**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **ý**                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                                                   |       |                                                                                                      |
| **For  the quarterly period ended June 30, 2005** |
|                                                   |       |                                                                                                      |
| **OR**                                                 |
|                                                   |       |                                                                                                      |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom            to            **

 

**Commissionfile number 000-31511**

 

**@ROAD,INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**47071Bayside Parkway**

**Fremont,CA 94538**

(Address ofprincipal executive offices, including zip code)

 

**510-668-1638**

(Registrant’s telephonenumber, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

 

**Yes   ****ý     No**     o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

**Yes   ****ý     No**     o

 

As of August 1, 2005there were 60,740,400 shares of the registrant’s Common Stock outstanding.

 

 

----

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                    | 2  |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
|              | Item 1. Financial  Statements.                                                                                                                          | 2  |
|              | Condensed Consolidated  Balance Sheets as of June 30, 2005 and December 31, 2004.                                                                  | 2  |
|              | Condensed  Consolidated Statements of Operations for the three and six months ended June 30,  2005 and 2004.                                            | 3  |
|              | Condensed  Consolidated Statements of Stockholders’ Equity for the six months ended June 30,  2005, December 31, 2004 and June 30, 2004. | 4  |
|              | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2005 and 2004.                                                      | 5  |
|              | Notes  to Condensed Consolidated Financial Statements.                                                                                                       | 6  |
|              | Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations.                                                   | 18 |
|              | Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                                                                                    | 33 |
|              | Item 4.  Controls and Procedures.                                                                                                                       | 34 |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                        | 34 |
|              | Item 1. Legal  Proceedings.                                                                                                                             | 34 |
|              | Item 4.  Submission of Matters to a Vote of Security Holders.                                                                                                | 34 |
|              | Item 6. Exhibits.                                                                                                                                       | 35 |

 

1

----

 

** PART I. FINANCIAL INFORMATION**

 

** Item 1. Financial Statements.**

 

**@Road, Inc.**

**CondensedConsolidated Balance Sheets**

**(Inthousands, except per share data) (unaudited)**

 
| ** **                                                                                                                                                                                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  assets:                                                                                                                                                                                                |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                                                      |       | $                       | 44,874     |                        | $          | 14,494 |   |
| Short-term  investments                                                                                                                                                                                         |       | 63,309                  |       | 103,222                     |       |
| Accounts  receivable, net                                                                                                                                                                                       |       | 7,558                   |       | 7,960                       |       |
| Inventories                                                                                                                                                                                                     |       | 7,237                   |       | 3,593                       |       |
| Deferred  product costs                                                                                                                                                                                         |       | 15,948                  |       | 11,104                      |       |
| Prepaid  expenses and other                                                                                                                                                                                     |       | 2,142                   |       | 1,542                       |       |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Total  current assets                                                                                                                                                                                           |       | 141,068                 |       | 141,915                     |       |
| Property  and equipment, net                                                                                                                                                                                    |       | 5,165                   |       | 3,668                       |       |
| Deferred  product costs                                                                                                                                                                                         |       | 7,311                   |       | 5,947                       |       |
| Deferred  tax assets                                                                                                                                                                                            |       | 88                      |       | —                      |       |
| Goodwill                                                                                                                                                                                                        |       | 21,055                  |       | —                      |       |
| Intangible  assets, net                                                                                                                                                                                         |       | 31,623                  |       | —                      |       |
| Other  assets                                                                                                                                                                                                   |       | 238                     |       | 680                         |       |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Total  assets                                                                                                                                                                                                   |       | $                       | 206,548    |                        | $          | 152,210 |   |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| **LIABILITIES,  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                           |       |                    |       |                        |       |
| Accounts  payable                                                                                                                                                                                               |       | $                       | 12,313     |                        | $          | 5,666 |   |
| Accrued  liabilities                                                                                                                                                                                            |       | 7,282                   |       | 5,529                       |       |
| Deferred  revenue and customer deposits                                                                                                                                                                         |       | 13,308                  |       | 11,347                      |       |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Total  current liabilities                                                                                                                                                                                      |       | 32,903                  |       | 22,542                      |       |
| Deferred  revenue                                                                                                                                                                                               |       | 9,454                   |       | 4,830                       |       |
| Other  long-term liabilities                                                                                                                                                                                    |       | 473                     |       | 2                           |       |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Total  liabilities                                                                                                                                                                                              |       | 42,830                  |       | 27,374                      |       |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Commitments  and contingencies (Note 10)                                                                                                                                                                        |       |                    |       |                        |       |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Preferred  stock, $0.0001 par value, 10,000 shares authorized, 98 shares designated as  redeemable preferred stock, shares issued and outstanding: 78 at June 30,  2005 and none at December 31, 2004 |       | 7,929                   |       | —                      |       |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                     |       |                    |       |                        |       |
| Common  stock, $0.0001 par value, 250,000 shares authorized, shares issued and  outstanding: 60,696 at June 30, 2005 and 54,805 at December 31,  2004                                                 |       | 271,194                 |       | 232,016                     |       |
| Notes  receivable from stockholders                                                                                                                                                                             |       | (8                      | )          | —                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                                           |       | (81                     | )          | (179                        | )          |
| Accumulated  deficit                                                                                                                                                                                            |       | (115,316                | )          | (107,001                    | )          |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Total  stockholders’ equity                                                                                                                                                                                |       | 155,789                 |       | 124,836                     |       |
|                                                                                                                                                                                                            |       |                    |       |                        |       |
| Total  liabilities, redeemable preferred stock and stockholders’ equity                                                                                                                                    |       | $                       | 206,548    |                        | $          | 152,210 |   |

 

See notes tocondensed consolidated financial statements.

 

2

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Operations**

**(Inthousands, except per share data) (unaudited)**

 
| ** **                                                                    | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                               | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                     |       |                                   |       |                                |       |   |   |   |   |
| Hosted                                                                        |       | $                                      | 19,685     |                                | $          | 18,331 |   | $ | 39,175 |   | $ | 36,223 |   |
| Licensed                                                                      |       | 941                                    |       | —                              |       | 1,443 |   | — |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Total  revenues                                                               |       | 20,626                                 |       | 18,331                              |       | 40,618 |   | 36,223 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Costs  and expenses:                                                          |       |                                   |       |                                |       |   |   |   |   |
| Cost  of hosted revenue (excluding intangibles amortization included below)   |       | 9,227                                  |       | 8,669                               |       | 18,751 |   | 17,037 |   |
| Cost  of licensed revenue (excluding intangibles amortization included below) |       | 1,473                                  |       | —                              |       | 2,173 |   | — |   |
| Intangibles  amortization                                                     |       | 1,010                                  |       | 11                                  |       | 1,467 |   | 21 |   |
| In-process  research and development                                          |       | —                                 |       | —                              |       | 5,640 |   | — |   |
| Sales  and marketing                                                          |       | 5,832                                  |       | 3,082                               |       | 10,479 |   | 6,193 |   |
| Research  and development                                                     |       | 3,849                                  |       | 1,431                               |       | 6,424 |   | 2,798 |   |
| General  and administrative                                                   |       | 3,942                                  |       | 2,371                               |       | 8,389 |   | 4,553 |   |
| Terminated  acquisition costs                                                 |       | —                                 |       | 2,017                               |       | — |   | 2,017 |   |
| Stock  compensation (*)                                                       |       | —                                 |       | —                              |       | — |   | 4 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Total  costs and expenses                                                     |       | 25,333                                 |       | 17,581                              |       | 53,323 |   | 32,623 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| (Loss)  income from operations                                           |       | (4,707                                 | )          | 750                                 |       | (12,705 | ) | 3,600 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Other  income, net:                                                           |       |                                   |       |                                |       |   |   |   |   |
| Interest  income, net                                                         |       | 729                                    |       | 329                                 |       | 1,347 |   | 583 |   |
| Other  expense, net                                                           |       | (154                                   | )          | (13                                 | )          | (152 | ) | (7 | ) |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Total  other income, net                                                      |       | 575                                    |       | 316                                 |       | 1,195 |   | 576 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Net  (loss) income before tax                                                 |       | (4,132                                 | )          | 1,066                               |       | (11,510 | ) | 4,176 |   |
| Benefit  from income taxes                                                    |       | 3,195                                  |       | —                              |       | 3,195 |   | — |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Net  (loss) income                                                            |       | (937                                   | )          | 1,066                               |       | (8,315 | ) | 4,176 |   |
| Preferred  stock dividends                                                    |       | (124                                   | )          | —                              |       | (181 | ) | — |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Net  (loss) income attributable to common stockholders                        |       | $                                      | (1,061     | )                                   | $          | 1,066 |   | $ | (8,496 | ) | $ | 4,176 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Net  (loss) income per share:                                            |       |                                   |       |                                |       |   |   |   |   |
| Basic                                                                         |       | $                                      | (0.02      | )                                   | $          | 0.02 |   | $ | (0.14 | ) | $ | 0.08 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Diluted                                                                       |       | $                                      | (0.02      | )                                   | $          | 0.02 |   | $ | (0.14 | ) | $ | 0.07 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Shares  used in calculating net (loss) income per share:                 |       |                                   |       |                                |       |   |   |   |   |
| Basic                                                                         |       | 60,551                                 |       | 54,185                              |       | 58,977 |   | 53,978 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Diluted                                                                       |       | 60,551                                 |       | 57,414                              |       | 58,977 |   | 57,856 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| (*)  Stock compensation:                                                      |       |                                   |       |                                |       |   |   |   |   |
| Cost  of hosted revenue                                                       |       | $                                      | —     |                                | $          | — |   | $ | — |   | $ | — |   |
| Cost  of licensed revenue                                                     |       | —                                 |       | —                              |       | — |   | — |   |
| Sales  and marketing                                                          |       | —                                 |       | —                              |       | — |   | 1 |   |
| Research  and development                                                     |       | —                                 |       | —                              |       | — |   | 1 |   |
| General  and administrative                                                   |       | —                                 |       | —                              |       | — |   | 2 |   |
|                                                                          |       |                                   |       |                                |       |   |   |   |   |
| Total                                                                         |       | $                                      | —     |                                | $          | — |   | $ | — |   | $ | 4 |   |

 

See notes tocondensed consolidated financial statements.

