FORM 10-KSB

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(Mark One)

|X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the fiscal year ended: September 30, 1998

|_|      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

         For the transition period from ________________ to _________________

         Commission file number: 0-27166


                                XATA CORPORATION
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                 (Name of small business issuer in its charter)

                                    Minnesota
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         (State or other jurisdiction of incorporation or organization)

                                   41-1641815
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                      (I.R.S. Employer Identification No.)



151 East Cliff Road, Suite 10, Burnsville, Minnesota                    55337
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    (Address of principal executive offices)                          (Zip Code)

Issuer's telephone number:  (612) 894-3680

Securities registered under Section 12(g) of the Exchange Act:

                                  Common Stock
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                                (Title of Class)

Check whether the issuer (1) has 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 |X| No |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of 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. |X|

State issuer's revenues for its most recent fiscal year:  $ 9,215,000.
<PAGE>

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $ 4,085,343 based on shares held by non-affiliates as of December 21,
1998, and the closing sale price for said shares in the Nasdaq National Market
as of such date.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,418,133 shares of Common Stock, as
of December 21, 1998.


                       DOCUMENTS INCORPORATED BY REFERENCE

The registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on February 17, 1999 (the "Proxy Statement") is
incorporated by reference in Part III of this Form 10-KSB to the extent stated
herein. Except with respect to information specifically incorporated by
reference in this Form 10-KSB, the Proxy Statement is not deemed to be filed as
a part hereof. Such Proxy Statement is not filed herewith, but will be filed
with the Commission not later than January 28, 1999. In addition, there are
incorporated by reference in this report on Form 10-KSB certain previously filed
exhibits identified in Part III, Item 13 hereof.


                                       ii
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<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

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<S>                                                                                                              <C>
PART I                                                                                                           1

Item 1.    Description of Business                                                                               1

Item 2.    Description of Property                                                                              18

Item 3.    Legal Proceedings                                                                                    18

Item 4.    Submission of Matters to a Vote of Security Holders                                                  18

PART II                                                                                                         19

Item 5.    Market for the Common Equity and Related Stockholder Matters                                         19

Item 6.    Management's Discussion and Analysis or Plan of Operation                                            20

Item 7.    Financial Statements                                                                                 24

Item 8.    Changes in and Disagreement with Accountants on Accounting and
               Financial Disclosure                                                                             24

PART III                                                                                                        25

Item 9.    Directors, Executive Officers, Promoters and Control Persons; Compliance with
                  Section 16(a) of the Exchange Act                                                             25

Item 10.  Executive Compensation                                                                                25

Item 11.  Security Ownership of Certain Beneficial Owners and Management                                        25

Item 12.  Certain Relationships and Related Transactions                                                        25

Item 13.  Exhibits and Reports on Form 8-K                                                                      25

SIGNATURES                                                                                                      27

</TABLE>


                                      iii

<PAGE>

THIS DOCUMENT INCLUDES FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS.
ACTUAL RESULTS MAY DIFFER MATERIALLY. THESE FORWARD-LOOKING STATEMENTS INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, THE RECEIPT AND
SHIPPING OF NEW ORDERS FOR THE COMPANY'S CURRENT PRODUCTS; THE TIMELY
INTRODUCTION AND MARKET ACCEPTANCE OF NEW PRODUCTS; THE SUCCESSFUL AND TIMELY
DISPOSITION OF THE COMPANY'S NON-CORE BUSINESS UNITS AND THE DETERMINATION OF
WRITE-DOWNS, IF ANY, ASSOCIATED WITH SUCH TRANSACTIONS; RESEARCH AND DEVELOPMENT
FUNDING AT THE LEVELS REQUIRED; AND THE ABILITY TO SECURE AND MAINTAIN STRATEGIC
PARTNER RELATIONSHIPS.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
-------  -----------------------

GENERAL

         XATA Corporation ("XATA" or the "Company") is the leading provider of
onboard technology to the fleet trucking industry. Founded in 1985 as an onboard
technology company, XATA today remains solely focused on developing and
delivering solution-based applications for the transportation industry. XATA
ONBOARD is the most powerful, advanced, intelligent, yet user-friendly onboard
computer system on the market. XATA ONBOARD seamlessly combines onboard
computing, real-time communications, global positioning, and fleet management
software to provide an enterprise-wide logistics management solution for
America's largest fleets.

         XATA's state-of-the-art technology, strong customer base and
unparalleled commitment to customer satisfaction make XATA the leader in this
market. With 15 years of industry experience, over 350 fleets using its system,
and more than 15,000 units installed in the field, XATA continues to develop
leading-edge software solutions that deliver a significant and rapid return on
investment for its customers.

         XATA Corporation was founded in 1985 by William P. Flies to design,
develop, and distribute computer information systems for use in non-office
operating environments. In December 1991, the Company obtained additional needed
capital through a merger with a publicly held entity. In late 1995, the Company
received net proceeds of approximately $4,945,000 from a public offering.

         In August 1996, the Company purchased substantially all of the assets
of a business known as Payne & Associates ("Payne"), an unincorporated division
of Computer Petroleum Corporation, including software products that integrate
information, communication, and Internet based technologies for trucking
industry applications. Such products include Desktop Dispatch, SatMap WarRoom,
Dealer Locator, Internet Dealer Locator, Transportation Breakdown Management
System, and LoadTracker. This acquisition was intended to provide the Company
with capabilities in the development of Internet, Intranet and Windows(R)-based
applications software that complement the core functionality of the XATA Fleet
Management System and to broaden the portfolio of products the Company could
offer to the fleet trucking industry. In June 1997, XATA formed a new
unincorporated business division, XATA Enterprise Technologies (XET), using
personnel and products XATA acquired from Payne. During the fourth quarter of
1997, the Company completed an evaluation of the recoverability of assets
(primarily purchased software and goodwill) acquired from Payne in August 1996
resulting in a fourth quarter 1997 charge of approximately $1.8 million. See
"XATA Enterprise Technologies" below.

         In October, 1996, the Company acquired all of the issued and
outstanding equity securities of 


<PAGE>

Key Logistics, Inc., a company which developed a PC Windows(R)-based software
known as RouteView that automatically sequences and optimizes delivery routes on
a daily basis. RouteView generates computer-rendered maps that display each
delivery location on a route, sequences delivery locations to minimize mileage,
and provides tools for the dispatcher to modify routes as necessary. The name
"Key Logistics" is no longer in commercial use and Key Logistics' operations
have been consolidated into the Company; however, Key Logistics, Inc. currently
remains as a wholly owned subsidiary of the Company. RouteView is sold and
marketed as both a stand-alone software package and as an integrated component
of the XATA System.

         The Company incurred a significant loss in 1998, following a
significant loss in 1997. The 1997 loss is attributable principally to the write
down in value of assets acquired from Payne (now XET). The 1998 loss is
attributable principally to loss of sales of XET products which did not perform
to customers' expectations, as well as other factors, such as the Company's
inability in 1998 to deliver Windows NT-based fleet management software and
real-time communication capabilities being sold by competitors, and customers'
special Year 2000 concerns. During the first quarter of fiscal 1999, the Company
reassessed its products and operations and decided to direct its product
development and marketing efforts to areas of its core competencies. The Company
further determined that the XET and RouteView products, although complementary
to its core products, do not significantly impact its core competencies and, in
general, are not integral to the Company's plans for second generation product
development, as formulated in the first quarter of fiscal 1999. Accordingly, the
Company is considering discontinuing these product lines and operations through
sale of one or both of these business units.

THE TRUCKING INDUSTRY

         The trucking industry, with annual revenues around $300 billion, is the
major component of the transportation sector of the United States economy,
accounting for 78% of the nation's freight bill and 5% of the GDP. Published
economic forecasts indicate that the trucking industry's share of the total
transportation market in the United States is likely to remain relatively
stable. Private carriers and for-hire carriers traditionally have comprised the
two major fleet categories within the trucking industry. Private carriers are
manufacturers, wholesalers, merchants and other companies who transport their
own goods using equipment that they own or lease. For-hire carriers are
companies whose primary business is trucking and who transport freight that
belongs to others. Today, however, the functions of for-hire and private
carriers are evolving to include services which address more than merely
delivery, resulting in the rapidly growing market segment of logistics.
Logistics providers manage a portion or all of the transportation and logistics
for businesses that choose to outsource as part of their operation.


         The Company believes that the following trends are significantly
impacting the trucking industry and are resulting in increasing competitive
pressures and an accelerated rate of change:

         1.       Further industry consolidation, as shippers demand more
                  service and logistical management. Only the most efficient
                  companies will survive.

         2.       Continued growth of outsourcing and leasing arrangements as
                  manufacturers consider the expense of maintaining their own
                  fleets.

         3.       Further legislation on driver health, safety, and the
                  environment (including stricter hours-of-service regulations),
                  which will drive up the cost of compliance.

         4.       Continued revolutionary changes in trucking technology which
                  are creating capabilities 



                                       2
<PAGE>

                  that are becoming required standard features for all truck
                  operations; for example, in cab communications capabilities.

         5.       Continued shortage of qualified drivers for heavy-duty
                  trucking operations.

         6.       Continued emphasis on effective management of the movement of
                  goods from the source of supply to the final customer (supply
                  chain management).

         7.       Continued blurring of the distinctions between traditional
                  segments of the trucking industry as many fleets begin acting
                  as broad-based transportation providers.

         Management of the Company believes that there is, and will continue to
be, significant demand in the transportation industry for onboard technology,
principally because the use of this technology enables trucking companies to
both respond to competitive pressures with significant cost savings and to
deliver increased levels of customer service.

TARGET MARKET

         XATA's current target market consists of the approximately 2.9 million
Class 6, 7 and 8 "heavy duty" trucks which are designed to carry large amounts
of cargo over long distances. To date, XATA has concentrated its sales and
marketing efforts on trucking, transportation and logistics companies operating
fleets of 25 or more vehicles, which include approximately 61% of the heavy duty
trucks in operation. The Company believes there is an increasing demand by the
management of these fleets for improved fuel economy, productivity, and
profitability.

         Heavy duty commercial trucking fleets are characterized by a
significant investment in equipment, valuable cargo, relatively high operating
costs, significant annual mileage per vehicle, and extensive federal and state
compliance reporting requirements. In general, any fleet with ten or more
vehicles has a sufficient capital investment in fleet equipment and related
operating costs to require the services of a fleet manager to ensure efficient
deployment of the fleet's assets. Investment in equipment includes the cost of
each tractor, at an average cost of $75,000, and each trailer, at an average
cost of $25,000. Heavy duty vehicles typically travel 100,000 miles per year
with fuel economy figures of five to seven miles per gallon ("mpg"), and fuel
costs may average $18,000 per year. These costs, plus driver costs exceeding
$0.40 per mile, insurance costs of up to $5,000 per vehicle per year, and
expenses related to maintenance, dispatchers, safety directors, clerical support
and support equipment make the efficient operation of each vehicle an essential
and complex part of fleet management. Accordingly, accurate and timely data
collection and analysis is necessary to enable fleet management to sustain and
increase profitability.

         In addition to management information needs, extensive operational data
collection and reporting is mandated by federal and state agencies. For example,
the Federal Highway Administration (FHWA) imposes strict work hour rules on
drivers and requires maintenance of driver logs. Drivers of hazardous loads are
subject to additional regulation and documentation requirements. Failure to
maintain legally required driver logs can result in the permanent revocation of
a driver's commercial drivers license, substantial fines and, in the case of an
accident, potential liability for the trucking company and its management.
Although insurance companies and other safety-minded organizations are lobbying
to mandate electronic logs to improve the accuracy of recordkeeping, there is no
assurance that legislation or regulation mandating such logs will be adopted in
the near future. FHWA regulations currently allow, but do not require, onboard
electronic driver logs.



                                       3
<PAGE>

         Extensive federal regulation of the industry is supplemented by
regulation by each of the 50 states. In general, each state requires that each
vehicle pay state fuel taxes based on the amount of fuel that is consumed while
in that state. Compliance requires the driver to record state border crossing
information and fuel purchase information. Many long haul vehicles cross up to
25 state borders per week, resulting in significant paperwork for the driver,
the clerical staff of the carrier and the carrier's fuel tax return preparer. To
complicate an already large paperwork requirement, these records must be
maintained at the vehicle domicile location (i.e., home base for a fleet of
trucks) and at the carrier's headquarters for access by state fuel tax auditors
and by federal driver log compliance personnel.

