity compensation plan.




**Item
      6.********Management’s
      Discussion and Analysis or Plan of Operations.**




**“Safe
      Harbor” Statement under the Private Litigation Reform Act of
      1995**




This
      Annual Report, other than historical information, may include forward-looking
      statements, including statements with respect to financial results, product
      introductions, market demand, sales channels, industry trends, sufficiency
      of
      cash resources and certain other matters. These statements are made under the
      “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995
      and involve risks and uncertainties which could cause actual results to differ
      materially from those in the forward-looking statements, including those
      discussed in the section entitled “Factors That May Affect Future Results
      of Operations” in Item 1 and elsewhere in this Annual Report on Form 10-KSB
      and other filings with the Securities and Exchange Commission.




**Overview**




We
      market, sell and support automatic vehicle location (“AVL”) and mobile resource
      management solutions targeting companies that operate private vehicle fleets.
      We
      believe that the REDIviewTM family of solutions is ideal for metro, short-haul
      fleets within diverse industry vertical markets such as field services,
      distribution, courier, limousine, electrical/plumbing, waste management, and
      government. Our core technology, telematics, combines wireless communications,
      GPS location technology, geospatial solutions and vehicle data integration
      with
      an easy-to-use web-accessible application that aids in the optimization of
      remote business solutions. Our state of the art fleet management solution
      contributes to higher customer revenues and improved operator efficiency by
      improving the productivity of mobile workers through real-time position reports,
      route-traveled information, and exception based reporting designed to highlight
      mobile workforce inefficiencies. This in-depth reporting enables our customers
      to correct those inefficiencies and deliver significant savings to the bottom
      line.




Historically,
      much of our revenues have been derived from products sold to the long-haul
      trucking industry and to member companies of SBC Communications, Inc. (“SBC”).
      Revenues from these legacy customers have ceased as of December 31, 2005. SBC
      selected an alternative vendor to supply its next generation AVL product, and,
      as of December 31, 2005, had deactivated all of its subscriber units. For us
      to
      sustain ongoing business operations and ultimately achieve profitability, we
      must substantially increase our sales and penetration into the marketplace
      with
      next generation products and services.




We
      commercially introduced our next generation AVL product, REDIview, in January
      of
      2005. REDIview was designed with a flexible architecture to accommodate expected
      additional functional requirements that will be required to effectively compete
      in the marketplace.




23




Our
      new
      REDIview product line forms the basis of our business plan for fiscal year
      2007
      and beyond. We expect this product line to provide the foundation for a growth
      in revenues and, if our revenues grow as we anticipate, ultimately
      profitability. In addition, the REDIview product line allows us to move to
      a
      recurring revenue model for all of its current product offerings, an important
      and necessary change to our revenue model to achieve overall sustained revenue
      growth and cash flow positive operations. In implementing our new business
      plan,
      we are completing a significant cost and operational-based restructuring,
      reducing the workforce at all levels, including the senior management level.
      We
      are focusing our efforts on enhancing the existing REDIview product line. As
      a
      result, in addition to significantly reducing projected operational costs,
      we
      have significantly reduced our projected sales targets and associated cash
      flows
      from our previous business plan which included multiple product offerings sold
      through both a direct sales force and third-party distributors.




24




*Results
      of Operations*




The
      following tables set forth, for the periods indicated, certain financial data
      as
      a percentage of net revenue.


**Year
                  ended August 31,****2006**
              
              **2005**RevenuesService
              
              
              53.0
              %
              
              78.9
              %Ratable
                  product
              
              
              43.8
              
              
              15.5Product
              
              
              3.2
              
              
              5.6Total
                  revenues
              
              
              100.0
              
              
              100.0Cost
                  of revenuesService
              
              
              49.0
              
              
              36.5Ratable
                  product
              
              
              22.4
              
              
              8.3Product
              
              
              4.5
              
              
              5.3Total
                  cost of revenues
              
              
              75.9
              
              
              50.1Gross
                  profit
              
              
              24.1
              
              
              49.9Expenses:General
                  and administrative
              
              
              63.7
              
              
              29.7Customer
                  service
              
              
              14.7
              
              
              9.3Sales
                  and marketing
              
              
              31.5
              
              
              19.5Engineering
              
              
              13.7
              
              
              8.1Depreciation
                  and amortization
              
              
              33.6
              
              
              16.5Impairment
                  loss on license right
              
              
              4.0
              
              
              1.2Goodwill
                  impairment
              
              
              130.8
              
              
              58.7Legal
                  settlement
              
              
              4.2
              
              
              -Total
                  expenses
              
              
              296.2
              
              
              143Operating
                  loss
              
              
              (272.1
              )
              
              (93.0
              )Interest
                  income
              
              
              1.9
              
              
              1.5Interest
                  expense
              
              
              (42.7
              )
              
              (2.4
              )Other
                  (expense) income
              
              
              5.6
              
              
              (1.7
              )Loss
                  before reorganization items and income taxes
              
              
              (307.3
              )
              
              (95.5
              )Reorganization
                  items:Restructuring
                  expenses and losses
              
              
              -
              
              
              (0.1
              )Net
                  loss before income taxes
              
              
              (307.3
              )
              
              (95.7
              )Income
                  tax benefit
              
              
              -
              
              
              -Net
                  loss
              
              
              (307.3
              )
              
              (96
              )Preferred
                  stock dividend
              
              
              (8.5
              )
              
              (2.2
              )Loss
                  on redemption of preferred stock
              
              
              (44.8
              )
              
              -Repricing
                  of warrants
              
              
              (1.2
              )
              
              -Net
                  loss attributable to common stockholders
              
              
              (361.8
              )%
              
              (97.9
              )%


*Twelve
      Months Ended August 31, 2006, Compared to Twelve Months Ended August 31,
      2005*





Total
      revenue of $5.9 million for the twelve months ended August 31, 2006 decreased
      from $16.4 million during the same period of the prior fiscal year. NSC Systems,
      revenue, comprised of our REDIview, SBC and Geologic products and services,
      decreased from $12.6 million during the twelve months ended August 31, 2005
      to
      $3.8 million during the twelve months ended August 31, 2006 primarily due to
      a
      reduction in active SBC network subscriber units from 21,900 as of August 31,
      2005 to -0- as of August 31, 2006. SBC selected an alternate vendor to supply
      its next generation AVL product. As the revenues from the SBC contract ended
      in
      December 2005, our future revenues will be solely dependent upon sales of our
      REDIview product line. The failure of the marketplace to accept our REDIview
      product line would have a material adverse effect on the Company’s business,
      financial condition and results of operations.




25




NSC
      Systems service revenue decreased from $11.9 million during the twelve months
      ended August 31, 2005 to $2.6 million during the twelve months ended August
      31,
      2006 while NSC Systems product revenue, including ratable product revenue,
      increased to $1.2 million during the twelve months ended August 31, 2006 from
      $0.7 million during the twelve months ended August 31, 2005. New NSC Systems
      product sales during the twelve months ended August 31, 2006 were derived from
      sales of REDIview while sales of parts under the service vehicle contract with
      SBC were minimal. In accordance with our revenue recognition policies, REDIview
      unit sales and the associated cost of sales are deferred and recognized over
      the
      customer’s contract life. Thus, REDIview sales accounted for $0.5 million and
      $2.9 million of total NSC Systems revenue during the twelve months ended August
      31, 2005 and 2006, respectively.




VMI
      revenue for the twelve months ended August 31, 2006 was $2.1 million down from
      $3.8 million during the same period of the prior fiscal year. New VMI unit
      sales
      were minimal during the twelve months ended August 31, 2006 and 2005 as sales
      and marketing focused on sales of the REDIview product line. We no longer
      actively market the VMI product; however, we will continue to service and
      support existing VMI customers and will continue to recognize deferred product
      revenues and costs over the remaining VMI contract lives.




Total
      gross profit margin of 24% during the twelve months ended August 31, 2006
      decreased from 50% during the twelve months ended August 31, 2005 primarily
      due
      to the loss of higher margins associated with the SBC network subscriber units.
      We expect gross profit margin to be 25-30% for fiscal year ended 2007 as we
      focus solely on sales from our REDIview product line.





Total
      operating expenses decreased from $23.4 million during the twelve months ended
      August 31, 2005 to $17.5 million during the twelve months ended August 31,
      2006.
      We recorded a $7.7 million and $9.6 million goodwill impairment loss during
      the
      twelve months ended August 31, 2006 and 2005, respectively. Since its launch
      of
      the REDIview product line in January of 2005, we have experienced significant
      competition in the marketplace which has eroded our price points and prevented
      us from achieving our sales targets with sales cycles for large accounts proving
      to be much longer and complex than originally anticipated. Thus, in response
      to
      current market conditions, we further revised our business plan modifying our
      pricing structure, sales and marketing approach and added new feature sets
      to
      our REDIview product line to ensure that we remain competitive in the
      marketplace. We perform an annual test for goodwill impairment utilizing an
      income approach, a discounted future cash flow analysis and an analysis of
      market multiples and therefore determined our goodwill was
      impaired.





Sales
      and
      marketing costs decreased by $1.3 million during the twelve months ended August
      31, 2006 to $1.9 million versus $3.2 million during the same period of the
      prior
      fiscal year. This decrease was primarily related to the restructuring efforts
      resulting in a reduction in personnel, auto expenses, facility costs and other
      related sales and marketing operating costs. General and administrative expenses
      decreased from $4.9 million during the twelve months ended August 31, 2005
      to
      $3.8 million during the twelve months ended August 31, 2006 primarily due to
      restructuring and general cost-cutting efforts resulting in lower facility
      rents, equipment rental, professional fees and other operating expenses.
      Customer service expenses decreased to $0.9 million during the twelve months
      ended August 31, 2006 from $1.5 million during the same period of the prior
      fiscal year primarily due to staffing reductions and other cost-cutting efforts.
      Engineering expenses decreased to $0.8 million during the twelve months ended
      August 31, 2006 from $1.3 million also primarily due to staffing reductions
      and
      other cost-cutting efforts. Depreciation and amortization expense decreased
      to
      $2.0 million during the twelve months ended August 31, 2006 from $2.7 million
      during the same period in the prior year primarily due to customer relationships
      being fully amortized as of December 2005 and NSC equipment being fully
      depreciated as of December 2005.





We
      recorded $0.3 million to legal settlements expense for the twelve months ended
      August 31, 2006, representing a proposed settlement of a lawsuit filed by @Road,
      Inc. Interest income decreased to $0.1 million during the twelve months ended
      August 31, 2006 from $0.3 million during the same period in the prior year
      primarily due to a reduction in VMI lease receivables. Interest expense
      increased to $2.5 million during the twelve months ended August 31, 2006 from
      $0.4 million during the same period in the prior year primarily due to interest
      expense related to the Series A Note Financing. Other income (expense) increased
      to $0.3 million during the twelve months ended August 31, 2006 from ($0.3)
      million during the same period in the prior year primarily due to the sale
      of
      patents to Vehicle IP LLC. We recorded a loss on redemption of preferred stock
      totaling $2.6 million for the twelve months ended August 31, 2006 for the
      exchange of Series A preferred stock into Series B preferred stock.




26




*Liquidity
      and Capital Resources*




We
      have
      incurred significant operating losses since our inception and have limited
      financial resources until such time that we are able to generate positive cash
      flow from operations. We had cash and cash equivalents of $0.3 million as of
      August 31, 2006.




Net
      cash
      used in operations in 2006 was $4.5 million, primarily due to a net loss of
      $18.2 million offset by a goodwill impairment charge of $7.7 million, a decrease
      in accounts receivable of $2.0 million, amortization of debt discount of $1.4
      million, depreciation and amortization of $1.5 million, and amortization of
      deferred financing fees of $0.8 million.




Net
      cash
      provided by investing activities in 2006 was $0.6 million, primarily due to
      the
      sale of patents to Vehicle IP, LLC for $0.5 million.




Net
      cash
      provided by financing activities in 2006 was $3.7 million, primarily due to
      the
      proceeds from the debt offering of $4.0 million, the proceeds from the sale
      of
      Series B preferred stock and warrants of $0.4 million, and the proceeds from
      the
      exercise of warrants of $0.3 million, offset by payments on capital leases
      and
      other notes payable of $1.1 million.




We
      had
      cash and cash equivalents of $0.5 million as of August 31, 2005.




Net
      cash
      used in operations in 2005 was $5.0 million, primarily due to a net loss of
      $15.7 million, a decrease in restructuring accruals of $3.1 million and a
      decrease in deferred product revenue of $1.4 million, offset by a charge for
      goodwill impairment of $9.6 million, a decrease in lease receivables and other
      assets of $1.4 million, depreciation and amortization of $1.5 million,
      amortization of license right of $1.2 million, decrease in accrued expenses
      and
      other liabilities of $0.9 million, and a decrease in restricted cash of $0.4
      million.




Net
      cash
      used in investing activities in 2005 was $1.0 million due to additions to
      property and equipment.




Net
      cash
      provided by financing activities in 2005 was $5.2 million, due to the proceeds
      from the sale of Series A preferred stock of $4.7 million and the issuance
      of
      the note payable to SDS of $1.8 million, offset by payments on capital leases
      and other notes payable of $0.9 million and $0.4 million in dividends paid
      on
      the Series A preferred stock.




We
      have
      historically relied on a series of financings and asset sales to fund our
      ongoing operations, including:




·
            On
                October 1, 2004, we closed the sale of 5,000 shares of Series A
                convertible preferred stock, with each preferred share having a face
                value
                of $1,000, for a total purchase price of $5,000,000. Net cash proceeds
                were $4,651,000 after payment of expenses.





·
            On
                May 31, 2005, we consummated a bridge loan and security agreement
                in which
                we issued a promissory note in the amount of $1.75 million. The bridge
                loan was exchanged into a common stock purchase warrant to purchase
                1,666,667 shares of common stock at an exercise price of $0.01 per
                share
                and a common stock purchase warrant to purchase 700,000 shares of
                common
                stock at an exercise price of $1.75 per share on September 2, 2005.




27




·
            On
                September 2, 2005, we closed the sale of $6.5 million of Series B
                convertible preferred stock and common stock warrants. In consideration
                for the issuance of the Series B convertible preferred stock, we
                received
                $750,000 and the return of all of our outstanding Series A convertible
                preferred stock.





·
            On
                December 16, 2005, in consideration of our reducing the exercise
                price on
                certain outstanding warrants from $0.67 to $0.30 per share, the holder
                exercised the warrants for the purchase of 1,125,000 shares of our
                common
                stock resulting in the receipt by us of cash proceeds in the amount
                of
                $337,500. This repricing resulted in an increase in the net loss
                attributable to common shareholders of approximately
                $69,000.





·
            On
                December 23, 2005, we consummated the sale and assignment of certain
                of
                our patents and pending patent applications in exchange for
                $500,000.





·
            On
                February 24, 2006, we closed a Note and Warrant Purchase Agreement
                pursuant to which we sold $5.75 million of our series A senior secured
                convertible notes and original issue discount series A notes in a
                private
                placement transaction. In the private placement, we received proceeds
                of
                approximately $4.1 million in cash (after deducting brokers’ commission
                but before payment of legal and other professional fees, the 15%
                original
                issue discount of $750,000 and the tendering of 50 shares of their
                650
                shares Series B preferred convertible stockwith
                an aggregateface value of $500,000 by our sole series B preferred convertible
                stockholder). The purchasers of the series A notes (and the placement
                agent in the transaction) received the following common stock purchase
                warrants in the transaction: (i) series A-7 warrants to purchase
                20,625,000 million shares in the aggregate of common stock, (ii)series B-4
                warrants to purchase 13,750,000 million shares in the aggregate of
                common stock, (iii) series C-3 warrants to purchase
                27,500,000 million shares in the aggregate of common stock, and
                (iv)Series D-1 warrants (callable only at our option) to purchase 19,250,000
                shares in the aggregate of common
                stock.





·
            On
                November 30, 2006, we entered into a Note and Warrant Purchase Agreement
                pursuant to which, we will receive up to $1,754,000 in gross proceeds
                from
                the sale of up to (i) $1,754,000 principal amount of our series B
                subordinated secured convertible promissory notes, (ii) $701,600
                principal
                amount of our original issue discount series B subordinated secured
                convertible promissory notes, (iii) our series E-7 warrants to purchase
                82,218,750 shares of our common stock and (iv) our series F-4 warrants
                to
                purchase 82,218,750 shares of our common stock. As a result of the
                private
                placement and pursuant to the terms of "most favored nations" rights
                granted to investors in our February 2006 private placement of our
                series
                A notes, we issued to certain of our February 2006 private placement
                investors, in exchange for $1,652,111 principal amount of the series
                A
                notes, an additional (i) $1,784,111 principal amount of series B
                subordinated secured convertible promissory notes, (ii) $713,644
                principal
                amount of original issue discount series B subordinated secured
                convertible promissory notes, (iii) series E-7 warrants to purchase
                83,690,203 shares of our common stock and (iv) series F-4 warrants
                to
                purchase 83,690,203 shares of our common stock. We received no additional
                proceeds from the exchange. In connection with the private placement,
                we
                agreed to pay to the placement agent for the transaction consideration
                consisting of (a) a cash sales commission of $150,480, (b) warrants
                to
                purchase 23,021,250 shares of common stock, with each warrant having
                an
                exercise price of $0.016 per share and being exercisable for ten
                years,
                (c) E-7 Warrants to purchase 12,332,813 shares of common stock, and
                (d)
                F-4 Warrants to purchase 12,332,813 shares of common stock. We also
                agreed
                to pay legal fees in the amount of $35,000 to legal counsel for the
                investors in the private placement





Our
      November 2006 private placement is structured to occur in four closings, each
      providing $438,500 in gross proceeds to us. The first closing occurred on
      December 4, 2005 and the second closing occurred on January 10, 2007. The third
      closing will occur within five business days after the date that we file an
      amendment to our Certificate of Incorporation making effective an increase
      in
      the number of our authorized shares of common stock to 575,000,000 and a
      one-for-fifty reverse stock split of our common stock. The fourth closing will
      occur within five business days after the date that an initial resale
      registration statement for the shares underlying the notes and warrants issued
      in the private placement is declared effective by the Securities and Exchange
      Commission. Each closing is subject to certain other conditions being satisfied,
      including (i) our representations and warranties in the agreement being true
      and
      correct in all material respects as of each closing date, (ii) our having
      performed, satisfied and complied in all material respects with all covenants,
      agreements and conditions required by the agreement to be performed, satisfied
      or complied with by us at or prior to each closing date, and (iii) no material
      adverse effect on the business, operations, properties, prospects, or financial
      condition of us and our subsidiaries having occurred.




28




We
      currently do not expect to achieve profitability during the 2007 fiscal year
      since we will be building our sales force and channels, completing our cost
      reduction plans and continuing to transition our customer base to a monthly
      recurring revenue model. Based on our latest revised pricing structure and
      cost
      structure, we currently estimate that to achieve profitability, we will need
      to
      have approximately $600,000 in monthly revenues. However, there can be no
      assurances that we will achieve our REDIview sales targets or our targeted
      operating cost reductions and failure to do so may have a material adverse
      effect upon our business, financial condition and results of
      operations.




We
      currently believe that with the expected proceeds from our November 2006 private
      placement, and assuming the achievement of our revised REDIview sales targets
      and expected operating cost reductions, we have sufficient capital to fund
      our
      ongoing operations through the remainder of our 2007 fiscal year. The
      sufficiency of our cash resources depends to a certain extent on general
      economic, financial, competitive or other factors beyond our control. Moreover,
      despite actions to reduce costs and improve profitability, our operating losses
      and net operating cash outflows will continue through at least June 2007. As
      a
      result, we may not be able to achieve the revenue and gross margin objectives
      necessary to achieve positive cash flow or profitability without obtaining
      additional debt or equity financing. We do not currently have any arrangements
      for additional financing and we may not be able to secure additional debt or
      equity financing on terms acceptable to us, or at all, at the time when we
      need
      such funding. Further, our ability to secure certain types of additional
      financings is restricted under the terms of our existing financing arrangements.
      There can be no assurance that we will be able to consummate a transaction
      for
      additional capital prior to substantially depleting our available cash reserves,
      and our failure to do so may force us to file for bankruptcy protection and/or
      cease operations.




*Nasdaq
      Delisting Notification*




On
      February 15, 2005, we received notice from the Nasdaq Listing Qualifications
      Department that for the previous 30 days, the bid price for our common stock
      had
      closed below the minimum $1.00 per share requirement for continued inclusion
      under Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule
      4310(c)(4), we were provided 180 calendar days, or until August 15, 2005, to
      regain compliance.




On
      April
      27, 2005, we received written notice from the Nasdaq Listing Qualifications
      Staff of the Nasdaq Stock Market that we had regained compliance with Nasdaq
      Marketplace Rule 4310(c)(4) as the closing bid price for our common stock
      has been at $1.00 per share or greater for at least 10 consecutive business
      days. Accordingly, the matter regarding the Company’s non-compliance with
      Marketplace Rule 4310(c)(4) was closed and our listing on the Nasdaq Small
      Cap Market was in good standing.




On
      November 2, 2005, we received a Nasdaq Staff Deficiency Letter from the Nasdaq
      Listing Qualifications Department that for the previous 30 days, the bid price
      for our common stock had closed below the minimum $1.00 per share requirement
      for continued inclusion under Marketplace Rule 4310(c)(4). In accordance with
      Marketplace Rule 4310(c)(8)(D), we were provided 180 calendar days, or until
      May
      1, 2006, to regain compliance.




On
      February 10, 2006, as a result of our request, after conferring with the Nasdaq
      Staff to voluntarily accept the impending delisting of its securities, our
      securities were delisted from The Nasdaq Capital Market. After conferring with
      the Nasdaq Staff, and based upon the current business plan and forecast, we
      did
      not believe that we could achieve compliance with the requirements set forth
      in
      Marketplace Rule 4310(c)(2)(B) in the time frame required by the Nasdaq Stock
      Market to maintain the listing of its securities on the Nasdaq Stock Market.




29




Our
      securities are traded on the NASD OTC Bulletin Board (“OTCBB”). The OTCBB is a
      controlled quotation service that offers real-time quotes, last-sale prices
      and
      volume information in over-the-counter equities. In accordance with Nasdaq
      Marketplace Rule 6530, in order for the securities to be eligible to trade
      on
      the OTCBB, they must not be listed on The Nasdaq Stock Market or a registered
      national securities exchange in the U.S. and we must be subject to and current
      in its filings under Section 13 or 15(d) of the Securities and Exchange Act
      of
      1934.





On
      February 15, 2006, SDS, the sole holder of our Series B Convertible Preferred
      Stock, provided us with a waiver letter irrevocably waiving their right to
      force
      us to redeem our Convertible Stock pursuant to Article VII of the Certificate
      of
      Designation, Preferences and Rights for the Series B Stock based upon the
      delisting of our common stock from the Nasdaq SmallCap Market which occurred
      on
      February 10, 2006 (the “Waiver Letter”). As per the Waiver Letter, SDS further
      irrevocably waived its right to demand that we pay any penalties to SDS pursuant
      to that certain Registration Rights Agreement between us and SDS dated September
      2, 2005 based upon the delisting of our common stock from the Nasdaq SmallCap
      Market which occurred on February 10, 2006.




**Contractual
      Obligations**




The
      following summarizes the Company’s significant financial commitments at August
      31, 2006:




Payments
                  due by periodTotal
              
              Less
                  than 1
                Year
              
              1-3
                  Years
              
              3-5
                  Years
              
              More
                  than 5YearsObligations
                  under Series A Note and WarrantPurchase
                  AgreementPrincipal
                  Payments - Notes
              
              $
              5,000
              
              $
              3,333
              
              $
              1,667
              
              $
              -
              
              $
              -Principal
                  Payments - OID Notes
              
              
              750
              
              $
              500
              
              $
              250
              
              
              -
              
              
              -Long-Term
                  Debt (a)Principal
                  Payments
              
              
              2,000
              
              
              2,000
              
              
              -
              
              
              -
              
              
              -Interest
                  Payments
              
              
              210
              
              
              210
              
              
              -
              
              
              -
              
              
              -Capital
                  Lease Obligations
              
              
              450
              
              
              232
              
              
              218
              
              
              -
              
              
              -Legal
                  settlement
              
              
              250
              
              
              83
              
              
              167
              
              
              -
              
              
              -Operating
                  Leases
              
              
              152
              
              
              139
              
              
              13
              
              
              -
              
              
              -Other
                  Notes Payable
              
              
              134
              
              
              134
              
              
              -
              
              
              -
              
              
              -Purchase
                  Obligations (b)
              
              
              1,051
              
              
              1,051
              
              
              -
              
              
              -
              
              
              -Other
                  Liabilities (c)
              
              
              379
              
              
              227
              
              
              96
              
              
              56
              
              
              -Total
              
              $
              10,376
              
              $
              7,909
              
              $
              2,411
              
              $
              56
              
              $
              -





(a)
            Convertible
                promissory note payable to HFS Minorplanet Funding LLC with the principal
                balance being due in July of 2007. Interest is payable monthly based
                on an
                annual rate of 12%.




(b)
            Primarily
                includes obligations to purchase REDIview
                inventory.




(c)
            Primarily
                includes obligations under priority tax claims allowed under the
                bankruptcy proceedings and product warranty
                commitments.




30




**Critical
      Accounting Policies and Estimates**




Management’s
      discussion and analysis of financial condition and results of operations are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates, including those related to product
      returns, bad debts, inventories, income taxes, warranty obligations, maintenance
      contracts and contingencies. We base our estimates on historical experience
      and
      on various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions.




We
      believe the following critical accounting policies affect our more significant
      judgments and estimates used in the preparation of our consolidated financial
      statements.




*Revenue
      Recognition*




We
      recognize revenue when earned in accordance with the applicable accounting
      literature including: EITF No. 00-21, “Revenue Arrangements With Multiple
      Deliverables”, Statement of Position 97-2, “Software Revenue Recognition”, and
      Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
      Statements”, as amended by Staff Accounting Bulletin No. 104, “Revenue
      Recognition in Financial Statements”. Revenue is recognized when the following
      criteria are met: there is persuasive evidence that an arrangement exists,
      delivery has occurred and all obligations under such arrangement have been
      fulfilled, the price is fixed and determinable and collectibility is reasonably
      assured.





Initial
      sale proceeds received under multiple-element sales arrangements that require
      us
      to deliver products and services over a period of time and which are not
      determined by us to meet certain criteria are deferred. All REDIview and VMI
      sales proceeds related to delivered products are deferred and recognized over
      the contract life that typically ranges from one to five years. Product sales
      proceeds recognized under this method are portrayed in the accompanying
      Consolidated Statement of Operations as “Ratable product revenues.” The related
      deferred revenue is classified as a current and long term liability on the
      Consolidated Balance Sheets under the captions “Deferred product revenues -
      current portion” and “Deferred product revenues non-current portion.” If the
      customer relationship is terminated prior to the end of the customer contract
      term, such deferred sales proceeds are recognized as revenue in the period
      of
      termination. Under sales arrangements, which initially meet the earnings
      criteria described above, revenues are recognized upon shipment of the products
      or upon customer acceptance of the delivered products if terms of the sales
      arrangement give the customer the right of acceptance.





Service
      revenue generally commences upon product installation and customer acceptance
      and is billed and recognized during the period such services are
      provided.





We
      provide lease financing to certain customers of our REDIview and VMI products.
      Leases under these arrangements are classified as sales-type leases or operating
      leases. These leases typically have terms of one to five years, and all sales
      type leases are discounted at interest rates ranging from 14% to 18% depending
      on the customer’s credit risk. The net present value of the lease payments for
      sales-type leases is recognized as product revenue and deferred under our
      revenue recognition policy described above. Income from operating leases is
      recognized ratably over the term of the leases.





*Allowance
      for Doubtful Accounts and Returns*




We
      maintain allowances for doubtful accounts for estimated losses resulting from
      the inability of our customers to make required payments. Our receivables are
      uncollaterized and we expect to continue this policy in the future.  If the
      financial condition of our customers were to deteriorate, resulting in an
      impairment of their ability to make payments, additional allowances may be
      required.  Historically, our estimates for sales returns and doubtful
      accounts have not differed materially from actual results.




31




*Inventory*




We
      write
      down our inventory for estimated obsolescence or unmarketable inventory equal
      to
      the difference between the cost of inventory and the estimated market value
      based upon assumptions about future demand and market conditions. If actual
      market conditions are less favorable than those projected by management,
      additional inventory write-downs may be required.   Historically, our
      estimates for inventory obsolescence have not differed materially from actual
      results.