 

3

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Stockholders’ Equity**

**Forthe Six Months Ended June 30, 2005 and 2004**

**andthe Six Months Ended December 31, 2004**

**(Inthousands) (unaudited)**

 
| ** **                                                              | ** ** | **Common  Stock** | ** ** | **Deferred  Stock** | ** ** | **Notes  Receivable  From** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Total  Comprehensive** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|-----------------------------|------------|---------------------------------------|------------|-----------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                                              | ** ** | **Shares**        | ** ** | **Amount**          | ** ** | **Compensation**            | ** ** | **Stockholders**                      | ** ** | **Loss**        | ** ** | **Deficit**            | ** ** | **Equity**               | ** ** | **Income  (Loss)** | ** ** |
| BALANCES,  January 1, 2004                                         |       | 53,700            |       | $                   | 228,441    |                        | $          | (4                                    | )          | $               | (87        | )                      | $          | —                   |       | $ | (116,222 | ) | $ | 112,128 |   |   |   |
| Net  income                                                             |       |              |       |                |       |                        |       |                                  |       |            |       | 4,176                  |       | 4,176                    |       | $ | 4,176 |   |
| Unrealized  (loss) on short-term investments                            |       |              |       |                |       |                        |       |                                  |       | (188            | )          |                   |       | (188                     | )          | (188 | ) |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Comprehensive  income                                                   |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       | $ | 3,988 |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Shares  issued under employee stock purchase plan                       |       | 243               |       | 1,129               |       |                        |       |                                  |       |            |       |                   |       | 1,129                    |       |   |   |
| Exercise  of stock options                                              |       | 473               |       | 1,202               |       |                        |       |                                  |       |            |       |                   |       | 1,202                    |       |   |   |
| Collection  of notes receivable from stockholders                       |       |              |       |                |       |                        |       | 50                                    |       |            |       |                   |       | 50                       |       |   |   |
| Amortization  of deferred stock compensation                            |       |              |       |                |       | 4                           |       |                                  |       |            |       |                   |       | 4                        |       |   |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| BALANCES,  June 30, 2004                                           |       | 54,416            |       | 230,772             |       | —                      |       | (37                                   | )          | (188            | )          | (112,046               | )          | 118,501                  |       |   |   |
| Net income                                                         |       |              |       |                |       |                        |       |                                  |       |            |       | 5,045                  |       | 5,045                    |       | $ | 5,045 |   |
| Unrealized  gain on short-term investments                              |       |              |       |                |       |                        |       |                                  |       | 9               |       |                   |       | 9                        |       | 9 |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       | $ | 5,054 |   |
| Comprehensive  income                                                   |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Shares  issued under employee stock purchase plan                       |       | 221               |       | 1,006               |       |                        |       |                                  |       |            |       |                   |       | 1,006                    |       |   |   |
| Exercise  of stock options                                              |       | 168               |       | 238                 |       |                        |       |                                  |       |            |       |                   |       | 238                      |       |   |   |
| Collection  of notes receivable from stockholders                       |       |              |       |                |       |                        |       | 37                                    |       |            |       |                   |       | 37                       |       |   |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| BALANCES,  December 31, 2004                                       |       | 54,805            |       | 232,016             |       | —                      |       | —                                |       | (179            | )          | (107,001               | )          | 124,836                  |       |   |   |
| Net  loss                                                               |       |              |       |                |       |                        |       |                                  |       |            |       | (8,315                 | )          | (8,315                   | )          | $ | (8,315 | ) |
| Unrealized  gain on short-term investments                              |       |              |       |                |       |                        |       |                                  |       | 98              |       |                   |       | 98                       |       | 98 |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Comprehensive  loss                                                     |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       | $ | (8,217 | ) |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| Shares  issued upon acquisition of Vidus, net of issuance costs of $478 |       | 5,454             |       | 37,699              |       |                        |       |                                  |       |            |       |                   |       | 37,699                   |       |   |   |
| Options  issued upon acquisition of Vidus                               |       |              |       | 531                 |       |                        |       |                                  |       |            |       |                   |       | 531                      |       |   |   |
| Shares  issued under employee stock purchase plan                       |       | 295               |       | 849                 |       |                        |       |                                  |       |            |       |                   |       | 849                      |       |   |   |
| Exercise  of stock options                                              |       | 142               |       | 280                 |       |                        |       |                                  |       |            |       |                   |       | 280                      |       |   |   |
| Issuance  of notes receivable to stockholder                            |       |              |       |                |       |                        |       | (11                                   | )          |            |       |                   |       | (11                      | )          |   |   |
| Collection  of notes receivable from stockholder                        |       |              |       |                |       |                        |       | 3                                     |       |            |       |                   |       | 3                        |       |   |   |
| Dividends  on redeemable preferred stock                                |       |              |       | (181                | )          |                        |       |                                  |       |            |       |                   |       | (181                     | )          |   |   |
|                                                                    |       |              |       |                |       |                        |       |                                  |       |            |       |                   |       |                     |       |   |   |
| BALANCES,  June 30, 2005                                           |       | 60,696            |       | $                   | 271,194    |                        | $          | —                                |       | $               | (8         | )                      | $          | (81                      | )          | $ | (115,316 | ) | $ | 155,789 |   |   |   |

 

See notes tocondensed consolidated financial statements.

 

4

----

 

**@Road, Inc.**

**CondensedConsolidated Statements of Cash Flows**

**(Inthousands) (unaudited)**

 
| ** **                                                                                                | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Cash  flows from operating activities:                                                                    |       |                                 |       |   |   |
| Net  (loss) income                                                                                        |       | $                                    | (8,315     | ) | $ | 4,176 |   |
| Adjustments  to reconcile net (loss) income to net cash (used in) provided by  operating activities: |       |                                 |       |   |   |
| In-process  research and development                                                                      |       | 5,640                                |       | — |   |
| Deferred  income taxes                                                                                    |       | (3,195                               | )          | — |   |
| Depreciation  and amortization                                                                            |       | 2,615                                |       | 617 |   |
| Write-off  of deferred acquisition costs                                                                  |       | —                               |       | 1,095 |   |
| Loss  on disposal of property and equipment                                                               |       | 48                                   |       | — |   |
| Amortization  of deferred stock compensation                                                              |       | —                               |       | 4 |   |
| Provision  (reversal) for inventory reserves                                                              |       | 138                                  |       | (48 | ) |
| (Reversal)  for doubtful accounts and sales returns                                                       |       | (46                                  | )          | (413 | ) |
| Change  in assets and liabilities:                                                                        |       |                                 |       |   |   |
| Accounts  receivable                                                                                      |       | 1,746                                |       | 1,709 |   |
| Inventories                                                                                               |       | (3,782                               | )          | (775 | ) |
| Deferred  product costs                                                                                   |       | (6,208                               | )          | (237 | ) |
| Prepaid  expenses and other                                                                               |       | 254                                  |       | (178 | ) |
| Accounts  payable                                                                                         |       | 6,107                                |       | (1,564 | ) |
| Accrued  and other liabilities                                                                            |       | (1,198                               | )          | 72 |   |
| Deferred  revenue and customer deposits                                                                   |       | 2,315                                |       | 32 |   |
|                                                                                                      |       |                                 |       |   |   |
| Net  cash (used in) provided by operating activities                                                      |       | (3,881                               | )          | 4,490 |   |
|                                                                                                      |       |                                 |       |   |   |
| Cash  flows from investing activities:                                                                    |       |                                 |       |   |   |
| Purchase  of property and equipment                                                                       |       | (1,671                               | )          | (704 | ) |
| Purchase  of short-term investments                                                                       |       | (54,235                              | )          | (94,972 | ) |
| Proceeds  from the sale of short-term investments                                                         |       | 94,246                               |       | — |   |
| Acquisition  of Vidus, net of cash acquired                                                               |       | (5,211                               | )          | — |   |
|                                                                                                      |       |                                 |       |   |   |
| Net  cash provided by (used in) investing activities                                                      |       | 33,129                               |       | (95,676 | ) |
|                                                                                                      |       |                                 |       |   |   |
| Cash  flows from financing activities:                                                                    |       |                                 |       |   |   |
| Proceeds  from sale of common stock                                                                       |       | 1,129                                |       | 2,331 |   |
| Proceeds  from payments on notes receivable issued to stockholders                                        |       | 3                                    |       | 50 |   |
|                                                                                                      |       |                                 |       |   |   |
| Net  cash provided by financing activities                                                                |       | 1,132                                |       | 2,381 |   |
|                                                                                                      |       |                                 |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                                                |       | 30,380                               |       | (88,805 | ) |
| Cash  and cash equivalents:                                                                               |       |                                 |       |   |   |
| Beginning  of period                                                                                      |       | 14,494                               |       | 103,669 |   |
|                                                                                                      |       |                                 |       |   |   |
| End  of period                                                                                            |       | $                                    | 44,874     |   | $ | 14,864 |   |
|                                                                                                      |       |                                 |       |   |   |
| Supplemental  disclosure of cash flow information:                                                        |       |                                 |       |   |   |
| Issuance  of common stock, preferred stock and options in connection with the  acquisition of Vidus       |       | $                                    | 46,456     |   | $ | — |   |
|                                                                                                      |       |                                 |       |   |   |
| Dividends  on redeemable preferred stock                                                                  |       | $                                    | 181        |   | $ | — |   |
|                                                                                                      |       |                                 |       |   |   |   |   |
| Unrealized  gain (loss) on short-term investments                                                         |       | $                                    | 98         |   | $ | (188 | ) |

 

See notes tocondensed consolidated financial statements.