COMPETITION

         Until the late 1970's, when Rockwell International introduced a product
called the TripMaster, onboard driver information was limited to engine gauges
and rudimentary tachographs. The TripMaster is an electronic version of the
tachograph that records road speed and engine speed in an electronic memory
rather than on paper. This data can be retrieved by numerous means, such as
cables or computers, and can be transferred to office equipment for presentation
in a format more readable than that produced by the tachograph. Other suppliers
of electronic tachograph equipment followed suit with similar products. Several
engine manufacturers also market systems that provide limited fuel and vehicle
performance information directly from the ECM (electronic control module) in
electronic engines to the fleet and driver. In the mid-1980's, CADEC Systems,
Inc. (which was later acquired by Cummins Engine Company, a large manufacturer
of truck diesel engines) appeared in the market with the first onboard driver
interaction product, consisting of a keyboard containing a single line screen.
In 1997, Eaton Corporation, a major manufacturer of commercial truck components,
commercially introduced Fleet Advisor, the first system to integrate onboard
computing with real-time communications.

         Sophisticated onboard communication systems were introduced to the
heavy duty trucking market in 1987 for the purpose of providing nationwide
two-way communication between vehicles and management sites. Today, Qualcomm,
Inc., a California-based company that produces and markets a satellite based
vehicle tracking and communication system, has captured a significant portion of
the onboard communications market. HighwayMaster Communications, Inc., a
Texas-based company, has introduced a nationwide cellular-based communication
system that provides both voice and data transmissions. Although communication
systems are traditionally not in direct competition with XATA's products, and
are, in fact, complementary to XATA's system, they compete for a fleet's
"technology budget." XATA believes that trucking fleets that purchase
communication systems will eventually augment those systems with the
capabilities of an onboard system such as the XATA system, and conversely, that
those who purchase the XATA onboard system may augment that system with the
purchase of a complementary communication system. Therefore, the Company is
working to provide its customers with a total integrated solution bydeveloping
communication capabilities and solutions internally and by establishing
strategic relationships, such as its current relationships with Bell South and
Symbol Technologies.

         The Company believes that the nature and sources of competition in its
industry are rapidly evolving and, in the future, that these changes will
require it to adapt its existing products and to develop new products which
facilitate the collection, communication and processing of onboard information
throughout the transportation network and the entire supply chain. This may
entail the development of new technologies and the adaptation of new and
existing products to be compatible with products and services provided by others
in the industry, including others who may be considered competitors of the
Company in one or more lines of business.



                                       4
<PAGE>

DESCRIPTION OF THE COMPANY'S PRODUCTS AND SERVICES

         XATA ONBOARD is a state-of-the-art onboard information system that
integrates onboard computing, real-time communications, global positioning, and
advanced fleet management software into an enterprise-wide logistics solution
for the fleet trucking industry.

         Transportation professionals are increasingly turning to onboard
technology in order to improve fleet productivity and profitability. XATA
enables these professionals to achieve measurable improvements by integrating
onboard technology into the fleet management process. The XATA system features
ease-of-use and extensive functionality not found in competitors' products. This
has led to its use by such nationally known fleets as AmeriServe, BOC Gases,
Coca Cola, EOTT, Safeway, Supervalu, Ruan, Ryder, Penske, Unisource, and
Whirlpool.

         XATA's onboard computer is an essential productivity tool for the
professional driver that helps him contribute to the overall success of the
company. The onboard computer and powerful fleet management software unifies
drivers and fleet managers into a single team with the power to drive out cost
and drive up service.


SYSTEM COMPONENTS
The XATA System consists of six basic components:

o        Mobile Application Server
o        Driver Computer
o        Data Station
o        Driver Key
o        OpCenter(TM)
o        SmartCom(TM)

Each component of the XATA System has a basic function that it performs as part
of its role in the total system.

Mobile Application Server
-------------------------
The Mobile Application Server (MAS) is the most technologically advanced onboard
computer available on the market today. The MAS and our Driver Computer form an
advanced client/server architecture that extends the life of the customer's
existing onboard computer system and enables the deployment of new applications
in the future using this powerful platform.

Using this client/server architecture, the MAS contains and executes multiple
onboard applications in a multi-tasking real time environment while providing
extensive connectivity to vehicle networks, peripheral devices, and other server
devices. The MAS serves as the primary application platform for XATA's onboard
computer system by:

o        providing processor and memory resources for more advanced 
         applications.
o        supporting connectivity to multiple peripheral devices.
o        providing the architecture to support the use of GPS and real-time
         communications.
o        increasing the level of systems integration in the vehicle.
o        creating an architecture that is modular, scaleable, expandable, 
         and open.



                                       5
<PAGE>

The Mobile Application Server is physically small, about the size of a box of
diskettes, but contains a powerful 486-class microprocessor, flash disk, memory,
backup battery power, a real time clock, an Ethernet port, and a Controller Area
Network (CAN) port. In addition, the Mobile Application Server contains three
RS-232 serial I/O ports, two of which can be either RS-485 ports or RS-232 ports
and an internal 12 Channel GPS receiver.

These servers are built to live in the harsh world of heavy-duty vehicles and to
handle the concurrent events that occur in those vehicles. They are controlled
by pSOS, a popular multi- tasking, real-time operating system, which manages
multiple applications that function in a client/server architecture. TCP/IP
application interfaces are employed throughout the system.

Driver Computer
---------------
The Driver Computer has a large, touch-sensitive, easy to read, user friendly
screen which provides instant feedback to the driver. It requires little
training and interacts with the driver, who simply touches the screen. The
Driver Computer has a very high level of acceptance among drivers not only
because it is easy to use, but because it makes the job easier and, in fact,
acts as an onboard advisor in a number of ways. For example, the Driver Computer
creates a paperless interactive trip plan, paperless state fuel tax data
capture, and a DOT certified paperless driver's log. In addition, the XATA
system gives the driver important information about each day's routes. The
system tells the driver where to go, when to be there, and what to do. The trip
plan is always available for the driver's review. All data that is captured by
the Driver Computer is presented to the driver first, and the driver can read
and interact with the system at all times.

Driver Key
----------
Each driver has an electronic key which stores the driver's identity, the
driver's log, dispatch data, and trip data. It has the capacity to hold multiple
trips. Besides serving as a data storage device, the Driver Key transports
information to and from the Driver Computer and Data Stations for collection
purposes, utilizing the key receptacles built into both devices.Because each key
contains a computer memory chip, the Driver Key provides a portable, powerful,
efficient and secure method for transporting information in a paperless,
electronic format.

Data Station
------------
Data Stations contain the same hardware as the Driver Computer, but utilize
different software. The Data Stations are located where trips begin and end. The
data station gives the driver his dispatch data on a Driver Key at the beginning
of trips and offloads actual trip data from the driver's key at the end of
trips. The Data Station connects directly to a PC or to a modem, giving the user
the capability to transfer information to or from his PC or from any remote
site. Drivers can access the Data Station at any time, allowing them to operate
on their schedule without the need to physically interchange paper with
management.

OpCenter Fleet Management Software
----------------------------------
OpCenter operates in an open, multi-user, Windows NT environment, and collects,
validates and processes data recorded by a fleet's network of XATA onboard
computers - then stores the information in an open SQL database for further
analysis and reporting. It also automatically delivers this information in a
user-friendly, intelligent format over an interactive desktop interface.
OpCenter provides a decision support system for the entire distribution team
that reduces operating costs, improves safety, streamlines compliance reporting,
and automates data collection for other systems.



                                       6
<PAGE>

By integrating all fleet operations under one Windows NT-based desktop, this
family of intelligent applications helps users more efficiently measure fleet
performance, resolve exception conditions, monitor ongoing operations and
perform detailed analysis when time permits.

The OpCenter modules - Frontline(TM), Control Center(TM), Courier Station(TM)
and Task Force(TM) - are tailored to specific job functions:

o    Frontline. Frontline streamlines data collection, processing and reporting
     through automatically generated, standard reports.
o    Control Center. Control Center controls security, configuration and system
     management, and can be customized to meet the needs of a single site or an
     enterprise-wide distribution network.
o    Courier Station. Courier Station is a powerful communications management
     application that collects and distributes data to wired and wireless
     networks including spread spectrum, terrestrial and satellite networks.
o    Task Force. Task Force is a collection of fleet management applications 
     designed to support information delivery and analysis.

OpCenter fleet management software provides access to all of the information
captured by the Driver Computers. The software serves as an expert system that
learns the important factors in the fleet's operation. It collects trip
information from the Data Stations and oversees every aspect of dispatch, cargo
management, and driver management. The data import and export capabilities
provides the carrier headquarters with compliance data and domicile comparisons.
In addition, OpCenter provides the user's MIS department with accurate data for
billing, payroll, incentives, and routing. OpCenter uses its learned knowledge
and the customer's guidelines to detect and report exceptions. Automatic
reporting, structured specifically by each customer, provides the user with
predefined information on a consistent schedule. More extensive detail reports
are also available when the user needs to "drill down" into the detail for any
reason.

With more than 100 standard reports, and a powerful query tool that lets users
create customized graphical reports, OpCenter provides instant access to the
information and analysis fleet managers need. XATA's OpCenter suite is currently
the only fleet management software on the market that automatically retrieves,
transforms and delivers onboard information throughout the enterprise in an
intelligent, interactive, exception-based format.

In addition to OpCenter's four modules, users may also select optional software
applications to expand OpCenter's capabilities to meet their individual needs.
These optional system applications are described in detail further below.

SmartCom
--------
SmartCom(TM) is a suite of communications applications that complement XATA's
industry-leading onboard logistics applications and fleet management software.
SmartCom provides intelligent and immediate access to critical onboard
information at multiple levels within fleet operations by integrating
"real-time" communications throughout XATA's suite of logistics applications.

XATA uses a "least cost, network independent" approach to deliver SmartCom's
communications capabilities. SmartCom's real-time notification is triggered by
onboard exception conditions, defined and selected by users, ensuring only
critical information is reported to fleet management.

By detecting and processing exception conditions onboard - 'in-the-truck' -
instead of back at the office, 



                                       7
<PAGE>

customers minimize transmission costs and control the recurring communication
charges that can negatively impact return on investment.

By enabling real-time identification and communication of exception conditions,
SmartCom helps drivers, dispatchers and fleet managers work together to improve
customer service and operating efficiency. SmartCom's inherent design minimizes
message size and traffic by providing only critical information with the most
operational benefit.

XATA's SmartCom provides customers with the flexibility to choose from several
different communication modes to find the least costly, most efficient means to
send and receive fleet information. XATA is the only company that allows
customers to select logistics applications independently from a communication
network. Vendors that own their network or resell air-time for profit are not
minimizing cost for their customers. XATA designs its logistics applications to
minimize transmission costs through the intelligence built into the system.

SmartCom applications will operate on any communication network that the
customer may choose. With this approach the customer has the flexibility to
deliver information in a "least cost" manner via several different modes:

o    Data Key - allows the upload and download of trip data via a no-cost
     "batch" method at the beginning or end of trips. XATA collects and
     processes detailed driver and vehicle data, a majority of which is not
     relevant to "real-time" operating decisions.
o    Yard Express - allows fleets to communicate at no cost with in-yard
     wireless technology.
o    Bell South - This terrestrial network allows low-cost communication in 
     metropolitan areas containing 93% of the US population.
o    Other WAN modes - Satellites offer complete, continuous coverage anywhere 
     in the world.


SYSTEM APPLICATIONS
The XATA system offers functionality unmatched by any other system on the market
today, including the software applications described below:

Onboard Fuel Management
-----------------------
Every XATA Driver Computer has "real time" fuel management. Fuel consumption is
sensed 10 times per second, electronically captured, and continually displayed
for the driver. Drivers can use this information to alter speed and gear
shifting to improve fuel economy.

Onboard Electronic Logs
-----------------------
Every XATA Driver Computer automatically maintains a complete electronic driver
log that complies with Department of Transportation regulations. No paper record
must be produced by the driver. Driver logs can be recalled for the prior 8 days
at any time and the driver's available driving time is constantly displayed.

Electronic State Fuel Tax
-------------------------
All of the electronic data concerning fuel consumption is captured by the Driver
Computer and transferred directly to the customer's fuel tax processor. All fuel
consumption and mileage driven is electronically captured, and all fuel
purchases by state and all state crossings are entered by the driver as they
occur.



                                       8
<PAGE>

Electronic Tachograph
---------------------
This one-of-a-kind system turns the XATA Driver Computer into a high-tech speed
recorder. It can record and report a second-by-second, foot-by-foot analysis of
any vehicle's speed data, at any time and at any location, and it lets the
customer create precise reports of speed, speed changes and distance for any
unit in the fleet.

Smart Route
-----------
Every XATA Driver Computer is capable of receiving complete trip plan data from
the Route Dispatcher subsystem, and during the route, collects comprehensive
stop and leg information. This allows for comparison between planned and actual
data. The Driver Computer can receive dispatch data that guides drivers through
their routes with step-by-step instructions.

Exception Management
--------------------
XATA's expert system software works in the background of OpCenter analyzing
every event, then offering suggestions to improve productivity. The customer is
relieved of the time intensive, error prone task of manually processing
information, since the XATA system alerts the user to only the problems that
occur. "Management by exception" allows operations personnel to spend more time
interacting with drivers and customers and less time dealing with all of the
information being collected. This type of decision support is currently only
available from XATA.