*Stock-Based
      Compensation*




In
      December of 2004, the Financial Accounting Standards Board (“FASB”) issued FAS
      123R which applies to transactions in which an entity exchanges its equity
      instruments for goods or services and also applies to liabilities an entity
      may
      incur for goods or services that are based on the fair value of those equity
      instruments. For any unvested portion of previously issued and outstanding
      awards, compensation expense is required to be recorded based on the previously
      disclosed FAS 123 methodology and amounts. Prior periods presented are not
      required to by restated. We adopted FAS 123R as of September 1, 2005 and applied
      the standard using the modified prospective method, which requires compensation
      expense to be recorded for new and modified awards. We extinguished our prior
      stock options upon emergence from bankruptcy effective July 2, 2004 and have
      not
      issued any new stock options beyond that date. We have issued restricted stock
      to certain members of senior management. Compensation expense totaling $70,000
      has been recorded during the fiscal year ended August 31, 2006 related to the
      vesting of restricted shares.





*Goodwill
      and Other Intangibles*





We
      account for goodwill, the vehicle management information license right, and
      other intangibles in accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) and
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets” (“SFAS 144”). SFAS 144 requires us to review for impairment of our
      long-lived assets, whenever events or changes in circumstances indicate that
      the
      carrying amount of an asset might not be recoverable and exceeds its fair value.
      Impairment evaluations involve our estimates of asset useful lives and future
      cash flows. When this event occurs, we estimate the future cash flows expected
      to result from the use of the asset and its eventual disposition. If the
      undiscounted expected future cash flows are less than the carrying amount of
      the
      asset and the carrying amount of the asset exceeds its fair value, we recognize
      an impairment loss. We generally utilize an income approach, a discounted future
      cash flow analysis and an analysis of market multiples to estimate fair value
      of
      the asset. Actual useful lives and cash flows could be different from those
      estimated. This could have a material affect on our operating results and
      financial position. We test goodwill for impairment on an annual basis, or
      between annual tests if we determine that a significant event or change in
      circumstances warrants such testing in accordance with the provisions of SFAS
      142 which requires a comparison of the carrying value of goodwill to the fair
      value of the reporting unit. If the fair value of the reporting unit is less
      than the carrying value of goodwill, an adjustment to the carrying value of
      goodwill is required.





Since
      our
      launch of the REDIview product line in January of 2005, we have experienced
      significant competition in the marketplace which has eroded our price points
      and
      prevented us from achieving our sales targets with sales cycles for large
      accounts proving to be much longer and complex than originally anticipated.
      Thus, in response to current market conditions, we further revised our business
      plan modifying our pricing structure, our sales and marketing approach and
      added
      new feature sets to our REDIview product line to ensure that we remain
      competitive in the marketplace. We have significantly reduced our future
      projected cash flows from previous projections. During the fiscal year ended
      August 31, 2005, we performed our annual test for goodwill impairment
      utilizing an income approach, a discounted future cash flow analysis and an
      analysis of market multiples and determined that our goodwill was impaired
      by an
      estimated $9.6 million. Goodwill was written off by $9.6 million
      representing the full amount of the estimated impairment.





Based
      on
      our failure to achieve our forecasted sales targets for the fiscal year ended
      August 31, 2006, we began analyzing and revising our current and long-term
      business plans with the goal of optimizing our sales and marketing strategy
      in
      order to maximize our revenues and further reduce our operating costs. As a
      result, we materially modified our existing business plan. In implementing
      our
      new business plan, we completed a significant cost and operational-based
      restructuring downsizing our workforce at all levels including prior senior
      management level and ceased our development efforts to launch two new product
      lines during the fiscal year ended August 31, 2006 instead focusing our efforts
      on enhancing our existing REDIview product line. As a result, in addition to
      significantly reducing our projected operational costs, we significantly reduced
      our projected sales targets and associated cash flows from our previous business
      plan which included multiple product offerings sold through both a direct sales
      force and third-party distributors.




32




As
      a
      result and in accordance with SFAS 142, we performed interim and annual tests
      of
      our goodwill utilizing a discounted future cash flow analysis based on our
      new
      projected sales targets and the estimated impact of our cost savings. We have
      determined that our goodwill was further impaired during the fiscal year ended
      August 31, 2006 by an estimated $7.7 million. Goodwill was thus further
      written off by $7.7 million representing the full amount of the estimated
      impairment. At August 31, 2006, the remaining carrying value of our
      goodwill was $2.4 million. There can be no assurances that we will achieve
      our REDIview sales targets and targeted cost reductions and our failure to
      do so
      may have a material adverse effect upon our Goodwill.




*Business
      and Credit Concentrations*




We
      continuously monitor collections and payments from our customers and maintain
      a
      provision for estimated accounts receivable that may eventually become
      uncollectible based upon historical experience and specific customer
      information. There is no guarantee that we will continue to experience the
      same
      credit loss history in future periods. If a significant change in the liquidity
      or financial condition of a large customer or group of customers were to occur,
      it could have a material adverse affect on the collectibility of our accounts
      receivable and future operating results.





Revenues
      from sales of our REDIview products and services accounted for approximately
      50%
      and 3% of our total revenues during the fiscal years ended August 31, 2006
      and
      2005, respectfully. SBC accounted for approximately 15% and 61%, respectively,
      of total revenues during the same period. The SBC contract expired effective
      December 31, 2005. During the fiscal years ended August 31, 2006 and 2005,
      SBC
      and Geologic Solutions, Inc. (“Geologic”) accounted for approximately 15% and
      73%, respectively, of total revenues. Geologic terminated its contract with
      us
      effective August 31, 2005. Revenues from sales of our VMI products and services
      accounted for approximately 35% and 23% of our total revenues during the fiscal
      years ended August 31, 2006 and 2005, respectfully.




**Impact
      of Recently Issued Accounting Standards**




*Financial
      Accounting Standards No. 155 (“FAS 155”).* In
      February 2006, the FASB issued FAS 155, “Accounting for Certain Hybrid Financial
      Instruments,” an amendment of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) and
      Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). With
      respect to FAS 133, FAS 155 simplifies accounting for certain hybrid financial
      instruments by permitting fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation and eliminates the interim guidance in Statement 133 Implementation
      Issue No. D1, “Application of Statement 133 to Beneficial Interests in
      Securitized Financial Assets,” which provided that beneficial interests in
      securitized financial assets are not subject to the provision of FAS 133. With
      respect to FAS 140, FAS 155 eliminates a restriction on the passive derivative
      instruments that a qualifying special-purpose entity may hold. FAS 155 is
      effective for all financial instruments acquired or issued after the beginning
      of an entity’s first fiscal year that begins after September 15, 2006. We do not
      expect the adoption of FAS 155 to significantly affect our financial condition
      or results of operations.




*FASB
      Interpretation No. 48 (“FIN 48”).* In July
      2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes” which
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return. Additionally, FIN 48 provides guidance on derecognition,
      classification, accounting in interim periods and disclosure requirements for
      uncertain tax positions. The accounting provisions of FIN 48 will be effective
      for us beginning October 1, 2007. We are in the process of determining the
      effect, if any, the adoption of FIN 48 will have on our financial statements.




33




*Financial
      Accounting Standards No. 157 (“FAS 157”).* In
      September 2006, the FASB issued FAS 157, “Fair Value Measurements.” FAS 157
      defines fair value, established a framework for measuring fair value in
      generally accepted accounting principles (GAAP) and expands disclosures about
      fair value measurements. FAS 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007. We do not expect the
      adoption of FAS 157 to significantly affect our financial condition or results
      of operations.




**Off-Balance
      Sheet Arrangements**




As
      of
      August 31, 2006, we did not have any significant off-balance sheet arrangements,
      as defined in Item 303(c)(2) of Regulation S-B.




**Quantitative
      and Qualitative Disclosures About Market Risk**




We
      do not
      have any material exposure to market risk associated with our cash and cash
      equivalents. Our note payables are at a fixed rate and, thus, are not exposed
      to
      interest rate risk.





**Item
      7.********Financial
      Statements.**




The
      information required by this item is included on pages F-1 through
      F-48.




**Item
      8.********Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure.**




**Change
      from BDO Seidman, LLP to KBA Group LLP**





On
      March 10, 2006, the audit committee of our board of directors approved the
      engagement of, and we engaged, KBA Group LLP to serve as our principal
      independent registered public accounting firm to audit our consolidated
      financial statements for the fiscal year ending August 31, 2006, replacing
      BDO Seidman, LLP.





During
      our two most recent fiscal years and through March 10, 2006, there were no
      disagreements with BDO Seidman, LLP on any matters of accounting principles
      or
      practices, financial statement disclosure, or auditing scope or procedure,
      which, if not resolved to BDO Seidman, LLP’s satisfaction, would have caused
      them to make reference to the subject matter in connection with their report
      on
      our consolidated financial statements for such years, and there were no
      reportable events, as listed in Item 304(a)(1)(v) of
      Regulation S-K.





On
      February 3, 2006, following their review of our disclosure contained herein
      in response to Item 304(a) of Regulation S-K, BDO Seidman, LLP furnished us
      with a letter addressed to the Commission stating that it agrees with the
      statements made by us contained herein in response to Item 304(a) of
      Regulation S-K.





During
      our two most recent fiscal years and through March 10, 2006, we did not
      consult KBA Group LLP with respect to the application of accounting principles
      to a specified transaction, either completed or proposed, or the type of audit
      opinion that might be rendered on our consolidated financial statements, or
      any
      other matters or reportable events listed in Items 304 (a)(2)(i) and
      (ii) of Regulation S-K.





**Item
      8A.********Controls
      and Procedures**




We
      maintain disclosure controls and procedures, which we have designed to ensure
      that material information related to us, including our consolidated
      subsidiaries, is made known to our disclosure committee on a regular basis.
      Our
      disclosure committee consists of members of our senior management.




34




Under
      the
      supervision, and with the participation of our senior management, including
      our
      Chief Financial Officer, an evaluation of the effectiveness of our disclosure
      controls and procedures was performed as of August 31, 2006. Based on this
      evaluation, the CFO has concluded that, as of the end of the period covered
      by
      this Annual Report, our Disclosure Controls are not effective to provide
      reasonable assurance that our financial statements are fairly presented in
      conformity with generally accepted accounting principles for the reasons
      discussed below.





These
      matters are with regard to insufficient personnel resources within the company,
      based on the size and complexity of the organization, to affect timely financial
      close process and to effectively evaluate and resolve certain routine and
      non-routine and/or complex accounting transactions. A significant deficiency,
      or
      combination of significant deficiencies, that results in more than a remote
      likelihood that a material misstatement of the annual or interim financial
      statements will not be prevented or detected is considered a material weakness.
      Significant deficiencies are control issues that could have a significant
      adverse effect on the ability to record, process, summarize and report financial
      data in the financial statements.





To
      remediate this internal control weakness, management has commenced
      implementation of the following measures: The Company will continue to add
      sufficient personnel to properly segregate duties and to effect a timely,
      accurate preparation of the financial statements. The Company plans to have
      this
      implemented during the second quarter of 2007.





There
      were no changes in our internal controls over financial reporting (as such
      term
      is defined in Rule 13a-15(f) under the Exchange Act) that occurred during
      our fiscal year ended August 31, 2006, that have materially affected, or
      are reasonably likely to materially affect, our internal controls over financial
      reporting. In the estimation of our senior management, none of the following
      changes in the composition of management have materially affected, or are
      reasonably likely to materially affect, our internal controls over financial
      reporting:




(i)
            
            On
                May 31, 2006, J. Raymond Bilbao resigned the office of President,
                Chief Operating Officer and Secretary;(ii)
            
            On
                June 18, 2006, Mathew Petzold resigned from his position as
                director;(iii)
            
            On
                June 30, 2006, Dennis R. Casey resigned the office of Chief Executive
                Officer and resigned from his position as Chairman of our Board of
                Directors;(iv)
            
            On
                June 30, 2006, Gregg J. Pritchard resigned from his position as
                director;(v)
            
            On
                June 30, 2006, Thomas W. Honeycutt resigned from his position as
                director;(vi)
            
            On
                June 30, 2006, Marshall G. Saffer joined our Board of
                Directors;(vii)
            
            On
                July 8, 2006, Phillip K. Hunter joined our Board of
                Directors;(viii)
            
            On
                July 11, 2006, Christopher D. Phillips joined our Board of
                Directors;(ix)
            
            On
                December 5, 2006, David Walters joined our Board of Directors and
                was
                appointed Chairman of the Board;(x)
            
            On
                December 5, 2006, Keith C. Moore joined our Board of Directors and
                was
                appointed Secretary of the Board;




35




(xi)
            
            On
                December 5, 2006, Christopher D. Phillips resigned from his position
                as
                director; and,(xii)
            
            On
                December 22, 2006, Phillip K. Hunter resigned from his position as
                director.




**Item
      8B.********Other
      Information**




Not
      applicable.


36


**PART
      III**




**Item
      9.********Directors
      and Executive Officers of Remote Dynamics, Inc.**




The
      following table presents information with respect to our directors and executive
      officers.


**Name**
              
              **Age**
              ****
              **Position**David
                  Walters
              
              44
              
              Director,
                  ChairmanKeith
                  C. Moore
              
              46
              
              Director,
                  SecretaryDennis
                  Ackerman
              
              59
              
              DirectorMarshall
                  G. Saffer
              
              36
              
              DirectorNeil
                  Read
              
              42
              
              Vice
                  President, Chief Financial Officer, and
                  Treasurer




**Directors**





**DAVID
      WALTERS - Director and Chairman since December 5, 2006.**


Mr.
      Walters has served as Chairman and Chief Executive Officer of Bounce Mobile
      Systems, Inc., since July 2006. Since February 2000, he has served as a managing
      member of Monarch Bay Capital Group, LLC, a consulting company and since March
      2006, as a managing member of Monarch Bay Management Company, LLC, also a
      consulting company. Mr. Walters has extensive experience in investment
      management, corporate growth development strategies and capital markets. Mr.
      Walters earned a B.S. in Bioengineering from the University of California,
      San
      Diego in 1985. Mr. Walters also serves as Chairman of the Board of Directors
      of
      Monarch Staffing, Inc. and a member of the Board of Directors of Precision
      Aerospace Components, Inc..





**KEITH
      C. MOORE - Director and Secretary since December 5, 2006.**





Mr.
      Moore
      is Chairman and Chief Executive Officer of DataLogic International, Inc., an
      information technology company, positions he has held since January 2005. Since
      March 2006, he has also served as a managing member of Monarch Bay Management
      Company, LLC, a consulting company. From April 1999 to January 2005, Mr. Moore
      served as Chairman and Chief Executive Officer of iTechexpress, Inc. Mr. Moore
      received his Bachelors degree in Finance from Eastern Michigan University in
      1982 and his Masters degree from Eastern Michigan University in Finance in
      1984.
      Mr. Moore also serves as member of the Board of Directors of Monarch Staffing,
      Inc.




**DENNIS
      ACKERMAN — Director since January 4, 2006.**





Mr. Ackerman,
      age 59, served as Director of the Bank of America Entrepreneurial Center from
      1987 through December 2004. The Bank of America Entrepreneurial Center
      provides business planning and business plan implementation services for
      businesses. Since formation in 1987, the Center has assisted business with
      raising over $500 million in working capital. From 1974 through 1987, Mr.
      Ackerman served as President of energy company with a distribution network
      covering five states. Mr. Ackerman obtained a B.S. degree in Comprehensive
      Science from the College of Education at Ohio State University in
      1969.





**MARSHALL
      G. SAFFER — Director since June 30, 2006.**





Mr. Saffer,
      age 36, has served as the Senior Manager — Business Development for VITEOS
      Capital Markets since March 2006. Previously, Mr. Saffer held senior
      sales and marketing positions for SS&C Technologies, DST International and
      Financial Models Company. Mr. Saffer holds a Bachelor of Administration in
      Psychology from Connecticut College.




37




**Executive
      Officers**





Except
      as
      disclosed under “Employment Agreements” below, all officers serve until their
      successors are duly elected and qualified or their earlier death, disability
      or
      removal from office.




**NEIL
      READ** — **Vice
      President, Chief Financial Officer and Treasurer since December 27, 2005**





Mr. Read,
      age 42, previously served as the Company’s Chief Accounting Officer since July
      2004. Mr. Read originally joined the Company as Tax Manager serving in such
      role from November 1998 through December 1999. From January 2000
      through June 2004, Mr. Read served as Director of Revenue Assurance and
      Treasury. Prior to joining Remote Dynamics Mr. Read was employed by
      AT&T Wireless and McCaw Cellular where he served in various financial and
      accounting roles. Mr. Read earned a Bachelor of Business Administration in
      Accounting from Texas Tech University and is a Certified Public
      Accountant.





There
      are
      no family relationships among the directors and executive officers of Remote
      Dynamics, Inc.





**Organization
      of the Board of Directors and Meetings**





Pursuant
      to our Third Amended and Restated Bylaws, our Board of Directors will consist
      of
      five board members. Our Board of Directors presently consists of board members:
      David Walters, Keith C. Moore, Dennis Ackerman, and Marshall Saffer. All
      directors serve until the next annual meeting of the stockholders or until
      their
      respective successors are duly elected and qualified, or until their earlier
      death or removal from office.





On
      September 2, 2005, we sold 650 shares of our Series B convertible
      preferred stock to SDS Capital Group SPC Ltd. pursuant to a Securities Purchase
      Agreement, dated September 2, 2005. The holder of a majority of the
      Series B convertible preferred stock has the right to appoint one
      representative to our Board of Directors and is entitled to designate one
      observer to meetings of our Board of Directors and its committees. Although
      the
      holder of our Series B convertible preferred stock retains the right to do
      so in the future, it has not yet exercised its right to appoint a board member.
      The holder of our Series B convertible preferred stock has designated
      Raahim Don as its board observer to attend the meetings of our Board of
      Directors and its committees. If the holder of a majority of the Series B
      convertible preferred stock provides written notice to us that it intends to
      designate a board member, then the Board of Directors can, by resolution,
      increase the size of the board by one board seat to accommodate the
      request.





**Audit
      Committee** .
      Our
      Board of Directors maintains a separately standing audit committee, currently
      composed of Keith C. Moore and Dennis Ackerman.   Neither Mr.
      Ackerman nor Mr. Moore qualifies as “independent,” as required by Rule
      4200(a)(15) of the National Association of Securities Dealers’ listing
      standards. The Audit Committee, with the assistance of our independent
      accountants, determines the adequacy of internal controls and other financial
      reporting matters, and reviews and recommends to the board of directors for
      approval all published financial statements.





**Audit
      Committee Financial Expert** .
      Our
      Board of Directors has determined that Keith C. Moore qualifies as an audit
      committee financial expert under the Sarbanes-Oxley Act of 2002 and the rules
      of
      the Securities and Exchange Commission. Mr. Moore does not qualify as
      independent under Rule 4200(a)(15) of the National Association of
      Securities Dealers’ listing standards.





**Code
      of Ethics for Chief Executive Officer and Senior Financial
      Officers** .
      On
      November 7, 2003, our Board of Directors adopted a Code of Ethics that
      applies to our principal executive officer, principal financial officer,
      principal accounting officer or controller, or persons performing similar
      functions. A full copy of this Code is filed as Exhibit 14.1 filed in
      connection with our Annual Report on Form 10-K/A for the fiscal year ended
      August 31, 2004.





**Nomination
      and Corporate Governance Committee** .
      There
      have been no material changes to the procedures by which our stockholders may
      recommend nominees to our Board of Directors.




38




**Indemnification
      of Directors and Officers.** We
      indemnify each person who is or was a director, officer, employee or agent
      of
      Remote Dynamics, or serves at our request as a director, officer, employee
      or
      agent of another corporation, partnership, joint venture, trust or other
      enterprise, against expenses, judgments, fines and amounts incurred in that
      capacity.





We
      will
      indemnify only for actions taken:





·
            in
                good faith in a manner the indemnified person reasonably believed
                to be in
                or not opposed to the best interests of Remote Dynamics;
                or





·
            with
                respect to criminal proceedings, not
                unlawful.




We
      will
      also advance to the indemnified person payments incurred in defending a
      proceeding to which indemnification might apply, provided the recipient agrees
      to repay all such advanced amounts if it is ultimately determined that such
      person is not entitled to be indemnified. Our Bylaws specifically provide that
      the indemnification rights granted thereunder are nonexclusive. In accordance
      with our Bylaws, we have purchased insurance on behalf of our directors and
      officers in amounts that we believe to be reasonable.




**Section 16(a)
      Beneficial Ownership Reporting Compliance**





Section 16(a)
      of the Securities Exchange Act of 1934 requires our directors and executive
      officers, and persons who own more than 10% of a registered class of our equity
      securities to file with the Securities and Exchange Commission initial
      statements of beneficial ownership of securities and subsequent changes in
      beneficial ownership. Our officers, directors and greater-than-ten-percent
      stockholders are required by the Securities and Exchange Commission’s
      regulations to furnish us with copies of all Section 16(a) forms which they
      have
      filed.





To
      our
      knowledge, based solely on a review of the copies of such reports furnished
      to
      us and written representations that no Form 5 reports were required, all of
      our officers, directors and beneficial owners of more than 10% of our common
      stock, the only class of securities registered under the Exchange Act, timely
      complied with all Section 16(a) filing requirements applicable to them during
      the fiscal year ended August 31, 2006.





**Compensation
      of Directors**





Our
      Board
      of Directors has the authority to fix the compensation of directors. Our Bylaws
      provide that directors may be reimbursed for reasonable expenses for their
      services to us, and may be paid either a fixed sum for attendance at each Board
      of Directors meeting or a stated annual director fee. We also reimburse our
      directors for travel expenses. In addition, we provide our non-employee
      directors with a standard annual director’s fee of $10,000. The director’s fees
      are paid quarterly and prorated for partial service.




**Item
      10.** **** **Executive
      Compensation.**





The
      following table describes compensation awarded, paid to or earned, for the
      last
      three full fiscal years, by us to: (a) our former President and Chief
      Executive Officer, (b) our Chief Financial Officer and (c) four other four
      most highly compensated executive officers during fiscal year ended
      August 31, 2006. Some of the persons named below are employed by us under
      an employment agreement.




39




Annual Compensation
              
              Long
                  Term
                Compensation
                AwardsSecuritiesName
                  and Principal Position
              
              Year
              
              Salary(Dollars)
              
              Bonus(Dollars)
              
              Other
                  AnnualCompensation(Dollars)
              
              Underlying
                Options/
                SARs
                    (shares)Dennis
                  R. Casey (1)
              
              
              2006
              
              $
              83,333
              
              $
              -
              
              $
              -
              
              $
              -Former
                  President and Chief Executive
              
              
              2005
              
              $
              225,000
              
              $
              -
              
              $
              -
              
              $
              -Officer
              
              
              2004
              
              $
              121,311
              
              $
              25,000
              
              $
              73,500
                  (2
              )
              $
              -W.
                  Michael Smith (3)
              
              
              2006
              
              $
              66,667
              
              $
              -
              
              $
              108,334
                  (2
              )
              $
              -Former
                  Executive Vice President, Chief
              
              
              2005
              
              $
              200,000
              
              $
              -
              
              $
              -
              
              $
              -Financial
                  Officer, Chief Operating
              
              
              2004
              
              $
              182,107
              
              $
              -
              
              $
              49,000
                  (3
              )
              $
              -Officer
                  and TreasurerJ.
                  Raymond Bilbao (4)
              
              
              2006
              
              $
              150,000
              
              $
              -
              
              $
              50,000
                  (4
              )
              $
              -Former
                  President and Chief Operating
              
              
              2005
              
              $
              200,000
              
              $
              -
              
              $
              -
              
              $
              -Officer
              
              
              2004
              
              $
              182,019
              
              $
              -
              
              $
              49,000
                  (4
              )
              $
              -Joseph
                  Pollard (5)
              
              
              2006
              
              $
              52,180
              
              $
              -
              
              $
              -
              
              $
              -Former
                  Senior Vice President Sales and
              
              
              2005
              
              $
              200,000
              
              $
              -
              
              $
              -
              
              $
              -Marketing
                  for Remote Dynamics
              
              
              2004
              
              $
              19,354
              
              $
              -
              
              $
              164,500
                  (5
              )
              $
              -David
                  Bagley (6)
              
              
              2006
              
              $
              47,234
              
              $
              -
              
              $
              76,754
                  (6
              )
              $
              -Former
                  Senior Vice President, Networks &
              
              
              2005
              
              $
              141,700
              
              $
              -
              
              $
              67,500
                  (6
              )
              $
              -Engineering
                  for Remote Dynamics
              
              
              2004
              
              $
              128,800
              
              $
              -
              
              $
              -
              
              $
              -Neil
                  Read (7)Vice
                  President, Chief Financial Officer,
              
              
              2006
              
              $
              113,588
              
              $
              -
              
              $
              23,800
                  (7
              )
              $
              -and
                  Treasurer
              
              
              2005
              
              $
              103,394
              
              $
              2,899
              
              $
              -
              
              $
              -2004
              
              $
              98,452
              
              $
              6,756
              
              $
              -
              
              $
              -





(1)
              Mr.
                  Casey became our President and Chief Executive Officer effective
                  January
                  30, 2004. Mr. Casey resigned the office of President on December
                  27, 2005.
                  Mr. Casey resigned the office of Chief Executive Officer (Principal
                  Executive Officer) on June 30,
                  2006.





(2)
              Represents
                  150,000 shares of restricted stock with a value of $150,000. The
                  restricted stock originally vested pursuant to the achievement
                  of certain
                  performance objectives. On June 27, 2006, our Board of Directors
                  approved
                  vesting of all of Mr. Casey's restricted
                  shares.





(3)
              Represents
                  100,000 shares of restricted stock with a value of $100,000. The
                  restricted stock originally vested pursuant to the achievement
                  of certain
                  performance objectives. On February 1, 2006, Mr. Smith's restricted
                  shares
                  vested in accordance with the termination of his employment agreement
                  with
                  us. Mr. Smith received a severance payment in accordance with the
                  termination of his employment agreement with us. For the fiscal
                  year ended
                  August 31, 2006, Mr. Smith received $108,334 in severance
                  pay.





(4)
              Represents
                  100,000 shares of restricted stock with a value of $100,000. The
                  restricted stock originally vested pursuant to the achievement
                  of certain
                  performance objectives. Mr. Bilbao resigned the office of President,
                  Chief
                  Operating Officer and Secretary on May 31, 2006. Mr. Bilbao's restricted
                  shares were forfeited upon his resignation. The Board of Directors
                  granted
                  Mr. Bilbao a separation payment of $50,000 upon his resignation
                  from the
                  Company.





(5)
              Represents
                  100,000 shares of restricted stock with a value of $100,000. The
                  restricted stock originally vested pursuant to the achievement
                  of certain
                  performance objectives. Mr. Pollard resigned as of December 6,
                  2005. Mr.
                  Pollard's restricted shares were forfeited upon his
                  resignation.





(6)
              Represents
                  75,000 shares of restricted stock with a value of $75,000. The
                  restricted
                  stock originally vested pursuant to the achievement of certain
                  performance
                  objectives. Mr. Bagley's employment was terminated on December
                  27, 2005.
                  On February 1, 2006, Mr. Bagley's restricted shares vested in accordance
                  with the termination of his employment agreement with us. Mr. Bagley
                  received a severance payment in accordance with the termination
                  of his
                  employment agreement with us. For the fiscal year ended August
                  31, 2006,
                  Mr. Bagley received $47,234 in severance
                  pay.




40




(7)
              On
                  September 17, 2005, Mr. Read was issued 20,000 shares of restricted
                  stock
                  with a value of $23,800. The restricted stock vests pursuant to
                  the
                  achievement of certain performance objectives. If we pay cash dividends
                  on
                  shares of our common stock, we shall credit to a bookkeeping account
                  in
                  the name of Mr. Read the amount of cash dividends payable on his
                  shares of
                  restricted stock. Mr. Read's dividend account associated with his
                  shares
                  of restricted stock shall become vested and payable in cash on
                  the date
                  his shares of restricted stock vest. See the 2004 Restated Management
                  Incentive Plan for additional details regarding the vesting requirements.
                  On June 27, 2006, our Board of Directors approved vesting of Mr.
                  Read's
                  restricted shares.