 

5

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**@Road, Inc.**

**NotesTo Condensed Consolidated Financial Statements**

(unaudited)

 

**Note 1—Summary of Significant Accounting Policies**

 

*Basis ofConsolidation and Presentation*

 

The accompanyingcondensed consolidated financial statements include @Road, Inc. and itswholly-owned subsidiaries (collectively, the “Company”). Intercompany accountsand transactions are eliminated upon consolidation.

 

The accompanyingcondensed consolidated financial statements were prepared by the Company,without audit, pursuant to the rules and regulations of the Securities andExchange Commission (SEC). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations, althoughthe Company believes the disclosures which are made herein are adequate to makethe information presented not misleading.

 

In the opinion ofmanagement, the financial statements include all adjustments (consisting onlyof normal recurring adjustments) necessary to fairly present the financialcondition, results of operations, and cash flows for the periods presented.Results of operations for the periods presented are not necessarily indicativeof results to be expected for any other interim period or for the full year.These condensed consolidated financial statements should be read in conjunctionwith the Company’s consolidated financial statements and notes thereto in its Form 10-Kfor the year ended December 31, 2004 (Commission File No. 000-31511),dated March 15, 2005 and filed with the SEC. The condensed consolidatedbalance sheet as of December 31, 2004 was derived from the Company’saudited consolidated financial statements.

 

*Estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses during the reporting period. On an on-going basis, the Companyevaluates its estimates, including those related to provisions for doubtfulaccounts, legal and other contingencies, income taxes, goodwill and intangibleassets. The Company bases its estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances.Actual results could differ from those estimates.

 

*CertainSignificant Risks and Uncertainties*

 

The Company participatesin a dynamic high-technology industry and believes that changes in any of thefollowing areas could have a material adverse effect on its future financialposition, results of operations or cash flows: the ability of @Road tointegrate Vidus operations successfully; the ability of @Road to transition itscustomers from CDPD wireless networks; the ability of @Road to accelerate orcontinue to grow as a result of its investment initiatives; the ability of@Road and its alliances to market, sell and support @Road products andservices; the timing of purchasing and implementation decisions by prospectsand customers; the dependence of @Road on mobile data systems technology,wireless networks, network infrastructure and positioning systems owned andcontrolled by others; advances and trends in new technologies and industrystandards; competition; changes in the overall demand for solutions offered bythe Company; market acceptance of the Company’s products and services;development of sales channels; changes in third-party manufacturers, keysuppliers, certain strategic or customer relationships; litigation or claimsagainst the Company based on intellectual property, product, regulatory orother factors; and the Company’s ability to attract and retain employeesnecessary to support its growth.

 

Motorola is the solesupplier of microcontrollers used in the Company’s products. Micronet is the solesupplier of our Internet Data Terminal. Everex is the sole supplier of our Internet Wireless Manager. TheCompany expects to rely on these suppliers as the sole source for thesecomponents and devices for the next several years.

 

*ForeignCurrency Transactions*

 

The functional currencyof the Company’s foreign subsidiaries is the U.S. dollar. Accordingly, allmonetary assets and liabilities are translated at the current exchange rate atthe end of the period, non-monetary assets and liabilities are translated athistorical rates and revenues and expenses are translated at average exchangerates in effect during the period. Transaction gains and losses have not beensignificant to date and are included in Other income, net.

 

*Stock-BasedCompensation*

 

The Company accounts forstock-based employee compensation issued under compensatory plans using theintrinsic value method, which calculates compensation expense based on thedifference, if any, on the date of the grant, between the fair value of theCompany’s stock and the option exercise price.

 

6

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Accounting principlesgenerally accepted in the United States require companies who choose to accountfor stock option grants using the intrinsic value method to also determine thefair value of option grants using an option pricing model, such as theBlack-Scholes model, and to disclose the impact of fair value accounting in anote to the financial statements.

 

In December 2002, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 148,*Accounting for Stock-Based Compensation Transition and Disclosure, an Amendmentof SFAS No. 123* (SFAS 148). The Company did not elect tovoluntarily change to the fair value based method of accounting for stock basedemployee compensation and record such amounts as charges to operating expense.The impact of recognizing the fair value of option grants and stock grantsunder the Company’s employee stock purchase plan as an expense underSFAS 148 would have substantially reduced the Company’s operating results,as follows (in thousands, except per share amounts):

 
| ** **                                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net  (loss) income as reported                                                                           |       | $                                     | (937       | )                                   | $          | 1,066 |   | $ | (8,315 | ) | $ | 4,176 |   |
| Add:  stock-based employee compensation expense included in reported net (loss)  income, net of tax effect    |       | —                                |       | —                              |       | — |   | 4 |   |
| Less:  stock-based employee compensation expense determined under fair value based method,  net of tax effect |       | (1,901                                | )          | (1,644                              | )          | (4,479 | ) | (3,987 | ) |
|                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Pro  forma net (loss) income                                                                                  |       | (2,838                                | )          | (578                                | )          | (12,794 | ) | 193 |   |
| Preferred  stock dividends                                                                                    |       | (124                                  | )          | —                              |       | (181 | ) | — |   |
|                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Pro  forma net (loss) income attributable to common stockholders                                              |       | $                                     | (2,962     | )                                   | $          | (578 | ) | $ | (12,975 | ) | $ | 193 |   |
|                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Basic  net (loss) income per share:                                                                      |       |                                  |       |                                |       |   |   |   |   |
| As  reported                                                                                                  |       | $                                     | (0.02      | )                                   | $          | 0.02 |   | $ | (0.14 | ) | $ | 0.08 |   |
|                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Pro  forma                                                                                                    |       | $                                     | (0.05      | )                                   | $          | (0.01 | ) | $ | (0.22 | ) | $ | 0.00 |   |
|                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Diluted  net (loss) income per share:                                                                    |       |                                  |       |                                |       |   |   |   |   |
| As  reported                                                                                                  |       | $                                     | (0.02      | )                                   | $          | 0.02 |   | $ | (0.14 | ) | $ | 0.07 |   |
|                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Pro  forma                                                                                                    |       | $                                     | (0.05      | )                                   | $          | (0.01 | ) | $ | (0.22 | ) | $ | 0.00 |   |

 

The weighted average fairvalue of options granted in the three months ended June 30, 2005 and 2004,were $1.29 and $6.67, respectively. The weighted average fair value of optionsgranted in the six months ended June 30, 2005 and 2004, were $2.78 and$9.31, respectively. The Company calculated the fair value of each option awardon the date of grant using the Black-Scholes option pricing model. The Company’scalculations are based on a single option valuation approach and forfeituresare recognized as they occur. The following weighted average assumptions wereused for each respective period:

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Stock Option Plans:**   |       |                                  |       |                                |       |   |   |   |   |
| Risk  free interest rate  |       | 3.66                                  | %          | 3.85                                | %          | 3.72 | % | 3.32 | % |
| Expected  volatility      |       | 78                                    | %          | 104                                 | %          | 91 | % | 105 | % |
| Expected  life (in years) |       | 2.31                                  |       | 5.00                                |       | 3.66 |   | 5.00 |   |
| Expected  dividend        |       | $                                     | 0.00       |                                | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
|                           |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Employee Stock Purchase Plan:** |       |                                  |       |                                |       |   |   |   |   |
| Risk  free interest rate          |       | 3.14                                  | %          | 1.07                                | %          | 2.60 | % | 1.04 | % |
| Expected  volatility              |       | 57                                    | %          | 66                                  | %          | 87 | % | 69 | % |
| Expected  life (in years)         |       | 0.5                                   |       | 0.5                                 |       | 0.5 |   | 0.5 |   |
| Expected  dividend                |       | $                                     | 0.00       |                                | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
|                                   |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

The Company accounts forstock-based arrangements issued to non-employees using the fair value based method,which calculates the compensation expense based on the fair value of the stockoptions granted using the Black-Scholes option pricing model at the date ofgrant, or over the period of performance, as appropriate.