Onboard Tables
--------------
Every fleet has terminology that is specific to its operation. Every XATA Driver
Computer gives a customer the ability to create and download customized tables
with information specific to the fleet's operation, including cargo lists, delay
tables, unplanned events, notes, and many more.

Smart Standards
---------------
The XATA System compiles a learned operational standard for every element of a
customer's fleet, including: locations, legs, routes, drivers and power units.
This "learned history" can be used to establish exception reporting guidelines
or used as an ongoing measurement against the standards set by fleet management.

Positon Plus GPS
----------------
Position Plus(TM) is a suite of application software that uses a Mobile
Application Server with a built-in GPS (Global Positioning System) receiver to
add the date, time and vehicle position to traditional onboard computer data in
order to enhance and extend the benefits provided by the XATA system. Position
Plus(TM) consists of four applications:

1.   Hands Free State Crossing--automatically acquires and records vehicle
     locations at state line crossings to support completely automated fuel tax
     reporting.
2.   GPS Logs--automatically acquires and records vehicle position at driver log
     status changes to support automated driver logs.
3.   GPS Locations--automatically acquires and records vehicle position during
     trips to identify customer, fueling, rest, and service stops.
4.   Onboard Compass--vehicle direction is available to assist the driver when
     traveling unfamiliar routes via a compass heading displayed on the Driver
     Computer.


Yard Express
------------
Yard Express(TM) provides wireless communication with drivers while they are in
a yard, whether local or remote, and is intended to decrease the amount of time
needed to perform typical yard activities. Yard 



                                       9
<PAGE>

Express combines local area radio communications with XATA's Driver Computer and
Fleet Management System to expedite the data collection and dispatch process and
improve the efficiency of the driver.

In the vehicle, Yard Express utilizes a XATA Driver Computer, Mobile Application
Server, and a spread spectrum radio to allow the driver to transfer trip data
and receive new dispatch data in the yard without leaving the vehicle. In the
dispatch office, Yard Express utilizes the XATA Fleet Management System, a
PC-based communications server, and local area radio hardware to allow the
dispatcher to queue information to the drivers and to allow the drivers to
receive this data via the radio network.

Smart Check
-----------
SmartCheck automates check calls, enabling dispatchers and fleet managers to
automatically receive updates from drivers when pre-defined conditions or events
occur, or to request an update from SmartRoute, an integrated dispatching
application that monitors route progress.

Smart Messaging
---------------
SmartMessaging streamlines two-way messaging between drivers and fleet
operations by predefining the most common messages, and providing a means to
send free form text messages when necessary.

Fleet Incentives
----------------
Create incentive programs tailored to fleet objectives for all drivers, specific
drivers or the entire fleet management team.

Multiview
---------
Expands the capabilities of OpCenter to handle the measuring, monitoring and
management of multiple fleets and multiple operations within the same database.

Custom Commands
---------------
Allows the fleet to define and use up to eight new commands and associated data
screens for the Driver Computer to allow the customized collection of fleet
specific information.

Tanker Manager
--------------
Tanker Manager software allows drivers and fleet managers to use the power of
the XATA system to accurately capture inventory data during bulk deliveries of
gases and liquids. The software also does all calculations for the driver and
performs validity checks on the data entered. The resulting improvement in
inventory management means fleet managers can provide their customers with
better service while optimizing delivery and production schedules and reducing
driver paperwork.


XATASERV


         XATAServ is the Company's comprehensive customer service and technical
support program, offering a wide range of support options designed to provide
customer-focused solutions for operation of the XATA System. The mission of
XATAServ is to develop, communicate and deliver a comprehensive goal attainment
and support program that ensures the customer's success with the XATA system by
providing the tools, training and knowledge necessary to identify and maximize
their return on investment. XATAServ is typically purchased at the time of the
initial order and provides assistance in all areas, beginning with rollout and
installation, and including training and support of ongoing operations. The
XATAServ program is in addition to the limited warranty included in the base
price of the system.



                                       10
<PAGE>

         XATA also offers management-level consulting services to provide
clients with information and advice on how to improve their usage of the XATA
system. These advanced training services are different from the basic training
and support service for front-line staff. XATA's consultants advise management
on how to use the advanced capabilities of the XATA system to reduce operating
costs and increase savings. They help answer critical questions about
interpreting data and detecting trends that require more extensive experience
and expertise than technical support.

XATA ENTERPRISE TECHNOLOGIES (XET)

         XATA Enterprise Technologies (XET), an unincorporated division of XATA,
is built primarily around personnel, products and technological expertise from
Payne. XET's principal products are Desktop Dispatch and Transportation
Breakdown Management System. These products are "stand alone" products. While
these products are complimentary to the Company's core onboard business, they
are not a critical part of that business.

         DESKTOP DISPATCH allows a dispatcher to manage the entire dispatch
process using one application, from order entry, to equipment tracking and
trailer management, through final invoicing. Desktop Dispatch lets dispatchers
place orders, build trips, assign and track drivers and equipment, and optimize
loads. It allows dispatchers to manage more operational functions and receive
and post orders faster and more accurately with the same resources they have
today.

         TRANSPORTATION BREAKDOWN MANAGEMENT SYSTEM (TBMS) seamlessly integrates
Internet Dealer Locator and Breakdown Call Report to provide complete emergency
breakdown management from locating service, to providing a paperless work order
system for managing service calls. It reduces response times, phone expenses and
paperwork, tracks replacement part warranties and provides a detailed asset
history.

         During the fourth quarter of 1997, the Company completed an evaluation
of the recoverability of assets (primarily purchased software and goodwill)
acquired from Payne in August 1996. During fiscal 1997, following the
acquisition, the largest customer of Payne was unexpectedly acquired by another
company, resulting in the loss of this customer's business and a corresponding
decrease in the revenue stream upon which the software and goodwill values were
based. In addition, the loss of this customer required the Company to
substantially modify the acquired software for marketing and sale to others. As
a result of these events, management of the Company determined that the
Company's investment in Payne was severely impaired and that the value of the
remaining products being sold by the Company was approximately $200,000.
Accordingly, the goodwill and acquired software relating to the Payne
acquisition were written down to this estimated value, resulting in a fourth
quarter 1997 charge of approximately $1.8 million.


ROUTEVIEW

         In October 1996, the Company acquired all of the capital stock of Key
Logistics, Inc., which is currently a wholly-owned subsidiary of the Company.
Key Logistics' principal product is RouteView, a PC Windows(R)-based software
system that automatically sequences and optimizes delivery routes on a daily
basis. RouteView generates street-detailed maps that display each delivery
location on a route, sequences delivery locations to minimize mileage and
provides tools for the dispatcher to modify routes as necessary. RouteView is
designed to both duplicate and automate the everyday tasks and tools of the


                                       11
<PAGE>

routing process in a way that is simple, understandable, and easy-to-use.
RouteView assigns stops to routes based on geographic territory, then sequences
stops within these routes to minimize miles in the same manner as a dispatcher
performing these tasks manually. Additional RouteView Tools allow the user to
view the effects of route changes before implementation.

         In September of 1997, the Company introduced a 32-bit version of its
RouteView(TM) software. Compatible with the Windows 95(R) and Windows NT(R)
platforms, the new version of this map-based software processes stops and
optimizes routes within a familiar, point-and-click interface. The new version
of RouteView also features an interface with XATA's onboard computer system.

         RouteView's main functions include verifying addresses with its
powerful address-location system, assigning stops to individual routes,
sequencing stops within routes, optimizing routes to achieve minimum mileage,
balancing routes to maximize the use of assets and calculating estimated time of
arrivals (ETAs). It also prints street-level maps and manifests for drivers that
include addresses and ETAs for each stop as well as notes on special or
time-sensitive stops.

YEAR 2000 ISSUE

         The Company has investigated the impact of the Year 2000 issue on both
its own internal information systems and the products it develops, markets and
sells. During fiscal 1996, the Company purchased from a world-wide supplier and
developer of information systems an enterprise-wide information system with
written assurance from the developer that the system will correctly function
across the year 2000, as verified by previous systems tests. During fiscal 1997,
the Company reviewed all of the products it develops, markets and sells. The one
product that was not Year 2000 compliant was scheduled to be modified to be
compliant at a nominal cost before the end of fiscal 1998. This product was
modified and is now Year 2000 compliant. Therefore, Year 2000 is not expected to
have a material effect on the Company's financial position, operations or cash
flow

MARKETING

         XATA sells its onboard computer systems to the fleet trucking industry
and logistics providers nationwide through its direct sales force and several
OEM agreements. The efforts of the direct sales force are supported, when
necessary, by systems engineers, who have a strong working knowledge of the
typical hardware and software configurations required by fleet operations, and
by technical support representatives with experience in integrating the XATA
system into fleets in similar industries under similar operating conditions.
XATA is currently focusing its sales and marketing efforts on transportation and
logistics companies operating fleets of 25 or more vehicles within specific
vertical markets that have experienced significant benefits with the XATA
system, including food distribution, petroleum production and marketing,
manufacturing and processing, and retail/wholesale delivery.

         The Company uses a combination of integrated marketing activities,
including but not limited to advertising, trade shows, the Internet, and direct
mail to gain exposure within the marketplace. The Company uses exhibits at
selected industry conferences to promote XATA name awareness, demonstrate its
products, and obtain additional sales opportunities. XATA also actively pursues
speaking opportunities at such trade shows for its customers who have gained
efficiencies in fleet operations using the Company's technology.





                                       12
<PAGE>

MAJOR CUSTOMERS

         Net sales during the fiscal years ended September 30, 1998 and 1997 to
customers who accounted for more than ten percent of revenue in either of such
years are as follows:

                                              Years Ended September 30,
                                      ---------------------------------------
                                           1998                         1997
                                      ---------------------------------------
                                                Percent of Net Sales
                                      ---------------------------------------
Safeway, Inc.                               17%                          *
Ryder Systems, Inc                          16%                         15%
Ameriserve Food Distribution, Inc.           *                          14%

*  Net sales were less than ten percent of total net sales.

         Although the Company anticipates growth in its customer base as its
sales volume increases, it is likely to continue to be dependent in the near
future on a few major customers who may change from year to year. Loss of any
major customer or failure to expand the Company's customer base could adversely
affect the Company.

MANUFACTURING, PRODUCTION, AND QUALITY CONTROL

         The Company subcontracts the manufacture and assembly of its major
components, pursuant to the Company's specifications. All such suppliers have
entered into confidentiality agreements with respect to the Company's
proprietary technology used in manufacture and assembly. Although such suppliers
provide necessary labor and material components, the Company performs inventory
management, quality control management, and final system downloading at XATA's
facility. XATA believes its current suppliers can provide production volumes to
meet its anticipated increases in product demand and is not aware of any
difficulty experienced by its suppliers in obtaining raw materials for
manufacture. Other than purchase orders, the Company has no written supply
agreements with its suppliers.

PATENTS, TRADEMARKS, AND COPYRIGHTS

         "XATA" is a trademark registered with the United States Patent and
Trademark office. All computer programs, report formats, and screen formats are
protected under United States copyright laws. In addition, the Company has been
issued a design patent by the United States Patent and Trademark Office which
covers the design of its computer display. The Company's software programs have
not been patented. The Company claims trademark and tradename protection for the
following: OpCenter, SmartCom, RouteView, Desktop Dispatch, and Transportation
Breakdown Management System. The Company intends to protect and defend its
intellectual property rights vigorously.

RESEARCH AND DEVELOPMENT

         The Company's market position is based on its strong research and
development capability and its market technology leadership. Management believes
that product development must continue in order to maintain this market
position, to integrate industry requirements, to respond to market
opportunities, and to keep abreast of technological change, which is expected to
continue at a rapid pace. The Company employs systems engineers who are engaged
in numerous development projects led by 



                                       13
<PAGE>

William P. Flies, the Company's founder and Chief Technical Officer. Along with
customer-driven requirements, much of the impetus to adopt new technologies will
come from logistics providers, suppliers, shippers, government, and other
non-industry influences that are endorsing the use of reliable, low-cost
technologies to increase overall industry efficiency. These new technologies
include global positioning systems, onboard communications (cellular, satellite,
wireless, paging), and trailer identification. Research and development expense
was approximately $750,000 for fiscal 1998 and $828,000 for fiscal 1997.
Capitalized software development costs were $3,057,000 for fiscal 1998 and
$1,154,000 for fiscal 1997.

EMPLOYEES

         As of September 30, 1998, XATA's staff included 76 employees and 11
contractors. Although employees are organized as an integral XATA team, their
primary assignments, including independent contractors, are as follows: 15 in
administrative, finance, and MIS; 24 in sales, marketing, and customer service;
3 in logistics; and 45 engineering, product design, and development.