**2004
      Restated Management Incentive Plan**





Pursuant
      to our plan of reorganization, we implemented the 2004 Restated Management
      Incentive Plan. Grants made pursuant to the 2004 Restated Management Incentive
      Plan vest as follows:





·
            One
                third of the restricted shares granted will vest upon the execution
                by
                Remote Dynamics of an agreement with the member companies of SBC
                Communications, Inc. for the retrofit of SBC’s fleet of service vehicles
                at the substantially similar volumes and profit margins as set forth
                in
                the May 20, 2004 Report to the Official Unsecured Creditors
                Committee;





·
            One
                third of the restricted shares granted will vest upon the completion
                by
                Remote Dynamics of three consecutive fiscal quarters in which Remote
                Dynamics achieves positive earnings before interest, depreciation,
                taxes
                and amortization on or before January 2, 2007;
                and





·
            One
                third of the restricted shares granted vest upon the completion by
                Remote
                Dynamics of four consecutive fiscal quarters in which Remote Dynamics
                achieves net income on or before July 2,
                2007.





**Savings
      Plan**





We
      have a
      401(k) Retirement Investment Profit-Sharing Plan that covers all of our
      employees once they become eligible to participate. As permitted under the
      401(k) Plan, employees may contribute up to 20% of their pre-tax earnings.
      The
      maximum amount of contributions by any employee each calendar year is $15,000,
      the maximum amount permitted under the Internal Revenue Code of 1986, as
      amended. We match 50% of an employee’s contribution to the 401(k) Plan up to 6%
      of pre-tax earnings for a total potential matching contribution of 3% of the
      employee’s pre-tax earnings.





**Employment
      Agreements**





As
      of
      January 16, 2007, we have a current employment agreement with Neil Read, our
      Vice President, Chief Financial Officer and Treasurer. The following is a
      summary of the material details of the employment agreement. Please be aware
      that this summary may not contain all of the information that is important
      to
      you and we encourage you to read the actual employment agreement in its
      entirety.





The
      agreement for Mr. Read provides for Mr. Read’s employment with us for
      an initial one-year term, through October 23, 2007. The agreement will
      thereafter continue on a month-to-month basis and may be terminated by either
      party on thirty days written notice. Mr. Read’s employment will be automatically
      terminated upon his death or permanent disability. Under the terms of the
      agreement, Mr. Read:





·
            is
                to be paid an annual base salary of
                $150,000;





·
            is
                subject to particular confidentiality, non-competition and
                non-solicitation covenants, as more fully described in his employment
                agreement;




41




·
            is
                entitled to a one-time severance payment equal to his monthly base
                salary
                multiplied by the number of months remaining in the initial one year
                term
                of the employment agreement should Mr. Read be terminated by us without
                cause;





·
            is
                entitled to participate in our 2004 Restated Management Incentive
                Plan as
                well as our other employee benefit
                plans.





*Compensation
      Committee Interlocks and Insider Participation*





During
      the fiscal year ended August 31, 2006, the following members of the Board
      of Directors served on our Compensation Committee: Gerry Quinn, Thomas
      Honeycutt, Greg Pritchard, Matthew Petzold, Marshall Saffer and Keith C. Moore.
      Gerry Quinn resigned from the Board of Directors and its Compensation Committee
      effective December 22, 2005. Matthew Petzold was appointed to the
      Compensation Committee effective January 23, 2006. Mr. Petzold resigned from
      the
      Board of Directors and its Compensation Committee effective June 18, 2006.
      Mr.
      Honeycutt resigned from the Board of Directors and its Compensation Committee
      effective June 30, 2006. Mr. Pritchard resigned from the Board of Directors
      and
      its Compensation Committee effective June 30, 2006. Marshall Saffer and Keith
      C.
      Moore were appointed to the Compensation Committee effective December 5,
      2006.





During
      the fiscal year ended August 31, 2006, our Compensation Committee reviewed
      and adjusted the salary structures of executive officers subject to employment
      agreements and executive officers who were not subject to employment
      agreements.




**Item
      11.********Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters.**




The
      following table sets forth certain information regarding beneficial ownership
      of
      our common stock as of January 16, 2007





·
            by
                each person who is known by us to beneficially own more than 5% of
                our
                common stock;





·
            by
                each of our executive officers and directors; and





·
            by
                all of our executive officers and directors as a group.


Name
                        and Address of Beneficial Owner (1)
                
                Nature
                      of Beneficial owner (1)
                
                Beneficial
                      Ownership
                    Number
                      of Shares
                
                Percent
                      of
                    Total
                      (2)Bounce
                    Mobile Systems, Inc.
                
                
                Stockholder
                
                
                1,320,332,565
                    (3
                )
                
                61.5
                %30950
                    Rancho Viejo Rd. #120San
                    Juan Capistrano, CA 92675Dennis
                    Ackerman
                
                
                Director
                
                
                650,650
                    (4
                )
                
                *Keith
                    Moore
                
                
                Director
                
                
                —
                
                
                —Marshall
                    Saffer
                
                
                Director
                
                
                —
                
                
                —David
                    Walters
                
                
                Chairman
                    and Director
                
                
                1,320,332,565
                    (3
                )
                
                61.5
                %Neil
                    Read
                
                
                Vice
                    President, Chief
                    Financial
                      Officer & Treasurer
                
                
                20,000
                
                
                *All
                    executive officers anddirectors
                    as a group(5
                    persons)
                
                
                
                
                
                1,321,001,915
                    (3,4
                )
                
                61.5
                %




*
      Less
      than 1%




42




(1)
      Beneficial ownership is determined in accordance with the rules of the
      Commission and generally includes voting or investment power with respect to
      securities. In accordance with Commission rules, shares of the Company's common
      stock which may be acquired upon exercise of stock options or warrants which
      are
      currently exercisable or which become exercisable within 60 days of the date
      of
      the table are deemed beneficially owned by the optionees. Subject to community
      property laws, where applicable, the persons or entities named in the table
      above have sole voting and investment power with respect to all shares of the
      Company's common stock indicated as beneficially owned by them.





(2)
      Based
      upon the following outstanding securities: (a) 63,228,182 shares of common
      stock, (b) 547 shares of our series B convertible preferred stock (which were
      convertible into 3,690,323 shares of common stock), (c) 5,000 shares of our
      series C convertible preferred stock (which were convertible into 1,094,676,315
      shares of common stock), (d) $3,789,031 principal amount of our series A senior
      secured convertible promissory notes (which were convertible into 236,814,438
      shares of common stock), (e) $4,649,555 principal amount of our series B
      subordinated secured convertible promissory notes (which were convertible into
      290,597,188 shares of common stock), (f) series A-7 warrants exercisable for
      20,625,000 shares of common stock, (g) series B-4 warrants exercisable for
      13,750,000 shares of common stock, (h) series C-3 warrants exercisable for
      27,500,000 shares of common stock, (i) series D-1 warrants exercisable for
      19,250,000 shares of common stock, (j) series E-7 warrants exercisable for
      168,049,892 shares of common stock, (k) series F-4 warrants exercisable for
      168,049,892 shares of common stock, and (l) other warrants exercisable for
      41,872,010 shares of common stock.





(3)
      Consists of shares of common stock issuable upon conversion or exercise of
      the
      following outstanding securities held by BMSI: (a) 5,000
      shares of our series C convertible preferred stock, (b) $1,743,000 principal
      amount of series B subordinated secured convertible notes (including original
      issue discount series B subordinated secured convertible notes), (c) our series
      E-7 warrants to purchase 58,359,375 shares of our common stock, and (d) our
      series F-4 warrants to purchase 58,359,375 shares of our common
      stock.





(4) This
      individual does not actually own any shares but is deemed to beneficially own
      650,650 shares issuable upon conversion of a convertible promissory note issued
      by the Company.




**Item
      12.********Certain
      Relationships and Related Transactions.**




*HFS
      Exit Financing*




On
      June
      29, 2004, we closed on a bankruptcy court-approved exit financing facility
      with
      HFS Minorplanet Funding LLC (“HFS”) and other accredited investors in the amount
      of $1,575,000. As part of the facility, we agreed to issue a $1,575,000
      convertible promissory note to HFS with the principal balance being due 36
      months from the date of funding, with an annual interest rate of 12%. HFS was
      required to provide the funding within 21 days of the closing.




On
      July
      20, 2004, we amended the exit financing by with HFS increasing the amount of
      the
      financing from $1,575,000 to $2,000,000. As a result, we issued a $2,000,000
      convertible promissory note to HFS with the principal balance being due 36
      months from the date of funding, with an annual interest rate of 12%. Upon
      issuance of the note, HFS provided the $2,000,000 funding to us less a
      commission in the amount of $80,000 representing 4% of the loan proceeds. HFS,
      may at any time demand repayment of the accrued interest and unpaid principal
      on
      the note, based upon a fixed conversion price (currently $3.08 per share of
      common stock), whose aggregate value equals the amount of accrued interest
      and
      principal being repaid. We paid HFS $240,000 in interest payments on the note
      during each of the twelve months ended August 31, 2006 and August 31, 2005,
      respectively.




In
      connection with the exit financing, we agreed to appoint one additional member
      to our Board of Directors as designated by HFS, unless such appointment would
      cause us to violate the independent director requirements, based on the written
      advice of legal counsel, as set forth in the rules and regulations of the NASDAQ
      Stock Exchange, the Sarbanes-Oxley Act of 2002 and the rules and regulations
      promulgated by the Securities and Exchange Commission. This additional designee
      will serve on our Board of Directors until the exit financing note is repaid
      in
      cash or repaid by conversion to common stock. Stephen CuUnjieng, the president
      of HFS and a controlling partner in HFS, served as the HFS designee from July
      13, 2004 to December 15, 2005. Mr. CuUnjieng was employed by us as director
      of
      strategic finance from January 30, 2004 through December 31, 2004, to assist
      us
      with further fund raising. On January 4, 2006, we appointed Dennis Ackerman
      to
      serve as the HFS-designee member of our Board of Directors. Mr. Ackerman
      currently serves as a director of HFS Capital Private Equity Fund LLC, the
      Managing Member of HFS. Mr. Ackerman is deemed to beneficially own 650,650
      shares of common stock issuable upon conversion of the HFS note.




43




On
      November 30, 2006, we entered into a promissory note with HFS in the principal
      amount of $1,000,000 and having a maturity date of December 1, 2007. At
      maturity, (a) the promissory note (and all amounts due under the note)
      automatically converts into our securities of the same kind issued by us in
      our
      November 2006 private placement (based on $1,000,000) and (b) the existing
      $2,000,000 convertible promissory note issued by us to HFS will be
      cancelled.




*Monarch
      Bay Management Company Agreement*





Our
      wholly owned subsidiary, BounceGPS, Inc., has an agreement with Monarch Bay
      Management Company, L.L.C. ("MBMC") for corporate development and chief
      financial officer services. David Walters (our Chairman) and Keith Moore (a
      member of our Board of Directors) are managing members of MBMC. The agreement
      was entered into prior to our December 4, 2006 acquisition of BounceGPS, Inc.
      and prior to Messrs. Walters and Moore joining our Board of Directors. Under
      the
      agreement with MBMC, BounceGPS, Inc. will pay to MBMC a monthly fee of $20,000
      in cash. The initial term of the agreement expires on December 31, 2007 and
      continues thereafter on a month-to-month basis unless terminated by either
      party.





**Item
      13.********Exhibits.**




(a)  1. **Consolidated
      Financial Statements.**




The
      following consolidated financial statements of Remote Dynamics, Inc. and
      Subsidiary, are submitted as a separate section of this report (See
      F-pages), and are incorporated by reference in Item 7:




Report
                of Independent Registered Public Accounting Firm
            F-1Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets at August 31, 2006 and 2005
            F-3Consolidated
                Statements of Operations for the fiscal years ended August 31, 2006,
                and 2005
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit) for the fiscal years ended
                August 31, 2006 and 2005
            F-5Consolidated
                Statements of Cash Flows for the fiscal years ended August 31, 2006
                and
                2005
            F-6Notes
                to Consolidated Financial Statements
            F-8




(b) **** **Exhibits**




The
      following Exhibits are filed herewith pursuant to Item 601 of
      Regulation S-B or incorporated herein by reference to previous filings as
      noted:




**Exhibit
                No.**
              
              **Identification
                of Exhibit**2.1
              
              Stock
                  Purchase and Exchange Agreement by and among @Track Communications,
                  Inc.,
                  Minorplanet
                  Systems PLC and Mackay Shields LLC dated February 14, 2001
                  (1)2.2.1
              
              Asset
                  Purchase Agreement by and between @Track Communications, Inc. and
                  Aether
                  Systems,
                  Inc. dated March 15, 2002
                  (2)




44


2.2.2
              
              List
                  of schedules and exhibits omitted from that certain Asset Purchase
                  Agreement by and between @Track Communications, Inc. and Aether
                  Systems,
                  Inc. dated March 15, 2002 (2)2.3
              
              Findings
                  and Fact, Conclusions of Law and Order Confirming Remote Dynamics,
                  Inc.’s
                  Third Amended Joint Plan of Reorganization and Approving Settlement
                  of
                  Remote Dynamics, Inc.’s Amended Motion for Valuation dated June 28, 2004.
                  (3)2.4.1
              
              Share
                  Exchange Agreement with Bounce Mobile Systems, Inc. dated November
                  30,
                  2006(4)2.4.2
              
              Registration
                  Rights Agreement with Bounce Mobile Systems, Inc. dated December
                  4, 2006
                  (4)2.4.3
              
              Security
                  Agreement with Bounce Mobile Systems, Inc. dated December 4, 2006
                  (4)2.4.4
              
              Series
                  B subordinated secured convertible promissory note of issued to
                  Bounce
                  Mobile Systems, Inc. on December 4, 2006 (4)2.4.5
              
              Original
                  issue discount series B subordinated secured convertible promissory
                  note
                  issued to Bounce Mobile Systems, Inc. on December 4, 2006
                  (4)2..4.6
              
              Series
                  E-7 Warrant issued to Bounce Mobile Systems, Inc. on December 4,
                  2006
                  (4)2.4.7
              
              Series
                  F-4 Warrant issued to Bounce Mobile systems, Inc. on December 4,
                  2006
                  (4)3.1.1
              
              Amended
                  and Restated Certificate of Incorporation dated June 30, 2004
                  (3)3.1.2*
              
              Certificate
                  Of Amendment to the Amended and Restated Certificate of Incorporation
                  dated May 26, 2006 (5)3.2
              
              Third
                  Amended and Restated By-Laws dated June 30, 2004 (6)4.1
              
              Specimen
                  of certificate representing the Common Stock, $.01 par value, of
                  Remote
                  Dynamics, Inc. (7)4.2
              
              Amended
                  and Restated Certificate of Designation, Preferences and Rights,
                  Series B
                  Convertible Preferred Stock, as filed with Secretary of State of
                  Delaware
                  on December 4, 2006 (4)4.3
              
              Certificate
                  of Designation, Preferences and Rights, Series C Convertible Preferred
                  Stock, as filed with Secretary of State of Deleware on December
                  4, 2006
                  (4)10.1.1
              
              Securities
                  Purchase Agreement with SDS Capital Group SPC, Ltd. dated May 31,
                  2005(8)10.1.2
              
              Amendment
                  No. 1 to Securities Purchase Agreement with SDS Capital Group SPC,
                  Ltd.
                  (4)10.2.1
              
              Registration
                  Rights Agreement by and between Remote Dynamics, Inc. and SDS Capital
                  Group SPC, Ltd. dated September 2, 2005 (8)10.2.2
              
              Stock
                  Purchase Warrant issued to SDS Capital Group SPC, Ltd. on September
                  2,
                  2005 for purchase of 2,000,000 shares of common stock
                  (8)10.2.3
              
              Stock
                  Purchase Warrant issued to SDS Capital Group SPC, Ltd. on September
                  2,
                  2005 for purchase of 1,666,667 shares of common stock
                  (8)10.2.4
              
              Stock
                  Purchase Warrant issued to SDS Capital Group SPC, Ltd. on September
                  2,
                  2005 for purchase of 700,000 shares of common stock (8)10.3.1
              
              Note
                  and Warrant Purchase Agreement dated as of February 23, 2006
                  (9)10.3.2
              
              Registration
                  Rights Agreement dated as of February 23, 2006 (9)10.3.3
              
              Security
                  Agreement dated as of February 23, 2006 (9)10.3.4
              
              Form
                  of series A senior secured convertible promissory note due February
                  24,
                  2008 (9)10.3.5
              
              Form
                  of original issue discount series A senior secured convertible
                  promissory
                  note due February 24, 2008 (9)10.3.6
              
              Form
                  of Series A-7 Warrant issued on February 24, 2006 (9)10.3.7
              
              Form
                  of Series B-4 Warrant issued on February 24, 2006 (9)10.3.8
              
              Form
                  of Series C-3 Warrant issued on February 24, 2006 (9)10.3.9
              
              Form
                  of Series D-! Warrant issued on February 24, 2006 (9)10.4.1
              
              Note
                  and Warrant Purchase Agreement dated as of November 30, 2006
                  (4)10.4.2
              
              Registration
                  Rights Agreement dated as of November 30, 2006 (4)10.4.3
              
              Security
                  Agreement dated as of November 30, 2006 (4)10.4.4
              
              Form
                  of series B senior secured convertible promissory note due December
                  4,
                  2009 (4)10.4.5
              
              Form
                  of original issue discount series B senior secured convertible
                  promissory
                  note due December 4, 2009 (4)10.4.6
              
              Form
                  of Series E-7 Warrant issued on December 4, 2006
                  (4)




45


10.4.7
              
              Form
                  of Series F-4 Warrant issued on December 4, 2006 (4)10.5#
              
              2004
                  Restated Management Incentive Plan(10)10.6.1#
              
              Employment
                  Agreement with Neil Read dated October 23, 2006 (11)10.6.2#
              
              Restricted
                  Stock Agreement with Neil Read dated November 7, 2005
                  (5)10.7
              
              Consulting
                  Agreement with Saffron Capital Management LLC dated January 24,
                  2006(12)10.8#
              
              Separation
                  Agreement with J. Raymond Bilbao dated May 31, 2006 (5)10.9*
              
              Consulting
                  Agreement with Monarch Bay Management Company dated July 1,
                  200610.10*
              
              Promissory
                  Note issued to HFS due December 1, 200714.1
              
              Code
                  of Ethics for Senior Financial Officers (20)21.1*
              
              Subsidiaries
                  of Registrant23.1*
              
              Consent
                  of KBA Group LLP23.3*
              
              Consent
                  of BDO Seidman, LLP31.1*
              
              Certification
                  of Principal Executive Officer and Principal Financial Officer
                  pursuant to
                  Rules 13a-14 and 15d-14 promulgated under the Securities Exchange
                  Act of
                  193432.1*
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002




#
      Management contract and/or compensatory plan, contract or
      arrangement





*
      Filed
      herewith


(1)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Definitive Proxy Statement
                  on Schedule 14A, as filed with the SEC on May 11, 2001.(2)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Current Report on Form 8-K,
                  as filed with the SEC on March 27, 2002; certain confidential portions
                  were deleted pursuant to an ‘Order Granting Application for Confidential
                  Treatment’ issued in connection with Remote Dynamics, Inc.’s Current
                  Report on Form 8-K filed with the SEC on March 27,
                  2002.(3)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Quarterly Report on Form
                  10-Q, as filed with the SEC on July 14, 2004.(4)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Current Report on Form 8-K,
                  as filed with the SEC on December 7, 2006.(5)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Quarterly Report on Form
                  10-QSB, as filed with the SEC on July 17, 2006.(6)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Annual Report on Form 10-K,
                  as filed with the SEC on November 18, 2004.(7)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Registration Statement on
                  Form S-1, as amended (No. 33-9 1486), as declared effective by
                  the SEC on
                  June 22, 1995(8)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Current Report on Form 8-K,
                  as filed with the SEC on September 7, 2005.(9)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Current Report on Form
                  8-K/A, as filed with the SEC on March 1, 2006.(10)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Annual Report on Form 10-K,
                  as filed with the SEC on November 18, 2004.(11)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Current Report on Form 8-K,
                  as filed with the SEC on November 22, 2006.(12)
              Incorporated
                  herein by reference to Remote Dynamics, Inc.’s Current Report on Form 8-K,
                  as filed with the SEC on January 30,
                  2006.




**Item
      14.********Principal
      Accountant Fees and Services**




On
      March
      8, 2006, the Audit Committee our Board of Directors approved the engagement
      of
      KBA Group LLP (“KBA”) to serve as our principal independent public accountant to
      audit our financial statements for the fiscal year ended August 31, 2006. Prior
      to March 8, 2006, our principal independent public accountant was BDO Seidman,
      LLP (“BDO”). Audit fees billed by our principal independent public accountants
      for services rendered for the audit of our annual financial statements and
      review of our quarterly financial statements included in Form 10-Q for the
      last
      two fiscal years are presented below. Audit-related fees, tax fees, and other
      fees for services billed by our principal independent public accountant during
      each of the last two fiscal years are also presented in the following
      table:




46




Fiscal
                  Year Ended August 31,2006
              
              2005**KBA
                  Group**Audit
                  fees
              
              $
              35,000
              
              $
              -Audit-related
                  fees (a)
              
              
              2,100
              
              
              -Tax
                  fees (b)
              
              
              19,050
              
              
              -Registration
                  Statement Fees
              
              
              3,000
              
              
              -All
                  other fees
              
              
              4,000
              
              
              -**BDO
                  Seidman**Audit
                  fees
              
              $
              89,171
              
              $
              113,171Audit-related
                  fees (a)
              
              
              8,000
              
              
              -Tax
                  fees (b)
              
              
              -
              
              
              27,900Registration
                  Statement Fees
              
              
              33,768
              
              
              -All
                  other fees
              
              
              -
              
              
              16,500**Deloitte
                  & Touche**Audit
                  fees
              
              $
              -
              
              $
              -Audit-related
                  fees (a)
              
              
              -
              
              
              -Tax
                  fees (b)
              
              
              -
              
              
              -Registration
                  Statement Fees
              
              
              5,750
              
              
              -All
                  other fees
              
              
              4,200
              
              
              -




(a)
      Audit-related fees primarily include research services to validate certain
      accounting policies of us.




(b)
      Tax
      fees include costs for the preparation of our corporate income tax return.




In
      accordance with the Audit Committee Charter of our Audit Committee (“Charter”),
      all audit and non-audit services to be provided by our principal accountant
      relating to the audit of our financial statements must be pre-approved by our
      Audit Committee. The Charter further provides that if the services to be
      rendered by our principal accountant are services other than audit, review
      or
      attest services, the pre-approval requirement is waived if: (a) the aggregate
      amount of all such services provided by the principal accountant constitutes
      no
      more than five percent (5%) of the total amount of revenues paid by us to our
      principal accountant during the fiscal year in which the services are provided;
      and (b) such services were not recognized by us at the time of the engagement
      to
      be non-audit services; and (c) such services are promptly brought to the
      attention of our Audit Committee and approved prior to the completion of the
      audit by our Audit Committee or by one or more members of our Audit Committee
      who are members of the Board of Directors to whom authority to grant such
      approvals has been delegated by our Audit Committee. All the services provided
      by our principal accountants during the fiscal years ended August 31, 2006
      and
      2005 were pre-approved by our Audit Committee.




47


**ANNUAL
      REPORT ON FORM 10-KSB**


**ITEM
      7**


**FINANCIAL
      STATEMENTS**


**YEARS
      ENDED AUGUST 31, 2006 and 2005**


**REMOTE
      DYNAMICS, INC.**


**RICHARDSON,
      TEXAS**







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of Directors and Stockholders


Remote
      Dynamics, Inc.




We
      have
      audited the accompanying consolidated balance sheet of Remote Dynamics, Inc.
      and
      subsidiary (the “Company”) as of August 31, 2006, and the related
      consolidated statements of operations, stockholders’ equity (deficit), and cash
      flows for the year then ended. These consolidated financial statements are
      the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements based on our
      audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement.  The Company is not required
      to have nor were we engaged to perform, an audit of their internal control
      over
      financial reporting.  Our audit included consideration of internal control
      over financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting.  Accordingly, we express no such opinion.  An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audit provides
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Remote
      Dynamics, Inc. and subsidiary as of August 31, 2006, and the consolidated
      results of their operations and their cash flows for the year then ended in
      conformity with accounting principles generally accepted in the United States
      of
      America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. The Company has a significant working capital
      deficit, suffered recurring losses from operations and has negative cash flows
      from operating activities that raise substantial doubt about its ability to
      continue as a going concern. The Company’s plans in regard to these matters are
      described in Note 1 to the financial statements. The financial statements do
      not
      include any adjustments that might result from the outcome of this
      uncertainty.




/s/ KBA
              Group
              LLPKBA
                Group LLP
              Dallas,
                Texas
              January
                9, 2007  F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors


Remote
      Dynamics, Inc.


Richardson,
      Texas





We
      have
      audited the accompanying consolidated balance sheet of Remote Dynamics, Inc.
      as
      of August 31, 2005 and the related consolidated statements of operations,
      stockholders’ equity and cash flows for the year then ended. These financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audit includes consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements, assessing the accounting principles used and significant
      estimates made by management, as well as evaluating the overall financial
      statement presentation. We believe that our audit provides a reasonable basis
      for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Remote Dynamics, Inc. at
      August 31, 2005 and the results of its operations and its cash flows for
      the year then ended in conformity with accounting principles generally accepted
      in the United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. The Company has suffered recurring
      losses from operations and has negative cash flows from operating activities
      that raise substantial doubt about its ability to continue as a going concern.
      Management’s plans in regard to these matters are described in Note 1 to the
      consolidated financial statements. The financial statements do not include
      any
      adjustments that might result from the outcome of this uncertainty.