 

7

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*RevenueRecognition*

 

The Company followsspecific and detailed guidelines in recognizing revenue in accordance with theprovisions of AICPA Statement of Position 97-2,*Software Revenue Recognition*, as amended by Statement of Position98-4 and Statement of Position 98-9, as well as Accounting Research Bulletin No. 45,*Long-Term Construction-Type Contracts* andStatement of Position 81-1*, Accounting forPerformance of Construction-Type and Certain Production-Type Contracts.*The Company recognizes revenue when the price is fixed and determinable, uponpersuasive evidence of an agreement, when it has fulfilled its obligationsunder any such agreement and upon a determination that collectibility isprobable.

 

The Company’s revenuesare derived from two sources, hosted revenues and licensed revenues. Hostedrevenues are derived from monthly fees for its MRM solutions and upfront ormonthly fees for the hardware device enabling the mobile resource to utilizeits MRM solution. Licensed revenues are derived from providing license,installation, training and post contract customer support services to endusers.

 

Monthly fees for theCompany’s MRM hosted solutions are recognized ratably over the minimum contractperiod, which commences (a) upon installation where customers haveinstalled its proprietary hardware devices in mobile worker vehicles or (b) uponthe creation of subscription licenses and a customer account on its websitewhere customers have elected to use its MRM solution with a location- or wirelessapplication protocol- enabled mobile telephone. Upfront fees for the Company’sMRM hosted solution primarily consist of amounts for the Internet LocationManager, Internet Data Terminal and a ruggedized personal digital assistant.The Company defers upfront fees at installation and recognizes them ratablyover the minimum contract period, generally two or three years. Renewal ratesfor its MRM solution are not considered priced at a bargain in comparison tothe upfront fees (as described in Staff Accounting Bulletin No. 104, *Revenue Recognition*). Changes to thepricing of the upfront fees for the Company’s MRM solutions in the future couldresult in the recognition of upfront fees over periods that extend beyond theminimum contract period.

 

Historically, the feesfor the Company’s proprietary hardware devices have often been at or below itscosts. Costs not in excess of related contractual revenue are deferred at thetime of shipment and amortized ratably over the minimum contract period. Costsin excess of related contractual revenue are expensed to cost of hosted revenueat the time of shipment.

 

For arrangements withmultiple elements, such as licenses and post-contract customer supportservices, the Company allocates revenue to each element of a transaction basedupon its fair value as determined in reliance on vendor specific objectiveevidence. Vendor specific objective evidence of fair value for all elements ofan arrangement is based upon the normal pricing and discounting practices whensold separately, and post-contract customer support services is additionallymeasured by the renewal rate. If the Company cannot objectively determine thefair value of any undelivered element included in license arrangements, itdefers revenue until all elements are delivered, all services have beenperformed or fair value can objectively be determined. When the fair value of alicense element has not been established, the Company uses the residual methodto record license revenue if the fair value of all undelivered elements isdeterminable. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the fee is allocated to thedelivered elements and is recognized as revenue.

 

Licensed revenuesassociated with the fees for the license of the Company’s*taskforce* product and relatedcustomization and installation are generally recognized using thepercentage-of-completion method of accounting over the period that services areperformed. For agreements accounted for under the percentage-of-completionmethod, the Company determines progress to completion based on actual directlabor hours incurred to date as a percentage of the estimated total directlabor hours required to complete the project. The Company periodicallyevaluates the actual status of each project to ensure that the estimates tocomplete each contract remain accurate. A provision for estimated losses oncontracts is made in the period in which the loss becomes probable and can bereasonably estimated. To date, the Company has not incurred any such losses.Costs incurred in advance of billings are recorded as costs in excess ofrelated billings on uncompleted contracts. If the amount of revenue recognizedexceeds the amounts billed to customers, the excess amount is recorded asunbilled accounts receivable. If the amount billed exceeds the amount ofrevenue recognized, the excess amount is recorded as customer deposits. Revenuerecognized in any period is dependent on the Company’s progress towardcompletion of projects in progress. Significant management judgment anddiscretion are used to estimate total direct labor hours. Any changes in ordeviations from these estimates could have a material effect on the amount ofrevenue the Company recognizes in any period.

 

The Company derivespost-contract customer support fees from post-contract customer supportcontracts, which are generally initially purchased at the same time as alicense for its*taskforce*product. Post-contract customer support can include telephone and email supportand the right to receive unspecified upgrades on a when-and-if-available basis.Post-contract customer support may generally be renewed on an annual basis. TheCompany recognizes revenue for post-contract customer support, based on vendorspecific objective evidence of fair value, ratably over the term of thepost-contract customer support period. It generally determines vendor specificobjective evidence of post-contract customer support based on the stated feesfor post-contract customer support renewal set forth in the original licenseagreement. If the Company is unable to establish vendor specific objectiveevidence of fair value, it recognizes all fees ratably over the term of thepost-contract customer support, when the only undelivered element ispost-contract customer support.

 

*Comprehensive(Loss) Income*

 

SFAS No. 130,*Reporting Comprehensive Income*, requiresthat an enterprise report, 

 

8

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by major components andas a single total, the change in its net assets during the period fromnon-owner sources.  Accumulated other comprehensive loss was comprised ofunrealized losses of $81,000 and $179,000 on short-term investments at June 30,2005 and December 31, 2004, respectively.

 

*Goodwilland intangible assets*

 

Goodwill represents theexcess of the purchase price over the fair value of the net tangible andidentifiable intangible assets acquired in a business combination. Intangibleassets resulting from the acquisitions of entities accounted for using thepurchase method of accounting are estimated by management based on the fairvalue of assets received. Identifiable intangible assets are comprised of coredeveloped technology, order backlog, customer relationships, trademarks and tradenames, and other intangible assets. Identifiable intangible assets that havefinite useful lives are being amortized over their useful lives of ten yearsfor core developed technology, three years for order backlog and ten years forcustomer relationships. Trademarks and trade names have indefinite lives and assuch are not amortized but are tested at least annually for impairment. The fair value assigned to in-process research and development and other identifiable intangibleassets was estimated by discounting to present value the cash flowsattributable to the technology once it had reached technologicalfeasibility.  The Company follows the provisions of SFAS No. 142,*Goodwill and Other Intangible Assets*,under which goodwill is no longer subject to amortization. Rather, goodwill issubject to at least an annual assessment for impairment, applying a fair-valuebased test.

 

*Long-livedassets and goodwill*

 

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

 

The Company evaluatesgoodwill, at a minimum, on an annual basis and whenever events and changes incircumstances suggest that the carrying amount may not be recoverable.Impairment of goodwill is tested at the reporting unit level by comparing thereporting unit’s carrying amount, including goodwill, to the fair value of thereporting unit. The fair values of the reporting units are estimated using acombination of the income, or discounted cash flows, approach and the market approach,which utilizes comparable companies’ data. If the carrying amount of thereporting unit exceeds its fair value, goodwill is considered impaired and asecond step is performed to measure the amount of impairment loss, if any. TheCompany plans to conduct its initial annual impairment test in August 2005and annually thereafter. There were no events or circumstances from the closeof the acquisition through June 30, 2005 that would require an interimassessment.

 

*RecentlyIssued Accounting Pronouncements*

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004),*Share-Based Payments* (SFAS 123R), that addresses theaccounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for either equity instruments of the enterpriseor liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.

 

The statement eliminatesthe ability to account for share-based compensation transactions using theintrinsic value method as prescribed by Accounting Principles Board (APB)Opinion No. 25,*Accounting for StockIssued to Employees*, and generally requires that such transactionsbe accounted for using a fair value based method and recognized as expenses inthe consolidated statement of operations. The statement requires companies toassess the most appropriate model to calculate the value of the options. TheCompany currently uses the Black-Scholes option pricing model to value optionsand is assessing which model it may use upon adoption of such standard. The useof an alternative model to value options may result in a different fair valuethan the use of the Black-Scholes option pricing model.

 

There are a number ofother requirements under the new standard that will result in a differentaccounting treatment than that currently required. These differences include,but are not limited to, the accounting for the tax benefit on employee stockoptions and for stock issued under the Company’s employee stock purchase plan.

 

The Company will also berequired to determine the transition method to be used at date of adoption. Theallowed transition methods include modified prospective and modifiedretroactive adoption alternatives. Under the modified retroactive method, priorperiods may be restated either as of the beginning of the year of adoption orfor all periods presented. This method would record compensation expense forall unvested stock options and restricted stock beginning with the first periodrestated. The modified prospective method requires that compensation expense berecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of SFAS 123R. In April 2005, the SECdeferred the effective date of SFAS 123R. The effective date of SFAS 123R forthe Company’s consolidated financial statements is January 1, 2006.

 

While the Company has notcompleted its assessment of the impact of SFAS 123R, it expects that thisstatement will have a significant impact on the Company’s consolidated financialstatements as the Company 

 

9

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will be required toexpense the fair value of its stock option grants and stock purchases under itsemployee stock purchase plans rather than disclose the impact on itsconsolidated net (loss) income attributable to common stockholders within itsfootnotes, as is its current practice.