RISK FACTORS

         RECENT LOSSES; LIMITED HISTORY OF PROFITABLE OPERATIONS. The Company
incurred a loss of $4,249,000 for the fiscal year ended September 30, 1998, and
a loss of $2,421,079 for the fiscal year ended September 30, 1997. From
inception in 1985 through the fiscal year ended September 30, 1994, the Company
focused its efforts primarily on product development and had only limited
product marketing and distribution, incurring a cumulative loss of $5,809,000.
The Company experienced operating profits beginning in the fourth quarter of the
fiscal year ended September 30, 1994, and continuing throughout the fiscal year
ended September 30, 1996. Although, as of the date of this Report on Form
10-KSB, the Company expects to return to profitability in fiscal 1999, there can
be no assurance that profitability will be restored or sustained.

         NEW AND UNPROVEN BUSINESS PLAN. In the first quarter of fiscal 1999,
the Company reassessed its product lines and its operations in light of the
losses incurred in 1998 and 1997 and adopted a plan to spin-off products and
services (principally XET and RouteView products and services) identified as
falling outside of its core competencies. Implementation of this plan and the
redeployment of resources within the Company may take up to 12 months and may
involve sales of business units, sales and subleasing of equipment and
facilities, lay-offs of employees, re-assignment of existing employees and other
actions which, in general, may be disruptive to existing operations.

         DEPENDENCE ON KEY CUSTOMERS. Historically, the Company has sold large
orders to individual fleets and thus has been dependent upon a few major
customers each year whose volume of purchases is significantly greater than that
of other customers. During the fiscal year ended September 30, 1998, two (2)
customers, together, accounted for approximately 33% of net sales. During the
fiscal year ended September 30, 1997, two customers, together, accounted for
approximately 30% of net sales. Although the Company has experienced significant
growth in its customer base as its sales volume has increased, it is currently
still dependent on continued purchases by its present customers, who are
continuing to equip and upgrade their fleets. Loss of any significant current
customers or an inability to further expand its customer base would adversely
affect the Company.

         SALES CYCLE. The period required to complete a sale of the Company's
systems can be as long as 12 months, due in large part to the technical
complexity of the system and the system's cost, which usually requires an
advance budget decision by the customer. In addition, the continuing emergence
of 



                                       14
<PAGE>

new technologies, as well as existing similar purpose technologies, may
complicate and delay a buying decision. The length of the sales cycle may result
in quarter to quarter fluctuations in the Company's purchase orders and
shipments. In addition, the Company has recently experienced delays in purchase
orders and shipments which it attributes to customers' uncertainties regarding
Year 2000 issues in general (not specific to the Company's products) and
diversion of resources by customers from buying decisions to Year 2000
evaluations and remediation.

         COMPETITION. Products with certain features competitive with the
Company's systems are offered by companies with greater financial and other
resources than those of the Company. These competitors are based both in the
United States and in Europe and offer products ranging in sophistication and
cost from basic onboard recorders to advanced mobile satellite communication
systems. Such companies may produce and offer products equivalent or comparable
to those of the Company or products which are more effectively marketed to or
preferred by customers. In addition, the Company believes that the nature and
sources of competition in its industry are rapidly evolving and, in the future,
will be based upon the service provider's ability to deliver integration of
multiple information systems, including links between trucking operations and
all other facets of the supply chain through a variety of sophisticated software
and communications technologies, including but not limited to the Internet.
These efforts represent a trend toward integration of intracompany data with the
larger external supply chain involving the flow of goods to markets. The Company
believes that these changing markets will require it to adapt its existing
products and to develop new products which facilitate the collection,
integration, communication and optimal utilization of information throughout the
transportation network and the entire supply chain. This may entail the
development of new technologies and the adaptation of new and existing products
to be compatible with products and services provided by others in the industry,
including others who may be considered competitors of the Company in one or more
lines of business.

         PRODUCT AND MARKET CONCENTRATION. Although the Company's system has
potential applications in a number of industries, to date, the Company has
targeted only the fleet trucking segment of the transportation industry. If this
market segment experiences a downturn which decreases the Company's sales. the
development of new applications and markets for the Company's system could take
several months or longer, and could require substantial funding. In addition,
the Company believes that its future success is dependent in part on developing
and marketing new applications. There can be no assurance that any such expanded
applications can be successfully developed or marketed.

         CYCLICAL NATURE OF THE TRUCKING INDUSTRY. The fleet trucking segment of
the transportation industry is subject to fluctuations and business cycles.
Because mobile integrated information systems are a relatively new product, the
Company is unable to predict to what extent economic business cycles may result
in increases or decreases in capital purchases by fleet managers. A significant
downturn in the prospects of the fleet trucking segment of the transportation
industry could have a material adverse effect on the Company. Although the
Company had a backlog of approximately $ 530,000 as of January 4, 1999, which
the Company believes to be firm, there can be no assurance that such backlog
will not decrease as a result of cancellations or reductions of orders in
response to adverse economic conditions in the industry or other factors.

         SALES AND MARKETING EFFORTS. Sales of the Company products are
dependent in part upon the salesperson's in-depth knowledge and understanding of
the XATA system, which requires experience and training over a period of several
months. While the Company believes the expansion of its previously limited sales
and marketing efforts will allow it to attract highly qualified sales and
marketing personnel, there can be no assurance that the Company will be able to
attract, train, and retain the qualified personnel necessary for its business.
Moreover, there is no assurance that the Company's 



                                       15
<PAGE>

augmented sales and marketing efforts will result in increased sales volume.

         DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily
dependent upon proprietary technology. The Company has been issued a design
patent by the United States Patent and Trademark Office which covers the design
of its computer display. The Company's software programs have not been patented.
The Company relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures, and contractual provisions to protect
its proprietary rights; however, these measures afford only limited protection
and there can be no assurance that competitors will not seek to use similar
computer displays or "touch screens." Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's systems or obtain and use information that the Company regards as
proprietary. Customer access to the Company's source code may increase the
possibility of misappropriation or other misuse of the Company's software. There
can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology which could adversely affect the Company.

         RISK OF TECHNOLOGICAL OBSOLESCENCE. The Company's systems utilize
proprietary software and an onboard touch-screen computer. Although the Company
believes its proprietary software is more important in the capture and
communication of operating data than the hardware in which the software is
encased, there can be no assurance that continued improvements in hardware will
not render the Company's technology, including its software, obsolete. The field
of PC-based software and hardware is constantly undergoing rapid technological
changes. In addition, the field of logistics management is rapidly changing and
developing more sophisticated, comprehensive solutions for users. There can be
no assurance that the Company will be able to react and adapt to changes in
these fields or that developments by its competitors will not render the
Company's system and services obsolete. Although the Company believes that
advancements in logistics management and in hardware and communications
technology provide opportunities for the Company to form alliances with
companies offering products complementary to the Company's system and services,
there can be no assurance that the Company can form alliances with such
companies or that any such alliance will be successful. The Company's success is
dependent in part upon its ability to anticipate changes in technology and
industry standards and to develop and introduce new features and enhancements to
its system on a timely basis. If the Company is unable to do so for
technological or other reasons or if new features or enhancements do not achieve
market acceptance. the Company's business could be materially and adversely
affected. There can be no assurance that the Company will not encounter
technical or other difficulties that could in the future delay the introduction
of new systems or system features or enhancements.

         MANAGEMENT CONTROL. The officers and directors of the Company
beneficially own approximately 34% of the Company's outstanding shares of Common
Stock. Because of such ownership, management is able to significantly influence
the affairs of the Company, including the election of the Board of Directors.
There is no cumulative voting for the election of directors of the Company.

         DEPENDENCE ON KEY PERSONNEL. The Company believes its future success
depends to a significant extent on the efforts of key management, technical, and
sales personnel, including Dennis R. Johnson, President and Chief Executive
Officer, and William P. Flies, Chief Technical Officer. The Company maintains
and is the beneficiary of keyperson life insurance policies on Dennis R. Johnson
and on William P. Flies, each in the amount of $1,000,000. The loss of Mr.
Johnson, Mr. Flies, or any other key employee. could have a material adverse
effect on the Company's business. Moreover, there can be no assurance that the
Company will be able to attract and retain the qualified personnel necessary for
its business. Except for William P. Flies, who has an agreement to refrain from
employment with any 



                                       16
<PAGE>

competitor of the Company for one year after leaving employment with the
Company, the Company's employees are not restricted as to future employment.
However, all employees are restricted as to use of information which is
confidential and proprietary to the Company.

         RELIANCE ON MANUFACTURERS AND DISTRIBUTORS. The Company acquires most
of the components of its systems from suppliers who manufacture these components
pursuant to Company specifications. The Company currently has no supply
agreements with any of these manufacturers. Although the Company currently
purchases more than ten percent of the components for its systems from a single
supplier, and while the loss of any supplier could cause a short-term disruption
in the availability of components, the Company believes, although no assurance
can be given, that alternative sources could be obtained for such components
without materially affecting system costs or timely delivery.

         NEED FOR ADDITIONAL CAPITAL OR FINANCING. During the last several
years, the Company has experienced rapid growth, including two business
acquisitions. The Company has recently experienced expenses in excess of cash
flow from operations and has been required to rely upon bank and other external
financing. As of the date of this Report on Form 10-KSB, the Company believes
that cash flow from operations will be sufficient to meet its capital
requirements for the foreseeable future if certain business operations are
discontinued and investment in R&D acquisition are strictly controlled. However,
it is possible that the Company's cash needs may vary significantly from its
predictions, due to failure to generate anticipated cash flow, growth at a rate
faster than anticipated, or other reasons. Moreover, any significant new product
development or acquisition in the near term will require external funding. No
assurance can be given that the Company's predictions regarding its cash needs
will prove accurate, that the Company will not require additional financing,
that the Company will be able to secure any required additional financing when
needed or at all, or that such financing, if obtained, will be on terms
favorable or acceptable to the Company. The Company's inability to obtain needed
financing could have a material adverse effect on operating results and any
future financings may result in dilution to holders of the Common Stock. In
addition, the Company's future growth and operating results will depend on
management's continuing ability to implement its growth strategy, as to which no
assurance can be given.

         ISSUANCE OF ADDITIONAL SHARES. The Company has authorized 8,333,333
shares of Common Stock, of which 4,418,133 shares of Common Stock are issued and
outstanding as of December 21, 1998. The Company's Board of Directors has
authority, without action or vote of the shareholders, to issue all or part of
the authorized but unissued shares. Such additional shares may be issued in
connection with future financings, acquisitions, employee plans, or otherwise.
Any such issuance will dilute the percentage ownership interest of existing
shareholders, and may dilute the book value of the Common Stock. In addition,
the Company is authorized to issue up to 333,333 shares of preferred stock, no
designated par value (the "Preferred Stock"), none of which is currently
outstanding. The Preferred Stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors,
without approval by shareholders, and may include voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion and redemption rights and sinking fund provisions.
The issuance of any Preferred Stock could affect the rights of the holders of
Common Stock adversely and reduce the value of the Common Stock. In addition,
specific rights granted to future holders of Preferred Stock could be used to
restrict the Company's ability to merge with or sell its assets to a third
party, thereby preserving control of the Company by its then owners.

         LIMITATIONS ON DIRECTORS' LIABILITY UNDER MINNESOTA LAW. Pursuant to
the Company's Articles of Incorporation, as amended and restated, as authorized
under applicable Minnesota law, directors of the 



                                       17
<PAGE>

Company are not liable for monetary damages for breach of fiduciary duty, except
in connection with a breach of the duty of loyalty, for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, for dividend payments or stock repurchases illegal under Minnesota law or
for any transaction in which a director has derived an improper personal
benefit. In addition, the Company's bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent permitted by
Minnesota law for all expenses incurred in the settlement of any actions against
such persons in connection with their having served as officers or directors of
the Company.

ANTITAKEOVER PROVISIONS. The Company is subject to certain antitakeover
provisions contained in the Minnesota Business Corporation Act which could delay
or prevent a change in control of the Company by requiring shareholder approval
of certain acquisitions of voting stock of the Company.

ITEM 2.  DESCRIPTION OF PROPERTY
-------  -----------------------

         On April 4, 1997, the Company moved into 20,588 square feet of new
office and warehouse space at 151 East Cliff Road in Burnsville, Minnesota. The
Company has signed a seven (7) year, non-cancelable operating lease for this
space, with initial rental payments of $12,010.00 per month, plus a pro rata
share of the building operating expenses commencing June 1, 1997. The base rent
will increase to $14,810.00 on February 1, 1999, in part due to occupancy on
March 1, 1999, of an additional 4,800 square feet of warehouse space adjacent to
the Company's current space. Base rent will increase to $16,291 on June 1, 2002,
the sixth year of the lease. To the extent any additional space is unused, the
Company will endeavor to sublease such space until such time as the Company
operations require additional space. The lease may be renewed for three (3)
additional terms of five (5) years each.