/s/ BDO
                Seidman, LLPBDO
                    Seidman, LLP
                  Dallas,
                    Texas
                  October
                    27, 2005 
 F-2
 **REMOTE
            DYNAMICS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
            BALANCE SHEETS** **(in
              thousands, except par value amounts)**
 **August
                      31,****2006**
                  
                  **2005****ASSETS**Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  303
                  
                  $
                  503Accounts
                      receivable, net of allowance for doubtful accountsof
                      $77 and $197, respectively
                  
                  
                  586
                  
                  
                  2,695Inventories,
                      net of reserve for obsolescense of $112 and $313,
                      respectively
                  
                  
                  360
                  
                  
                  791Deferred
                      product costs - current portion
                  
                  
                  1,121
                  
                  
                  950Lease
                      receivables and other current assets, net
                  
                  
                  299
                  
                  
                  632Total
                      current assets
                  
                  
                  2,669
                  
                  
                  5,571Property
                      and equipment, net of accumulated depreciationand
                      amortization of $2,548 and $1,565 respectively
                  
                  
                  2,237
                  
                  
                  3,743Deferred
                      product costs - non-current portion
                  
                  
                  1,044
                  
                  
                  1,007Goodwill
                  
                  
                  2,395
                  
                  
                  10,120License
                      right, net
                  
                  
                  95
                  
                  
                  580Other
                      intangibles, net
                  
                  
                  -
                  
                  
                  271Deferred
                      financing fees, net
                  
                  
                  2,353
                  
                  
                  -Lease
                      receivables and other assets, net
                  
                  
                  365
                  
                  
                  414Total
                      assets
                  
                  $
                  11,158
                  
                  $
                  21,706**LIABILITIES
                      AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                      liabilities:Accounts
                      payable
                  
                  $
                  1,090
                  
                  $
                  1,557Deferred
                      product revenues - current portion
                  
                  
                  2,033
                  
                  
                  2,038Series
                      A convertible notes payable (net of discount of $2,395)
                  
                  
                  1,438
                  
                  
                  -Note
                      payable - HFS
                  
                  
                  2,000
                  
                  
                  -Note
                      payable - SDS
                  
                  
                  -
                  
                  
                  1,750Accrued
                      expenses and other current liabilities
                  
                  
                  1,793
                  
                  
                  2,083Total
                      current liabilities
                  
                  
                  8,354
                  
                  
                  7,428Deferred
                      product revenues - non-current portion
                  
                  
                  1,786
                  
                  
                  2,112Capital
                      leases, less current portion
                  
                  
                  211
                  
                  
                  423Note
                      payable - HFS
                  
                  
                  -
                  
                  
                  2,000Series
                      A convertible notes payable - non-current (net of discount
                      of
                      $1,917)
                  
                  
                  -
                  
                  
                  -Other
                      non-current liabilities
                  
                  
                  325
                  
                  
                  300Total
                      liabilities
                  
                  
                  10,676
                  
                  
                  12,263Commitments
                      and contingenciesRedeemable
                      Preferred Stock - Series A (8% cumulative, $1,000 stated value,2,000,000
                      shares authorized, 5,000 shares issued and outstanding atAugust
                      31, 2005
                  
                  
                  -
                  
                  
                  3,542Redeemable
                      Preferred Stock - Series B (8% cumulative, $10,000 stated value,2,000,000
                      shares authorized, 600 shares issued and outstanding atAugust
                      31, 2006 (redeemable in liquidation at an aggregate of $7,400,000)
                  
                  
                  4,850
                  
                  
                  -Stockholders'
                      equity (deficit):Common
                      stock, $0.01 par value, 230,000,000 shares authorized, 10,463,385shares
                      issued and 9,533,437 outstanding at August 31, 2006;50,000,0000
                      shares authorized, 8,255,785 shares issued and 7,325,937
                      outstandingat
                      August 31, 2005
                  
                  
                  105
                  
                  
                  83Treasury
                      stock, 929,948 shares, at cost
                  
                  
                  (1,860
                  )
                  
                  (1,860
                  )Additional
                      paid-in capital
                  
                  
                  34,821
                  
                  
                  24,250Accumulated
                      deficit
                  
                  
                  (37,434
                  )
                  
                  (16,572
                  )Total
                      stockholders' equity (deficit)
                  
                  
                  (4,368
                  )
                  
                  5,901Total
                      liabilities and stockholders' equity (deficit)
                  
                  $
                  11,158
                  
                  $
                  21,706
 See
            accompanying notes to consolidated financial statements.
 F-3
 **REMOTE
            DYNAMICS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
            STATEMENTS OF OPERATIONS** **(In
              thousands, except per share amounts)**
 **Year
                      ended August 31,****2006**
                  
                  **2005**RevenuesService
                  
                  $
                  3,133
                  
                  $
                  12,914Ratable
                      product
                  
                  
                  2,584
                  
                  
                  2,538Product
                  
                  
                  189
                  
                  
                  920Total
                      revenues
                  
                  
                  5,906
                  
                  
                  16,372Cost
                      of revenuesService
                  
                  
                  2,896
                  
                  
                  5,968Ratable
                      product
                  
                  
                  1,320
                  
                  
                  1,362Product
                  
                  
                  265
                  
                  
                  868Total
                      cost of revenues
                  
                  
                  4,481
                  
                  
                  8,198Gross
                      profit
                  
                  
                  1,425
                  
                  
                  8,174Expenses:General
                      and administrative
                  
                  
                  3,763
                  
                  
                  4,863Customer
                      service
                  
                  
                  869
                  
                  
                  1,521Sales
                      and marketing
                  
                  
                  1,858
                  
                  
                  3,186Engineering
                  
                  
                  811
                  
                  
                  1,319Depreciation
                      and amortization
                  
                  
                  1,982
                  
                  
                  2,700Impairment
                      loss on license right
                  
                  
                  237
                  
                  
                  201Goodwill
                      impairment
                  
                  
                  7,725
                  
                  
                  9,604Legal
                      settlement
                  
                  
                  250
                  
                  
                  -Total
                      expenses
                  
                  
                  17,495
                  
                  
                  23,394Operating
                      loss
                  
                  
                  (16,070
                  )
                  
                  (15,220
                  )Interest
                      income
                  
                  
                  110
                  
                  
                  253Interest
                      expense
                  
                  
                  (2,524
                  )
                  
                  (390
                  )Other
                      (expense) income
                  
                  
                  329
                  
                  
                  (284
                  )Loss
                      before reorganization items and income taxes
                  
                  
                  (18,155
                  )
                  
                  (15,641
                  )Reorganization
                      items:Restructuring
                      expenses and losses
                  
                  
                  -
                  
                  
                  (22
                  )Net
                      loss before income taxes
                  
                  
                  (18,155
                  )
                  
                  (15,663
                  )Income
                      tax benefit
                  
                  
                  -
                  
                  
                  -Net
                      loss
                  
                  
                  (18,155
                  )
                  
                  (15,663
                  )Preferred
                      stock dividend
                  
                  
                  (500
                  )
                  
                  (368
                  )Loss
                      on redemption of preferred stock
                  
                  
                  (2,643
                  )
                  
                  -Repricing
                      of warrants
                  
                  
                  (69
                  )
                  
                  -Net
                      loss attributable to common stockholders
                  
                  $
                  (21,367
                  )
                  $
                  (16,031
                  )Net
                      loss per common share - basic and diluted
                  
                  $
                  (2.55
                  )
                  $
                  (2.47
                  )Weighted
                      average number of common shares outstanding:Basic
                      and diluted
                  
                  
                  8,378
                  
                  
                  6,498
 See
            accompanying notes to consolidated financial statements.
 F-4
  **REMOTE
            DYNAMICS, INC. AND SUBSIDIARY** **CONSOLIDATED
              STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)** **(in
                thousands, except share information)**
  **Additional******Common** Stock**
                  
                  **Paid-in**
                  
                  **Treasury
                      Stock**
                  
                  **Accumulated****Shares**
                  
                  **Amount**
                  
                  **Capital**
                  
                  **Shares**
                  
                  **Amount**
                  
                  **Deficit**
                  
                  **Total****Stockholders'
                      equity at August 31, 2004**
                  
                  
                  7,450,000
                  
                  $
                  75
                  
                  $
                  21,825
                  
                  
                  929,948
                  
                  $
                  (1,860
                  )
                  $
                  (541
                  )
                  $
                  19,499Issuance
                      of common stock under planof
                      reorganization
                  
                  
                  393,568
                  
                  
                  4
                  
                  
                  1,307
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,311Issuance
                      of warrants in connection withSeries
                      A preferred stock offering
                  
                  
                  
                  
                  
                  
                  
                  
                  1,037
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,037Issuance
                      of Series A preferred stock dividends
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (368
                  )
                  
                  (368
                  )Repricing
                      of warrants
                  
                  
                  
                  
                  
                  
                  
                  
                  85
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  85Exercise
                      of warrants
                  
                  
                  337,317
                  
                  
                  3
                  
                  
                  (3
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Issuance
                      of restricted stock
                  
                  
                  75,000
                  
                  
                  1
                  
                  
                  (1
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Change
                      in deferred stock compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (15,663
                  )
                  
                  (15,663
                  )**Stockholders'
                      equity at August 31, 2005**
                  
                  
                  8,255,885
                  
                  
                  83
                  
                  
                  24,250
                  
                  
                  929,948
                  
                  
                  (1,860
                  )
                  
                  (16,572
                  )
                  
                  5,901Issuance
                      of warrants in connection withSeries
                      B preferred stock offering
                  
                  
                  
                  
                  
                  
                  
                  
                  975
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  975Issuance
                      of warrants in connection withdebt
                      offering
                  
                  
                  
                  
                  
                  
                  
                  
                  4,846
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,846Beneficial
                      conversion feature of convertible notes
                  
                  
                  
                  
                  
                  
                  
                  
                  2,421
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,421Exchange
                      of note payable to SDS for warrants
                  
                  
                  
                  
                  
                  
                  
                  
                  1,750
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,750Exercise
                      of warrants
                  
                  
                  1,125,000
                  
                  
                  11
                  
                  
                  326
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  337Issuance
                      of common stock to placement agent for debt offering
                  
                  
                  1,262,500
                  
                  
                  13
                  
                  
                  278
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  291Issuance
                      of restricted stock
                  
                  
                  40,000
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Forfeiture
                      of restricted stock
                  
                  
                  (220,000
                  )
                  
                  (2
                  )
                  
                  3
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1Vesting
                      of restricted stock
                  
                  
                  
                  
                  
                  
                  
                  
                  68
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  68Series
                      B preferred stock dividends
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (500
                  )
                  
                  (500
                  )Loss
                      on redemption of preferred stock
                  
                  
                  
                  
                  
                  
                  
                  
                  (96
                  )
                  
                  
                  
                  
                  
                  
                  
                  (2,207
                  )
                  
                  (2,303
                  )Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (18,155
                  )
                  
                  (18,155
                  )**Stockholders'
                      deficit at August 31, 2006**
                  
                  
                  10,463,385
                  
                  $
                  105
                  
                  $
                  34,821
                  
                  
                  929,948
                  
                  $
                  (1,860
                  )
                  $
                  (37,434
                  )
                  $
                  (4,368
                  )
 See
            accompanying notes to consolidated financial statements.
 F-5
  **REMOTE
            DYNAMICS, INC. AND SUBSIDIARY** **CONSOLIDATED
              STATEMENTS OF CASH FLOWS (1 of 2)** **(in
                thousands)**
  **Year
                      ended August 31,****2006**
                  
                  **2005**Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (18,155
                  )
                  $
                  (15,663
                  )Adjustments
                      to reconcile net loss to cash used inoperating
                      activities:Depreciation
                      and amortization of property and equipment
                  
                  
                  1,462
                  
                  
                  1,460Amortization
                      of license right and other intangibles
                  
                  
                  519
                  
                  
                  1,240Amortization
                      of deferred financing fees
                  
                  
                  784
                  
                  
                  -Amortization
                      of debt discount
                  
                  
                  1,438
                  
                  
                  -Amortization
                      of deferred service revenues
                  
                  
                  (19
                  )
                  
                  21Impairment
                      loss on license right
                  
                  
                  237
                  
                  
                  201Goodwill
                      impairment
                  
                  
                  7,725
                  
                  
                  9,604Legal
                      settlement
                  
                  
                  250
                  
                  
                  -Provision
                      for bad debts
                  
                  
                  130
                  
                  
                  188Loss
                      on assets retired or sold
                  
                  
                  184
                  
                  
                  206Vesting
                      of restricted stock
                  
                  
                  69
                  
                  
                  -Non-cash
                      expense on repricing of warrants
                  
                  
                  -
                  
                  
                  85Gain
                      on sale of patents
                  
                  
                  (500
                  )
                  
                  -Changes
                      in operating assets and liabilities:Decrease
                      in restricted cash
                  
                  
                  -
                  
                  
                  439Decrease
                      (increase) in accounts receivable
                  
                  
                  1,979
                  
                  
                  (29
                  )Decrease
                      (increase) in inventories
                  
                  
                  431
                  
                  
                  (117
                  )Decrease
                      (increase) in deferred product costs
                  
                  
                  (208
                  )
                  
                  108Decrease
                      in lease receivables and other assets
                  
                  
                  401
                  
                  
                  1,401Decrease
                      in accounts payable
                  
                  
                  (467
                  )
                  
                  (610
                  )Decrease
                      in deferred product revenues
                  
                  
                  (331
                  )
                  
                  (1,398
                  )Decrease
                      (increase) in accrued expenses and other liabilities
                  
                  
                  (478
                  )
                  
                  914Net
                      cash used in operating activities before reorganization
                      items
                  
                  
                  (4,549
                  )
                  
                  (1,950
                  )Decrease
                      in restructuring accruals
                  
                  
                  -
                  
                  
                  (3,072
                  )Net
                      cash used in operating activities
                  
                  
                  (4,549
                  )
                  
                  (5,022
                  )Cash
                      flows from investing activities:Additions
                      to property and equipment
                  
                  
                  (57
                  )
                  
                  (962
                  )Proceeds
                      from sale of assets
                  
                  
                  212
                  
                  
                  -Proceeds
                      from sale of patents
                  
                  
                  500
                  
                  
                  -Net
                      cash provided by (used in) investing activities
                  
                  
                  655
                  
                  
                  (962
                  )Cash
                      flows from financing activities:Proceeds
                      from issuance of note payable
                  
                  
                  -
                  
                  
                  1,750Proceeds
                      from sale of Series A preferred stockand
                      warrants, net of offering costs
                  
                  
                  -
                  
                  
                  4,651Proceeds
                      from sale of Series B preferred stockand
                      warrants, net of offering costs
                  
                  
                  443
                  
                  
                  -Interest
                      paid on bridge note
                  
                  
                  36
                  
                  
                  -Proceeds
                      from issuance of debt offering and warrants,net
                      of offering costs
                  
                  
                  4,004
                  
                  
                  -Proceeds
                      from exercise of warrants
                  
                  
                  337
                  
                  
                  -Dividends
                      paid on preferred stock
                  
                  
                  -
                  
                  
                  (368
                  )Payments
                      on capital leases and other notes payable
                  
                  
                  (1,126
                  )
                  
                  (858
                  )Net
                      cash provided by financing activities
                  
                  
                  3,694
                  
                  
                  5,175Decrease
                      in cash and cash equivalents
                  
                  
                  (200
                  )
                  
                  (809
                  )Cash
                      and cash equivalents, beginning of year
                  
                  
                  503
                  
                  
                  1,312Cash
                      and cash equivalents, end of year
                  
                  $
                  303
                  
                  $
                  503
 See
            accompanying notes to consolidated financial statements.
 F-6


**REMOTE
        DYNAMICS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (2 of 2)** **(in
          thousands)**
  **Year
                  ended August 31,****2006**
              
              **2005**Supplemental
                  cash flow information:Interest
                  paid
              
              $
              286
              
              $
              288Non-cash
                  investing and financing activities:Discharge
                  of debt and exchange of common stockunder
                  the plan of reorganization
              
              $
              -
              
              $
              1,311Purchases
                  of assets through capital leases and other notes payables
              
              $
              295
              
              $
              571Exchange
                  of bridge note into warrants
              
              $
              1,750
              
              $
              -Financing
                  of Series A original issued discount
              
              $
              750
              
              $
              -Issuance
                  of common stock to placement agent for debt offering
              
              $
              291
              
              $
              -Beneficial
                  conversion feature of convertible notes
              
              $
              2,421
              
              $
              -Issuance
                  of warrants in connection with debt offering
              
              $
              3,329
              
              $
              -Issuance
                  of warrants in connection with debt offering recorded asdeferred
                  financing fees
              
              $
              1,517
              
              $
              -Preferred
                  stock dividends accrued
              
              $
              500
              
              $
              -Issuance
                  of warrants in connection with Series B preferred stock
                  offering
              
              $
              975
              
              $
              -


See
        accompanying notes to consolidated financial statements.


F-7




**REMOTE
      DYNAMICS, INC. AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.**
            **BUSINESS
                OVERVIEW, REORGANIZATION AND GOING
                CONCERN**




**Business
      Overview**





Remote
      Dynamics, Inc., a Delaware Corporation (“we” or the “Company”) was originally
      incorporated on February 3, 1994. We market, sell and support automatic vehicle
      location (“AVL”) and mobile resource management solutions targeting companies
      that operate private vehicle fleets. The REDIviewTM family of solutions is ideal
      for metro, short-haul fleets within diverse industry vertical markets such
      as
      field services, distribution, courier, limousine, electrical/plumbing, waste
      management, and government. Our core technology, telematics, combines wireless
      communications, GPS location technology, geospatial solutions and vehicle data
      integration with an easy-to-use web-accessible application that aids in the
      optimization of remote business solutions. Our state of the art fleet management
      solution contributes to higher customer revenues and improved operator
      efficiency by improving the productivity of mobile workers through real-time
      position reports, route-traveled information, and exception based reporting
      designed to highlight mobile workforce inefficiencies. This in-depth reporting
      enables our customers to correct those inefficiencies and deliver significant
      savings to the bottom line.




Historically,
      much of our revenues have been derived from products sold to the long-haul
      trucking industry, and to member companies of SBC Communications, Inc. (“SBC”).
      Revenues from these legacy customers have ceased as of December 31, 2005. SBC
      selected an alternative vendor to supply its next generation AVL product, and,
      as of December 31, 2005, had deactivated all of its subscriber units. For us
      to
      sustain ongoing business operations and ultimately achieve profitability, we
      must substantially increase our sales and penetration into the marketplace
      with
      next generation products and services.




On
      June
      21, 2001, we acquired an exclusive, royalty-free, 99-year license to market,
      sell and operate Minorplanet System PLC’s VMI technology in the United States,
      Canada and Mexico. VMI is designed to maximize the productivity of a mobile
      workforce as well as reduce vehicle mileage and fuel related expenses. The
      VMI
      technology consists of: (i) a data control unit (“DCU”) that continually
      monitors and records a vehicle’s position, speed and distance traveled; (ii) a
      command and control center (“CCC”) which receives and stores in a database
      information downloaded from the DCU’s; and (iii) software used for
      communication, messaging and detailed reporting. VMI uses satellite-based Global
      Positioning System (“GPS”) location technology to acquire a vehicle location on
      a minute-by-minute basis, and a global system for mobile communications (“GSM”)
      based cellular network to transmit data between the DCU’s and the CCC. GSM is a
      digital technology developed in Europe and has been adapted for North America.
      GSM is the most widely used digital standard in the world. The VMI application
      is targeted to small and medium sized fleets based in major metropolitan areas.




VMI
      provides minute-by-minute visibility into the activities of a mobile workforce
      via an extensive reporting system that provides real-time and exception-based
      reporting. Real-time reports provide information regarding a vehicle’s location,
      idling, stop time, speed and distance traveled. With real-time reporting, the
      customer can determine when an employee starts or finishes work, job site
      arrival times and site visit locations. In addition, exception reports allow
      the
      customer to set various parameters within which vehicles must operate, and
      the
      system will report exceptions including speeding, extended stops, unscheduled
      stops, route deviations, visits to barred locations and excessive
      idling.




We
      commercially launched our current product offering, REDIview, during January
      of
      2005. REDIview is an Internet and service bureau-based software application
      that
      provides an extensive array of real-time and accurate mapping, trip replay,
      and
      vehicle activity reports. REDIview includes a series of exception-based reports
      designed to highlight inefficiencies in the operations of a vehicle fleet.
      Utilizing GPRS technology and our proven, high-capacity network service center,
      customers may access their information securely through the Internet from any
      personal computer or certain other devices.




F-8




REDIview
      incorporates technologies that allow for fast and effective integration into
      legacy applications operated by companies with vehicle fleets and mobile
      workers. This design allows companies to easily extend their existing supply
      chain management systems to the mobile workforce for transaction processing
      and
      customer fulfillment. REDIview was also designed to be hardware and network
      agnostic to provide the maximum flexibility in designing solutions that best
      fit
      the customer’s specific needs.




Our
      new
      REDIview product line forms the basis of our business plan for fiscal year
      2007
      and beyond and will be the foundation for expected growth in revenues and
      ultimately profitability for us. In addition, the REDIview product line allows
      us to move to a recurring revenue model for all of its current product
      offerings, an important and necessary change to our revenue model to achieve
      overall sustained revenue growth and cash flow positive operations. In
      implementing our new business plan, we are completing a significant cost and
      operational-based restructuring, rightsizing the workforce at all levels,
      including the senior management level. We are focusing our efforts on enhancing
      the existing REDIview product line. As a result, in addition to significantly
      reducing projected operational costs, we have significantly reduced our
      projected sales targets and associated cash flows from our previous business
      plan which included multiple product offerings sold through both a direct sales
      force and third-party distributors.




**Voluntary
      Bankruptcy Filing and Reorganization**




In
      February, 2004, we and two of our wholly-owned subsidiaries, Caren
      (292) Limited and Minorplanet Systems USA Limited, filed voluntary
      petitions for relief under Chapter 11 of the United States Bankruptcy Code
      in the United States Bankruptcy Court for the Northern District of Texas, in
      order to facilitate the restructuring of our debt, trade liabilities, and other
      obligations. During the bankruptcy, we remained in possession of our assets
      and
      operated as “debtors-in-possession” under the jurisdiction of the Bankruptcy
      Court and in accordance with the applicable provisions of Bankruptcy Code,
      the
      Federal Rules of Bankruptcy Procedure and applicable court orders.





In
      June,
      2004, the Bankruptcy Court entered an order confirming our Third Amended Joint
      Plan of Reorganization, as modified. The Bankruptcy Court set our enterprise
      value at $25,300,000 for purposes of distributions of new common stock under
      the
      plan of reorganization. We set the effective date of the plan of reorganization
      as July 2, 2004. Caren (292) Limited and Minorplanet Systems USA
      Limited, as a matter of law, were merged with and into Remote Dynamics, Inc.,
      ceasing to exist as separate entities as of July 2, 2004. The plan of
      reorganization was substantially consummated on July 8, 2004. On
      August 25, 2005, the Bankruptcy Court signed the final decree and closed
      our bankruptcy case. In connection with our Chapter 11 reorganization, we
      applied “Fresh Start Accounting” which resulted in approximately
      $19.7 million of excess reorganizational value which we recorded as
      goodwill. Goodwill was subsequently determined to be impaired; thus, goodwill
      was written off by approximately $9.6 million during the fiscal year ended
      August 31, 2005 and an additional $7.7 million during fiscal year ended August
      31, 2006 to its estimated fair value. At August 31, 2006, the remaining carrying
      value of our goodwill was $2.4 million.





In
      July
      2004, we changed our name to “Remote Dynamics, Inc.” in connection with our exit
      from bankruptcy.




**Going
      Concern**




Historically,
      much of our revenues have been derived from products and services sold to the
      long-haul trucking industry, small to medium-sized companies through our Vehicle
      Management InformationTM (“VMI”) product line, and to SBC. Revenues from the
      long-haul trucking industry and SBC have ceased as of December 31, 2005. SBC
      selected an alternative vendor to supply its next generation AVL product, and,
      as of December 31, 2005, had deactivated all of its subscriber units. For us
      to
      sustain ongoing business operations and ultimately achieve profitability, we
      must substantially increase our sales and penetration into the marketplace
      with
      competitive products and services. We believe that the potential market
      opportunity for automatic vehicle location products in the United States, such
      as our GPRS-based REDIview product, is significant and that we will be well
      positioned with our telematics product lines and proven operations support
      to
      take advantage of the significant market potential.




F-9




At
      August
      31, 2006 we have a significant working capital deficit, have incurred
      significant recurring losses and have used significant cash in operations and
      currently do not expect to achieve profitability during the 2007 fiscal year.
      Key to achieving profitability is to obtain a REDIview customer base that
      provides monthly recurring revenues and corresponding gross margins that exceed
      operating costs and expenses to support the REDIview customer base. Based on
      our
      latest revised pricing structure and cost-based reduction in workforce, we
      currently estimate that to achieve profitability, we will need to have
      approximately $600,000 in monthly revenues. However, there can be no assurances
      that we will achieve our REDIview sales targets and failure to do so may have
      a
      material adverse effect upon our business, financial condition and results
      of
      operations.





Critical
      success factors in our plans to achieve positive cash flow from operations
      include:





·
            Ability
                to increase sales of the REDIview product line to lessen the amount
                of
                capital resources necessary to fund our operations until such time
                that
                revenues from the REDIview product line are sufficient to fund ongoing
                operations.




·
            Ability
                to further reduce our operating costs in accordance with our latest
                revised business plan.




·
            Ability
                to complete development of additional features and functionality
                for the
                REDIview product line.




·
            Significant
                market acceptance of our product offerings from new customers, including
                our REDIview product line, in the United
                States.




·
            Maintaining
                and expanding our direct sales channel. New salespersons will require
                training and time to become productive. In addition, there is significant
                competition for qualified sales personnel, and we must continue to
                offer
                attractive compensation plans and opportunities to attract qualified
                salespersons.




·
            Expansion
                into new markets not currently served by
                us.




·
            Increasing
                sales production from existing channel
                partners.




·
            Obtaining
                new channel partners to distribute our product
                lines.




·
            Maintenance
                and expansion of indirect distribution channels for our REDIview
                product
                line.




·
            The
                securing and maintenance of adequate third party leasing sources
                for
                customers who purchase our
                products.




There
      can
      be no assurances that any of these success factors will be realized or
      maintained.




We
      currently believe that with the expected proceeds from our November 2006 private
      placement described in Note 14, and assuming the achievement of our revised
      REDIview sales targets and expected operating cost reductions, we have
      sufficient capital to fund our ongoing operations through the remainder of
      our
      2007 fiscal year. The sufficiency of our cash resources depends to a certain
      extent on general economic, financial, competitive or other factors beyond
      our
      control. Moreover, despite actions to reduce costs and improve profitability,
      our operating losses and net operating cash outflows will continue through
      at
      least June 2007. As a result, we may not be able to achieve the revenue and
      gross margin objectives necessary to achieve positive cash flow or profitability
      without obtaining additional debt or equity financing. We do not currently
      have
      any arrangements for additional financing and we may not be able to secure
      additional debt or equity financing on terms acceptable to us, or at all, at
      the
      time when we need such funding. Further, our ability to secure certain types
      of
      additional financings is restricted under the terms of our existing financing
      arrangements. There can be no assurance that we will be able to consummate
      a
      transaction for additional capital prior to substantially depleting our
      available cash reserves, and our failure to do so may force us to file for
      bankruptcy protection and/or cease operations.




F-10




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





**Principles
      of Consolidation**





Our
      consolidated financial statements include our accounts and those of our wholly
      owned subsidiary. Intercompany balances and transactions have been eliminated
      in
      consolidation.





**Estimates
      Inherent in the Preparation of Financial Statements**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires us to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.





**Revenue
      Recognition**





We
      recognize revenue when earned in accordance with the applicable accounting
      literature including: EITF No. 00-21, “Revenue Arrangements With Multiple
      Deliverables”, Statement of Position 97-2, “Software Revenue Recognition”, and
      Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
      Statements”, as amended by Staff Accounting Bulletin No. 104, “Revenue
      Recognition in Financial Statements”. Revenue is recognized when the following
      criteria are met: there is persuasive evidence that an arrangement exists,
      delivery has occurred and all obligations under such arrangement have been
      fulfilled, the price is fixed and determinable and collectibility is reasonably
      assured.





Initial
      sale proceeds received under multiple-element sales arrangements that require
      us
      to deliver products and services over a period of time and which are not
      determined by us to meet certain criteria are deferred. All REDIview and VMI
      sales proceeds related to delivered products are deferred and recognized over
      the contract life that typically ranges from one to five years. Product sales
      proceeds recognized under this method are portrayed in the accompanying
      Consolidated Statement of Operations as “Ratable product revenues.” The related
      deferred revenue is classified as a current and long term liability on the
      Consolidated Balance Sheets under the captions “Deferred product revenues -
      current portion” and “Deferred product revenues non-current portion.” If the
      customer relationship is terminated prior to the end of the customer contract
      term, such deferred sales proceeds are recognized as revenue in the period
      of
      termination. Under sales arrangements, which initially meet the earnings
      criteria described above, revenues are recognized upon shipment of the products
      or upon customer acceptance of the delivered products if terms of the sales
      arrangement give the customer the right of acceptance.





Service
      revenue generally commences upon product installation and customer acceptance
      and is billed and recognized during the period such services are
      provided.





We
      provide lease financing to certain customers of our REDIview and VMI products.
      Leases under these arrangements are classified as sales-type leases or operating
      leases. These leases typically have terms of one to five years, and all sales
      type leases are discounted at interest rates ranging from 14% to 18% depending
      on the customer’s credit risk. The net present value of the lease payments for
      sales-type leases is recognized as product revenue and deferred under our
      revenue recognition policy described above. Income from operating leases is
      recognized ratably over the term of the leases.




**Shipping
      and Handling Fees and Costs**




We
      record
      amounts billed to customers for shipping and handling and related costs incurred
      for shipping and handling as components of “Product revenues” and “Cost of
      product revenues” respectively.




**Deferred
      Product Costs**




We
      defer
      certain product costs (generally consisting of the direct cost of product sold
      and installation costs) for our sales contracts determined to require deferral
      accounting. The deferred costs are classified as a current and long term asset
      on the balance sheet under the captions “Deferred product costs - current
      portion” and “Deferred product costs non-current portion”. Such costs are
      recognized over the longer of the term of the service contract or the estimated
      life of the customer relationship and are portrayed in the accompanying
      Consolidated Statements of Operations as “Ratable product costs.” Such terms
      range from one to five years. If the customer relationship is terminated prior
      to the end of the estimated customer relationship period, such costs are
      recognized in the period of termination.




F-11




**Financial
      Instruments**




We
      consider all liquid interest-bearing investments with a maturity of ninety
      days
      or less at the date of purchase to be cash equivalents. Short-term investments
      mature between ninety days and one year from the purchase date.




The
      carrying amount of cash and cash equivalents, accounts receivable, notes
      payable, accounts payable and accrued liabilities approximates fair value
      because of their short-term maturity.




**Allowance
      for Doubtful Accounts**




We
      use
      estimates in determining the allowance for doubtful accounts based on historic
      collection experience, current trends and a percentage of the accounts
      receivable aging categories. In determining these percentages we review
      historical write-offs, including comparisons of write-offs to provisions for
      doubtful accounts and as a percentage of revenues and monitor collections
      amounts and statistics.


August
                      31,2006
                  
                  2005Beginning
                      balance
                  
                  $
                  197
                  
                  $
                  162Additions
                  
                  
                  85
                  
                  
                  165Deductions
                  
                  
                  (206
                  )
                  
                  (130
                  )Ending
                      balance
                  
                  $
                  76
                  
                  $
                  197




**Business
      and Credit Concentrations**




We
      continuously monitor collections and payments from our customers and maintain
      a
      provision for estimated accounts receivable that may eventually become
      uncollectible based upon historical experience and specific customer
      information. There is no guarantee that we will continue to experience the
      same
      credit loss history in future periods. If a significant change in the liquidity
      or financial condition of a large customer or group of customers were to occur,
      it could have a material adverse affect on the collectibility of our accounts
      receivable and future operating results.