 

In November 2004, theFASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter4 (SFAS 151). SFAS 151 clarifies that abnormal inventory costs such as thecosts of idle facilities, excess freight and handling costs, and wastedmaterials (spoilage) are required to be recognized as current period charges.The provisions of SFAS 151 are effective for fiscal years beginning after July1, 2005. The Company does not expect that the adoption of SFAS 151 will have amaterial impact on its consolidated statement of operations and financialcondition.

 

On June 7, 2005, theFASB issued SFAS No. 154, *AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, and Statement No. 3, Reporting Accounting Changes inInterim Financial Statements* (SFAS 154). SFAS 154 changes therequirements for the accounting for, and reporting of, a change in accountingprinciple. Previously, most voluntary changes in accounting principles wererequired to be recognized by way of a cumulative effect adjustment within netincome during the period of the change. SFAS 154 requires retrospectiveapplication to prior periods’ financial statements, unless it is impracticableto determine either the period-specific effects or the cumulative effect of thechange. SFAS 154 is effective for accounting changes made in fiscal years beginningafter December 15, 2005; however, the Statement does not change thetransition provisions of any existing accounting pronouncements.

 

**Note 2 —Basic and Diluted Net (Loss) Income per Share**

 

Basic net (loss)income per share is computed by dividing the net (loss) income for theperiod by the weighted average number of common shares outstanding during theperiod. Diluted net (loss) income per share is computed by dividing thenet (loss) income for the period by the weighted average number of common sharesand potentially dilutive common shares outstanding during the period.Potentially dilutive common shares, composed of unvested restricted commonstock and incremental common shares issuable upon the exercise of stockoptions, are included in diluted net (loss) income per share (using thetreasury stock method) to the extent such shares are dilutive. Potentiallydilutive shares that are anti-dilutive, as calculated based on the weightedaverage closing price of the Company’s common stock for the period, areexcluded from the calculation of diluted net (loss) income per share.Common share equivalents are excluded from the computation in loss periods, astheir effect would be anti-dilutive.

 

The following table setsforth the computation of basic and diluted net (loss) income per share for theperiods indicated (in thousands, except per share amount):

 
| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Net  (loss) income attributable to common stockholders (numerator) |       | $                                     | (1,061     | )                                   | $          | 1,066 |   | $ | (8,496 | ) | $ | 4,176 |   |
| Shares  (denominator):                                             |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                              |       |                                  |       |                                |       |   |   |   |   |
| Weighted  average common shares outstanding                        |       | 60,551                                |       | 54,185                              |       | 58,977 |   | 53,990 |   |
| Weighted  average common shares outstanding subject to repurchase  |       | —                                |       | —                              |       | — |   | (12 | ) |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Shares  used in computation                                        |       | 60,551                                |       | 54,185                              |       | 58,977 |   | 53,978 |   |
| Diluted                                                            |       |                                  |       |                                |       |   |   |   |   |
| Dilution  impact from option equivalent shares                     |       | —                                |       | 3,110                               |       | — |   | 3,713 |   |
| Dilution  impact from employee stock purchase plan                 |       | —                                |       | 119                                 |       | — |   | 153 |   |
| Add  back weighted average common shares subject to repurchase     |       | —                                |       | —                              |       | — |   | 12 |   |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Shares  used in computation                                        |       | 60,551                                |       | 57,414                              |       | 58,977 |   | 57,856 |   |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Net  (loss) income per share                                       |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                              |       | $                                     | (0.02      | )                                   | $          | 0.02 |   | $ | (0.14 | ) | $ | 0.08 |   |
| Diluted                                                            |       | $                                     | (0.02      | )                                   | $          | 0.02 |   | $ | (0.14 | ) | $ | 0.07 |   |

 

Employee stock options topurchase approximately 9.0 million shares with a weighted average exerciseprice of $5.00 and approximately 1.4 million shares with a weighted averageexercise price of $11.71 for the three months ended June 30, 2005 and2004, respectively, were outstanding, but were not included in the computationof diluted earnings per share because their effect would have beenanti-dilutive.  Employee stock options topurchase approximately 9.0 million shares with a weighted average exerciseprice of $5.00 and approximately 623,000 shares with a weighted averageexercise price of $13.10 for the six months ended June 30, 2005 and 2004,respectively, were outstanding, but were not included in the computation ofdiluted earnings per share because their effect would have been anti-dilutive.

 

10

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**Note 3 —Acquisition of Vidus**

 

On February 18,2005, the Company completed the acquisition of Vidus Limited (“Vidus”) in atransaction accounted for as a business combination using the purchase method.As consideration for the acquisition, the Company issued approximately 5.5million shares of its common stock valued at $38.2 million and newly createdredeemable preferred stock (“preferred stock”) in face amount of approximately$7.7 million and extinguished for cash existing debt of approximately $5.5million in exchange for all of the outstanding shares of Vidus capital stock,and the Company issued approximately 146,000 vested options with a fair valueof $531,000. Under the terms of the grants, each option has been classified asa non-qualified stock option, is fully vested, has an exercise price rangingfrom $0.67 to $2.00 per share and has a one-year term. The Company incurredacquisition related costs of $2.6 million, of which $478,000 was allocated tothe issuance of common stock. The purchase price of approximately$54.6 million was preliminarily allocated among the tangible and identifiableintangible assets acquired and liabilities assumed on the basis of theirestimated fair values on the acquisition date.

 

The total estimatedconsideration is subject to an adjustment for a period of one year if theaverage closing price of the Company’s common stock for any ten consecutivetrading days during such period does not meet at least an average market priceper share of $7.00. The one year period begins on the date ten days after thedate the SEC declares the Company’s registration statement effective coveringthe common shares issued in the transaction. The fair value of the Company’scommon stock was derived from this guaranteed market price per share of$7.00.  The fair value of the stock options was determined using theBlack-Scholes option pricing model with the following assumptions: no dividendyield, expected volatility of 96%, expected life of one year and a risk-freeinterest rate of 3.09%.

 

The Vidus acquisition wasaccounted for under SFAS No. 141,*Business Combinations* (SFAS 141) and certain specified provisions ofSFAS No. 142,*Goodwill and OtherIntangible Assets* (SFAS 142).  The results of operations ofVidus were included in the Company’s Condensed Consolidated Statement ofOperations from February 19, 2005.

 

 

The following tablesummarizes the estimated fair values of the tangible assets acquired and theliabilities assumed at the date of acquisition (in thousands):

 

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

 

Under the purchase methodof accounting, the Company allocated the total purchase price to the acquirednet tangible and intangible assets based upon their estimated fair market valueas of the date of acquisition, February 18, 2005. The intangible assetsrecognized, apart from goodwill, represented contractual or other legal rightsof Vidus and those intangible assets of Vidus that could be clearly identified.These intangible assets were identified and valued through interviews andanalysis of data provided by Vidus concerning development projects, their stageof development, the time and resources needed to complete them and, ifapplicable, their expected income generating ability. There were no othercontractual or other legal rights of Vidus clearly identifiable by management,other than those identified below. The preliminary allocation of the purchaseprice to the tangible and identifiable intangible assets acquired andliabilities assumed was as follows (in thousands):

 

| Fair  value of net tangible liabilities assumed |   | $      | (2,575 | )      |
|-------------------------------------------------|--------|--------|--------|--------|
| Intangible  assets acquired:                    |   |   |   |
| Core  developed technology                      |   | 18,410 |   |
| Order  backlog                                  |   | 5,500  |   |
| Customer  relationships                         |   | 3,660  |   |
| Trademarks  and trade names                     |   | 5,520  |   |
|                                            |   |   |   |
|                                            |   | 33,090 |   |
|                                            |   |   |   |
| In-process  research and development            |   | 5,640  |   |
| Costs  allocated to common stock issued         |   | 478    |   |
| Deferred  tax liability                         |   | (6,354 | )      |
| Deferred  tax asset                             |   | 3,247  |   |
| Goodwill                                        |   | 21,055 |   |
|                                            |   |   |   |
| Purchase  price                                 |   | $      | 54,581 |   |

 

11

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*Coredeveloped technology*. Core developed technology ofapproximately $18.4 million relates to the Vidus*taskforce* technology. At the date of acquisition, thedeveloped technology was complete and had reached technological feasibility.Any costs to be incurred in the future will relate to the ongoing maintenanceof the developed technology and will be expensed as incurred. To estimate thefair value of the developed technology, an income approach was used with adiscount rate of 35%, which included an analysis of future cash flows and therisks associated with achieving such cash flows. The developed technology isbeing amortized over its estimated useful life of ten years.

 

*Orderbacklog and Customer relationships.* The Order backlog ofapproximately $5.5 million and the Customer relationships of approximately $3.7million represented the fair value of the post-contract customer supportobligations and existing customer relationships. To estimate the fair value ofthe Order backlog and the Customer relationships, an income approach was usedwith a discount rate of 30%. The order backlog and Customer relationships areamortized over their estimated useful lives of three years for Order backlogand ten years for Customer relationships.