         The Company's XET operation leases 3,150 square feet in an office
building in Peoria, Illinois. The lease terminates in the year 2000 and has a
monthly rental of $3,100, including operating costs. On July 1, 1998, XET
entered into a lease for 1290 square feet of additional space in a building
adjacent to its current location in Peoria, Illinois. The additional space was
leased from the current landlord and the lease will run co-terminus with the
original lease. The total monthly rental on the additional space is $980.

The Company believes that this space is adequate for its needs at this location
for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS
-------  -----------------

         The Company has been named as a defendant in an action based upon a
disputed account payable. The amount in controversy is less than $12,000.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------  ---------------------------------------------------

         None





                                       18
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-------  ------------------------------------------------------------

         The Company's Common Stock is traded under the symbol "XATA" in the
Nasdaq National Market.

         The following table sets forth the quarterly high and low sales prices
as reported by the Nasdaq National Market during the last two fiscal years ended
September 30, 1997 and September 30, 1998.
---------------------------

                                                       SALE PRICE
                                                       ----------
       FISCAL YEAR 1997                             LOW         HIGH
                                                    ---         ----
       First Quarter
       Second Quarter                             6.250       10.500
       Third Quarter                              4.047       7.500
       Fourth Quarter                             3.500       6.125
                                                  3.375       5.375

                                                       SALE PRICE
                                                       ----------
                                                    LOW         HIGH
                                                    ---         ----
       FISCAL YEAR 1998                           3.375       7.250
       First Quarter                              3.375       6.000
       Second Quarter                             5.750       2.000
       Third Quarter                              3.250       2.000
       Fourth Quarter

         As of December 21, 1998, the Company's Common Stock was held of record
by 87 holders. Registered ownership includes nominees who may hold securities on
behalf of multiple beneficial owners. The Company estimates the number of
beneficial owners of its Common Stock as 1,300 as of December 21, 1998 based
upon information provided by a proxy services firm.

DIVIDEND POLICY

         The Company has never paid cash dividends on any of its securities. The
Company currently intends to retain any earnings for use in its operations and
does not anticipate paying cash dividends in the foreseeable future. Future
dividend policy will be determined by the Company's Board of Directors based
upon the Company's earnings, if any, its capital needs and other relevant
factors.

RECENT SALE OF UNREGISTERED SECURITIES

         During the past three fiscal years, the Company has issued an aggregate
of 43,309 shares (9,375 in September 1996, 6,250 in May 1997, 12,500 in October
1997, 2,684 in April 1998 and 12,500 in August 1998) to 3 employees who joined
the Company in connection with the Company's acquisition of the Payne assets
from Computer Petroleum Corporation ("CPC"). Such employees were formerly
employees of CPC. Pursuant to the terms of their respective employment
agreements with the Company, an additional 12,500 shares will be issued in
October 1999 and, if certain performance objectives are attained, an additional
3,125 shares will be issued in October 1999.



                                       19
<PAGE>

         In October 1996, the Company issued an aggregate of 41,558 shares of
its Common Stock to the two shareholders of Key Logistics, Inc., in exchange for
all of the issued and outstanding stock of Key Logistics. An additional 10,390
shares were issued in August 1998.

         All such shares have been or will be issued in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
-------  ---------------------------------------------------------

PREFACE

         In August 1996, the Company purchased substantially all of the assets
of a business known as Payne & Associates ("Payne"), an unincorporated division
of Computer Petroleum Corporation, including software products that integrate
information, communication, and Internet based technologies for trucking
industry applications. The acquisition was accounted for as a purchase and
accordingly, the results of operations for Payne are included with the Company's
since the date of the acquisition. In June 1997, XATA formed a new
unincorporated business division, XATA Enterprise Technologies (XET), using
personnel and products acquired from Payne.


         During the fourth quarter of 1997, the Company completed an evaluation
of the recoverability of assets (primarily purchased software and goodwill)
acquired from Payne in August 1996. Certain events occurred during fiscal 1997
which caused the full recoverability of those assets to be brought into
question. The largest customer of Payne was unexpectedly acquired by another
company resulting in the loss of this customer's business, the Company's sales
distribution channel, and a corresponding decrease in the revenue stream upon
which the software and goodwill values were based. The software product being
sold to this customer was interfaced to and dependent upon the functionality of
this customer's system as it had been designed specifically for that purpose. As
a result, the loss of this customer also has required the Company to
substantially redesign and rewrite the acquired software before it could be sold
to others and to establish an entirely new distribution channel to pursue the
redefined market opportunity. As a result of these events, which occurred after
the acquisition, it became clear that the investment in Payne had become
severely impaired. Management has determined the value of the remaining product
of Payne's being sold by the Company to be approximately $200,000. Accordingly,
the goodwill and acquired software relating to the Payne acquisition were
written down to this estimated value, resulting in a fourth quarter charge of
approximately $1.8 million.

         During the third quarter of 1998, the Company decided to suspend sales
of its Desktop Dispatch software product. The Company suspended sales of this
product and reversed revenues on licenses sold as a result of the product's
unacceptable performance under actual service conditions. The Company expects to
re-introduce Desktop Dispatch to the market in spring of 1999, unless this
product division is sold, as discussed below.

         Revenue for sales of the Company's systems is recognized when ownership
transfers to the customer, which is generally upon shipment. Pursuant to certain
contractual arrangements discussed above, revenues are recognized for completed
systems held at the Company's warehouse pending the receipt of delivery
instructions from the customer. These arrangements have not had and are not
expected to have a significant effect on the Company's working capital. Revenue
from extended warranty and service support contracts is deferred and recognized
ratably over the contract period.

         The Company has investigated the impact of the Year 2000 issue on both
its own internal 



                                       20
<PAGE>

information systems and the products it develops, markets and sells. See
"Business-Year 2000 Issues". As discussed, Year 2000 is not expected to have a
material effect on the Company's financial position, operations or cash flow.


RESULTS OF OPERATIONS

        NET SALES. The Company had net sales of $9,215,000 for fiscal 1998
compared to $10,404,000 in fiscal 1997. This represents a decrease of
$1,189,000, or 11%, for fiscal 1998 over the previous fiscal year; $490,000, or
41%, of this decrease resulted from a one-time charge against revenue for
previous sales related to the decision to suspend sales of the Desktop Dispatch
product. Onboard sales to private fleet customers for fiscal 1998 were
$8,411,000 compared to $9,758,000 in fiscal 1997. Sales of XET products were $
835,000 in fiscal 1998 compared to $616,000 in fiscal 1997. RouteView sales were
$258,000 in fiscal 1998 and $30,000 in fiscal 1997. The Company anticipates that
total revenue for fiscal 1999 will exceed fiscal 1998 levels.

         GROSS PROFIT. The Company had a gross profit in fiscal 1998 of
$4,508,000 or 48.9% of net revenue compared to $4,728,000, 45.4% of net revenue,
for fiscal 1997. The increase in gross profit resulted primarily from an
increase in direct sales to private fleets. These were partially offset by the
increased amortization of capitalized software development. Gross margins are
dependent on product sales mix and discounts on volume shipments to certain
customers. The Company anticipates gross margins, as a percentage of sales, for
fiscal 1999 to be unchanged from fiscal 1998.

         OPERATING EXPENSES. Operating expenses include sales and marketing
expenses, general and administrative expenses, and research and development.
Total operating expenses were $8,231,000 for fiscal 1998 (89.3% of net sales)
compared to $7,785000 for fiscal 1997 (74.8 % of net sales).

         Operating expenses other than research and development were $7,481,000
in fiscal 1998 (81.2% of net sales) compared to $6,958,000 in fiscal 1997 (66.9%
of net sales). The increase of $523,000 in fiscal 1998 compared to fiscal 1997
was primarily due to a one-time charge to bad debt expense of $300,000
associated with the discontinuance of Desktop Dispatch. Operating expenses for
fiscal 1999 are expected to be lower than fiscal 1998.

         The Company's market position is based on its strong research
capability and its technology leadership. The increases in research and
development in recent years occurred as the result of planned increases in
personnel and expenses related to new system capabilities. Expenditures for
research and development, net of capitalized software development costs, are
charged to operations as incurred. These charges amounted to $750,000 for fiscal
1998 and $828,000 for fiscal 1997. Software development costs are capitalized
after the establishment of technological feasibility and later amortized to cost
of goods sold based on the anticipated useful life of the product. The useful
life of each product is determined by its anticipated future net revenues.
Capitalized software development costs were $3,057,000 for 1998 compared to
$1,154,000 for 1997. This increase was due to development of new software to
respond to industry requirements and specific customer needs. The Company
anticipates that expenditures for research and development and software
development for fiscal 1999 will be similar to those experienced in fiscal 1998,
subject to available funding.

INCOME TAXES

         Federal and State income tax benefit (expense) was ($573,000) in fiscal
1998 compared to a benefit of $510,000 in fiscal 1997. The 1998 income tax
expenses consists primarily of an increase in 



                                       21
<PAGE>

the valuation allowance on deferred tax assets as a result of a change in the
conclusion regarding the realizability of the deferred tax assets in the near
term. The Company believes it will realize an income tax benefit in future years
as a result of the loss incurred in 1997 and 1998. However, because of the
uncertainties involved in projecting Company operations so far into the future,
the Company has recorded the net deferred tax asset using management's estimate
of taxable earnings during a future time horizon of one year. Prior to 1998,
management used estimated taxable earnings for a future period of five years. At
September 30, 1998, the Company has federal net operating losses of
approximately $6,017,000. In 1996 and 1995, substantially all of the Company's
taxable income was offset by available net operating loss carry-forwards, and at
September 30, 1996, substantially all of the Company's net operation loss
carry-forwards had been utilized. Prior to 1996, the Company had recorded a
valuation allowance against its net deferred tax assets due to uncertainty of
realization

LIQUIDITY AND CAPITAL RESOURCES

         The Company had a working capital deficit at the end of fiscal 1998 of
$991,000 compared to working capital of $4,849,000 at the end of fiscal 1997.

         Cash flows used in operating activities during fiscal 1998 totaled
$1,591,000 resulting primarily from the net loss of $4,249,000 offset by
depreciation and amortization of $2,130,000, and non-cash charges of $580,000
for deferred income tax expense, $918,000 for provisions for bad debt and sales
returns and decreases in other working capital items of $1,049,000, primarily
increased accounts receivable. The Company anticipates that continued growth in
its business will result in further increases in accounts receivable and, to a
lesser extent, inventory.

         Cash flows provided by investing activities of $78,000 during fiscal
1998 resulted primarily from expenditures for software development of $3,057,000
and capital expenditures of $523,000. These amounts were offset by the proceeds
from both the collection and sale of notes receivable related to the Company's
financing of certain onboard computer sales and the sale and maturity of
securities held-for-sale. The Company expects capital expenditures and product
development expenses for fiscal 1999 to be less than those incurred in fiscal
1998.

         Cash provided by financing activities was $1,177,000 during fiscal
1998; $549,000 was provided under the Company's operating line of credit and a
$625,000 increase in long term debt, with GE Capital Corporation Commercial
Asset Funding.

         During fiscal 1998, the Company had a $150,000 term debt facility
available for fixed asset additions, and a $1,000,000 line of credit with
Norwest Bank Minnesota, N.A., both of which were set to expire in March 1998.
The line of credit was extended through November 30, 1998. Advances under the
line of credit accrued interest at prime plus 1.0% with an effective rate of
9.50% as of October 15, 1998. The Company paid a minimum usage fee to maintain
the line of credit. The Company used approximately $550,000 of the line of
credit during fiscal 1998. In August 1998, the Company negotiated a long term
debt agreement secured by certain of its fixed assets with GE Capital's
Commercial Asset Funding group. Under this agreement, recorded as a note
payable, the Company received $625,000 and is obligated to make payments,
including interest at the rate of 10%, of approximately $28,000 per month for 24
months. In October, 1998 the Company replaced its bank credit facility with a
line of credit from Norwest Business Credit, Inc. See "Subsequent Events".

         The Company believes its line of credit, and its current vendor terms
will provide adequate cash to fund anticipated revenue growth and operating
needs, for the foreseeable future, if certain business 



                                       22
<PAGE>

operations are discontinued and investment in product development are strictly
controlled. However, it is possible that the Company's cash needs may vary
significantly from its predictions, due to failure to generate anticipated cash
flow, growth at a rate faster than anticipated, or other reasons. Moreover, any
significant new product development in the near term will require external
funding. No assurance can be given that the Company's predictions regarding its
cash needs will prove accurate, that the Company will not require additional
financing, that the Company will be able to secure any required additional
financing when needed or at all, or that such financing, if obtained, will be on
terms favorable or acceptable to the Company.



SUBSEQUENT EVENTS

         In October 23, 1998, the Company entered into an asset based financing
agreement with Norwest Business Credit, Inc. under which the Company was given a
line of credit, based on eligible accounts receivable and inventory of
$1,500,000. This new financing arrangement replaces the previous credit facility
of $1,000,000 with Norwest Bank, NA. The bank amended the October 23, 1998
agreement on November 30, 1998, increasing the line of credit to $2,000,000. On
January 8, 1999 the agreement was amended requiring the Company to maintain a
minimum net worth level which varies during the term of the agreement. During
fiscal 1999, the most restrictive of the net worth requirement occurs on
September 30, 1999, when the Company must have a net worth of not less than
$2,475,000.