Revenues
      from sales of our REDIview products and services accounted for approximately
      50%
      and 3% of our total revenues during the fiscal years ended August 31, 2006
      and
      2005, respectfully.





SBC
      accounted for approximately 15% and 61%, respectively, of total revenues during
      the same periods. The SBC contract expired effective December 31, 2005. During
      the fiscal years ended August 31, 2006 and 2005, SBC and Geologic Solutions,
      Inc. (“Geologic”) combined accounted for approximately 15% and 73%,
      respectively, of total revenues. Geologic terminated its contract with us
      effective August 31, 2005. Revenues from sales of our VMI products and services
      accounted for approximately 35% and 23% of our total revenues during the fiscal
      years ended August 31, 2006 and 2005, respectfully.




**Inventories**




Inventories
      consist primarily of component parts and finished products that are valued
      at
      the lower of cost or market. Cost is determined using the first-in, first-out
      (FIFO) method. The Company records a write-down for excess and obsolete
      inventory based on usage history and specific identification criteria. There
      is
      a risk we will forecast demand for our products and market conditions
      incorrectly and maintain excess inventories. Therefore, there can be no
      assurance that we will not maintain excess inventory and incur inventory lower
      or cost or market charges in the future.




F-12




**Property
      and Equipment**




Property
      and equipment, prior to fresh start accounting adjustments, were stated at
      cost
      and depreciated on a straight-line basis over the estimated useful lives of
      the
      various classes of assets, which generally ranged from two to seven years.
      After
      fresh start accounting adjustments, the new fair value of property and equipment
      is being depreciated on a straight-line basis over the estimated applicable
      remaining useful lives which generally ranged from one to five years. Property
      and equipment obtained post-bankruptcy is stated at cost less accumulated
      depreciation and is depreciated on a straight-line basis over the estimated
      useful lives of the assets, generally one to five years. Maintenance and repairs
      costs are expensed as incurred.




**Research
      and Development Costs**




We
      expense research and development costs as incurred. During the fiscal years
      ended August 31, 2006 and 2005, we expensed approximately $410,000 and $529,000,
      respectively, in research and development costs associated with new product
      development. All research and development costs are reflected in “Engineering
      expenses” in the Consolidated Statements of Operations.




**Capitalized
      Software Costs**




In
      accordance with Statement of Position 98-1, “Accounting for the Costs of
      Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”) and
      Statement of Financial Accounting Standards No. 86 (“FAS 86”), software
      development costs that meet certain capitalization requirements are capitalized.
      Such costs consist of software development costs for products to be sold or
      leased, as well as the cost of software acquired for internal use. Additions
      to
      capitalized software during the fiscal years ended August 31, 2006 and 2005
      were
      approximately $52,000 and $545,000, respectively. Amortization expense on
      capitalized software during the fiscal years ended August 31, 2006 and 2005
      was
      $374,000 and $310,000, respectively.




**Valuation
      of Long-Lived Assets**




We
      evaluate the recoverability of our long-lived assets under Statement of
      Financial Accounting Standards No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets” (“ SFAS 144”). SFAS 144 requires us to review for
      impairment of our long-lived assets, whenever events or changes in circumstances
      indicate that the carrying amount of an asset might not be recoverable and
      exceeds its fair value. Impairment evaluations involve our estimates of asset
      useful lives and future cash flows. When such an event occurs, we estimate
      the
      future cash flows expected to result from the use of the asset and its eventual
      disposition. If the undiscounted expected future cash flows are less than the
      carrying amount of the asset and the carrying amount of the asset exceeds its
      fair value, an impairment loss is recognized. We utilize an expected present
      value technique, in which multiple cash flow scenarios that reflect the range
      of
      possible outcomes and a risk-free rate are used, to estimate fair value of
      the
      asset.




We
      assess
      the impairment in value to our long-lived assets whenever events or
      circumstances indicate that the carrying value may not be recoverable.
      Significant factors, which would trigger an impairment review, include the
      following:




·
            significant
                negative industry trends,





·
            significant
                changes in technology,





·
            significant
                underutilization of the asset, and


****


·
            significant
                  changes in how the asset is used or is planned to be
                  used.




F-13




**VMI
      License Right**





In
      June
      of 2001, we received a 99-year exclusive license right to market, sell and
      operate Minorplanet Systems PLC’s (“PLC”) VMI technology in the United States,
      Canada and Mexico. On June 14, 2004, the Bankruptcy Court approved a Compromise
      and Settlement Agreement (the “Agreement”) by and among us and Minorplanet
      Limited and PLC regarding the license agreement for the VMI technology, which
      allowed us to use, market and sell the VMI technology until December 31, 2004.
      On January 6, 2005, we entered into an Addendum to Compromise and Settlement
      Agreement (the “Addendum”) with PLC which granted us the right to continue to
      market and sell the VMI product line to our existing VMI customers. Although
      we
      have ceased actively marketing and selling the VMI product, the Addendum allows
      us to fulfill VMI product orders from existing VMI customers.




We
      account for the VMI license right in accordance with SFAS No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which
      requires us to review for impairment of our long-lived assets whenever events
      or
      changes in circumstances indicate that the carrying amount of an asset might
      not
      be recoverable and exceeds its fair value. Thus, we used an expected present
      value technique, in which multiple cash flow scenarios that reflect the range
      of
      possible outcomes and a risk-free rate, to estimate the fair value of the VMI
      license right at August 31, 2006. Accordingly, we recorded an impairment loss
      of
      $0.2 million during the year ended August 31, 2006 to reflect the fair value
      of
      the VMI license right based on our revised sales and cash flow forecasts. At
      August 31, 2006, the carrying value of the license right was approximately
      $0.1
      million. The new fair value of the VMI license right at August 31, 2006 is
      being
      amortized over its expected useful life of ten months.




**Goodwill
      and Other Intangibles**





We
      test
      our goodwill for impairment on an annual basis, or between annual tests if
      it is
      determined that a significant event or change in circumstances warrants such
      testing, in accordance with the provisions of SFAS No. 142, “Goodwill and Other
      Intangible Assets”, (“SFAS 142”) which requires a comparison of the carrying
      value of goodwill to the fair value of the reporting unit. If the fair value
      of
      the reporting unit is less than the carrying value of goodwill, an adjustment
      to
      the carrying value of goodwill is required.




Since
      our
      launch of the REDIview product line in January of 2005, we have experienced
      significant competition in the marketplace which has eroded our price points
      and
      prevented us from achieving our sales targets with sales cycles for large
      accounts proving to be much longer and complex than originally anticipated.
      Thus, in response to current market conditions, we revised our business plan
      modifying our pricing structures, our sales and marketing approach and added
      new
      feature sets to our REDIview product line to ensure that we remain competitive
      in the marketplace. We have significantly reduced our future projected cash
      flows from previous projections. Thus, we performed our annual test for goodwill
      impairment at August 31, 2005 utilizing an income approach, a discounted future
      cash flow analysis and an analysis of market multiples to determine our goodwill
      was impaired by an estimated $9.6 million. Goodwill was thus written off by
      $9.6
      million representing the full amount of the estimated impairment during the
      fiscal year ended August 31, 2005.




Based
      on
      our failure to achieve our forecasted sales targets for the three months ended
      November 30, 2005, we began analyzing and revising our current and long-term
      business plans, materially modifying our existing business plan in late December
      2005. Our business plan significantly reduced our projected sales forecasts
      and
      operational costs from the former plan. As a result, and in accordance with
      SFAS
      142, we performed an interim test of our goodwill as of November 30, 2005
      utilizing a discounted future cash flow analysis based on our new projected
      sales targets and the estimated impact of our cost saving measures. We
      determined that goodwill was further impaired by an estimated $5.0 million.
      Goodwill was thus further written off by $5.0 million at November 30, 2005
      representing the full amount of the estimated impairment.




We
      further modified our business plan as of August 31, 2006 significantly reducing
      our projected sales forecasts and operational costs from the former plan. As
      a
      result, and in accordance with SFAS 142, we performed an annual test of our
      goodwill as of August 31, 2006 utilizing a discounted future cash flow analysis
      based on our new projected sales targets and the estimated impact of our
      additional cost saving measures. We determined that goodwill was further
      impaired by an estimated $2.7 million. Goodwill was thus further written off
      by
      $2.7 million at August 31, 2006 representing the full amount of the estimated
      impairment. At August 31, 2006, the carrying value of our goodwill was $2.4
      million.




F-14




**Advertising
      Costs**




Advertising
      costs are expensed as incurred. During the fiscal years ended August 31, 2006
      and 2005, we expensed $53,000 and $203,000, respectively, in advertising costs
      that are reflected in “Sales and marketing expenses” in the Consolidated
      Statements of Operations.




**Income
      Taxes**




Deferred
      income taxes are calculated using an asset and liability approach wherein
      deferred taxes are provided for the tax effects of basis differences for assets
      and liabilities arising from differing treatments for financial and income
      tax
      reporting purposes. A valuation allowance is recognized if, based on the weight
      of available evidence, it is more likely than not that some portion or all
      of
      the deferred tax asset will not be realized.




**Restricted
      Stock**




On
      July
      2, 2004, in accordance with the plan of reorganization, we adopted the Restated
      2004 Management Incentive Plan (the “Incentive Plan”). The Incentive Plan allows
      for the issuance of up to 700,000 restricted shares of common stock to
      management. As of August 31, 2006, 565,000 shares of restricted stock had been
      issued to certain members of the senior management and 220,000 shares of
      restricted stock were retired. These restricted shares are accounted for in
      accordance with variable plan accounting, which requires that the fair value
      of
      the shares be measured and charged to the income statement upon determination
      that the fulfillment of the performance criteria has been met or is probable.
      We
      recorded approximately $70,000 of compensation expense associated with these
      restricted shares during the fiscal year ended August 31, 2006. Prior to the
      adoption of SFAS 123(R), “Share Based Payment”, we presented deferred
      compensation as a separate component of stockholders’ equity. In accordance with
      the provisions of SFAS 123(R), we reclassified the balance in deferred
      compensation to additional-paid-in-capital on our balance sheet.




**Stock-Based
      Compensation**




In
      December of 2004, the Financial Accounting Standards Board (“FASB”) issued FAS
      123R, which applies to transactions in which an entity exchanges its equity
      instruments for goods or services and also applies to liabilities an entity
      may
      incur for goods or services that are based on the fair value of those equity
      instruments. For any unvested portion of previously issued and outstanding
      awards, compensation expense is required to be recorded based on the previously
      disclosed FAS 123 methodology and amounts. Prior periods presented are not
      required to by restated. We adopted FAS 123R as of September 1, 2005 and applied
      the standard using the modified prospective method. We extinguished our prior
      stock options upon emergence from bankruptcy effective July 2, 2004 and have
      not
      issued any new stock options beyond that date. As discussed above, we have
      issued restricted stock to certain members of senior management which have
      either been issued or retired as of August 31, 2006. Compensation expense
      totaling $70,000 has been recorded during the fiscal year ended August 31,
      2006
      related to the vesting of certain restricted shares described
      above.




**Earnings
      Per Share**




We
      compute earnings per share in accordance SFAS No. 128, “Earnings Per Share.” Net
      loss per basic share was computed by dividing net loss by the weighted average
      number of shares outstanding during the respective periods. Diluted earnings
      per
      share is computed using the “Treasury Stock Method.” The Company’s potentially
      dilutive securities ** have
      been
      excluded from the weighted average number of shares outstanding, since their
      effect would be anti-dilutive.




The
      securities listed below were not included in the computation of diluted earnings
      per share as the effect from their conversion would have been
      antidilutive:




F-15




Year
                  ended August 31,2006
              
              2005Restricted
                  stock ( not vested)
              
              
              -
              
              
              525,000Convertible
                  note payable
              
              
              29,399,350
              
              
              689,655Convertible
                  preferred stock
              
              
              3,870,968
              
              
              2,500,000Outstanding
                  warrants to purchase common stock
              
              
              87,991,667
              
              
              3,491,667




**Stock
      Warrants**




Stock
      warrants issued, redeemed and outstanding during the fiscal years ended August
      31, 2006 and 2005 are as follows:


AverageCommon
                  Stock
              
              Exercise
                    Priceper
                  shareWarrants
                  outstanding, August 31, 2004
              
              
              -Warrants
                  issued
              
              
              3,491,667
              
              $
              0.57Warrants
                  exercised
              
              
              -
              
              
              -Warrants
                  outstanding, August 31, 2005
              
              
              3,491,667
              
              
              0.57Warrants
                  issued
              
              
              85,625,000
              
              
              0.43Warrants
                  exercised
              
              
              (1,125,000
              )
              
              0.30Warrants
                  outstanding, August 31, 2006
              
              
              87,991,667
              
              
              0.43


**New
      Accounting Standards**




*Financial
      Accounting Standards No. 155 (“FAS 155”).* In
      February 2006, the FASB issued FAS 155, “Accounting for Certain Hybrid Financial
      Instruments,” an amendment of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) and
      Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). With
      respect to FAS 133, FAS 155 simplifies accounting for certain hybrid financial
      instruments by permitting fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation and eliminates the interim guidance in Statement 133 Implementation
      Issue No. D1, “Application of Statement 133 to Beneficial Interests in
      Securitized Financial Assets,” which provided that beneficial interests in
      securitized financial assets are not subject to the provision of FAS 133. With
      respect to FAS 140, FAS 155 eliminates a restriction on the passive derivative
      instruments that a qualifying special-purpose entity may hold. FAS 155 is
      effective for all financial instruments acquired or issued after the beginning
      of an entity’s first fiscal year that begins after September 15, 2006. We do not
      expect the adoption of FAS 155 to significantly affect our financial condition
      or results of operations.




*FASB
      Interpretation No. 48 (“FIN 48”).* In July
      2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes” which
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return. Additionally, FIN 48 provides guidance on derecognition,
      classification, accounting in interim periods and disclosure requirements for
      uncertain tax positions. The accounting provisions of FIN 48 will be effective
      for us beginning October 1, 2007. We are in the process of determining the
      effect, if any, the adoption of FIN 48 will have on our financial statements.




*Financial
      Accounting Standards No. 157 (“FAS 157”).* In
      September 2006, the FASB issued FAS 157, “Fair Value Measurements.” FAS 157
      defines fair value, established a framework for measuring fair value in
      generally accepted accounting principles (GAAP) and expands disclosures about
      fair value measurements. FAS 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007. We do not expect the
      adoption of FAS 157 to significantly affect our financial condition or results
      of operations.




F-16




**3.**
            **INVENTORIES**





Inventories
      consist of the following (in thousands):


August
                  31,2006
              
              
              2005Complete
                  systems
              
              $
              201
              
              $
              622Component
                  parts
              
              
              159
              
              
              169$
              360
              
              $
              791




**4.**
            **PROPERTY
                AND EQUIPMENT**





Property
      and equipment consist of the following (in thousands):


August
                  31,2006
              
              2005Network
                  service center
              
              $
              414
              
              $
              720Machinery
                  and equipment
              
              
              153
              
              
              163Capitalized
                  software costs
              
              
              1,822
              
              
              1,770Leasehold
                  improvements
              
              
              692
              
              
              692Vehicles,
                  computer equipment, and other equipment
              
              
              1,704
              
              
              1,9634,785
              
              
              5,308Less:
                  accumulated depreciation and amortization
              
              
              (2,548
              )
              
              (1,565
              )$
              2,237
              
              $
              3,743




Total
      depreciation and amortization expense related to property and equipment
      (excluding capitalized software costs) charged to operations during the year
      ended August 31, 2006 and 2005 was $1,088,000 and $1,153,000, respectively.





As
      of
      August 31, 2006 and 2005, the unamortized portion of software costs was
      $1,100,000 and $1,425,000, respectively. Amortization of such costs charged
      to
      expense during year ended August 31, 2006 and 2005 was $374,000 and $310,000,
      respectively. Such costs are included in “Depreciation and amortization” on our
      Consolidated Statements of Operations.




**5.**
            **GOODWILL
                AND OTHER INTANGIBLE
                ASSETS**




Upon
      implementation of fresh start accounting as of June 30, 2004, we recorded
      goodwill and other intangible assets and therefore applied provisions of SFAS
      142 that requires that goodwill not be amortized but reviewed annually (or
      more
      frequently if impairment indicators arise) for impairment. Intangible assets
      that do not have indefinite lives are amortized over their estimated useful
      lives. Goodwill and other intangible assets consist of the following as of
      August 31, 2006 and 2005 (in thousands):





F-17


Balance
                        at
                      August
                        31,
                      2005
              
              
              Amortization
              
              
              Impairment
              
              
              Balance
                        at
                      August
                        31,
                      2006
              
              
              Remaining
                        Amortization
                        Period
                        (in
                          months)Goodwill
              
              $
              10,120
              
              $
              -
              
              $
              (7,725
              )
              $
              2,395
              
              
              n/aOther
                  intangibles:Customer
                  relationships
              
              
              271
              
              
              (271
              )
              
              -
              
              
              -
              
              
              n/aVMI
                  License Right
              
              
              580
              
              
              (248
              )
              
              (237
              )
              
              95
              
              
              10




Balance
                        at
                      August
                        31,
                      2004
              
              
              Amortization
              
              
              Impairment
              
              
              Balance
                        at
                      August
                        31,
                      2004
              
              
              Remaining
                        Amortization
                        Period
                        (in
                          months)
 Goodwill
              
              $
              19,724
              
              $
              -
              
              $
              (9,604
              )
              $
              10,120
              
              
              n/aOther
                  intangibles:Customer
                  relationships
              
              
              1,220
              
              
              (949
              )
              
              -
              
              
              271
              
              
              4VMI
                  License Right
              
              
              1,207
              
              
              (426
              )
              
              (201
              )
              
              580
              
              
              22




Total
      amortization expense for the VMI license right and other intangible assets
      for
      the year ended August 31, 2006 and 2005 was approximately $519,000 and
      $1,240,000, respectively.





**6.**
            **LEASE
                RECEIVABLES AND OTHER
                ASSETS**





We
      provide lease financing to certain customers of our REDIview and VMI products.
      Leases under these arrangements are classified as sales-type leases or operating
      leases. These leases typically have terms of one to five years, and all sales
      type leases are discounted at interest rates ranging from 14% to 18% depending
      on the customer’s credit risk.




The
      net
      present value of the lease payments for sales-type leases is recognized as
      product revenue and deferred under the Company’s revenue recognition policy. The
      components of the net investment in sales-type leases are as follows (in
      thousands):


August
                  31,2006
              
              2005Minimum
                  lease payments receivable
              
              $
              501
              
              $
              730Less:
                  Allowance for uncollectibles
              
              
              (65
              )
              
              (98
              )436
              
              
              632Less:
                  Unearned interest income
              
              
              (80
              )
              
              (128
              )Net
                  investment in sales-type leases
              
              $
              356
              
              $
              504





The
      long-term portion of the net investment in sales-type leases at August 31,
      2006
      and 2005 was $210,000 and $325,000, respectively.




Total
      minimum lease payments receivable on sales-type leases as of August 31, 2006
      are
      as follows (in thousands):





F-18


Fiscal
                      Year Ending August 31,2007
                  
                  
                  2712008
                  
                  
                  1792009
                  
                  
                  51Total
                      minimum lease payments receivable
                  
                  $
                  501


Income
      from operating leases is recognized ratably over the term of the leases. Total
      future minimum rental payments due under operating leases as of August 31,
      2006
      are as follows (in thousands):


Fiscal
                    Year Ending August 31,2007
                
                $
                252008
                
                
                22009
                
                
                -Total
                    minimum rental payments
                
                $
                27


**7.**
            **ACCRUED
                EXPENSES AND OTHER CURRENT
                LIABILITIES**





Accrued
      expenses and other current liabilities consist of the following (in
      thousands):


August
                    31,2006
                
                2005Reorganization
                    accruals
                
                $
                15
                
                $
                15Capital
                    leases - current portion
                
                
                212
                
                
                584Lawsuit
                    settlement - current portion
                
                
                83
                
                
                -Property,
                    franchise, and other taxes payable
                
                
                97
                
                
                302Accrued
                    warranty costs
                
                
                149
                
                
                210Accrued
                    telecom costs
                
                
                35
                
                
                165Accrued
                    vacation
                
                
                78
                
                
                198Dividends
                    payable
                
                
                500
                
                
                -Legal,
                    accounting, interest and other accruals
                
                
                624
                
                
                609$
                1,793
                
                $
                2,083




**8.**
            **NOTES
                PAYABLE**





**HFS
      Note Payable**




On
      June
      29, 2004, we closed on a bankruptcy court-approved exit financing facility
      withHFS Minorplanet Funding LLC (“HFS”) and other accredited investors in the
      amount of $1,575,000. As part of the facility, we agreed to issue a $1,575,000
      convertible promissory note to HFS with the principal balance being due 36
      months from the date of funding, with an annual interest rate of 12%. HFS was
      required to provide the funding within 21 days of the closing.




On
      July
      20, 2004, we amended the exit financing by with HFS increasing the amount of
      the
      financing from $1,575,000 to $2,000,000. As a result, we issued a $2,000,000
      convertible promissory note to HFS with the principal balance being due 36
      months from the date of funding, with an annual interest rate of 12%. Upon
      issuance of the note, HFS provided the $2,000,000 funding to us less a
      commission in the amount of $80,000 representing 4% of the loan proceeds. HFS,
      may at any time demand repayment of the accrued interest and unpaid principal
      on
      the note, based upon a fixed conversion price (currently $3.08 per share of
      common stock), whose aggregate value equals the amount of accrued interest
      and
      principal being repaid. We paid HFS $240,000 in interest payments on the note
      during each of the twelve months ended August 31, 2006 and August 31, 2005,
      respectively.




F-19


On
        November 30, 2006, we entered into a promissory note with HFS in the principal
        amount of $1,000,000 and having a maturity date of December 1, 2007. As of
        the
        date of this report, no amounts have been advanced under this note. Advances
        are
        only available under certain limited circumstances. At maturity, (a) the
        promissory note (and all amounts due under the note) automatically convert
        into
        our securities of the same kind issued by us in our November 2006 private
        placement (based on a $1,000,000) and (b) the existing $2,000,000 convertible
        promissory note issued by us to HFS will be cancelled.




**SDS
      Note Payable**


On
        May
        31, 2005, we consummated a bridge loan and security agreement with SDS in
        which
        we issued a promissory note in the amount of $1.75 million to SDS. The bridge
        note was secured by our assets, bore interest at 8% per annum and was due
        and
        payable on September 30, 2005. The bridge note automatically exchanged upon
        shareholder approval into a common stock purchase warrant with a 5-year term
        to
        purchase 1,666,667 shares of common stock at an exercise price of $0.01 per
        share and a common stock purchase warrant with a 5-year term to purchase
        700,000
        shares of common stock at an exercise price of $1.75 per share. Our stockholders
        approved the exchange of the bridge note into common stock warrants and final
        documents were signed in September 2005. This exchange was recorded during
        the
        first quarter of the fiscal year ended August 31, 2006.




**Series
      A Note Financing**




On
      February 24, 2006, we closed a Note and Warrant Purchase Agreement with certain
      institutional investors pursuant to which we sold $5.75 million of our series
      A
      senior secured convertible notes and original issue discount series A notes
      (“Series A Notes”) in a private placement transaction. In the private placement,
      we received proceeds of approximately $4.1 million in cash (after deducting
      brokers’ commission but before payment of legal and other professional fees, the
      15% original issue discount of $750,000 and the tendering of 50 shares of their
      650 shares Series B preferred convertible stock with
      an
      aggregate face
      value of $500,000 by our sole series B preferred convertible
      stockholder).




The Series
      A
      Notes are secured by substantially all of our assets. The Series A Notes mature
      24 months from issuance and are convertible at the option of the holder into
      our
      common stock at a fixed conversion price of $0.20 per share (which adjusted
      to
      $0.016 per share upon the issuance of series B subordinated secured convertible
      notes discussed in Note 14). Beginning on September 1, 2006 and continuing
      thereafter on the first business day of each month, we must pay an amount to
      each holder of a Series A Note equal to 1/18th of the original principal payment
      of the note; provided, that if on any principal payment date the outstanding
      principal amount of the note is less than such principal installment amount,
      then we must pay to the holder of the note the lesser amount. We may make such
      principal installment amounts in cash or in registered shares of our common
      stock. If paid in common stock, certain conditions must be satisfied, and the
      number of registered shares to be paid to the holder must be an amount equal
      to
      the principal installment amount divided by eighty percent (80%) of the average
      of the closing bid price for the ten (10) trading days immediately preceding
      the
      principal payment date.




We
      currently are not in compliance with certain of our obligations relating to
      our
      Series A Notes, including our failure to maintain sufficient authorized shares
      to permit conversion of the notes and our failure to register the resale of
      the
      shares of common stock issuable upon conversion of the notes. As of August
      31, 2006, we have obtained waivers of compliance of these obligations from
      all
      of the note holders, other than one holder of $100,000 principal amount of
      the
      notes.




The
      purchasers of the Series A Notes (and the placement agent in the transaction)
      received the following common stock purchase warrants:





·
            Series A-7
                warrants to purchase 20,625,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.40 per sharesubject to adjustment for stock splits and combinations, certain
                dividends
                and distributions, reclassification, exchange or substitution,
                reorganization, merger, consolidation or sales of assets; issuances
                of
                additional shares of common stock, and issuances of common stock
                equivalents. The exercise price of the series A-7 warrants adjusted
                to
                $0.016 per share upon the issuance of our series B subordinated secured
                convertible notes as discussed in Note 14. The series A-7 warrants
                are
                exercisable for a seven-year period from the date of issuance. 1.9
                million
                of these warrants are exercisable over 5
                years.




F-20




·
            Series B-4
                warrants to purchase 13,750,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.90 per sharesubject to adjustment for stock splits and combinations, certain
                dividends
                and distributions, reclassification, exchange or substitution,
                reorganization, merger, consolidation or sales of assets; issuances
                of
                additional shares of common stock, and issuances of common stock
                equivalents. The exercise price of the series B-4 warrants adjusted
                to
                $0.016 per share upon the issuance of our series B subordinated secured
                convertible notes as discussed in Note 14. The series B-4 warrants
                are
                exercisable for a four-year period beginning on the date a resale
                registration statement for the shares underlying the warrants is
                declared
                effective by the Securities and Exchange Commission. 1.3 million
                of these
                warrants are exercisable over 5
                years.





·
            Series C-3
                warrants to purchase 27,500,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.21 per sharesubject to adjustment for stock splits and combinations, certain
                dividends
                and distributions, reclassification, exchange or substitution,
                reorganization, merger, consolidation or sales of assets; issuances
                of
                additional shares of common stock, and issuances of common stock
                equivalents. The exercise price of the series C-3 warrants adjusted
                to
                $0.016 per share upon the issuance of our series B subordinated secured
                convertible notes as discussed in Note 14. The series C-3 warrants
                are
                exercisable for a three-year period from the date of issuance. 2.5
                million
                of these warrants are exercisable over 5
                years.





**·**
            Series
                D-1 warrants (callable only at our option) to purchase 19,250,000
                shares
                in the aggregate of common stock at an exercise price per share equal
                to
                the lesser of: (a) $0.35 and (b) 90% of the average of the 5 day
                volume weighted average price of our common stock on the OTC Bulletin
                Board preceding the call notice, as defined in the
                warrant.





See
      additional discussion of this transaction in Note 10.





The
      following summarizes the Company’s notes payable by maturity dates at August 31,
      2006 (in thousands):


Less
              
              CarryingPrincipal
              
              Discount
              
              AmountFiscal
                  year ending August 31,
              
              
              2007
              
              $
              5,833
              
              
              (2,395
              )
              $
              3,4382008
              
              
              1,917
              
              
              (1,917
              )
              
              -Total
                  notes payable by maturity date
              
              
              
              
              $
              7,750
              
              $
              (4,312
              )
              $
              3,438


**Capital
      Leases Payable**




We
      lease
      certain vehicles, computer equipment, and other equipment under capital leases.
      As of August 31, 2006 and 2005, assets under capital leases included in
“Property and equipment” on our Consolidated Balance Sheets, were $1,247,000 and
      $1,405,000, net of accumulated depreciation of $756,000 and $499,000
      respectively.




F-21


The
        following is a schedule of our future minimum lease payments under capital
        leases together with the present value of the net minimum lease payments
        as of
        August 31, 2006 (in thousands).