 

*Trademarksand trade names.* Vidus and its product name,*taskforce*, have strong name recognitionin European field service management, telecommunications, cable, and utilitiesmarkets. To estimate the fair value of the trademarks and trade names, anincome approach was used with a discount rate of 40%. The Company expects tocontinue to produce and market the*taskforce*line of product and utilize the Vidus trade name in Europe. Therefore, ananalysis of various economic factors indicated there was no limit to the periodof time the trademark and trade names would contribute to future cash flows.Because cash flow is expected to continue indefinitely, the trademark and tradenames are not being amortized, but tested for impairment annually and wheneverevents indicate that an impairment may have occurred.

 

*In-processresearch and development.* Development projects that hadreached technological feasibility were classified as developed technology, andthe value assigned to developed technology was capitalized. Expensed in-processresearch and development of approximately $5.6 million reflected researchprojects that had not reached technological feasibility or had no alternativefuture use at the time of the acquisition. In order to achieve technologicalfeasibility, the Company estimated the hours required to complete the projectsto cost approximately $5.7 million. The Company estimated the fair valueassigned to in-process research and development using the income approach,which discounts to present value the cash flows attributable to the technologyonce it had reached technological feasibility using a discount rate of 40%. Thestages of completion were determined by estimating the costs and time incurredto date relative to the costs and time incurred to develop the in-processtechnology into a commercially viable technology or product, while consideringthe relative difficulty of completing the various tasks and overcoming theobstacles necessary to attain technological feasibility. The weighted averagestage of completion for all projects, in the aggregate, was approximately 80%as of the acquisition date. Cash flows from sales of products incorporatingthose technologies commenced in fiscal 2005.

 

*Goodwill.*Goodwill of approximately $21.4 million represented the excess of the purchaseprice over the fair value of the net tangible and intangible assets acquired.The acquisition allows the Company to integrate its technology with Vidus’technology for dynamic scheduling, dispatching, routing and appointment bookingof mobile workers, cross-sell the companies’ solutions and further develop thecombined technologies to provide customers seamlessly integrated services. Theacquisition also creates the ability to expand the Company’s business to Europeand other international markets. These opportunities, along with the ability tohire the Vidus workforce, were significant contributing factors to theestablishment of the purchase price, resulting in the recognition of asignificant amount of goodwill. In accordance with SFAS 142, the Company is notamortizing goodwill. The Company will carry the goodwill at cost and test itfor impairment annually and whenever events indicate that an impairment mayhave occurred. The goodwill and intangible assets were allocated to itslicensed reporting segment.  The goodwill is not deductible for taxpurposes.

 

The results of operationsof Vidus are included in the Company’s Consolidated Statement of Operationsfrom the date of the acquisition. If the Company had acquired Vidus at thebeginning of the periods presented, the Company’s unaudited pro forma revenue,net loss, net loss attributable to common stockholders and net loss per sharewould have been as follows (in thousands, except per share amount):

 
| ** **                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                             |       |                                  |       |                                |       |   |   |   |   |
| Revenue                                                          |       | $                                     | 20,626     |                                | $          | 20,754 |   | $ | 41,311 |   | $ | 40,582 |   |
| Net  loss                                                        |       | (937                                  | )          | (2,771                              | )          | (11,000 | ) | (2,859 | ) |
| Net  loss attributable to common stockholders                    |       | (1,061                                | )          | (2,897                              | )          | (11,250 | ) | (3,111 | ) |
| Net  loss per share (basic and diluted)                          |       | (0.02                                 | )          | (0.05                               | )          | (0.19 | ) | (0.05 | ) |
| Shares  used in computing net loss per share (basic and diluted) |       | 60,551                                |       | 54,185                              |       | 60,423 |   | 59,432 |   |
|                                                                  |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

These results are notnecessarily indicative of what the actual results of operations would have beenif the acquisition of Vidus had in 

 

12

----

 

fact occurred on thedates or for the periods indicated, nor do they purport to project the resultsof operations for any future periods or as of any date. These results do notgive effect to any cost savings, operating synergies, and revenue enhancementswhich may result from the acquisition of Vidus or the costs of achieving thesecost savings, operating synergies, and revenue enhancements.  Thein-process research and development charge of approximately $5.6 million isincluded in the net loss attributable to common stockholders for the six monthsended June 30, 2005 and excluded for the three months ended June 30,2005 and three and six months ended June 30, 2004.

 

**Note 4 —Goodwill and Purchased Intangible Assets**

 

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

 

Intangible assets were asfollows (in thousands):

 
| ** **                      | ** ** | **As of June 30, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|---------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **Carrying  Amount**         | ** ** | **Accumulated  Depreciation**    | ** ** | **Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Depreciation** | ** ** | **Net** | ** ** |
| Amortized  intangible assets:   |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Core  developed technology      |       | $                            | 23,462     |                             | $          | (5,720 | ) | $ | 17,742 |   | $ | 5,052 |   | $ | (5,052 | ) | $ | — |   |
| Order  backlog                  |       | 5,500                        |       | (666                             | )          | 4,834 |   | — |   | — |   | — |   |
| Customer  relationships         |       | 3,660                        |       | (133                             | )          | 3,527 |   | — |   | — |   | — |   |
|                            |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Total                           |       | 32,622                       |       | (6,519                           | )          | 26,103 |   | 5,052 |   | (5,052 | ) | — |   |
|                            |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Unamortized  intangible assets: |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Trademarks  and trade names     |       | 5,520                        |       | —                           |       | 5,520 |   | — |   | — |   | — |   |
|                            |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Total  intangible assets        |       | $                            | 38,142     |                             | $          | (6,519 | ) | $ | 31,623 |   | $ | 5,052 |   | $ | (5,052 | ) | $ | — |   |

 

For the three monthsended June 30, 2005 and 2004, amortization of intangible assets was $1.0million and $11,000, respectively, and for the six months ended June 30,2005 and 2004, amortization of intangible assets was $1.5 million and $21,000,respectively. The estimated future amortization expense of purchased intangibleassets as of June 30, 2005 is as follows (in thousands):

 

| Remainder  of 2005 |   | $      | 2,020  |   |
|--------------------|--------|--------|--------|--------|
| 2006               |   | 4,040  |   |
| 2007               |   | 4,041  |   |
| 2008               |   | 2,458  |   |
| 2009               |   | 2,207  |   |
| Thereafter         |   | 11,337 |   |
|               |   |   |   |
| Total              |   | $      | 26,103 |   |

 

13

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**Note 5 —Short-Term Investments**

 

Short-term investmentsincluded the following available-for-sale securities at June 30, 2005 and December 31,2004 (in thousands):

 
| ** **                       | ** ** | **June 30, 2005** | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **Amortized  Cost**    | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S.  Government debt securities |       | $                      | 47,680     |   | $ | — |   | $ | (68 | ) | $ | 47,612 |   |
| Municipal  debt securities       |       | 8,880                  |       | — |   | (2 | ) | 8,878 |   |
| Corporate  debt securities       |       | 6,830                  |       | — |   | (11 | ) | 6,819 |   |
|                             |       |                   |       |   |   |   |   |   |   |
| Total                            |       | $                      | 63,390     |   | $ | — |   | $ | (81 | ) | $ | 63,309 |   |

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

 

**Note 6 – Income Taxes**

 

For the three and six months ended June 30,2005, the Company recorded an income tax benefit of $3.2 million primarilyrelating to the Company’s current losses in the United Kingdom.  TheCompany currently has provided a full valuation allowance on its United Statesdeferred tax assets. The Company intends to maintain its valuation allowanceuntil sufficient positive evidence exists to support reversal of the valuationallowance. Likewise, the occurrence of future negative evidence with respect tothe Company’s United Kingdom deferred tax assets could result in an increase tothe valuation allowance. The Company’s income tax expense recorded in thefuture will be reduced or increased to the extent of offsetting decreases orincreases to the Company’s valuation allowance. As of June 30, 2005 theCompany had approximately $42.7 million in deferred tax assets in the UnitedStates against which the Company retained a full valuation allowance.  Thedeferred tax asset as of June 30, 2005 consisted of deferred tax assets inthe United Kingdom of $6.4 million primarily relating to net operating losses withan unlimited carryforward period against which the deferred tax liabilities inthe United Kingdom of $6.3 million have been offset.  The deferred taxliabilities primarily relate to the intangible assets.  As of December 31,2004 the Company had approximately $43.2 million in deferred tax assets in theUnited States against which the Company retained a full valuation allowance.