ACCOUNTING PRONOUNCEMENTS

         The FASB has issued Statement No. 128, "Earnings Per Share," which
supersedes APB Opinion No. 15. Statement No. 128 requires the presentation of
earnings per share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic earnings per-share amounts. All other entities are
required to present basic and diluted per-share amounts. Diluted per-share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. The Company initially applied
Statement No. 128 for the year ended September 30, 1998, and as required by the
Statement, has restated all per share information for prior years to conform to
the statement.

As of October 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. Statement No. 130
establishes new rules for the reporting and display of comprehensive income and
its components. Statement No. 130 requires unrealized gains or losses on
available-for-sale securities and certain other items, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income. The Company has no comprehensive income as defined by SFAS
No. 130.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and related Information. This
statement requires public enterprises to report selected information about
operating segments in annual and interim reports issued to shareholders. It is
effective for financial statements for fiscal years beginning after December 15,
1997, but it is not required to be applied to interim financial statements in
the initial year of its application. The statement will have no effect on the
Company's basic financial statements, but management is reviewing to determine
if additional disclosures will be required.

ITEM 7.  FINANCIAL STATEMENTS
-------  --------------------



                                       23
<PAGE>


                                XATA CORPORATION

                                FINANCIAL REPORT

                               SEPTEMBER 30, 1998

<PAGE>


                                    CONTENTS

-------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT                                                F-1
-------------------------------------------------------------------------------

FINANCIAL STATEMENTS

      Balance sheets                                                  F-2 - F-3

      Statements of operations                                              F-4

      Statements of changes in shareholders' equity                         F-5

      Statements of cash flows                                        F-6 - F-7

      Notes to financial statements                                  F-8 - F-17

-------------------------------------------------------------------------------

<PAGE>


                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
XATA Corporation
Burnsville, Minnesota

We have audited the accompanying balance sheets of XATA Corporation as of
September 30, 1998 and 1997, and the related statements of operations, changes
in shareholders' equity, and cash flows for the years 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 audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of XATA Corporation as of
September 30, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred substantial losses and reductions in cash
and working capital during fiscal years 1998 and 1997. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




                                      McGLADREY & PULLEN, LLP


Minneapolis, Minnesota
December 8, 1998 (January 8, 1999, as to Note 8)


                                      F-1

<PAGE>


XATA CORPORATION

BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>

ASSETS (NOTE 8)                                                                    1998            1997
------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>         
Current Assets
       Cash and cash equivalents                                              $         --     $    336,126
       Available-for-sale securities (Note 5)                                           --        3,054,076
       Trade receivables, less allowances for doubtful accounts and sales
            returns of $1,047,000 in 1998 and $275,000 in 1997 (Note 14)         1,942,458        2,613,039
       Current maturities of notes receivable (Note 7)                              44,496               --
       Inventories (Note 6)                                                        474,011          434,836
       Prepaid expenses                                                            104,480          115,334
       Deferred income taxes (Note 10)                                                  --        1,040,000
                                                                            --------------------------------
                          TOTAL CURRENT ASSETS                                   2,565,445        7,593,411
                                                                            --------------------------------

Equipment and Leasehold Improvements, at cost
       Engineering and manufacturing equipment                                     844,438          759,181
       Office furniture and equipment                                            1,677,269        1,310,079
       Leasehold improvements                                                       38,417           38,417
                                                                            --------------------------------
                                                                                 2,560,124        2,107,677

       Less accumulated depreciation and amortization                            1,331,571          885,425
                                                                            --------------------------------
                          TOTAL EQUIPMENT AND LEASEHOLD IMPROVEMENTS             1,228,553        1,222,252
                                                                            --------------------------------

Other Assets (Note 3)
       Capitalized software development costs, less accumulated
            amortization of $2,395,993 in 1998 and $1,495,369 in 1997            2,685,324        1,065,633
       Acquired software, less accumulated amortization of $1,135,243
            in 1998 and $1,000,000 in 1997                                         264,757          400,000
       Goodwill, less accumulated amortization of $1,393,866 in 1998
            and $1,365,294 in 1997                                                 145,237          173,809
       Notes receivable (Note 7)                                                    54,436               --
       Other                                                                        42,217           54,873
                                                                            --------------------------------
                          TOTAL OTHER ASSETS                                     3,191,971        1,694,315
                                                                            --------------------------------
                          TOTAL ASSETS                                        $  6,985,969     $ 10,509,978
                                                                            ================================
</TABLE>

See Notes to Financial Statements.


                                      F-2

<PAGE>


<TABLE>
<CAPTION>

LIABILITIES AND SHAREHOLDERS' EQUITY                                              1998              1997
------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>         
Current Liabilities
       Bank line of credit (Note 8)                                          $    548,996      $         --
       Current maturities of long-term debt                                       309,534                --
       Accounts payable                                                         1,122,754           648,175
       Accrued expenses:
            Compensation                                                          520,822           706,915
            Other                                                                 325,024           273,312
       Deferred revenue                                                           729,820         1,116,106
                                                                           ---------------------------------
                          TOTAL CURRENT LIABILITIES                             3,556,950         2,744,508
                                                                           ---------------------------------



Long-Term Debt (Note 9)                                                           461,491           156,256
                                                                           ---------------------------------


Deferred Income Taxes (Note 10)                                                        --           460,000
                                                                           ---------------------------------


Commitments and Contingencies (Notes 2, 11, and 12)


Shareholders' Equity (Notes 12 and 13)
       Common stock, par value $0.01 per share; authorized 8,333,333
            shares; issued 4,430,633 shares in 1998 and 4,383,035 shares
            in 1997                                                                44,306            43,830
       Additional paid-in capital                                               9,398,821         9,195,771
       Common stock to be issued, 12,500 shares in 1998 and 25,000
            shares in 1997                                                        135,688           271,875
       Retained earnings (accumulated deficit)                                 (6,611,287)       (2,362,262)
                                                                           ---------------------------------
                          TOTAL SHAREHOLDERS' EQUITY                            2,967,528         7,149,214
                                                                           ---------------------------------
                          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         $  6,985,969      $ 10,509,978
                                                                           =================================
</TABLE>

See Notes to Financial Statements.


                                      F-3

<PAGE>


XATA CORPORATION

STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                      1998              1997
------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>         
Net sales (Note 14)                                              $  9,214,893      $ 10,404,477
Cost of goods sold                                                  4,707,375         5,676,123
                                                               ---------------------------------
                          GROSS PROFIT                              4,507,518         4,728,354

Operating expenses:
       Selling, development, general, and administrative            8,231,032         5,978,521
       Write-down of goodwill and acquired software (Note 3)               --         1,806,860
                                                               ---------------------------------
                          OPERATING LOSS                           (3,723,514)       (3,057,027)

Nonoperating income (expense):
       Interest income                                                 93,516           140,848
       Interest expense                                               (36,997)          (14,900)
       Other                                                           (9,030)               --
                                                               ---------------------------------
                          LOSS BEFORE INCOME TAXES                 (3,676,025)       (2,931,079)

Federal and state income tax provision (benefit) (Note 10)            573,000          (510,000)
                                                               ---------------------------------
                          NET LOSS                               $ (4,249,025)     $ (2,421,079)
                                                               =================================

Basic and diluted net loss per share                             $      (0.97)     $      (0.55)
Weighted-average common shares outstanding                          4,394,714         4,420,672

</TABLE>

See Notes to Financial Statements.


                                      F-4

<PAGE>


XATA CORPORATION

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                            Common        Retained
                                                      Common Stock          Additional      Stock         Earnings
                                               ------------------------      Paid-In        To Be       (Accumulated
                                                  Shares        Amount       Capital        Issued         Deficit)         Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>          <C>          <C>            <C>            <C>            <C>        
Balance, September 30, 1996                      4,342,481    $  43,425    $ 8,701,956    $   407,812    $    58,817    $ 9,212,010
    Common stock issued in connection
       with the acquisition of Key Logistics,
       Inc. (Note 4)                                41,558          416        399,584             --             --        400,000
    Common stock issued on exercise of
       options and warrants                          5,780           58         16,980             --             --         17,038
    Repurchase of common stock by
       company                                     (25,534)        (255)       (95,219)            --             --        (95,474)
    Issuance of common stock                        18,750          186        172,470       (135,937)            --         36,719
    Net loss                                            --           --             --             --     (2,421,079)    (2,421,079)
                                               ------------------------------------------------------------------------------------
Balance, September 30, 1997                      4,383,035       43,830      9,195,771        271,875     (2,362,262)     7,149,214
    Common stock issued on exercise of
       options and warrants                          9,524           95         14,905             --             --         15,000
    Issuance of common stock (Note 4)               38,074          381        188,145       (136,187)            --         52,339
    Net loss                                            --           --             --             --     (4,249,025)    (4,249,025)
                                               ------------------------------------------------------------------------------------
Balance, September 30, 1998                      4,430,633    $  44,306    $ 9,398,821    $   135,688    $(6,611,287)   $ 2,967,528
                                               ====================================================================================
</TABLE>

See Notes to Financial Statements.


                                      F-5

<PAGE>


XATA CORPORATION

STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                       1998             1997
----------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>              <C>         
Cash Flows From Operating Activities
       Net loss                                                                    $(4,249,025)     $(2,421,079)
       Adjustments to reconcile net loss to net cash provided by (used in)
            operating activities:
            Write-down of goodwill and acquired software (Note 3)                           --        1,806,860
            Depreciation                                                               502,608          389,564
            Amortization                                                             1,626,909        1,283,977
            Provisions for bad debt and sales returns                                  918,000          119,000
            Common stock issued for compensation                                        40,261               --
            Accrued income on available-for-sale securities                                 --            6,223
            Loss on sale of note receivable                                             31,379               --
            Loss on sale of equipment                                                    8,410           20,870
            Deferred income taxes                                                      580,000         (510,000)
            Changes in assets and liabilities, net of effects of acquisitions:
                Accounts receivable                                                   (975,364)         631,724
                Inventories                                                            (39,175)         (60,945)
                Accounts payable                                                       474,579         (347,858)
                Accrued expenses and deferred revenue                                 (520,667)         790,123
                Other                                                                   10,854          (39,034)
                                                                                 -------------------------------
                          NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES       (1,591,231)       1,669,425
                                                                                 -------------------------------

Cash Flows From Investing Activities
       Principal payments received on notes receivable                                  48,651               --
       Proceeds from sale of note receivable                                           548,983               --
       Purchase of available-for-sale securities                                            --       (4,884,703)
       Proceeds from sale and maturity of available-for-sale securities              3,054,076        4,850,924
       Purchase of equipment                                                          (522,588)        (750,130)
       Proceeds from sale of equipment                                                   5,269           15,125
       Addition to software development costs                                       (3,056,728)      (1,154,436)
       Purchase of other assets                                                             --         (108,447)
                                                                                 -------------------------------
                          NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES           77,663       (2,031,667)
                                                                                 -------------------------------
</TABLE>

                                   (Continued)


                                       F-6

<PAGE>


XATA CORPORATION

STATEMENTS OF CASH FLOWS  (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                       1998             1997
----------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>              <C>         
Cash Flows From Financing Activities
       Net borrowings on revolving credit agreements                                   548,996               --
       Proceeds from borrowings on long-term debt                                      625,000               --
       Payments on long-term debt                                                      (23,632)              --
       Proceeds from common stock issued                                                12,078           36,719
       Proceeds from options and warrants exercised                                     15,000           17,038
       Repurchase of common stock                                                           --          (95,474)
                                                                                 -------------------------------
                          NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES        1,177,442          (41,717)
                                                                                 -------------------------------

                          DECREASE IN CASH AND CASH EQUIVALENTS                       (336,126)        (403,959)

Cash and Cash Equivalents
       Beginning                                                                       336,126          740,085
                                                                                 -------------------------------
       Ending                                                                      $        --      $   336,126
                                                                                 ===============================

Supplemental Disclosures of Cash Flow Information
       Cash payments for interest                                                  $    23,596      $    14,900
       Cash payments for income taxes                                                       --           38,770
                                                                                 ===============================

Supplemental Schedule of Noncash Investing and Financing Activities
       Accounts receivable converted into notes receivable                         $   727,945      $        --
       Common stock issued in connection with acquisition of Key
            Logistics, Inc. (Note 4)                                                        --          400,000
       Discount on interest-free note payable                                           13,401           13,401
                                                                                 ===============================
</TABLE>

See Notes to Financial Statements.


                                      F-7

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS: XATA Corporation (the Company) develops, markets, and
services fully integrated, mobile information systems for the fleet trucking
segment of the transportation industry in the United States. XATA systems
utilize proprietary software, onboard touch-screen computers, and related
hardware components and accessories to capture, analyze, and communicate
operating information that assists fleet management in improving productivity
and profitability.