Fiscal
                  year ending August 31,2007
              
              $
              2322008
              
              
              1982009
              
              
              20Total
                  minimum lease payments
              
              
              
              
              
              450Less:
                  amount representing interest
              
              
              
              
              
              (27
              )Present
                  value of net minimum lease payments
              
              
              
              
              $
              423




**9.**
            **INCOME
                TAXES**




The
      components of the income tax provision are as follows (in
      thousands).




Fiscal
                  Year Ended August 31,2006
              
              2005Current:Federal
              
              $
              -
              
              $
              -State-
              
              
              -Deferred:FederalState-
              
              
              -Income
                  Tax Expense (Benefit)
              
              $
              -
              
              $
              -




Deferred
      taxes are provided for those items reported in different periods for income
      tax
      and financial reporting purposes. The net deferred tax asset has been fully
      reserved because of uncertainty regarding our ability to recognize the benefit
      of the asset in future years. The tax effects of the temporary differences
      that
      give rise to significant portions of the deferred tax assets are as follows
      (in
      thousands).




F-22
 
 Fiscal
                      Year Ended August 31,2006
                  
                  2005Deferred
                      tax assets:Deferred
                      revenue
                  
                  
                  596
                  
                  
                  803Allowance
                      for doubtful accounts
                  
                  
                  48
                  
                  
                  100Other
                      accrued liabilities
                  
                  
                  27
                  
                  
                  73Inventory
                      reserves
                  
                  
                  38
                  
                  
                  106Other
                      reserves
                  
                  
                  104
                  
                  
                  177Other
                      Intangible assets
                  
                  
                  298
                  
                  
                  418License
                      Intangible
                  
                  
                  8,392
                  
                  
                  9,116Net
                      operating loss carryforwards
                  
                  
                  71,200
                  
                  
                  66,669Gross
                      deferred tax assets
                  
                  
                  80,703
                  
                  
                  77,462Valuation
                      allowance
                  
                  
                  (80,337
                  )
                  
                  (76,977
                  )Net
                      deferred tax assets
                  
                  
                  366
                  
                  
                  485Deferred
                      tax liabilities:Depreciation
                  
                  
                  (366
                  )
                  
                  (363
                  )Fresh
                      Start Identified Intangibles
                  
                  
                  -
                  
                  
                  (122
                  )Gross
                      deferred tax liabilities
                  
                  
                  (366
                  )
                  
                  (485
                  )Net
                      deferred tax asset
                  
                  $
                  -
                  
                  $
                  -




There
      was
      a net increase in the valuation allowance of $3.4 million during the year
      ended August 31, 2006.




The
      provision for income taxes is different than the amount computed using the
      applicable statutory federal income tax rate with the difference summarized
      below (in thousands).


Fiscal
                  Year Ended August 31,2006
              
              2005Income
                  tax at federal statutory rate
              
              $
              (7,095
              )
              $
              (5,325
              )Valuation
                  allowance
              
              
              3,360
              
              
              6,109Permanent
                  differences
              
              
              3,554
              
              
              -Other
              
              
              181
              
              
              (784
              )Provision
                  for income taxes
              
              $
              -
              
              $
              -


At
      August
      31, 2006, we had net operating loss carryforwards aggregating approximately
      $209
      million that expire in various years between 2010 and 2026. The utilization
      of
      these net operating losses will be limited pursuant to Internal Revenue Code
      Section 382 and may cause some amount of the carryforwards to expire
      unutilized.




**10.**
            **STOCKHOLDERS’
                EQUITY INSTRUMENTS AND RELATED
                MATTERS**





**Common
      and Preferred Stock**





As
      of
      August 31, 2005 we had 50,000,000 shares of common stock authorized, par value
      $0.01, and 2,000,000 shares of preferred stock authorized, par value $0.01.
      We
      had 8,255,785 common stock shares issued and 7,325,937 shares outstanding.
      We
      had 5,000 Series A preferred shares issued and outstanding as described
      below.





As
      of
      August 31, 2006 we had 230,000,000 shares of common stock authorized, par value
      $0.01, and 2,000,000 shares of preferred stock authorized, par value $0.01.
      We
      had 10,463,385 common stock shares issued and 9,533,437 shares outstanding.
      The
      Company had 600 Series B preferred shares issued and outstanding as described
      below.





F-23




**Series
      A Convertible Redeemable Preferred Stock**




On
      October 1, 2004, we closed the sale of 5,000 shares of Series A convertible
      preferred stock (“Series A convertible preferred stock “), with each preferred
      share having a face value of $1,000, for a total purchase price of $5,000,000.
      Net cash proceeds received by us were $4,651,000 after payment of expenses.
      The
      Series A convertible preferred stock was convertible into shares of our common
      stock at a conversion price of $2.00 per share. We sold the Series A Preferred
      Stock to SDS Capital Group SPC, Ltd (“SDS”) pursuant to that certain Securities
      Purchase Agreement , dated October 1, 2004, by and between us and SDS. The
      Series A Preferred Stock was issued to SDS pursuant to the exemption from the
      registration requirements of the Securities Act of 1933 as amended, provided
      by
      Regulation D promulgated thereunder.




On
      May
      31, 2005, we consummated a bridge loan and security agreement with SDS in which
      we issued a promissory note in the amount of $1.75 million to SDS (the “Bridge
      Note”). The Bridge Note was secured by our assets, accrued interest at 8% per
      annum and was due and payable on September 30, 2005. The Bridge Note
      automatically exchanged into a common stock purchase warrant with a 5-year
      term
      to purchase 1,666,667 shares of common stock at an exercise price of $0.01
      per
      share and a common stock purchase warrant with a 5-year term to purchase 700,000
      shares of common stock at an exercise price of $1.75 per share (the “Bridge
      Warrants”) upon approval of our stockholders. Our stockholders approved the
      exchange of the Bridge Note into the Bridge Warrants at our August 31, 2005
      annual stockholders meeting. On September 2, 2005, the Bridge Note was
      extinguished and exchanged for the Bridge Warrants.


As
        discussed below the Series A convertible preferred stock was converted into
        Series B convertible preferred stock in September 2005.




**Series
      B Convertible Redeemable Preferred Stock**




On
      September 2, 2005, we closed the sale of $6.5 million of preferred stock and
      common stock purchase warrants in a private placement transaction with SDS
      previously entered into on May 31, 2005. In consideration for the issuance
      of
      the Series B convertible preferred stock, SDS paid us $750,000 and returned
      to
      us all of the outstanding Series A convertible preferred stock with a face
      value
      of $5 million which was held by SDS. We incurred an early redemption penalty
      of
      $750,000 related to the Series A convertible preferred stock. Net cash proceeds
      received by us were approximately $443,000 after deduction of brokers’
commissions, accrued interest on the bridge note and other expenses. The Series
      B convertible preferred stock is convertible into common stock at an original
      conversion price of $1.55 per share. SDS also received a common stock purchase
      warrant with a 5-year term to purchase 2 million shares at an exercise price
      of
      $1.75 per share. We used the net proceeds from the financing transaction to
      fund
      our business plan. We are obligated to register the common stock issuable upon
      conversion of the Series B convertible preferred stock or exercise of the common
      stock purchase warrants for public resale under the Securities and Exchange
      Act
      of 1933.




On
      December 16, 2005, in consideration of our reducing the exercise price on
      certain warrants held by SDS from $0.67 to $0.30 per share, SDS exercised the
      warrants for the purchase of 1,125,000 shares of our common stock resulting
      in
      the receipt by us of cash proceeds in the amount of $337,500. This repricing
      resulted in an increase in the net loss attributable to common shareholders
      of
      approximately $69,000.




The
      terms
      of the Series B convertible preferred stock are set forth in the Certificate
      of
      Designation, Preferences and Rights, the most significant of which are as
      follows:




***Ranking*** *.* The
      Series B convertible preferred stock ranks senior to our common stock with
      respect to payment of dividends and amounts upon any liquidation, dissolution
      or
      winding up of the company.




***Dividends*** .
      Dividends accrue from the date of issuance of the Series B convertible preferred
      stock through August 31, 2008, and will be cumulative from such date. Holders
      of
      shares of Series B convertible preferred stock will be entitled to receive
      cumulative dividends in an amount equal to 8% per year until September 1, 2006
      and 3% per year thereafter, payable at the election of the holder of our Series
      B convertible preferred stock in cash or additional shares of Series B
      convertible preferred stock.




F-24


***Conversion*** *.* Each
      holder of Series B convertible preferred stock has the right to convert its
      shares of Series B convertible preferred stock into shares of our common stock
      at an original conversion price of $1.55 per share of common stock. The
      conversion price shall be adjusted in the event of stock splits, stock dividends
      and similar distributions and events affecting all of our common stockholders
      on
      a pro rata basis so that the conversion price is proportionately increased
      or
      decreased to reflect the event. In addition, if there is a change of control
      (as
      discussed below), then each holder of Series B convertible preferred stock
      has
      the right to receive upon conversion, in lieu of common stock otherwise
      issuable, such shares of stock, securities or other property as would have
      been
      issued or payable in such change of control with respect to the number of shares
      of common stock which would have been issuable upon conversion had such change
      of control not taken place (subject to appropriate revisions to preserve the
      economic value of the Series B preferred shares before the change of control).
      We have to provide 10 days written notice to the holders of its Series B
      convertible preferred stock before we may effect any change of control. In
      no
      event can any holder of Series B convertible preferred stock convert shares
      of
      Series B convertible preferred stock into shares of common stock or dispose
      of
      any shares of Series B convertible preferred stock to the extent that such
      conversion or disposition would result in the holder and its affiliates together
      beneficially owning or having the power to vote more than 9.99% of our
      outstanding shares of common stock.




***Redemption
      by Holder*** .
      The
      holders of shares of Series B convertible preferred stock have the right to
      cause us to redeem any or all of its shares at a price equal to 115% of face
      value (150% of the face value if the redemption event is a change of control
      event discussed below), plus accrued but unpaid dividends in the following
      events:




·
            Our
                common stock is suspended from trading or is not listed for trading
                on at
                least one of, the New York Stock Exchange, the American Stock Exchange,
                The Nasdaq National Market or The Nasdaq SmallCap Market for an aggregate
                of 10 or more trading days in any twelve-month
                period;




·
            The
                initial registration statement required to be filed by us pursuant
                to the
                registration rights agreement has not been declared effective by
                April 30,
                2006 or such registration statement, after being declared effective,
                cannot be utilized by the holders of Series B convertible preferred
                stock
                for the resale of all of their registerable securities for an aggregate
                of
                more than 15 days in the aggregate;




·
            We
                fail to remove any restrictive legend on any certificate or any shares
                of
                common stock issued to the holders of Series B convertible preferred
                stock
                upon conversion of the Series B convertible preferred stock as and
                when
                required and such failure continues uncured for five business
                days;




·
            We
                provide written notice (or otherwise indicate) to any holder of Series
                B
                convertible preferred stock, or state by way of public announcement
                distributed via a press release, at any time, of our intention not
                to
                issue, or otherwise refuse to issue, shares of common stock to any
                holder
                of Series B convertible preferred stock upon conversion in accordance
                with
                the terms of the certificate of designation for our Series B convertible
                preferred stock;




·
            We
                or any of our subsidiaries make an assignment for the benefit of
                creditors, or applies for or consents to the appointment of a receiver
                or
                trustee for us or for a substantial part of our property or
                business;




·
            Bankruptcy,
                insolvency, reorganization or liquidation proceedings or other proceedings
                for the relief of debtors shall be instituted by or against us or
                any of
                our subsidiaries which shall not be dismissed within 60 days of their
                initiation; or




·
            We:




·
            Sell,
                convey or dispose of all or substantially all of our
                assets;




·
            Merge
                or consolidate with or into, or engage in any other business combination
                with, any other person or entity, in any case which results in either
                (i)
                the holders of our voting securities immediately prior to such transaction
                holding or having the right to direct the voting of fifty percent
                (50%) or
                less of our total outstanding voting securities of or such other
                surviving
                or acquiring person or entity immediately following such transaction
                or
                (ii) the members of our board of directors comprising fifty percent
                (50%)
                or less of the members of our board of directors or such other surviving
                or acquiring person or entity immediately following such transaction;




F-25




·
            Either
                (i) fail to pay, when due, or within any applicable grace period,
                any
                payment with respect to any indebtedness in excess of $250,000 due
                to any
                third party, other than payments contested by us in good faith, or
                (ii)
                suffer to exist any other default under any agreement binding us
                which
                default or event of default would or is likely to have a material
                adverse
                effect on our business, operations, properties, prospects or financial
                condition;




·
            Have
                fifty percent (50%) or more of the voting power of our capital stock
                owned
                beneficially by one person, entity or
“group”;




·
            Experience
                any other change of control not otherwise addressed above; or




·
            Otherwise
                breach any material term under the private placement transaction
                documents, and if such breach is curable, shall fails to cure such
                breach
                within 10 business days after we have been notified thereof in writing
                by
                the holder.




For
      purposes of the Series B convertible preferred stock, a change of control means
      any sale, transfer or other disposition of all or substantially all of our
      assets, the adoption of a liquidation plan, any merger or consolidation where
      we
      are not the surviving entity with our capital stock unchanged, any share
      exchange where all of our shares are converted into other securities or
      property, any sale or issuance by us granting a person the right to acquire
      50%
      or more of our outstanding common stock, any reclassification of our common
      stock, and the first day on which the current member of our board of directors
      cease to represent at least a majority of the members of our board of directors
      then serving.




***Redemption
      by us*** .
      If, at
      any time after September 2, 2006 and before September 2, 2009, during a period
      of at least twenty (20) consecutive trading days (a) the closing trading price
      of our common stock is at least 200% of the conversion price then in effect
      and
      (b) the trading volume and trading price of our common stock result in a product
      of at least $350,000 on each trading day, then we shall have the right to redeem
      all shares of Series B convertible preferred stock then outstanding at price
      per
      share equal to 200% of the sum of the face amount of such share plus all accrued
      and unpaid dividends thereon through the closing date of such
      redemption.




***Restricted
      Actions*** .
      So long
      as any shares of Series B convertible preferred stock are outstanding, we are
      not permitted to take any of the following corporate actions (whether by merger,
      consolidation or otherwise) without first obtaining the approval of the majority
      holders of Series B convertible preferred stock:




·
            Alter
                or change the rights, preferences or privileges of the Series B
                convertible preferred stock, or increase the authorized number of
                shares
                of Series B convertible preferred stock;




·
            Amend
                our certificate of incorporation or
                bylaws;




·
            Issue
                any shares of Series B convertible preferred stock other than pursuant
                to
                the Securities Purchase Agreement with the selling
                stockholder;




·
            Redeem,
                repurchase or otherwise acquire, or declare or pay any cash dividend
                or
                distribution on, any junior
                securities;




·
            Increase
                the par value of our common stock;




·
            Sell
                all or substantially all of our assets or stock, or consolidate or
                merge
                with another entity;




·
            Enter
                into or permit to occur any change of control
                transaction;




·
            Sell,
                transfer or encumber technology, other than licenses granted in the
                ordinary course of business;




F-26




·
            Liquidate,
                dissolve, recapitalize or
                reorganize;




·
            Authorize,
                reserve, or issue common stock with respect to any plan or agreement
                that
                provides for the issuance of equity securities to our employees,
                officers,
                directors or consultants in excess of 250,000 shares of common stock;




·
            Change
                our principal business;




·
            Issue
                shares of our common stock, other than as contemplated by the certificate
                of designation or by the warrants issued to the selling stockholder;




·
            Increase
                the number of members of our board of directors to more than 7 members,
                or, if no Series B convertible preferred stock director has been
                elected,
                increase the number of members of our board of directors to more
                than 6
                members;




·
            Alter
                or change the rights, preferences or privileges of any of our capital
                stock so as to affect adversely the Series B convertible preferred
                stock;




·
            Create
                or issue any senior securities or pari passu securities to the Series
                B
                convertible preferred stock;




·
            Except
                for the issuance of debt securities to, or incurrence of indebtedness
                from, a recognized financial institution in an aggregate amount not
                exceeding $5,000,000 and which, in the case of debt securities, are
                not
                convertible securities, issue any debt securities or incur any
                indebtedness that would have any preferences over the Series B convertible
                preferred stock upon our liquidation, or redeem, repurchase, prepay
                or
                otherwise acquire any of our outstanding debt securities or indebtedness,
                except as expressly required by the terms of such securities or
                indebtedness;




·
            Make
                any dilutive issuance;




·
            Enter
                into any agreement, commitment, understanding or other arrangement
                to take
                any of the foregoing actions; or




·
            Cause
                or authorize any of our subsidiaries to engage in any of the foregoing
                actions.




***Voting
      Rights*** .
      Except
      as otherwise provided in the certificate of designation and as otherwise
      required by the Delaware General Corporation Law, each holder of Series B
      convertible preferred stock has the right to vote on all matters before the
      common stockholders on an as-converted basis voting together with the common
      stockholders as a single class. This voting right is subject to the limitation
      that in no event may a holder of shares of Series B convertible preferred stock
      (or warrants discussed below) have the right to convert shares of Series B
      convertible preferred stock into shares of our common stock or to dispose of
      any
      shares of Series B convertible preferred stock to the extent that such right
      to
      effect such conversion or disposition would result in the holder and its
      affiliates together beneficially owning or having the power to vote more than
      9.99% of our outstanding shares of common stock. The holders of a majority
      of
      the Series B convertible preferred stock also have the right to appoint one
      representative to our board of directors and are entitled to designate one
      observer to the meetings of our board of directors and committees.





***Warrants
      Issued to Selling Stockholder*** .
      In
      connection with the issuance of shares of Series B convertible preferred stock
      to SDS, we also issued to SDS three warrants to purchase shares of our common
      stock.





With
      respect to the first warrant, the holder has the right to purchase up to
      1,666,667 shares of our common stock at an exercise price equal to $0.01 per
      share. The first warrant may be exercised at any time until September 2, 2010.




With
      respect to the second warrant, the holder has the right to purchase up to
      700,000 shares of our common stock at an exercise price equal to $1.75 per
      share. The second warrant may be exercised at any time until September 2, 2010.
      The remaining terms of the second warrant are identical to the first warrant
      except the second warrant contains certain anti-dilution price protections
      in
      the event of a dilutive stock issuance (in addition to anti-dilution protections
      for stock splits and other similar pro rata events).




F-27
 
 With
          respect to the third warrant, the holder has the right to purchase up to
          2,000,000 shares of our common stock at an exercise price equal to $1.75
          per
          share. The third warrant may be exercised at any time after March 2, 2006
          until
          September 2, 2010. The remaining terms of the third warrant are identical
          to the
          first warrant except (i) the third warrant contains a provision which requires
          us to obtain the consent of the holder of the third warrant prior to any
          issuing
          any of our securities in a dilutive issuance and (ii) cashless exercise
          of the
          third warrant is not available until September 2, 2006. All three warrants
          contain a provision that prevents any holder from exercising the warrant
          to the
          extent that such exercise would result in such holder beneficially owning
          or
          having the right to vote more than 9.99% of our outstanding shares of common
          stock.


In
      addition to the warrants discussed above, SDS also holds two warrants for a
      total of 2,366,667 common shares which were issued in October 2004 and which
      are
      described more fully in the “Description of Capital Stock” section of our
      registration statement on Form S-3, filed by us with the Commission on November
      24, 2004.




***Registration
      Rights Agreement*** .
      In
      connection with the issuance of Series B convertible preferred stock and
      warrants to SDS, we entered into a registration rights agreement, dated
      September 2, 2005, with SDS, whereby we granted certain registration rights
      to
      SDS. On or prior to October 2, 2005, we were obligated to file a registration
      statement on Form S-3 covering 10,000,000 shares of common stock that SDS may
      acquire upon conversion of the Series B convertible preferred stock or upon
      exercise of the warrants. SDS and we subsequently amended the Registration
      Rights Agreement to extend the date by which we were obligated to file a
      registration statement on Form S-3 from October 2, 2005 to February 28, 2006.
      As
      per the amended registration rights agreement, we could face a liquidated
      damages claim by SDS if (i) the initial registration statement is not declared
      effective by the SEC on or prior to April 30, 2006, (ii) after the effectiveness
      of the registration statement, sales of common stock cannot be made by SDS
      due
      to a stop order by the SEC or our need to update the registration statement,
      or
      (iii) our common stock is not listed on Nasdaq, the New York Stock Exchange
      or
      the American Stock Market. The liquidated damages for the first 30 days equals
      3% of the purchase price of the Series B convertible preferred stock and equal
      1.5% for each 30 days thereafter of non-compliance. In addition to the
      liquidated damages provision discussed above, SDS can require the redemption
      of
      its shares of Series B convertible preferred stock upon certain default events.
      SDS subsequently waived prior penalties and agreed to allow the registration
      of
      such shares to occur with the registration statement on Form SB-2 registering
      shares of the Series A convertible Notes described below. We registered
      4,062,500 shares on Form SB-2 filed April 10, 2006 that went effective April
      29,
      2006. We intend to register the remaining shares which we are obligated to
      register under the registration rights agreement upon a new SB-2 filing
      registering the warrant shares in connection with the “Note and Warrant Purchase
      Agreement” below.





SDS
      also
      has the right to piggy-back on to the registration statements filed by us
      registering shares of our common stock (other than Form S-8 and Form S-4
      registration statements filed by us), subject to share cut-backs by the
      underwriters (if an underwritten public offering), provided that at least 25%
      of
      the shares requested for inclusion in the registration statement by SDS must
      be
      included in such underwritten public offering.





We
      are in
      violation of the registration rights agreement; however, SDS waived this right
      on November 24, 2006.





**Accounting
      for Sale of Series B Convertible Redeemable Preferred Stock and Exchange of
      Note
      Payable for Warrants**





The
      gross
      proceeds from the sale of the 650 shares of Series B convertible preferred
      stock
      was $6,500,000. The proceeds were used to redeem 5,000 shares of Series A
      convertible preferred stock at a face value of $5,000,000. The
      premium incurred upon redemption was $750,000. The carrying value on the
      Series A convertible preferred stock was $3,542,000; thus, we recorded a loss
      on
      redemption in September, 2005 of approximately $2,208,000. The loss is
      considered a deemed dividend and is reported after net loss and before net
      loss
      attributable to common stockholders.





Approximately
      $975,000 of the net proceeds were allocated to the associated third warrant
      based on its relative fair value as computed using the Black-Scholes pricing
      model; thus, the Series B convertible preferred stock had an original carrying
      value of $5,254,000, net of transaction costs totaling approximately $271,000.
      The net cash proceeds received by us after redemption of the Series A
      convertible preferred stock and payment of expenses and interest on the note
      payable was $443,000. As discussed above, the holders of the Series B
      convertible preferred stock have the right to require us to redeem any or all
      of
      its outstanding preferred shares upon a change of control or certain other
      contingent events that could be outside our control. Thus, the Series B
      convertible preferred stock is carried outside of permanent equity in the
      mezzanine section of our balance sheet.




F-28




On
      December 16, 2005, in consideration of our reducing the exercise price on
      certain warrants held by SDS from $0.67 to $0.30 per share, SDS exercised the
      warrants for the purchase of 1,125,000 shares of our common stock resulting
      in
      the receipt by us of cash proceeds in the amount of $337,500. This repricing
      resulted in an increase in the net loss attributable to common shareholders
      of
      approximately $69,000.




On
      December 23, 2005, we consummated the sale and assignment of certain of our
      patents and pending patent applications to Vehicle IP LLC in exchange for the
      payment by Vehicle IP LLC to us of $500,000.




**The
      Series A Note and Warrant Purchase Agreement**




As
      discussed in Note 8, on February 24, 2006, we closed a Note and Warrant Purchase
      Agreement dated February 23, 2006 (the “Purchase Agreement”) with several
      institutional investors as purchasers. Each of these purchasers was an
“accredited investor” under the SEC rules.




Under
      the
      terms of the Purchase Agreement, the purchasers have purchased from
      us:




·
            Series
                A Senior Secured Convertible Promissory Notes in the aggregate principal
                amount of $5,000,000, convertible into shares of our common stock
                (the
                “Series A Notes”); and




·
            Original
                Issue Discount Senior Secured Convertible Promissory Notes in the
                aggregate principal amount of $750,000, convertible into shares of
                our
                common stock (the “OID Notes”). Unless otherwise specified, the Series A
                Notes and the OID Notes are collectively referred to as the
                “Notes”).




In
      addition, pursuant to the Purchase Agreement, the following warrants to purchase
      shares of our common stock were issued to each purchaser on February 24,
      2006:




·
            Series A-7
                warrants to purchase shares of our common stock equal to 75% of the
                number
                of shares of our common stock issuable upon conversion of such purchaser’s
                Series A Note (approximately 18.8 million shares in the aggregate)
                at an
                exercise price per share equal to $0.40 (and subsequently reduced
                to
                $0.016) with a term of 7 years following the closing
                date;




·
            Series
                A-7 warrants issued to our placement agents to purchase shares of
                our
                common stock equal to equal to 10% of the number of Series A-7 warrants
                issued (approximately 1.9 million shares in the aggregate) at an
                exercise
                price per share equal to $0.40 (and subsequently reduced to $0.016)
                with a
                term of 5 years following the closing
                date;




·
            Series B-4
                warrants to purchase shares of our common stock equal to 50% of the
                number
                of conversion shares issuable upon the conversion of such purchaser’s
                Series A Note on the date of issuance of the note (approximately
                12.5
                million shares in the aggregate) at an exercise price per share equal
                to
                $0.90 (and subsequently reduced to $0.016) with a term of 4 years
                following the effective date of the registration statement providing
                for
                the resale of the conversion shares and the share of our common stock
                issuable upon exercise of the warrants;




·
            Series
                B-4 warrants issued to our placement agents to purchase shares of
                our
                common stock equal to equal to 10% of the number of Series B-4 warrants
                issued (approximately 1.3 million shares in the aggregate) at an
                exercise
                price per share equal to $0.90 (and subsequently reduced to $0.016)
                with a
                term of 5 years following the closing
                date;




F-29




·
            Series C-3
                warrants to purchase a number of shares of our common stock equal
                to 100%
                of the number of conversion shares issuable upon the conversion of
                such
                purchaser’s Series A Note on the date of issuance of this note
                (approximately 25.0 million shares in the aggregate) at an exercise
                price
                per share equal to $0.21 (and subsequently reduced to $0.016) with
                a term
                of 3 years following the closing
                date;




·
            Series
                C-3 warrants issued to our placement agents to purchase shares of
                our
                common stock equal to equal to 10% of the number of Series C-3 warrants
                issued (approximately 2.5 million shares in the aggregate) at an
                exercise
                price per share equal to $0.40 (and subsequently reduced to $0.016)
                with a
                term of 5 years following the closing
                date;




·
            Series D-1
                warrants (callable only at our option) to purchase a number of our
                shares
                of common stock equal to 70% of the number of conversion shares issuable
                upon conversion of such purchaser’s Series A Note (approximately 17.5
                million shares in the aggregate) at an exercise price per share equal
                to
                the lesser of: (a) $0.35 and (b) 90% of the average of the 5 day
                volume weighted average price of our common stock on the OTC Bulletin
                Board preceding the call notice, as defined in this
                warrant;




·
            Series
                D-1 warrants issued to our placement agents to purchase shares of
                our
                common stock equal to equal to 10% of the number of Series D-1 warrants
                issued (approximately 1.8 million shares in the aggregate) at an
                exercise
                price per share equal to the lesser of: (a) $0.35 and (b) 90% of
                the average of the 5 day volume weighted average price of our common
                stock
                on the OTC Bulletin Board preceding the call notice, as defined in
                this
                warrant;




·
            10%
                Placement Agent Warrant issued to our placement agents to purchase
                shares
                of our common stock equal to equal to 10% of the number of shares
                of
                common stock issuable to the note holders upon conversion of theirs
                notes
                (approximately 2.5 million shares in the aggregate) at an exercise
                price
                per share equal to $0.20 with a term of 5 years following the
                closing.




The
      issuance and purchase of the notes and warrants was effected in accordance
      with
      and in reliance upon the exemption from securities registration afforded by
      Regulation D promulgated under the Securities Act of 1933, and upon such other
      exemption from the registration requirements of this statute as may be available
      with respect to the investments made pursuant to the Purchase
      Agreement.




A
      portion
      of the purchase price in the amount of $500,000 received under the Purchase
      Agreement was delivered by SDS Capital Group SPC, Ltd. by exchanging 50 shares
      of our Series B convertible preferred stock held by this entity with an
      aggregate face value of $500,000.