 

**Note 7 —Balance Sheet Components**

 

Inventories consist ofraw materials, work in process and finished goods, and are stated at the lowerof cost (average cost) or market and consisted of (in thousands):

 

| ** **       | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw  materials   |       | $                       | 2,220      |                        | $          | 1,025 |   |
| Work  in process |       | 2,766                   |       | 746                         |       |
| Finished  goods  |       | 2,251                   |       | 1,822                       |       |
|             |       |                    |       |                        |       |
| Total            |       | $                       | 7,237      |                        | $          | 3,593 |   |

 

Property and equipmentconsist of (in thousands):

 

| ** **                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Computers  and software                    |       | $                       | 14,787     |                        | $          | 13,196 |   |
| Manufacturing  and office equipment        |       | 656                     |       | 352                         |       |
| Furniture  and fixtures                    |       | 474                     |       | 494                         |       |
| Leasehold  improvements                    |       | 688                     |       | 307                         |       |
|                                       |       |                    |       |                        |       |
| Total                                      |       | $                       | 16,605     |                        | $          | 14,349 |   |
| Accumulated  depreciation and amortization |       | (11,440                 | )          | (10,681                     | )          |
|                                       |       |                    |       |                        |       |
| Property  and equipment, net               |       | $                       | 5,165      |                        | $          | 3,668 |   |

 

14

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Accrued liabilitiesconsist of (in thousands):

 

| ** **                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued  operating expenses                |       | $                       | 3,813      |                        | $          | 2,278 |   |
| Accrued  compensation and related benefits |       | 3,373                   |       | 2,855                       |       |
| Accrued  installation charges              |       | 96                      |       | 396                         |       |
|                                       |       |                    |       |                        |       |
| Total                                      |       | $                       | 7,282      |                        | $          | 5,529 |   |

 

**Note 8 —Redeemable Preferred Stock**

 

On February 18,2005, the Board of Directors of the Company authorized the creation of fourseries of preferred stock and designated approximately 44,000, 44,000, 5,000,and 5,000 shares as Series A-1, A-2, B-1, and B-2 preferred stock,respectively, of which approximately 24,000, 44,000, 5,000, and 5,000 shares ofSeries A-1, A-2, B-1, and B-2 preferred stock, respectively, were issuedand outstanding as of June 30, 2005.

 

*Dividends*

 

The holders of the Series A-1,A-2, B-1, and B-2 preferred stock are entitled to receive dividends at the rateof $6.50 per share annually.  The dividends are accrued from day to day,whether or not earned or declared, starting on February 18, 2005. Thedividends are payable when and if declared by the Board of Directors. Anyaccumulation of unpaid dividends on the preferred stock does not bear interest.

 

*Redemption*

 

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

 

Each share of Series A-1and A-2 preferred stock is redeemable for an amount equal to (i) $100 plus(ii) all declared or accumulated but unpaid dividends. Each share of Series B-1and B-2 preferred stock is redeemable for an amount equal to (i) $100, plus(ii) all declared or accumulated but unpaid dividends, plus (iii) additionalconsideration if the Company’s common stock’s average closing sales price pershare is not at least $7.00 for any 10 consecutive trading day period during aone year period commencing ten days after the SEC declares the Company’sregistration statement effective covering the common shares issued in theacquisition.

 

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

 

*Liquidation*

 

Series A-1, A-2,B-1, and B-2 preferred stockholders are entitled to receive, upon liquidation,an amount equal to their respective redemption price. The holders of the Series A-1,A-2, B-1, and B-2 preferred stock rank on a pari passu basis as to the receiptof such distributions and in preference to the holders of common stock.

 

*Voting*

 

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

 

The following tableillustrates the activity for each series of preferred stock through June 30,2005 (in thousands):

** **
| ** **                                                                     | ** ** | **Series A-1** | ** ** | **Series A-2** | ** ** | **Series B-1** | ** ** | **Series B-2** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|-----------|------------|
| **Issued**                                                                     |       | $                   | 2,352      |                | $          | 4,424               |       | $                   | 486        |      | $          | 486 |   | $ | 7,748 |   |
| Amounts  accrued for dividends for the three months ending March 31, 2005 |       | 17                  |       | 32                  |       | 4                   |       | 4                   |       | 57        |       |
|                                                                           |       |                |       |                |       |                |       |                |       |      |       |
| Balance,  March 31, 2005                                                  |       | 2,369               |       | 4,456               |       | 490                 |       | 490                 |       | 7,805     |       |
| Amounts  accrued for dividends for the three months ending June 30, 2005  |       | 37                  |       | 71                  |       | 8                   |       | 8                   |       | 124       |       |
|                                                                           |       |                |       |                |       |                |       |                |       |      |       |
| Balance,  June 30, 2005                                                   |       | $                   | 2,406      |                | $          | 4,527               |       | $                   | 498        |      | $          | 498 |   | $ | 7,929 |   |

 

15

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**Note 9 —Segment Reporting**

 

Reportable segments arebased upon the Company’s internal organization structure, the manner in whichthe operations are managed, the criteria used by the Company’s chief operatingdecision-maker to evaluate segment performance, the availability of separatefinancial information and overall materiality considerations.  The Company’s chief operating decision-maker isthe CEO.

 

Effective with theacquisition of Vidus, the Company reports the results of its operations in twosegments: Hosted and Licensed. The operating segments are managed separatelybecause each offers different products and serves different markets. The Hostedsegment provides MRM solutions that provide location, reporting, dispatch,messaging, and other management services and that are designed to be easy toimplement and use. Customers using the Hosted MRM solutions can manage theirmobile workers in several ways, including by logging onto the Company’swebsite, receiving their data directly into their existing softwareapplications, using any telephone to access the Company’s speech-to-text voiceportal or requesting information from its data centers using applicationprogramming interfaces. The Licensed segment provides customers with theCompany’s*taskforce* productoffering, a field service automation software solution. *taskforce* is designed to enable apredictable and reliable customer experience from commitment to servicefulfillment; and to help synchronize the call center and field serviceoperations.

 

Hosted revenues arederived from monthly fees for the Company’s MRM solution and monthly or upfrontfees for the hardware device enabling the mobile resource to utilize the MRMsolution. Licensed revenues are derived from license fees, installation feesand training and post contract customer support services to end users.

 

Information aboutoperations by segment is as follows (in thousands):

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **Hosted**                           | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net  revenue from external customers |       | $                                    | 19,685     |   | $ | 941 |   | $ | 20,626 |   | $ | 18,331 |   | $ | — |   | $ | 18,331 |   |
| Cost  of revenue                     |       | 9,227                                |       | 1,473 |   | 10,700 |   | 8,669 |   | — |   | 8,669 |   |
| Intangibles  amortization            |       | —                               |       | 1,010 |   | 1,010 |   | 11 |   | — |   | 11 |   |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                        |       | 10,458                               |       | (1,542 | ) | 8,916 |   | 9,651 |   | — |   | 9,651 |   |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Gross  margin percentage             |       | 53                                   | %          | (164 | )% | 43 | % | 53 | % | — | % | 53 | % |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) before income taxes   |       | 1,892                                |       | (6,024 | ) | (4,132 | ) | 1,066 |   | — |   | 1,066 |   |
| Benefit  from income taxes           |       | —                               |       | 3,195 |   | 3,195 |   | — |   | — |   |   |   |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss)                   |       | $                                    | 1,892      |   | $ | (2,829 | ) | $ | (937 | ) | $ | 1,066 |   | $ | — |   | $ | 1,066 |   |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                         |       | $                                    | 459        |   | $ | 147 |   | $ | 606 |   | $ | 305 |   | $ | — |   | $ | 305 |   |

 
| ** **                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **Hosted**                         | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
|                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Net  revenue from external customers   |       | $                                  | 39,175     |   | $ | 1,443 |   | $ | 40,618 |   | $ | 36,223 |   | $ | — |   | $ | 36,223 |   |
| Cost  of revenue                       |       | 18,751                             |       | 2,173 |   | 20,924 |   | 17,037 |   | — |   | 17,037 |   |
| Intangibles  amortization              |       | —                             |       | 1,467 |   | 1,467 |   | 21 |   | — |   | 21 |   |
|                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                          |       | 20,424                             |       | (2,197 | ) | 18,227 |   | 19,165 |   | — |   | 19,165 |   |
|                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Gross  margin percentage               |       | 52                                 | %          | (152 | )% | 45 | % | 53 | % | — | % | 53 | % |
|                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss) before income taxes |       | 2,268                              |       | (13,778 | ) | (11,510 | ) | 4,176 |   | — |   | 4,176 |   |
| Benefit  from income taxes             |       | —                             |       | 3,195 |   | 3,195 |   | — |   | — |   | — |   |
|                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss)                     |       | $                                  | 2,268      |   | $ | (10,583 | ) | $ | (8,315 | ) | $ | 4,176 |   | $ | — |   | $ | 4,176 |   |
|                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                           |       | $                                  | 944        |   | $ | 204 |   | $ | 1,148 |   | $ | 596 |   | $ | — |   | $ | 596 |   |

 

16

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Revenues are attributedto countries based on the location of the customer.  The distribution ofrevenue by geographic area was summarized as follows (in thousands):

 
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                               | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenue from Unaffiliated Customers:** |       |                                  |       |                                |       |   |   |   |   |
| United  States and Canada                |       | $                                     | 19,685     |                                | $          | 18,331 |   | $ | 39,175 |   | $ | 36,223 |   |
| Europe                                   |       | 941                                   |       | —                              |       | 1,443 |   | — |   |
|                                     |       |                                  |       |                                |       |   |   |   |   |
|                                     |       | $                                     | 20,626     |                                | $          | 18,331 |   | $ | 40,618 |   | $ | 36,223 |   |

 

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

 

| ** **                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| **Long-Lived Assets, Net:** |       |              |       |                  |       |
| United  States              |       | $                 | 11,237     |                  | $          | 10,039 |   |
| United  Kingdom             |       | 53,935            |       | —                |       |
| India                       |       | 308               |       | 256                   |       |
|                        |       |              |       |                  |       |
|                        |       | $                 | 65,480     |                  | $          | 10,295 |   |

 

**Note 10— Commitments and Contingencies**

 

*LeaseCommitments*

 

The following tablerepresents the future minimum lease payments under non-cancelable operatingleases as of June 30, 2005 (in thousands):

 
| Remainder  of 2005            |   | $      | 916    |   |
|-------------------------------|--------|--------|--------|--------|
| 2006                          |   | 1,306  |   |
| 2007                          |   | 1,284  |   |
| 2008                          |   | 1,234  |   |
| 2009                          |   | 1,110  |   |
| Thereafter                    |   | 476    |   |
|                          |   |   |   |
| Total  minimum lease payments |   | $      | 6,326  |   |

 

The Company recognizesrent expense on a straight-line basis over the lease period and has accrued forrent expense incurred but not paid. Rent expense was approximately $606,000 and$399,000 for the three months ended June 30, 2005 and 2004, respectively,and approximately $1.3 million and $806,000 for the six months ended June 30,2005 and 2004, respectively.