The majority of the Company's sales are on a credit basis to customers located
throughout the United States.

A summary of the Company's significant accounting policies follows:

REVENUE RECOGNITION: Revenue for sales of the Company's systems is recognized
when ownership transfers to the customer, which is generally upon shipment.
Pursuant to certain contractual arrangements, revenues are recognized for
completed systems held at the Company's warehouse pending the receipt of
delivery instructions from the customer. At September 30, 1998, the Company had
approximately $963,000 of systems awaiting specific delivery instructions on
hand that had been billed to those customers. Revenue from extended warranty and
service support contracts is deferred and recognized ratably over the contract
period.

CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all unrestricted cash and any Treasury bills, commercial paper, and
money market funds with an original maturity of three months or less to be cash
equivalents. The Company maintains its cash in bank deposit and money market
accounts, which, at times, exceed federally insured limits. The Company has not
experienced any losses in such accounts.

FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include the
following financial instruments: cash and cash equivalents, investment in debt
securities, trade accounts receivable, notes receivable, accounts payable, and
long-term debt. At September 30, 1998 and 1997, no separate comparison of fair
values versus carrying values is presented for the aforementioned financial
instruments since their fair values are not significantly different than their
balance sheet carrying amounts. The aggregate fair values of the financial
instruments would not represent the underlying value of the Company.

INVESTMENT IN DEBT SECURITIES: Management determines the appropriate
classification of the securities at the time they are acquired and evaluates the
appropriateness of such classifications at each balance sheet date. The Company
classified its investment in debt securities as available-for-sale securities.
The available-for-sale securities were stated at fair value, and unrealized
holding gains and losses, if any, net of related deferred tax effect, are
reported as a separate component of shareholders equity.

Realized gains and losses, including losses from declines in value of specific
securities determined by management to be other-than-temporary, are included in
income. Realized gains and losses are determined on the basis of the specific
cost of the securities sold.


                                       F-8

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined on the weighted-average method.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS: Software development costs incurred
after the establishment of technological feasibility are capitalized and later
amortized to cost of goods sold at the greater of the amount computed using the
ratio of current gross revenues for the product to the total of current and
anticipated future gross revenues or the straight-line method over the remaining
estimated economic life (normally two years) of the product.

RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and development
activities performed by the Company are charged to operations as incurred.
Research and development expense was approximately $750,000 and $828,000 for the
years ended September 30, 1998 and 1997, respectively.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization are provided using
the straight-line method based on the estimated useful lives of individual
assets over the following periods:

                                                                           Years
--------------------------------------------------------------------------------
Engineering and manufacturing equipment                                      3-7
Office furniture and equipment                                               3-7
Leasehold improvements                                                      3-15
Goodwill                                                                       7
Acquired software                                                              4

The Company reviews its long-lived assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets with
estimated future cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future
cash flows be less than the carrying value, the Company would recognize an
impairment loss. An impairment loss would be measured by comparing the amount by
which the carrying value exceeds the fair value o the long-lived assets. During
1997, management determined the goodwill and software related to the Payne
acquisition were impaired (see Note 3).

PRODUCT WARRANTIES: The Company sells its systems with a limited warranty, with
an option to purchase extended warranties. The Company provides for estimated
warranty costs at the time of sale and for other costs associated with specific
items at the time their existence and amount are determinable.

INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than no that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.


                                      F-9

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

401(k) PLAN: The Company has a 401(k) plan covering substantially all employees.
The Company may make annual contributions to the plan at the discretion of the
Board of Directors. Company contributions for the years ended September 30, 1998
and 1997, were $-0- and $25,000, respectively.

NET LOSS PER SHARE: The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), EARNINGS PER SHARE, which supersedes APB
Opinion No. 15. SFAS No. 128 requires the presentation of earnings per share by
all entities that have common stock or potential common stock, such as options,
warrants, and convertible securities, outstanding that trade in a public market.
Those entities that have only common stock outstanding are required to present
basic earnings per share amounts. Basic per share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. All other entities are required to present basic and
diluted per share amounts. Diluted per share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless the
effect is antidilutive, thereby reducing a loss or increasing the income per
common share. The Company initially applied Statement No. 128 for the year ended
September 30, 1998, and, as required by the statement, has restated the per
share information for the prior year to conform to the statement. As described
in Note 12, at September 30, 1998 and 1997, the Company had options and warrants
outstanding to purchase a total of 751,820 and 592,670 shares of common stock,
respectively, at a weighted-average exercise price of approximately $5.31 and
$5.86, respectively. However, because the Company has incurred a loss in all
periods presented, the inclusion of those potential common shares in the
calculation of diluted loss per share would have an antidilutive effect.
Therefore, basic and diluted loss per share amounts are the same in each period
presented.

ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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. Significant estimates made by management include the remaining
value of the Payne acquisition (see Note 3), the allowance for doubtful accounts
and sales returns, valuation allowance on deferred tax assets, and the inventory
obsolescence reserve. Actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS: As of October 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components. Statement No. 130
requires unrealized gains or losses on available-for-sale securities and certain
other items, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. The Company has no
comprehensive income as defined by SFAS No. 130.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This
statement requires public enterprises to report selected information about
operating segments in annual and interim reports issued to shareholders. It is
effective for financial statements for fiscal years beginning after December 15,
1997, but it is not required to be applied to interim financial statements in
the initial year of its application. The statement will have no effect on the
Company's basic financial statements, but management is reviewing if additional
disclosures will be required.


                                      F-10

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2. CORPORATE LIQUIDITY

During fiscal years 1998 and 1997, the Company incurred losses of approximately
$4.2 million and $2.4 million, respectively. During fiscal 1998, working capital
fell from approximately $4.8 million at September 30, 1997, to a working capital
deficit of $1.0 million. Without the discontinuance of certain business
operations, further reductions in operating costs and/or additional financing,
the Company may not be able to fund future operations. These circumstances raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not reflect any adjustments that might result from
the outcome of this uncertainty.

The Company's plans in fiscal 1999 include an increased emphasis on promoting
its core onboard computing products. As a result, the Company is planning on
selling, divesting, or finding partners for certain product lines that have not
proven to be essential to its core business. Management does not expect any
material loss to result from the disposition of these product lines. The Company
intends to invest the resulting proceeds into the further development of its
onboard computing platform. Management believes that the disposition of these
noncomplementary and underperforming product lines and significant operational
cost-reduction efforts will provide positive cash flow from operations. Also,
additional cost reductions will be initiated during fiscal 1999 if working
capital requirements exceed available borrowings under the current financing
agreements. However, there can be no assurance that the current financing
arrangements will be sufficient or that additional financing, if needed, can be
obtained on terms acceptable to the Company.


NOTE 3. WRITE-DOWN OF GOODWILL AND ACQUIRED SOFTWARE

During the fourth quarter of fiscal 1997, the Company completed an evaluation of
the recoverability of assets (primarily purchased software and goodwill)
acquired from Payne & Associates (Payne) in August 1996. Certain events occurred
during fiscal 1997 which caused the full recoverability of those assets to be
brought into question. The largest customer of Payne was unexpectedly acquired
by another company, resulting in the loss of this customer's business, and a
corresponding decrease in the revenue stream upon which the software and
goodwill values were based. The loss of this customer also has required the
Company to substantially modify the acquired software before it can be sold to
others.

As a result of these events which occurred after the acquisition, it became
clear that the investment in Payne had become severely impaired. Management has
determined the value of the remaining product of Payne's being sold by the
Company to be approximately $200,000. Accordingly, the goodwill and acquired
software relating to the Payne acquisition were written down to this estimated
value, resulting in a fourth quarter 1997 charge of approximately $1.8 million.


NOTE 4. ACQUISITION OF KEY LOGISTICS, INC.

On October 28, 1996, the Company acquired certain assets of Key Logistics, Inc.
(Key). The acquisition has been accounted for as a purchase. The Company issued
41,558 shares of common stock with a fair value of $400,000. The assets acquired
consisted solely of software with an estimated value of $200,000. The remaining
unallocated purchase price of $200,000 was allocated to goodwill. An additional
10,390 shares of company common stock was issued during fiscal 1998 as certain
financial goals related to Key were achieved. Accordingly, the fair value of the
shares issued of approximately $40,300 was recognized as compensation expense in
fiscal 1998.


                                      F-11

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5. INVESTMENT IN DEBT SECURITIES

The following is a summary of the Company's investment in available-for-sale
securities as of September 30, 1997:

Commercial paper                                                   $   1,394,869
Corporate bonds                                                          149,996
Government bonds                                                       1,010,461
U.S. Treasury notes                                                      498,750
                                                                  --------------
                                                                   $   3,054,076
                                                                  ==============

The cost of available-for-sale securities approximated fair value. The Company
realized no gains or losses on available-for-sale securities during the years
ended September 30, 1998 and 1997.


NOTE 6. INVENTORIES

Inventories consisted of the following:

                                                            September 30
                                                   -----------------------------
                                                       1998              1997
--------------------------------------------------------------------------------
Raw materials and subassemblies                    $    369,511     $   339,000
Finished goods                                          203,500         149,619
Obsolescence reserve                                    (99,000)        (53,783)
                                                   -----------------------------
                                                   $    474,011     $   434,836
                                                   =============================


NOTE 7. NOTES RECEIVABLE

                                                            September 30
                                                   -----------------------------
                                                       1998           1997
--------------------------------------------------------------------------------
Note receivable, customer, due in monthly
   installments of $2,082, including
   interest at 9.5%, through March 2001,
   secured by equipment                            $    55,397      $       --
Note receivable, customer, due in monthly
   installments of $1,626, including
   interest at 6.5%, through January 2001,
   secured by equipment                                 43,535              --
                                                   -----------------------------
                                                        98,932              --

Less current maturities                                 44,496              --
                                                   -----------------------------
                                                   $    54,436      $       --
                                                   =============================


                                      F-12

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8. LINE OF CREDIT

The Company has a credit line agreement with a financial institution consisting
of a $2,000,000 line of credit. Advances under the line of credit accrue
interest at prime rate (8.25 percent at September 30, 1998) plus 2.0 percent and
are due on demand. The line is subject to borrowing base requirements and is
secured by substantially all the assets of the Company. The agreement expires
October 31, 1999. The agreement requires the Company to maintain certain
financial requirements, including a minimum net worth level, of which the 
Company was in violation. To cure this violation, the bank amended the agreement
on January 8, 1999. The amended agreement requires the Company to maintain a
minimum net worth level which varies during the term of the agreement. During
fiscal 1999, the most restrictive of the net worth requirement occurs on
September 30, 1999, when the Company must maintain a net worth of not less than
$2,475,000.


NOTE 9. LONG-TERM DEBT

Long-term debt consisted of the following:


                                                           September 30
                                                  ------------------------------
                                                      1998              1997
--------------------------------------------------------------------------------
Note payable, noninterest-bearing, discounted
   at 9%, due December 1999, unsecured            $    169,657      $    156,256
Note payable, due in monthly installments of
   $28,840 including interest at 10% through
   July 2000, secured by equipment and
   leasehold improvements                              601,368                --
                                                  ------------------------------
                                                       771,025           156,256

Less current maturities                                309,534                --
                                                  ------------------------------
                                                  $    461,491      $    156,256
                                                  ==============================


NOTE 10. INCOME TAXES

The tax effects of the Company's deferred tax assets and liabilities are as
follows:

                                                             September 30
                                                   -----------------------------
                                                        1998             1997
--------------------------------------------------------------------------------
Goodwill and acquired software amortization        $      862,000   $   862,000
Inventory and warranty reserve                            223,000       206,000
Accrued expenses and deferred revenue                     425,000       274,000
Federal and state net operating loss carryforwards      2,589,000       506,000
                                                   -----------------------------
Gross deferred tax assets                               4,099,000     1,848,000

Valuation allowance on deferred tax assets             (2,900,000)     (700,000)
                                                   -----------------------------
Net deferred tax assets                                 1,199,000     1,148,000
                                                   -----------------------------

Software development costs                             (1,071,000)     (464,000)
Depreciation                                             (128,000)     (104,000)
                                                   -----------------------------
Gross deferred tax liabilities                         (1,199,000)     (568,000)
                                                   -----------------------------
Net deferred tax asset                             $          --    $   580,000
                                                   =============================


                                      F-13

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10. INCOME TAXES (CONTINUED)

The Company's deferred tax assets and liabilities are shown in the accompanying
balance sheets as follows:

                                                           September 30
                                                  ------------------------------
                                                      1998              1997
--------------------------------------------------------------------------------
Current deferred tax assets                       $        --      $  1,040,000
Long-term deferred tax liabilities                         --          (460,000)
                                                  ------------------------------
                                                  $        --      $    580,000
                                                  ==============================

The Company's income tax expense (benefit) differed from the statutory federal
rate as follows:

                                                            September 30
                                                   -----------------------------
                                                        1998            1997
--------------------------------------------------------------------------------
Statutory rate applied to income before tax        $ (1,287,000)   $ (1,026,000)
State income tax (benefit), net of federal tax
    effect                                              (67,000)        (20,000)
Effect of net operating loss carryforwards with
    no current benefit                                1,335,000         553,000
Change in valuation allowance                           580,000              --
Other                                                    12,000         (17,000)
                                                   -----------------------------
                                                   $    573,000    $   (510,000)
                                                   =============================

Currently refundable                               $     (7,000)   $         --
Deferred                                                580,000        (510,000)
                                                   -----------------------------
                                                   $    573,000    $   (510,000)
                                                   =============================

At September 30, 1998, the Company has federal net operating losses of
approximately $6,017,000 expiring as follows: $221,000 in 2009, $1,255,000 in
2012, and $4,541,000 in 2018.