*Certain
      Covenants*




Under
      the
      terms of the Purchase Agreement, our most significant obligations include that
      we will:




·
            Cause
                our common stock to continue to be registered under the Securities
                Exchange Act of 1934, continue the listing or trading of our common
                stock
                on the OTC Bulletin Board and to take all actions required to allow
                the
                purchasers to effect resales under Rule 144;




·
            (If
                we stop filing our periodic reports with the Securities and Exchange
                Commission) furnish annual and quarterly reports to the purchasers
                as long
                as they own or are obligated to purchase these securities;




·
            Use
                the net proceeds from the sale of the securities for working capital
                and
                general corporate purposes;




·
            Not
                provide any purchaser with any material non-public information;




·
            Acknowledge
                that the securities, under certain circumstances, may be pledged
                by the
                purchasers;




·
            Not
                declare or pay dividends or distributions on our common stock as
                long as
                any notes or warrants remain outstanding;




·
            As
                long as any notes or warrants remain outstanding, have authorized
                and
                reserved for issuance 120% of the aggregate number of shares of our
                common
                stock needed for the issuance of the conversion shares and the warrant
                shares;




F-30




·
            Issue
                irrevocable instructions to our transfer agent to issue certificates
                for
                the conversion shares and the warrant shares with a restrictive legend
                regarding the fact that such shares are not registered and are restricted
                securities;




·
            Not
                sell or dispose of any of our business assets without the prior written
                consent of the holders of a majority of the principal amounts of
                the notes
                outstanding;




·
            Agree
                that any business assets we acquire in the future will become part
                of the
                collateral securing our obligations under the notes;




·
            Maintain
                a directors and officers liability insurance policy with coverage
                equal to
                or greater than $3,000,000; and




·
            With
                regard to subsequent financings that, for a period of 1 year following
                the
                closing date; notify the purchasers in writing of the terms and conditions
                of any proposed offer or sale to any third party of any of our common
                stock or securities convertible into our common stock, which notice
                will
                provide each purchaser an option, during the 10 trading days after
                the
                notice, to inform us whether the purchaser will purchase up to its
“pro
                rata” shares of all of the securities being offered in this subsequent
                financing.




·
            In
                this context “pro rata” means the percentage obtained by
                dividing:




·
            The
                principal amount of the notes purchased by the purchaser on the closing
                date, by




·
            The
                total principal amount of all the notes purchased by all of the purchasers
                on the closing date with regard to “permitted financings” that such
                permitted financings, as defined below will not be considered a subsequent
                financing for these purposes; permitted financings include:




·
            Securities
                issued other than for cash in connection with a merger or acquisition;




·
            Securities
                issued prior to the closing date or issued pursuant to the conversion
                of
                the notes;




·
            Our
                common stock issued pursuant to the warrants;




·
            Securities
                issued in connection with strategic licensing or partnering agreements;




·
            Our
                common stock issued pursuant to our stock option plans or our employee
                stock purchase plans;




·
            Any
                warrants issued to the placement agent for the offering;




·
            Our
                common stock issued in connection with consulting or advisory services;




·
            The
                payment of any principal in shares of our common stock pursuant to
                the
                notes;




·
            As
                long as the notes remain outstanding, allow the purchasers to exchange
                their notes for any securities issued in a subsequent financing if
                such
                securities are on terms more favorable than the terms governing the
                notes.




Pursuant
      to the terms of the Purchase Agreement, we have agreed to indemnify the
      purchasers and certain of their related parties against all losses resulting
      from any inaccuracy in or breach of our representations, warranties or
      agreements made in the Purchase Agreement. The purchasers, severally but not
      jointly, have agreed to indemnify us and certain of our related parties against
      all losses resulting from any inaccuracy in or breach of the representations,
      warranties and agreements of the purchaser made in the Purchase Agreement.
      The
      maximum aggregate liability of each purchaser for such indemnification is
      limited to the portion of the total purchase price paid by the purchaser under
      the Purchase Agreement. The Purchase Agreement and each of the notes, warrants
      and other documents contemplated thereby are governed by New York
      law.





F-31


**Material
      Terms of the Senior Secured Convertible Notes**





We
      issued
      these notes pursuant to the Purchase Agreement, in which we issued, as maker,
      the notes on February 24, 2006, the issuance date, in the principal amount
      of $5,000,000. As described below, these notes are convertible into shares
      of
      our common stock and have a maturity date of February 24,
      2008.





Beginning
      on September 1, 2006 and after that on the first business day of each
      month, a principal payment date, we must pay to the holder of the note an amount
      equal to 1/18 th of the
      original principal amount of the note, or the principal installment amount.
      However, if on any principal payment date the outstanding principal on the
      note
      is less than the principal installment amount, then we must pay the holder
      the
      lesser amount. We may make payment in cash or in shares of our common stock,
      provided that a registration statement covering the resale of such shares has
      been declared effective by the SEC.





*Option
      to Pay with Shares in Certain Circumstances*




If
      we
      choose to pay the principal installment amount in shares of our common stock,
      we
      must pay the number of shares in an amount equal to the principal installment
      amount divided by 80% of the average closing bid price for the 10 trading days
      immediately prior to the principal payment date. We have this option only if,
      among other things, the convertible securities have been duly registered on
      an
      effective registration statement and trading in our common stock has not been
      suspended on the OTC Bulletin Board or other exchange.





Our
      obligations as the maker of these notes are secured by a continuing security
      interest in certain of our assets.





*Events
      of Default*




The
      amounts payable under the notes may be accelerated or increased upon the
      occurrence of an event of default, which includes:




·
            Our
                failure to make the principal installment amount on a designated
                principal
                payment date;




·
            The
                failure of the registration statement to be declared effective by
                the
                Securities and Exchange Commission on or prior to August 25, 2006;




·
            The
                suspension from listing or failure of our common stock to be listed
                on the
                OTC Bulletin Board or one of the major exchanges;




·
            Our
                notice to the holder of our inability to comply or intention not
                to comply
                with proper requests for conversion of the notes;




·
            Our
                failure to timely deliver shares of common stock upon conversion,
                to file
                a registration statement, or to make payment of fees under the notes,
                the
                Purchase Agreement or the related registration rights agreement;




·
            The
                lapsing of the effectiveness of the registration statement for a
                period of
                10 consecutive trading days;




·
            Our
                default in the performance of any material covenant in the notes,
                the
                Purchase Agreement, the registration rights agreement or any other
                ancillary documents;




·
            Our
                making of a false or incorrect representation or warranty in the
                Purchase
                Agreement, the registration rights agreement or any other ancillary
                documents;




·
            Our
                default in any payment of principal or interest on the indebtedness
                represented by the notes, or default in the observance or performance
                of
                any other agreement relating to such indebtedness in excess of $100,000;




F-32




·
            Our
                application for appointment of a receiver or liquidator or filing
                a
                petition in bankruptcy or other similar relief which is not dismissed
                within 30 days;




·
            The
                filing of a proceeding against us seeking the liquidation, reorganization,
                or dissolution of us or similar relief which is not dismissed within
                30
                days;




·
            Our
                failure to instruct our transfer agent to remove any legends from
                shares
                of common stock eligible to be sold under Rule 144 of the Securities
                Act
                of 1933 and to issue such shares to the holder;




·
            Our
                failure to pay any amounts due to the holder under the notes, the
                Purchase
                Agreement or the registration rights agreement within three (3) business
                days of the due date;




·
            The
                occurrence of an event of default under any of the other notes
                contemplated by the Purchase Agreement, known as a cross-default
                provision; and




·
            Our
                failure to obtain stockholder approval to increase the authorized
                shares
                of common stock in accordance with the Purchase
                Agreement.




·
            If
                one of these events of default has occurred, the holder
                may:




·
            Declare
                the entire unpaid principal balance of the notes due and it will
                be
                accelerated;




·
            Demand
                that the principal amount of the notes then outstanding be converted
                into
                shares of our common stock at the conversion price discussed in more
                detail below; and/or




·
            Exercise
                any of the holder’s other rights or remedies under the transaction
                documents or applicable law. We must pay interest on demand on the
                notes
                upon an event of default from the date of the default until the date
                of
                cure at the lesser of 10% and the maximum per annum legal
                rate.




*Conversion*




The
      notes
      contemplate both a voluntary conversion and a mandatory conversion. Under the
      voluntary conversion, at the option of the holder the notes will be convertible
      in whole or in part into that number of shares of our common stock determined
      by
      dividing: (i) that portion of the outstanding balance under the notes as of
      the date the holder chooses to convert; by (ii) the conversion price then
      in effect (the initial conversion price under the notes is $0.20), as it may
      be
      adjusted under the terms of the notes. The term mandatory conversion date is
      the
      date following the effective date of the registration statement on which the
      closing bid price is greater than 250% of the conversion price for a period
      of
      12 consecutive trading days and the average daily trading for such 12
      consecutive trading days exceeds 750,000 shares of common stock. On the
      mandatory conversion date, we may, upon 5-business days prior notice to the
      holder, cause the principal amount of the notes to convert into a number of
      shares of our common stock equal to the quotient of:




·
            The
                principal amount of the notes outstanding on the mandatory conversion
                date; divided by




·
            The
                conversion price in effect on the mandatory conversion date; however,
                in
                order to cause this conversion the following must be true:




·
            The
                registration statement must be effective 30 days immediately prior
                to the
                mandatory conversion date;




·
            Trading
                in our common stock must not have been suspended by the OTC Bulletin
                Board
                or other relevant exchange;




·
            No
                event of default must have occurred and be continuing;




·
            This
                mandatory conversion must not violate the note provisions regarding
                the
                ownership cap as described below, and




F-33




·
            We
                must not be in possession of any material non-public information.
                The
                mandatory conversion date will be extended during the time of occurrence
                of a triggering event as described
                below.




If,
      because the registration statement has not been filed or its effectiveness
      has
      been suspended, a holder is unable to trade any of our common stock, the holder
      will have the option, within 10 trading days after the expiration of such
      black-out period, of using the conversion price applicable on such conversion
      date or any conversion price selected by the holder that would have been
      applicable if the conversion date had been at an earlier time during such
      black-out period or within the 10 trading days after that period.




In
      order
      to make the holder whole from any economic loss resulting in our failure timely
      to deliver the conversion securities, we have agreed in such event to pay to
      the
      holder in cash, and as liquidated damages, an amount per trading day for each
      trading day until the shares are delivered, along with interest on such amount
      at a rate of 10% per annum, equal to the greater of:




·
            (a)
                1% of the principal amount of the notes requested to be converted
                for the
                first 5 trading days after the delivery date; and (b) 2% of the
                principal amount of the notes requested to be converted for each
                trading
                day after that; and




·
            $2,000
                per day.




In
      addition, if we fail to deliver certificates representing the convertible
      securities on or before the delivery date and if after that date the holder
      is
      required by its broker to purchase shares of our common stock to deliver in
      satisfaction of a sale by the holder of the convertible securities which the
      holder expected to receive upon proper conversion, or a buy-in, then we must:
      pay in cash to the holder the amount which such holder had to come out of pocket
      to cover the open market purchase in excess of the price at which the sell
      order
      giving rise to such purchase obligation was executed.





*Limitation
      of Beneficial Ownership of Our Shares*





Subject
      to waiver by the holder under certain circumstances upon 61 days notice to
      us,
      the holder may not convert all or any portion of the notes if the number of
      shares of convertible securities, when combined with all other shares of our
      common stock held by the holder: (i) would result in the holder
      beneficially owning more than 4.9% of all of our common stock then outstanding;
      or (ii) would result in the holder beneficially owning more than 9.9% of
      all of our common stock then outstanding.


*Conversion
      Price Adjustments*




The
      conversion price under the notes is subject to adjustment from time to time
      to
      reflect:




·
            Stock
                splits and combinations;




·
            Certain
                dividends and distributions;




·
            Reclassifications;
                exchanges or substitutions;




·
            Reorganizations,
                mergers, sales of assets;




·
            Issuances
                of additional shares of common stock (on a full-ratchet anti-dilution
                basis); and




·
            Issuances
                of common stock equivalents.




In
      the
      event of an issuance of additional shares of common stock, or an issuance of
      common stock equivalents, a “full ratchet” adjustment will be made to the
      conversion price. This means effectively that the conversion price will be
      reduced to the consideration per share paid for the additional shares of common
      stock in question.





We
      are
      not obligated to make any adjustments to the conversion price in connection
      with:




·
            Securities
                issued other than for cash in connection with a merger or
                acquisition;




·
            Securities
                issued pursuant to conversion or exercise of securities outstanding
                prior
                to the date of the notes and the
                warrants;




·
            Shares
                of our common stock issuable upon exercise of the
                warrants;




F-34




·
            Securities
                issued in connection with strategic license or partnering
                agreements;




·
            Shares
                of our common stock issued in connection with our stock option plans
                or
                employee stock purchase plans;




·
            Warrants
                issued to the placement agent for the
                offering;




·
            Shares
                of our common stock issued in connection with consulting or advisory
                services; and




·
            The
                payment of any principal in shares of our common stock pursuant to
                the
                notes.




*Prepayment*




The
      notes
      require several types of prepayment provisions, which reference the two
      following terms: major transaction and triggering event. The notes define a
      major transaction as:




·
            Our
                merger or consolidation with or into another entity involving a change
                of
                control;




·
            Our
                sale or transfer of more than 50% of our assets; or




·
            The
                closing of a tender offer for more than 50% of the outstanding shares
                of
                our common stock.




·
            The
                notes include the following in the definition of a triggering
                event:




·
            The
                effectiveness of the registration statement for the common stock
                issued on
                conversion of the notes lapses for any reason or it is unavailable
                for the
                resale of our common stock for a period of 20 consecutive trading
                days;




·
            The
                suspension from listing of our common stock on the OTC Bulletin Board
                or
                any other exchange for a period of 5 trading
                days;




·
            Our
                notice to any holder of our inability or intention not to comply
                with
                requests for conversion;




·
            Our
                failure to comply with a holder’s conversion notice within 10 business
                days of our receipt of it;




·
            Our
                deregistration of our common stock;




·
            Our
                completion of a “going private” transaction as a result of which our
                common stock is no longer registered under the exchange act;
                or




·
            Our
                breach of any of our representations, warranties and covenants made
                in the
                Purchase Agreement, the notes or any ancillary
                documents.




On
      the
      occurrence of an event of default, the holder has the right to require us to
      prepay in cash all or a portion of the notes at a price equal to 120% of the
      principal amount of the notes at the time of the request. Simultaneously with
      the occurrence of a major transaction, the holder has the right to require
      us to
      prepay all or a portion of the holder’s notes at a price equal to 100% of the
      principal amount of the notes.





For
      purposes of the prepayment option upon a triggering event, the term volume
      the
      weighted average price means for any date the daily volume weighted average
      price of our common stock for such date on the OTC Bulletin Board; or the “Pink
      Sheets”, or as determined by an independent appraisal if the stock is not then
      traded on one of the markets. After a triggering event occurs, the holder has
      the right to require us to prepay all or a portion of the notes in cash at
      a
      price equal to the sum of:





·
            The
                greater of:




·
            125%
                of the principal amount of the notes; and




·
            If
                the holder cannot get the benefit of its conversion rights and the
                ability
                to effect the resale of shares of our common stock issuable upon
                conversion, the aggregate principal amount of the notes divided by
                the
                conversion price on:




F-35




·
            The
                date the prepayment price is demanded or due; or




·
            The
                date the prepayment price is paid in full, whichever is less, multiplied
                by the volume the weighted average price on:




·
            The
                date the prepayment price is demanded or otherwise due; or




·
            The
                date the prepayment price is paid in full, whichever is greater;
                and




·
            All
                other costs or expenses due in respect of the notes and the other
                transaction documents.




No
      sooner
      than 15 days nor later than 10 days prior to the completion of a major
      transaction we must deliver notice of it to the holder. At any time after
      receipt of such notice, the holder may require us to prepay the notes
      immediately. Within 1 business day after the occurrence of a triggering event,
      we must deliver notice of it to the holder. At any time after the earlier
      of:




·
            The
                holder’s receipt of our notice; or




·
            The
                holder’s becoming aware of a triggering event, the holder may require us
                to prepay all of the notes on a pro rata basis. We must deliver the
                prepayment price related to a triggering event within 5 business
                days
                after we receive notice of this requirement from the holder; and
                we must
                deliver the prepayment price related to a major transaction immediately
                prior to the consummation of the major transaction. However, if we
                are
                unable to prepay all of the notes to be so prepaid, we must pay an
                amount
                to each holder equal to the holder’s pro rata amount of all notes being
                prepaid.




If
      we
      fail to prepay all of the notes submitted for prepayment, we have to pay
      interest on the prepayment price at the rate of 2% per month until paid in
      full.
      Until paid in full the holder may, in place of prepayment, require us to return
      to the holder all of the notes submitted for prepayment. We must return the
      notes and the conversion price of the returned notes must be adjusted to the
      lesser of:




·
            The
                conversion price in effect on the date on which the holder sends
                notice to
                us that it chooses in lieu of prepayment to have the notes returned;
                and




·
            The
                lowest closing bid price during the period beginning on the date
                on which
                we deliver notice of the prepayment option as it related to a major
                transaction or a triggering event and ending on the date on which
                the
                holder delivers notice to us of its choice, in lieu of prepayment,
                to have
                us return to the holder all of the
                notes.




If,
      on
      our receipt of a request for conversion of the notes we are unable to issue
      shares of our common stock registered for resale, either because we does not
      have sufficient authorized shares of our common stock or because we are
      otherwise prohibited by law from doing so, then we must issue as many shares
      of
      our common stock as we are able to in compliance with the holder’s request and,
      with regard to the unconverted portion of the notes, the holder may choose
      to:




·
            Require
                us to prepay that portion of the notes we are unable to convert at
                the
                triggering event prepayment price, or the mandatory prepayment
                price;




·
            If
                we are unable to issue registered shares of common stock because
                we are
                prohibited by law, require us to issue restricted shares of common
                stock;




·
            Void
                the holder’s notice of request for conversion and force us to return the
                notes that were to be converted; or




·
            Exercise
                its buy-in rights as described.




If
      the
      holder chooses to have its notes prepaid using the mandatory prepayment price,
      we must pay the mandatory prepayment price within 30 days of our receipt of
      the
      holder’s notice in response to our notice to the holder of our inability to
      convert the note, unless we have prior to this delivered notice that the event
      resulting in the mandatory prepayment price has been cured. If we fail to pay
      the mandatory prepayment price 1 business day after we receive notice from
      the
      holder of this election, we must pay interest on the unpaid amount at the rate
      of 2% per month until paid in full.





**The
      Original Issue Discount Notes**





F-36


The
      original issue discount notes are substantially the same in form and effect
      as
      the Series A Notes. The occurrence of an event of default under the
      Series A Notes constitutes an event of default under the OID Notes; and the
      occurrence of an event of default under the original issue discount notes
      constitutes an event of default under the Series A notes. The initial
      conversion price of $0.20 is the same for each of the Series A Notes and
      the original issue discount notes and the original issue discount notes are
      subject to the same adjustment provisions as apply to the Series A notes.
      The same prepayment provisions apply to both the Series A Notes
      and the OID Notes. As with the Series A Note holders, no holder of OID
      Notes will have any rights as one of our stockholders prior to the conversion
      of
      our OID Notes.





**The
      Warrants**




*The
      Series A -7 Warrants and Series A-7 Placement Agent Warrant*




The
      Series A-7 warrants represent seven-year warrants to purchase shares of our
      common stock at the holder’s option equal to 75% of the number of shares of our
      common stock issuable upon conversion of the purchaser’s Series A Note (an
      aggregate of 18,750,000 shares) at an original exercise price per share equal
      to
      $0.40.




The
      Series A-7 placement agent warrants represent five-year warrants to purchase
      shares of our common stock at the holder’s option equal to 10% of the number of
      Series A-7 warrants issued (approximately 1.9 million shares in the aggregate)
      at an original exercise price per share equal to $0.40.




*Warrant
      Exercise*




Warrant
      stock refers to our common stock issuable upon exercise of the Series A-7
      warrant or any of the other warrants. Payment of the exercise price may be
      made
      to us by:




·
            Certified
                check;




·
            “Cashless
                exercise,” but here only when there is no registration statement in effect
                for the warrant stock; or




·
            A
                combination of (i) and (ii) above.




A
      cashless exercise is only available beginning one (1) year after the original
      issue date of the Series A-7 warrant and if (i) the per share market value
      of a share of our common stock (either the volume the weighted average price
      or
      the fair market value as determined by an independent appraiser) is greater
      than
      the warrant price; and (ii) a registration statement for the warrant stock
      is not then in effect. In a cashless exercise, the warrant holder merely
      presents the warrant to us without tendering cash and we issue to it a number
      of
      shares of our common stock equal to the difference between (i) the number
      of shares of our common stock purchasable on exercise of all of the warrants
      so
      exercised, and (ii) the product of: (a) the warrant price; times
      (b) the number of shares of our common stock purchasable on exercise of all
      of such warrants; divided by: (iii) the per share market value of one share
      of our common stock.




If
      the
      warrant holder exercises the Series A-7 warrant, we have 3 trading days, or
      the
      delivery date, in which to issue to it certificates for shares of the warrant
      stock; or to deliver to the Depository Trust Company on the warrant holder’s
      account. If we fail to deliver the certificates on or before the delivery date
      and the warrant holder is required by its broker to purchase shares of our
      common stock on the open market to deliver in satisfaction of a sale of the
      warrant holder’s warrant stock, or a warrant buy-in, then we must:




·
            Pay
                cash to the warrant holder in the amount by which: (a) the warrant
                holder’s total purchase price exceeds: (b) the amount obtained by
                multiplying: (x) the number of shares of warrant stock we are
                required to deliver to the warrant holder; times (y) the price at
                which the sell order was executed;
                and




·
            Either
                reinstate the portion of the Series A-7 warrant for which exercise
                was not
                honored or deliver to the warrant holder the number of shares of
                our
                common stock that we would have issued if we had timely
                complied.




F-37




*Adjustment
      of Warrant Price*




The
      warrant price of the Series A-7 warrant is subject to adjustment from time
      to
      time to reflect:




·
            Recapitalizations,
                reorganizations, mergers;




·
            Stock
                dividends, subdivisions and
                combinations;




·
            Certain
                other distributions;




·
            Issuances
                of additional shares of common stock (on a full-ratchet anti-dilution
                basis); and




·
            Issuances
                of common stock equivalents.




In
      the
      event of an issuance of additional shares of common stock, or an issuance of
      common stock equivalents, a “full ratchet” adjustment will be made to the
      warrant price. This means effectively that the warrant price will be reduced
      to
      the consideration per share for the additional shares of common stock in
      question.





*Limitation
      of Beneficial Ownership of Our Shares*





Subject
      to the warrant holder’s right to waive these provisions in certain circumstances
      upon 61 days notice to us, at no time may a warrant holder exercise the warrant
      if the number of shares of our common stock issued pursuant to the exercise
      would exceed, when aggregated with all of the other shares of our common stock
      held by the warrant holder the number of shares which would result in the
      warrant holder beneficially owning greater than: (i) 4.9% of the then
      outstanding shares of our common stock; or (ii) 9.9% of the then
      outstanding shares of our common stock.





*The
      Call*





We
      are
      entitled under the warrant, at any time following the original issue date of
      the
      warrant, to call up to 100% of the warrant then outstanding by providing the
      warrant holder with a call notice; however, the following must be true in order
      to effect such a call:




·
            The
                per share market value of our common stock must be greater than $1.00
                per
                share for 10 consecutive trading days immediately prior to the date
                of the
                call notice; and the average daily trading volume during this period
                must
                exceed 500,000 shares of our common
                stock;




·
            A
                registration statement under the Securities Act of 1933 which provides
                for
                the resale of the warrant stock and the common stock issuable upon
                the
                conversion of the notes must be effective without lapse for 60 consecutive
                calendar days;




·
            Trading
                in our common stock must not have been suspended by the SEC or any
                relevant securities exchange;




·
            We
                must be in material compliance with the terms of the warrant;
                and




·
            We
                must not be in possession of any material non-public
                information.





In
      order
      to effect the call, this registration statement must be effective from the
      date
      of delivery of the call notice until the date which is the later of:
      (i) the date the warrant holder exercises the warrant pursuant to the call
      notice; and (ii) the 20 th day
      after the warrant holder receives the call notice, or the early termination
      date. Our rights with respect to the warrant stock subject to the call notice
      will expire on the early termination date if the warrant is not exercised prior
      to the early termination date. If the warrant is not exercised with regard
      to
      the called warrant stock, we must remit to the warrant holder: (i) $.001
      per share of called warrant stock; and (ii) a new warrant representing the
      number of shares of warrant stock, if any, which is not subject to the call
      notice.




F-38
 
 *The
          Series B-4 Warrants and Series B-4 Placement Agent Warrants*


The
      Series B-4 warrants represent rights to purchase shares of our common stock
      equal to 50% of the number of conversion shares issuable upon the conversion
      of
      the purchaser’s Series A note on the date of issuance of that note (an
      aggregate of 12,500,000 shares) at an original exercise price per share equal
      to
      $0.90 for a term of four years following the effective date of the registration
      statement providing for the resale of the conversion shares and the shares
      of
      our common stock issuable upon exercise of this warrant.




The
      Series B-4 placement agent warrants represent five-year warrants to purchase
      shares of our common stock at the holder’s option equal to 10% of the number of
      Series B-4 warrants issued (approximately 1.3 million shares in the aggregate)
      at an original exercise price per share equal to $0.90.




This
      warrant is substantially similar in form and effect to the Series A-7
      warrant, except as set forth in the preceding paragraph and except that in
      order
      to effect a call notice under the Series B-4 warrant, the per share market
      value of our common stock must be greater than $1.26 per share for the 10
      consecutive trading days prior to the call notice and the average daily trading
      volume during this time period must exceed only 250,000 shares of our common
      stock.





*The
      Series C-3 Warrants*





The
      Series C-3 warrants represent rights to purchase shares of our common stock
      equal to 100% of the number of conversion shares issuable upon the conversion
      of
      the purchaser’s Series A note on the date of issuance of that note (an
      aggregate of 25,000,000 shares) at an original exercise price per share equal
      to
      $0.21 on the date of closing of the Purchase Agreement and for a term of three
      years following that closing date.





The
      Series C-3 warrants are substantially similar in form and effect to the
      Series A-7 warrants, except as set forth in the preceding paragraph and
      except that we have no rights to call the Series C-3 warrant under any
      circumstances.





*The
      Series D-1 Warrants and Series D-1 Placement Agent Warrants*





The
      Series D-1 warrants are callable only by us requiring the holders of these
      warrants to purchase shares of our common stock equal to 70% of the number
      of
      conversion shares issuable upon conversion of the purchaser’s Series A note
      on the date of issuance of the note (an aggregate of 17,500,000 shares) at
      an
      exercise price per share equal to the lesser of: (a) $0.35 and (b) 90%
      of the average of the 5-day volume the weighted average price of our common
      stock immediately preceding the call notice under the Series D-1 warrants
      and for a term of 18 months following the date the SEC declares effective the
      registration statement registering for resale the shares of our common stock
      issuable upon the exercise of the Series D-1 warrants. The holders have no
      rights to exercise the D-1 warrants.





The
      Series D-1 placement agent warrants represent five-year warrants to purchase
      shares of our common stock at the holder’s option equal to 10% of the number of
      Series D-1 warrants issued (approximately 1.8 million shares in the aggregate)
      at an exercise price per share equal to the lesser of: (a) $0.35 and
      (b) 90% of the average of the 5-day volume weighted average price of our
      common stock immediately preceding the exercise notice. The Series D-1 placement
      agent warrants are substantially similar in form and effect to the series A-7
      warrants




The
      Series D-1 warrants are substantially similar in form and effect to the
      Series A-7 warrants, except as set forth in the preceding paragraph and
      except as set forth as follows:




·
            The
                Series D-1 warrants provide no “cashless exercise” alternative for their
                exercise;




·
            There
                are no adjustments to be made to the warrant price in the event of
                the
                issuance of additional shares of common stock or common stock equivalents;
                and




·
            The
                provisions relating to the call and the call notice for the Series
                D-1
                warrants are different from the parallel provisions of the Series
                A-7
                warrants in that:




·
            In
                order to effect a call notice under the Series D-1 warrants, the
                per share
                market value of our common stock must be greater than $1.53 for the
                10
                consecutive trading days prior to the delivery of the call notice
                and the
                average daily trading volume during this time period must exceed
                $100,000
                per day for 20 trading days out of the 30 prior trading days;
                and




F-39




·
            As
                an additional requirement in order for us to issue a call notice,
                at least
                60% of the proceeds from the exercise of the Series D-1 warrants
                must be
                applied to: (w) make a strategic acquisition which has been approved
                by our board of directors; (x) enter into a strategic joint venture;
                (y) effect an acquisition of product inventory to fulfill large
                customer orders in excess of 1,500 mobile units; or (z) move an
                appropriate level of business and operating off-shore to develop
                a more
                efficient cost and production
                structure.




·
            10%
                Placement Agent Warrants




The
      10%
      placement agent warrants represent five-year warrants to purchase shares of
      our
      common stock equal to equal to 10% of the number of shares of common stock
      issuable to the note holders upon conversion of theirs notes (approximately
      2.5
      million shares in the aggregate) at an exercise price per share equal to
      $0.20.





**The
      Registration Rights Agreement**





Pursuant
      to the terms of the Purchase Agreement, we have entered into a Registration
      Rights Agreement with the purchasers dated as of February 23, 2006 (the
“Registration Rights Agreement”). The primary purpose of this Registration
      Rights Agreement is to obligate us to effect resale registrations of the shares
      of our common stock contemplated to be issued by us pursuant to the Purchase
      Agreement.





*Nature
      and Timing of Filings*




On
      or
      prior to April 10, 2006, or the filing date, which is 45 days from the closing
      date under the Purchase Agreement, we agreed pursuant to the Registration Rights
      Agreement to prepare and file with the SEC a “resale” registration statement on
      Form SB-2 providing for the resale on a continuous basis pursuant to Rule 415
      of
      all of the shares of our common stock issuable upon the conversion or repayment
      of the notes. (the “Note Registerable Securities”). Under this registration
      statement, we are not allowed to permit any securities other than the following
      to be included in this registration statement: (i) the Note Registrable
      Securities; (ii) shares of our common stock issuable upon the exercise of
      warrants issuable to our placement agent for the offering; (iii) shares of
      our common stock acquired by SDS Capital Group SPC, Ltd. pursuant to the
      conversion of our Series B convertible preferred stock and related stock
      warrants; and (iv) 1,000,000 shares of our common stock issued to Saffron
      Capital Management LLC pursuant to our consulting agreement with
      it.




We
      were
      obligated to use our best efforts to cause this registration statement to be
      declared effective under the securities act on or prior to the effectiveness
      date, which is the earlier of (i) May 25, 2006 or June 26, 2006 if the
      this registration statement receives a full review from the SEC; or
      (ii) within 3 business days of the date on which the SEC informs us that:
      (a) it will not review the this registration statement; or (b) we may
      request the acceleration of the effectiveness of this registration statement
      and
      the Company make such a request. We are obligated to keep this registration
      statement continuously effective until the date that is the earlier
      of:




·
            The
                date when all of the registered under this registration statement
                have
                been sold; or




·
            The
                date on which the note registerable securities can be sold without
                restriction under Rule 144(k), or the effectiveness
                period.




We
      filed
      a registration statement on April 10, 2006 that went effective April 29, 2006
      covering the Note Registerable Securities.




We
      were
      also obligated to file a second registration statement within 15 days of
      obtaining approval of our stockholders to amend the our Certificate of
      Incorporation to increase our authorized shares of common stock. We obtained
      stockholder approval on May 9, 2006 to increase authorized shares or our common
      stock from 50 million shares to 230 million shares. Although we were obligated
      to file second registration statement by May 24, 2006, we have not received
      all consents from the selling stockholders needed to file such registration
      statement as of July 17, 2006. Accordingly, we intend to file a second
      registration statement on Form SB-2 providing for the resale of all of the
      shares of our common stock issuable upon exercise of the warrants issued in
      connection with the notes (the “Warrant Registrable Securities”) once we receive
      all consents required from the selling stockholders. This registration statement
      may not be used for the registration of any securities other than: (i) the
      Warrant Registrable Securities; (ii) the placement agent securities;
      (iii) the SDS Capital Group SPC, Ltd. securities; and (iv) the Saffron
      Capital Management LLC securities.




F-40


We
      are
      obligated to use our best efforts to cause this registration statement to be
      declared effective under the Securities Act on or prior to the warrant
      effectiveness date, which means the earlier of: (i) the 90th day following
      the date this registration statement was filed with the SEC or the
      120 th day
      following such filing date if this registration statement receives a full review
      from the SEC; or (ii) within 3 business days of the date on which the SEC
      informs us that: (a) the SEC will not review this registration statement;
      or (b) we may request the acceleration of the effectiveness of this
      registration statement and we make such a request. We are obligated to keep
      this
      registration statement continuously effective until the date that is the earlier
      of: (x) the date when all of the Warrant Registrable Securities registered
      under this registration statement have been sold; or (y) the date on which
      the Warrant Registrable Securities can be sold without registration under Rule
      144(k), or the warrant effectiveness period.




*Registration
      Procedures*




Under
      either registration statement, if at any time an additional registration
      statement is required because the number of shares of our common stock, combined
      with the actual number of shares of our common stock into which the notes are
      convertible and the warrants are exercisable exceeds the number of shares of
      registerable securities remaining under both registration statements, then
      we
      have 20 business days to file this additional registration statement. We would
      then have 90 days after filing to cause this additional registration statement
      to be declared effective by the SEC. Each of the parties have granted customary
      indemnification rights to the other parties to the registration rights
      agreement.




*Liquidated
      Damages*




We
      are
      subject to the payment of liquidated damages to each holder equal to 1.5% of
      the
      holder’s initial investment in the notes for each month following the “event
      date” associated with each of the following events until such event is cured:




·
            if
                the registration statements are not filed by the time periods set
                forth in
                the Registration Rights Agreement;




·
            if
                the registration statements are not declared effective by the time
                periods
                set forth in the Registration Rights Agreement;




·
            if
                we fail to file a request for acceleration promptly as provided in
                the
                Registration Rights Agreement;




·
            if
                a registration statement is filed and declared effective by the SEC
                but
                later ceases to be effective (subject to limited black-out period
                exceptions);




·
            if
                we breach certain provisions of the Registration Rights Agreement
                which
                permit us to postpone the effectiveness of a registration statement;
                and




·
            if
                trading in our common stock is suspended or if our common stock is
                delisted from the OTC Bulletin
                Board.




We
      currently are not in compliance with certain of our obligations relating to
      our
      series A senior secured convertible notes, including our failure to maintain
      sufficient authorized shares to permit conversion of the notes and our failure
      to register the resale of the shares of common stock issuable upon conversion
      of
      the notes. As of August 31, 2006, we have obtained waivers of compliance of
      these obligations from all of the note holders, other than one holder of
      $100,000 principal amount of the notes.





**Accounting
      for Series A Notes and Warrant Purchase Agreement**





The
      gross
      proceeds from the issuance and the Series A convertible Notes and the OID Notes
      was $5,750,000 which included the tendering of 50 shares of Series B convertible
      preferred stock at a face value of $500,000. The carrying value of this Series
      B
      convertible preferred stock was $404,000. The Series B convertible preferred
      stock had a market value approximately $65,000 and the convertible Notes issued
      had a fair value of $500,000; thus, we recorded a loss on redemption in
      February, 2006 of approximately $435,000. The loss is considered a deemed
      dividend and included in determining net loss attributable to common
      stockholders.




F-41


In
      connection with the convertible Notes and OID Notes, we issued warrants to
      the
      Note holders to purchase approximately 56.3 million shares of our common stock
      at exercise prices noted above. The fair value of the warrants was estimated
      to
      be approximately $7.9 million using the Black-Scholes pricing model. The fair
      value of the warrants allocated to the warrants on a relative fair value basis
      was determined to be approximately $3.3 million and was recorded as additional
      paid-in-capital and a debt discount. The debt discount will be amortized to
      interest expense over the terms of the notes. During the fiscal year ended
      August 31, 2006, approximately $832,000 of the debt discount was amortized
      to
      interest expense.





Additionally,
      the Notes and OID Notes were considered to have a beneficial conversion feature
      because they permitted the holders to convert their interest in the Notes and
      OID Notes into shares of our common stock at a deemed effective fair value
      conversion price of $0.08 per share, which on the date of issuance, was lower
      than the price of our common stock of $0.21 per share. The total amount of
      the
      beneficial conversion feature was approximately $3.6 million. Because the
      beneficial conversion feature cannot exceed the relative fair market value
      of
      the convertible Notes and OID Notes, we recorded a limited beneficial conversion
      feature of approximately $2.4 million. This amount was recorded as an additional
      paid-in-capital and will be amortized to interest expense from the date of
      issuance to the earlier of the maturity of the Notes or to the date of the
      conversion. During the fiscal year ended August 31, 2006, approximately $606,000
      of the beneficial conversion feature was amortized to interest
      expense.





We
      recorded approximately $750,000 and $870,000 as deferred financing fees
      representing the amount of the original issue discount financed and transaction
      costs, respectively. We also recorded approximately $1.5 million as deferred
      financing fees for the fair value of the placement agent warrants which were
      valued using the Black-Scholes pricing model. The deferred financing fees will
      be amortized to interest expense from the date of the Notes to the earlier
      of
      the maturity of the Notes or the date of conversion. During the fiscal year
      ended August 31, 2006, approximately $784,000 of the deferred financing fee
      was
      amortized to interest expense. The net cash proceeds received by us after
      deducting broker’s fees but before payment of legal and other professional fees
      was approximately $4.1 million.





**11.**
            **COMMITMENTS
                AND CONTINGENCIES**




**Operating
      Lease Commitments**




We
      lease
      certain office facilities and equipment under non-cancelable operating leases,
      with expirations through August 2008. The future minimum lease payments
      associated with such leases for the fiscal years ending August 31 are as follows
      (in thousands).


2007
              
              $
              1392008
              
              
              13$
              152




During
      the year ended August 31, 2006 and 2005, total rent charged to operating
      expenses was approximately $256,000 and $367,000, respectively.




**Product
      Warranty Guarantees**




We
      provide a limited warranty on all REDIview product sales, at no additional
      cost
      to the customer, that provides for replacement of defective parts for one year
      after the product is sold. We provide a limited warranty on all VMI product
      sales, at no additional cost to the customer, that provides for replacement
      of
      defective parts during the contract term, typically ranging from one to five
      years. We have established an estimated liability for expected future warranty
      commitments based on a review of historical warranty expenditures associated
      with these products and other similar products. Changes in our product warranty
      liability, which is included in “Accrued expenses and other current liabilities”
and “Other non-current liabilities” in the accompanying Consolidated Balance
      Sheets, are summarized below (in thousands).




F-42




Fiscal
                  Years EndedAugust
                  31,2006
              
              2005Warranty
                  product liability at beginning of period
              
              $
              210
              
              $
              375Accruals
                  for product warranties issued
              
              
              117
              
              
              28Product
                  replacements
              
              
              (252
              )
              
              (348
              )Adjustments
                  to pre-existing warranty estimates
              
              
              74
              
              
              155Warranty
                  product liability at end of period
              
              $
              149
              
              $
              210




The
      long-term portion of the warranty product liability at August 31, 2006 and
      2005
      was approximately $-0- and $50,000, respectively.




**Retirement
      Plan**




The
      Company sponsors a 401(k) Retirement Investment Profit-Sharing Plan (the
“Retirement Plan”) covering substantially all employees. In order to attract and
      retain employees, during 2000, the Company amended the Retirement Plan to
      include a mandatory employer matching. Matching contributions during the fiscal
      years ended August 31, 2006 and 2005 were approximately $23,000 and $103,000
      respectively.




**Other
      Purchase Commitments**




As
      of
      August 31, 2006, we had approximately $1,051,000 in primarily inventory-related
      purchase commitments.





**Litigation**





On
      October 13, 2006, we entered into a Memorandum of Understanding with @Road,
      Inc.
      with respect to a settlement of a lawsuit brought by @Road, Inc. on August
      10,
      2005 alleging intentional interference with prospective economic advantage
      against us (@Road, Inc. v. Kierston Dowd, et al., Stanislaus County Superior
      Court). Under the Memorandum of Understanding, @Road agreed to dismiss their
      lawsuit with prejudice in exchange for a payment from us of the sum of $250,000,
      payable in 24 equal monthly installments beginning January 1, 2007 (subject
      to
      acceleration upon certain change of control and financing transactions) and
      accruing interest at the rate of 8% per annum. The settlement is subject to
      the
      approval of our Board of Directors and execution of a final settlement agreement
      and general release. This amount has been recorded as a liability at August
      31,
      2006.





We
      are
      aware of a potential claim involving us and our prior inventory vendor. This
      claim has not been asserted, but we have discussed the possibility of a dispute
      arising out of disposition of inventory manufactured by this vendor. We do
      not
      believe we are liable for future inventory purchases from this vendor and
      several months ago expressed our position to them. However, should this vendor
      be successful in asserting a claim, it may have a material adverse affect to
      our
      financial position, operating results and cash flows.





We
      are
      subject to legal proceedings and claims that arise in the ordinary course of
      business. We do not believe that any claims other than those described above
      exist where the outcome of such matters would have a material adverse affect
      on
      our consolidated financial position, operating results or cash flows. However,
      there can be no assurance such legal proceedings will not have a material impact
      on future results.




F-43


**12.**
              **RELATED
                  PARTY TRANSACTIONS**


**HFS
      Note Payable**




As
      described in Note 8, on July 20, 2004, we entered into and consummated the
      Third
      Amended Letter Agreement with HFS issuing a $2.0 million convertible promissory
      note to HFS with the principal balance being due 36 months from the date of
      funding, with an annual interest rate of 12 percent. Upon issuance of the Note,
      HFS provided the $2 million funding to us less a commission in the amount of
      $80,000 representing four percent (4%) of the loan proceeds. Accordingly,
      Stephen CuUnjieng, the President of HFS, was appointed to our Board of Directors
      effective July 13, 2004. Mr. CuUnjieng was employed by us as Director of
      Strategic Finance from January 30, 2004 until December 31, 2004 to assist us
      with further fund raising. On January 4, 2006, we appointed Dennis Ackerman
      to
      serve as the HFS-designee member of our Board of Directors. Mr. Ackerman
      currently serves as a director of HFS Capital Private Equity Fund LLC, the
      Managing Member of HFS. Mr. Ackerman is deemed to beneficially own 689,655
      shares of common stock issuable upon conversion of the HFS note.




**13.**
            **SEGMENT
                REPORTING**




Our
      reportable segments offer different products and/or services. Each segment
      also
      requires different technology and marketing strategies. Our two reportable
      segments are VMI and Network Service Center Systems (“NSC Systems”), including
      our REDIview products and services.




VMI
      is
      designed to maximize the productivity of a mobile workforce as well as reduce
      vehicle mileage and fuel related expenses. The VMI technology consists of:
      (i) a
      data control unit that continually monitors and records a vehicle’s position,
      speed and distance traveled; (ii) a command and control center which receives
      and stores in a database information downloaded from the DCU’s; and (iii)
      software used for communication, messaging and detailed reporting. VMI uses
      the
      satellite-based global positioning system to acquire a vehicle location on
      a
      minute-by-minute basis and a global system for mobile communications based
      cellular network to transmit data between the DCU’s and the CCC. The VMI
      application is targeted to small and medium-sized fleets in the metro
      marketplace.




We
      commercially launched our latest product offering, REDIview, during January
      of
      2005. REDIview is an Internet and service bureau-based software application
      that
      provides an extensive array of real-time and accurate mapping, trip replay,
      and
      vehicle activity reports. REDIview includes a series of exception-based reports
      designed to highlight inefficiencies in the operations of a vehicle fleet.
      Utilizing GPRS technology and our proven, high-capacity network service center,
      customers may access their information securely through the Internet from any
      personal computer or certain other devices. REDIview incorporates technologies
      that allow for fast and effective integration into legacy applications operated
      by companies with vehicle fleets and mobile workers. This design allows
      companies to easily extend their existing supply chain management systems to
      the
      mobile workforce for transaction processing and customer fulfillment. REDIview
      was also designed to be hardware and network agnostic to provide the maximum
      flexibility in designing solutions that best fit the customer’s specific needs.




Historically,
      through our NSC Systems segment, we provided long-haul trucking companies with
      a
      comprehensive package of mobile communications and management information
      services, thereby enabling its trucking customers to effectively monitor the
      operations and improve the performance of their fleets. The initial product
      application was customized and has been sold to and installed in the service
      vehicle fleets of the member companies of SBC Communications, Inc., pursuant
      to
      the Service Vehicle Contract. SBC selected an alternative vendor to supply
      its
      next generation AVL product, and, as of December 31, 2005, had deactivated
      all
      of its subscriber units.




F-44


Operating
        expenses are allocated to each segment based on management’s estimate of the
        utilization of financial resources by each segment. Goodwill is allocated
        solely
        to the NSC Systems segment. The following tables set forth segment financial
        information (in thousands):


As
                  of and for the Year Ended August 31, 2006NSC
                  Systems
              
              
              VMI
              
              
              ConsolidatedRevenues
              
              $
              3,815
              
              $
              2,091
              
              $
              5,906Operating
                  loss
              
              
              (15,712
              )
              
              (358
              )
              
              (16,070
              )Interest
                  expense
              
              
              (2,524
              )
              
              -
              
              
              (2,524
              )Interest
                  income
              
              
              64
              
              
              46
              
              
              110Depreciation
                  and amortization
              
              
              (1,691
              )
              
              (291
              )
              
              (1,982
              )Goodwill
                  impairment
              
              
              (7,725
              )
              
              -
              
              
              (7,725
              )Impairment
                  loss on license right
              
              
              -
              
              
              (237
              )
              
              (237
              )Legal
                  settlement
              
              
              (250
              )
              
              -
              
              
              (250
              )Net
                  loss
              
              
              (17,810
              )
              
              (345
              )
              
              (18,155
              )Total
                  assets
              
              
              11,066
              
              
              92
              
              
              11,158Capital
                  expenditures
              
              
              352
              
              
              -
              
              
              352




As
                  of and For the Year Ended August 31, 2005ReorganizationNSC
                  Systems
              
              
              VMI
              
              
              Items
              
              
              ConsolidatedRevenues
              
              $
              12,593
              
              $
              3,779
              
              $
              -
              
              $
              16,372Operating
                  loss
              
              
              (13,928
              )
              
              (1,292
              )
              
              -
              
              
              (15,220
              )Interest
                  expense
              
              
              (390
              )
              
              -
              
              
              -
              
              
              (390
              )Interest
                  income
              
              
              31
              
              
              222
              
              
              -
              
              
              253Depreciation
                  and amortization
              
              
              (2,194
              )
              
              (506
              )
              
              -
              
              
              (2,700
              )Impairment
                  loss on license right
              
              
              -
              
              
              (201
              )
              
              -
              
              
              (201
              )Goodwill
                  impairment
              
              
              (9,604
              )
              
              -
              
              
              -
              
              
              (9,604
              )Net
                  loss
              
              
              (14,435
              )
              
              (1,206
              )
              
              (22
              )
              
              (15,663
              )Total
                  assets
              
              
              19,175
              
              
              2,531
              
              
              
              
              
              21,706Capital
                  expenditures
              
              
              913
              
              
              49
              
              
              
              
              
              962




**14.**
            **SUBSEQUENT
                EVENTS**




*Series
      B Note Financing*




On
      November 30, 2006, we entered into a Note and Warrant Purchase Agreement with
      Bounce Mobile Systems, Inc. (“BMSI”) and other accredited investors. Pursuant to
      the Note and Warrant Purchase Agreement, we will receive up to $1,754,000 in
      gross proceeds (of which BMSI has committed to provide $1,200,000) from the
      sale
      of up to (i) $1,754,000 principal amount of our series B subordinated secured
      convertible promissory notes (“Series B Notes’), (ii) $701,600 principal amount
      of our original issue discount series B subordinated secured convertible
      promissory notes (“Series B OID Notes”), (iii) our series E-7 warrants (“E-7
      Warrants”) to purchase 82,218,750 shares of our common stock and (iv) our series
      F-4 warrants (“F-4 Warrants”) to purchase 82,218,750 shares of our common stock.





·
            The
                Series B Notes and the Series B OID Notes are secured by all of our
                assets, subject to existing liens, are due December 4, 2009 and begin
                amortization of principal (in nine quarterly installments) on August
                1,
                2007. We may make principal installment payments in cash or in registered
                shares of our common stock. If paid in common stock, certain conditions
                must be satisfied, and the number of registered shares to be paid
                to the
                holder must be an amount equal to the principal installment amount
                divided
                by the greater of (i) $0.02 and (ii) 90% of the average of the volume
                weighted average trading prices of the common stock for the ten trading
                days immediately preceding the principal payment. The Series B Notes
                and
                Series B OID Notes are convertible into our common stock at an initial
                conversion price of $0.016 per share, subject to reduction if we
                fail to
                achieve specified financial and operating milestones and subject
                to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock
                equivalents.




F-45


·
            The
                E-7 Warrants have an exercise price of $0.02 per share, subject to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents. The E-7
                Warrants are exercisable for a seven-year period from the date of
                issuance.





·
            The
                F-4 Warrants have an exercise price of $0.03 per share, subject to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents. The F-4
                Warrants are exercisable for a four-year period beginning on the
                date a
                resale registration statement for the shares underlying the warrants
                is
                declared effective by the Securities and Exchange
                Commission.





The
      private placement is structured to occur in four closings, each providing
      $438,500 in gross proceeds to us. The first closing occurred on December 4,
      2005. The second closing occurred on January 10, 2007 after we filed a
      preliminary proxy statement on December 27, 2006 with the Securities and
      Exchange Commission with respect to stockholder approval of an increase in
      the
      number of our authorized shares of common stock to 575,000,000 and a
      one-for-fifty reverse stock split of our common stock. The third closing will
      occur within five business days after the date that we file an amendment to
      our
      Certificate of Incorporation making effective the increase in number of
      authorized shares and the reverse stock split. The fourth closing will occur
      within five business days after the date that an initial resale registration
      statement for the shares underlying the notes and warrants issued in the private
      placement is declared effective by the Securities and Exchange Commission.
      Each
      closing is subject to certain other conditions being satisfied, including (i)
      our representations and warranties in the agreement being true and correct
      in
      all material respects as of each closing date, (ii) our having performed,
      satisfied and complied in all material respects with all covenants, agreements
      and conditions required by the agreement to be performed, satisfied or complied
      with by us at or prior to each closing date, and (iii) no material adverse
      effect on the business, operations, properties, prospects, or financial
      condition of us and our subsidiaries having occurred.





As
      a
      result of the private placement and pursuant to the terms of "most favored
      nations" rights granted to investors in our February 2006 private placement
      of
      our Series A Notes, we issued to certain of our February 2006 private placement
      investors, in exchange for $1,652,111 principal amount of the Series A Notes,
      an
      additional (i) $1,784,111 principal amount of Series B Notes, (ii) $713,644
      principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase
      83,690,203 shares of our common stock and (iv) F-4 Warrants to purchase
      83,690,203 shares of our common stock. We will receive no additional proceeds
      from the exchange.





In
      connection with the private placement, we agreed to pay to the placement agent
      for the transaction consideration consisting of (a) a cash sales commission
      of
      $150,480, (b) warrants to purchase 23,021,250 shares of common stock, with
      each
      warrant having an exercise price of $0.016 per share and being exercisable
      for
      ten years, (c) E-7 Warrants to purchase 12,332,813 shares of common stock,
      and
      (d) F-4 Warrants to purchase 12,332,813 shares of common stock. We also agreed
      to pay legal fees in the amount of $35,000 to legal counsel for the investors
      in
      the private placement.




The
      issuance of the Series B Notes triggered anti-dilution adjustments to the
      conversion price of our Series A Notes and the exercise price of the common
      stock purchase warrants issued in connection with the Series A Notes as follows:
      (a) the conversion price of the Series A Notes changed from $0.20 to $0.016
      per
      share, (b) the exercise price of our Series A-7 warrants changed from $0.40
      to
      $0.016 per share, (c) the exercise price of our Series B-4 warrants changed
      from
      $0.90 to $0.016, and (d) the exercise price of our Series C-3 warrants changed
      from $0.21 to $0.016 per share. In addition, the transaction triggered an
      anti-dilution adjustment to certain warrants issued to SDS in September 2005
      in
      connection with the Series B preferred stock transaction, by changing the
      exercise price from $1.75 to $0.0966 per share and increasing the number of
      shares of common stock for which the warrants can be exercised from 750,000
      to
      12,683,191.




F-46




*BounceGPS
      Acquisition*




On
      November 30, 2006, we entered into a Share Exchange Agreement with
      BMSI.  Pursuant
      to the Share Exchange Agreement, we agreed to acquire from BMSI 100% of the
      capital stock of BounceGPS, Inc., a provider of mobile asset management
      solutions, in exchange for:




·
            5,000
                shares of our newly authorized series C convertible preferred stock




·
            A
                Series B Note in the principal amount of
                $660,000




·
            A
                Series B OID Note in the principal amount of
                $264,000




·
            An
                E-7 Warrant to purchase 30,937,500 shares of common
                stock




·
            A
                F-4 Warrant to purchase 30,937,500 shares of common
                stock




As
      part
      of the acquisition of BounceGPS, Inc., we acquired approximately 600 mobile
      subscribers, executive management and marketing expertise. Total assets acquired
      were approximately $380,000, consisting primarily of inventory and other current
      assets in the amount of $149,000, and $231,000 in fixed and other assets. Total
      liabilities acquired were approximately $380,000 consisting of accounts payable
      and other current liabilities of $103,000 and notes payable of $277,000. We
      anticipate that cash flows from operations from BounceGPS to be
      minimal.




The
      transactions contemplated by the Share Exchange Agreement closed on December
      4,
      2006.




The
      series C convertible preferred stock issued under the Share Exchange Agreement
      has a face amount of $1,000 per share ($5,000,000 in the aggregate), ranks
      junior to the Company’s series B convertible preferred stock and senior to its
      common stock with respect to payment of dividends and amounts upon any
      liquidation, dissolution or winding up of the Company, and is entitled to
      receive cumulative dividends in an amount equal to 8% per year (payable at
      the
      election of the holder in cash or additional shares).




The
      series C convertible preferred stock issued under the Share Exchange Agreement
      is initially convertible into 51% of the number of our fully diluted shares,
      as
      defined to include, without limitation:




·
            Shares
                of common stock outstanding on the date of issuance of the Series
                C
                Preferred Stock;




·
            Shares
                of common stock issuable upon conversion, exercise or exchange of
                any
                convertible security or purchase right outstanding on the date of
                issuance
                (including, without limitation, the series C convertible preferred
                stock,
                the Company’s series B convertible preferred stock, the Series A Notes,
                the Series B Notes, the Series B OID Notes, the E-7 Warrants and
                the F-4
                Warrants);




·
            Shares
                of common stock issuable upon conversion, exercise or exchange of
                any
                convertible security or purchase right issued after the issuance
                date of
                the series C convertible preferred stock in conversion, exercise
                or
                exchange of securities outstanding as of the issuance date or as
                a
                dividend, interest payment, liquidated damages, penalty, compromise,
                settlement or other payment of certain securities or pursuant to
                or in
                connection with any agreement, indebtedness or other obligation of
                the
                Company existing as of the issuance date, or with respect to any
                amendment, waiver or modification thereto or extension thereof;




·
            Shares
                of common stock issued after the issuance date of the series C convertible
                preferred stock as a dividend, interest payment, liquidated damages,
                penalty, compromise, settlement or other payment of certain securities
                or
                pursuant to or in connection with any agreement, indebtedness or
                other
                obligation of the Company existing as of the issuance date, or with
                respect to any amendment, waiver or modification thereto or extension
                thereof; and




·
            Shares
                of common stock authorized for issuance from time to time under the
                Company’s equity incentive plans.




F-47


The
      series C convertible preferred stock generally has the right to vote on all
      matters before the common stockholders on an as-converted basis voting together
      with the common stockholders as a single class. In addition, the holders of
      a
      majority of the Series C Preferred Stock, voting as a separate class, have
      the
      right to appoint a majority of the members of our Board of Directors (as long
      as
      we have not exercised our limited rights to redeem series C convertible
      preferred stock).




As
      a
      result of the Share Exchange Agreement and Note and Warrant Purchase Agreement
      transactions, BMSI, as the sole holder of our series C convertible preferred
      stock, currently holds approximately 94.1% of the voting power of our
      outstanding securities and beneficially owns approximately 94.2% of our common
      stock (59.8% calculated on a fully diluted basis).





*Stock
      Issuances*





Subsequent
      to August 31, 2006, we issued the following common shares:


·S-8
                  stock issued for professional fees
              
              
              21,435,724·Series
                  A Notes and OID Notes payments
              
              
              31,742,893·Series
                  B preferred stock conversion into common stock
              
              
              516,128


F-48