The Company has recorded the valuation allowance on its deferred tax assets to
reduce the total to an amount that management believes is more likely than not
to be realized. Realization of deferred tax assets is dependent upon sufficient
future taxable income during periods when deductible temporary differences and
carryforwards are expected to be available to reduce taxable income. The
increase in the valuation allowance during 1998 and 1997 was primarily the
result of the net operating loss (NOL) carryforward which was generated during
those years. The 1998 increase was also affected as a result of a change in the
conclusion regarding the need for a valuation allowance relative to $580,000 of
deferred tax assets.


NOTE 11. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES: The Company leases its office, warehouse, and certain office
equipment under noncancelable operating leases. The facility lease requires that
the Company pay a portion of the real estate taxes, maintenance, utilities, and
insurance.


                                      F-14

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Approximate future minimum rental commitments excluding common area costs under
these noncancelable operating leases are:

Years ending September 30:
   1999                                                           $     262,000
   2000                                                                 272,000
   2001                                                                 218,000
   2002                                                                 222,000
   2003                                                                 209,000
   Thereafter                                                           196,000
                                                                  --------------
                                                                  $   1,379,000
                                                                  ==============

Rental expense, including common area costs, was approximately $232,000 and
$173,000 for the years ended September 30, 1998 and 1997, respectively.


NOTE 12. STOCK OPTIONS AND WARRANTS

STOCK OPTION PLAN: The Company has a 1991 Long-Term Incentive and Stock Option
Plan (Plan). The Plan permits the granting of "incentive stock options" meeting
the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended, and nonqualified options which do not meet the requirements of Section
422. Stock appreciation rights and restricted stock awards may also be granted
under the Plan. A total of 875,000 shares of the Company's common stock has been
reserved for issuance pursuant to options granted or shares awarded under the
Plan. Generally, the options that have been granted under the Plan are
exercisable for a period of five years from the date of grant and vest over a
period of up to three years from the date of grant. All stock options have been
granted at fair market value, and accordingly, no compensation expense has been
recorded for all periods presented.

Grants under the Plan are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under the Plan. Had compensation cost for the plan been determined based
on the fair values of options granted (the method described in FASB Statement
No. 123), reported net loss and basic and diluted net loss per common share on a
pro forma basis as compared to reported results would have been as follows:

                                                       1998             1997
--------------------------------------------------------------------------------
Net loss:
   As reported                                   $  (4,249,025)   $  (2,421,079)
   Pro forma                                        (4,562,325)      (2,618,800)
Basic and diluted net loss per common share:
   As reported                                           (0.97)           (0.55)
   Pro forma                                             (1.04)           (0.59)


                                      F-15

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12. STOCK OPTIONS AND WARRANTS (CONTINUED)

For purposes of the aforementioned pro forma information, the fair value of each
option is estimated at the grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions for grants in 1998 and
1997, respectively: dividend rate of zero for both years; price volatility of
127.0 and 64.0 percent; risk-free interest rate of 6.1 and 6.2 percent; and
expected lives of approximately four years in both periods. The weighted-average
fair value per option, of options granted in 1998 and 1997, was $3.49 and $2.59,
respectively.

COMMON STOCK WARRANTS: The Company has, on occasion, issued warrants for the
purchase of Company stock to consultants and placement agents. Compensation
expense associated with the warrants issued to consultants has not been
material. At September 30, 1998, warrants were outstanding to purchase a total
of 59,334 shares of company stock at a weighted-average exercise price of $7.43
per share, with a weighted-average remaining life of approximately 1.9 years.

Additional information relating to all outstanding options as of September 30,
1998 and 1997, is as follows:

<TABLE>
<CAPTION>
                                                   1998                       1997
                                        -------------------------   ------------------------
                                                       Weighted-                  Weighted-
                                                        Average                   Average
                                                       Exercise                   Exercise
                                           Shares        Price         Shares       Price
--------------------------------------------------------------------------------------------
<S>                                        <C>        <C>             <C>         <C>      
Options outstanding at beginning of
  year                                     530,736    $    5.85       447,183     $    5.90
  Options granted                          206,750         4.26        96,000          5.46
  Options exercised                         (5,780)        3.12        (5,780)         2.90
  Options canceled                         (39,220)        4.87        (6,667)         7.26
                                        ----------------------------------------------------
Options outstanding at end of year         692,486    $    5.31       530,736     $    5.85
                                        ====================================================
</TABLE>

The following table further summarizes information about stock options
outstanding at September 30, 1998:

<TABLE>
<CAPTION>
                                                      Options Outstanding                Options Exercisable
                                                 -----------------------------      ----------------------------
                                                   Weighted-
                                   Number           Average          Weighted-         Number          Weighted-
                               Outstanding at      Remaining         Average        Exercisable at      Average
                                September 30,     Contractual        Exercise       September 30,      Exercise
Range of Exercise Price             1998         Life (Years)         Price             1998             Price
----------------------------------------------------------------------------------------------------------------
<S>                               <C>                <C>           <C>                 <C>             <C>     
$2.12 - $5.00                     369,267            2.8           $   3.44            212,737         $   3.43
$5.01 - $9.50                     323,219            4.1               7.44            214,549             7.19
                             -----------------------------------------------------------------------------------
$2.12 - $9.50                     692,486            3.4           $   5.31            427,286         $   5.32
                             ===================================================================================
</TABLE>


                                      F-16

<PAGE>


XATA CORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13. PREFERRED STOCK

The Company is authorized to issue 333,333 shares of preferred stock. The Board
of Directors is empowered to determine the rights, preferences, privileges, and
restrictions, including dividend rights and rates, liquidation preferences,
conversion or exchange rights, and redemption or sinking fund provisions of the
Company's preferred stock prior to issuance. The issuance of preferred stock
may, in some circumstances, deter or discourage takeover attempts or other
changes in the control of the Company.

As of September 30, 1998, no shares of preferred stock have been issued.


NOTE 14. MAJOR CUSTOMERS

Net sales include sales to major customers as follows:

                                                       Years Ended September 30
                                                     ---------------------------
                                                         1998           1997
--------------------------------------------------------------------------------
Revenue percentage:
   Customer A                                                17%             *
   Customer B                                                16%            15%
   Customer C                                                 *             14%
Ending receivable balance:
   Customer A                                        $   907,000     $       --
   Customer B                                            230,000        417,000
   Customer C                                                 --         76,000


*Net sales were less than 10 percent of total net sales.


                                      F-17



<PAGE>


ITEM 8.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND 
-------  -------------------------------------------------------------- 
         FINANCIAL DISCLOSURE
         --------------------

         None



                                       24
<PAGE>



                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
-------  --------------------------------------------------------------
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT      
         -------------------------------------------------      
         

         Information called for by this Item is set forth under the captions
"Election of Directors," and "Management" (and the subcaption "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" thereunder) in the
Company's definitive proxy statement to be filed pursuant to Regulation 14A,
which information is hereby incorporated by reference and made a part hereof.

ITEM 10.  EXECUTIVE COMPENSATION
--------  ----------------------

         Information called for by this Item is set forth under the captions
"Management" (and the subcaptions "Director Compensation" and ""Executive
Compensation" thereunder) in the Company's definitive proxy statement to be
filed pursuant to Regulation 14A, which information is hereby incorporated by
reference and made a part hereof.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------  --------------------------------------------------------------

         Information called for by this Item is set forth under the caption
"Principal Shareholders and Ownership of Management" in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A, which information is
hereby incorporated by reference and made a part hereof.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------  ----------------------------------------------

         None


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K
--------  --------------------------------

REPORTS ON FORM 8-K

                  No reports on Form 8-K were filed by the Company during the
last quarter of the fiscal year ended September 30, 1998.

EXHIBITS




                                       25
<PAGE>


<TABLE>
<CAPTION>

EXHIBIT
 NO.              DESCRIPTION OF EXHIBIT
----------------------------------------
<S>                        <C>
          3.1              Restated Articles of Incorporation, as amended (1)
          3.2              Bylaws (1)
          4.1              Form of certificate representing the Common Stock (1)
          5.1              Opinion and Consent of Counsel to the Company (1)
         10.1              Lease (for Office and Manufacturing Facilities), dated September 11, 1986,
                           Letter Agreement and Amendment No. 1 to lease dated July 10, 1992, and
                           Amendment No. 2 to Lease (1)
         10.2              Agreements with Dennis R. Johnson regarding employment (1)
         10.3              Agreements with William P. Flies regarding employment (1)
         10.4              1991  Long-Term  Incentive  and Stock Option Plan, as amended by the Board of Directors
                           in May 1997 subject to ratification by the shareholders
         10.5              Purchase Agreement with Ryder Dedicated Logistics, Inc. dated December 31,
                           1994, with supplemental agreement dated September 1, 1995 (2)
         10.7              Lease dated December 26, 1996 with Hoyt Properties, Inc. for new corporate headquarters. (3)
         10.8              Letter of Agreement with William Callahan regarding compensation (4)
         10.9              Credit Agreement with Norwest Business Credit, Inc., dated October 23, 1998 and Amendments dated
                           November  30, 1998 and January 8, 1999.
         10.10             Master Security Agreement and Promissory Note with GE Capital Corporation  Commercial Asset Funding,  
                           dated August 6, 1998.
         13                1998 Definitive Proxy Materials (portions of which are incorporated herein
                           by reference).(5)
         21                Subsidiaries of the Company
         23                Consent of McGladrey & Pullen, LLP, independent certified public accountants
         27                Financial Data Schedule

</TABLE>

--------------------

(1)      Incorporated by reference to exhibit filed as a part of Registration
         Statement on Form S-2 (Commission File No. 33-98932).

(2)      Incorporated by reference to exhibit filed as a part of Report on Form
         10-QSB for the fiscal quarter ended March 31, 1995. Certain segments
         have been granted confidential treatment.

(3)      Incorporated by reference to exhibit filed as a part of Report on Form
         10-QSB for the fiscal quarter ended March 31, 1997.

(4)      Incorporated by reference to exhibit filed as part of Report on Form
         10-KSB for fiscal year ended September 30, 1997.

(5)      To be filed in definitive form not later than January 28, 1998.





                                       26
<PAGE>


                                   SIGNATURES


         In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                XATA CORPORATION

Dated:  January 13, 1999       By:   /s/ Dennis R. Johnson
                                      ------------------------------------------
                                      Dennis R. Johnson, Chief Executive Officer
                                      (Principal executive officer)



         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.

<TABLE>
<S>                                 <C>
Dated:  January 13, 1999           By:           /s/      Dennis R. Johnson
                                          --------------------------------------------------------
                                          Dennis R. Johnson, Director, Chief Executive Officer and
                                          President (Principal executive officer)

Dated:  January 13, 1999           By:           /s/      Gary C. Thomas
                                          --------------------------------------------------------
                                          Gary C. Thomas, Chief Financial Officer and Treasurer
                                          (Principal  accounting and financial officer)

Dated:  January 13, 1999           By:           /s/      William P. Flies
                                          --------------------------------------------------------
                                          William P. Flies, Director, Chief Technical Officer and
                                          Secretary

Dated:  January 13, 1999           By:           /s/      Stephen A. Lawrence
                                          --------------------------------------------------------
                                          Stephen A. Lawrence, Director

Dated:  January 13, 1999           By:           /s/      Roger W. Kleppe
                                          --------------------------------------------------------
                                          Roger W. Kleppe, Director

Dated:  January 13, 1999           By:           /s/      Carl M. Fredericks
                                          --------------------------------------------------------
                                          Carl M. Fredericks, Director
</TABLE>

<PAGE>


                                INDEX TO EXHIBITS


INDEX
NUMBER   DESCRIPTION
--------------------------------------------------------------------------------

10.9     Credit Agreement with Norwest Business Credit, Inc.

10.10    Master Security Agreement and Promissory Note with GE Capital
         Corporation Commercial Asset Funding, dated August 6, 1998.
21       Subsidiaries of the Company

23       Consent of McGladrey & Pullen, LLP, independent public accountants

27       Financial Data Schedule