 

*Contingencies*

 

AT&T Wirelessannounced that it expected to cease operating its Cellular Digital Packet Data(CDPD) network by June 30, 2005. In October 2004, AT&T Wirelesswas acquired by Cingular Wireless and is now a directly wholly owned subsidiaryof Cingular Wireless. The Company believes that AT&T Wireless has begun toterminate the CDPD network. The Company believes that the termination will be donein several stages and will be completed by September 30, 2005.  TheCompany is in discussions with AT&T Wireless to minimize any disruption tothe delivery of its services to @Road customers. Similarly it is expectedthat Verizon Wireless will cease operating its CDPD network at the end of 2005.The Company is in discussions with Verizon Wireless to minimize any disruptionto the delivery of its services to @Road customers. The Company has notifiedcustomers comprising substantially all of the subscribers whose service wouldbe affected by the proposed termination of these and other CDPD networks. At June 30,2005, approximately 15,000 of the Company’s core subscribers have yet tocomplete negotiations with the Company for their migration plans from theseCDPD networks.  Additionally, at June 30,2005, Verizon Communications, which represents approximately 16,000 subscribers,has yet to determine their migration plans from the CDPD networks.

 

To use an alternatenetwork, existing hardware devices would have to be replaced for subscriberscurrently using a CDPD network. While the Company does not anticipate losses onthe sale of these replacement hardware devices, if it is unable to migratethese customers in a timely fashion, the Company may offer price concessions.If the Company were to offer such concessions, they could have a materialadverse impact on the Company’s financial results.

 

*LegalProceedings*

 

From time to time, theCompany is subject to claims in legal proceedings arising in the normal courseof business. Based on its evaluation of these matters, the Company believesthat these matters will not have a material effect on the results of operationsor 

 

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financial position of the Company.

 

*Other Contingencies*

 

The Company from time to time enters into certain types of agreementsthat contingently require it to indemnify parties against third party claims.These agreements primarily relate to: (i) certain agreements with theCompany’s officers, directors and employees and third parties, under which theCompany may be required to indemnify such persons for liabilities arising outof their duties to the Company and (ii) certain agreements under which theCompany indemnifies customers and alliances for claims such as those arisingfrom intellectual property infringement, personal injury, or non-performanceunder the agreement. Such indemnification provisions are accounted for inaccordance with SFAS No. 5,*Accountingfor Contingencies*. To date, the Company has not incurred any costsrelated to any claims under such indemnification provisions.

 

The terms of such obligations vary. Because the amounts of theobligation in these types of agreements often are not explicitly stated, theoverall maximum amount of the obligations cannot be reasonably estimated.Historically, the Company has not been obligated to make any payments for theseobligations, and no liabilities have been recorded for these obligations on theCompany’s balance sheet as of June 30, 2005.

 

In general, the Company provides its customers a 12-month limitedwarranty that the hardware furnished under the agreement will be free fromdefects in materials and workmanship and will substantially conform to thespecifications for such hardware. The Company’s policy is to expense such costsas incurred. To date, the Company has incurred minimal costs related to thislimited warranty obligation.

 

The Company also provides its European customers with a European Unionstatutory warranty of 90 days. If the warranty is invoked, the Company wouldhave to fix any errors in the software rather than refund any fees under thearrangement. As of June 30, 2005, this warranty has not been invoked byany of the Company’s customers.

 

**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

Except for the historical information contained herein, the mattersdiscussed in this news release are forward-looking statements involving risksand uncertainties that could cause actual results to differ materially fromthose in such forward-looking statements. Numerous factors, risks anduncertainties affect the company’s operating results and could cause thecompany’s actual results to differ materially from forecasts and estimates orfrom any other forward-looking statements made by, or on behalf of, @Road, andthere can be no assurance that future results will meet expectations, estimatesor projections. These factors, risks and uncertainties include, but are notlimited to, @Road historical and future operating results and profitability;the ability of @Road to integrate Vidus operations successfully; the ability of@Road to transition its customers from CDPD wireless networks; the ability of@Road to accelerate or continue to grow as a result of its investmentinitiatives; the ability of @Road and its alliances to market, sell and support@Road products and services; the timing of purchasing and implementationdecisions by prospects and customers; competition; the dependence of @Road onmobile data systems technology, wireless networks, network infrastructure andpositioning systems owned and controlled by others; and general economic andpolitical conditions. Further information regarding these and other risks isincluded in this Form 10-Q, in our Form 10-K for the year ended December 31,2004 (Commission File No. 000-31511), dated March 15, 2005, and in our otherfilings with the SEC.

 

**Overview**

 

@Road, Inc. is a global provider of solutions designed to automatethe management of mobile resources to help optimize the service deliveryprocess for customers across a variety of industries. Through mobile resourcemanagement (“MRM”) infrastructure integrating wireless communications,location-based technologies, software applications, transaction processing andthe Internet, our solutions are designed to increase productivity by way ofsynchronization of field service delivery resources. Our solutions are alsodesigned to provide a secure, scalable and upgradeable platform.

 

Our MRM solutions are designed to help customers improve theirproductivity by enabling the effective management of the activities of theirmobile workers, assets, goods and services. In addition, these solutions aredesigned to enable customers to increase the utility of their mobile resourcesand decrease their costs of operations by facilitating business processes, suchas event confirmation, signature verification, forms processing, projectmanagement and timekeeping while their workers are in the field.

 

Our MRM solutions also provide location, reporting, dispatch,messaging, and other management services and are designed to be easy toimplement and use. Our customers can manage their mobile workers in severalways, including by logging onto our website, receiving data directly into theirexisting software applications, using any telephone to access ourspeech-to-text voice portal or requesting information from our data centersusing application programming interfaces.

 

From July 1996 through June 1998, our operations consistedprimarily of various start-up activities relating to our MRM solutions,including development of Global Positioning System technologies, recruitingpersonnel and raising capital. We did not recognize any revenue prior to June 1998,and our expenses consisted of research and development, sales and marketing andgeneral and administrative expenses. In 1998, we expanded our strategy andredirected our focus to provide location-relevant and time-sensitive informationsolutions to companies managing mobile resources. In the second half of 1998,we introduced the first version of a MRM solution that is now calledGeoManager, which is a solution that leverages existing infrastructure,including the Global Positioning System, wireless networks and the Internetalong with integrated transaction processing and software applications, toenable companies to efficiently manage their mobile resources. Subsequent tothe introduction of GeoManager, we have introduced a number of new MRMsolutions, such as:

 

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•             GeoManager PE—a MRM solution that uses a location-enabled mobile telephone toprovide the GeoManager service.

•             @Road Pathway*i*LM—a mid-level MRMsolution that delivers metrics to measure mobile workforce performance andmanage compliance with business rules.

•             @Road Pathway PE—a MRM solution that uses a location-enabled mobile telephoneto provide the @Road Pathway*i*LMservice.

•             @Road Portico*i*LM—an entry-leveloffering providing a cost-effective MRM solution.

 

In addition, we have developed and packaged a specified set of MRMsolutions for three of our target vertical markets. These application suitesare designed to provide industry appropriate solutions. We currently offer thefollowing solution suites:

 

•             The @Road Telco, Cable and Utilities Suite

•             The @Road Transportation and Distribution Suite

•             The @Road Facilities Management Suite

 

Our MRM solutions provide current and historical data relating to acustomer’s mobile resources in a variety of formats, including activityreports, maps and completed business forms. We provide these formats in astandard configuration, and customers can configure certain elements and viewsthemselves to help achieve compliance with their internal business rules.Customers can choose to submit queries through our applications to createreports and views on demand, or they can have reports delivered on apre-scheduled basis. Customers can also download reports to manipulate andstore data as desired. Mobile resource data is typically stored by us for 30 to45 days, but is stored for longer periods for customers that purchase ourextended data storage service.

 

We commence implementation of our MRM solutions with the deployment ofa hardware device to each of the customer’s mobile resources. We call eachmobile resource with such a hardware device a ‘‘subscriber.’’ Our servicesoperate with two hardware device types:

 

•             A mobile worker can use our proprietary hardware device that integrates a GPSreceiver and a wireless modem and which includes embedded operating anddiagnostic software. This hardware device is called an Internet Location Manager(‘‘*i*LM’’). We offer severaldifferent models of*i*LM devices.An*i*LM is installed in a mobileworker’s vehicle. Installation is typically completed in less than one hour andis performed by our subcontracted installation agents.

•             A mobile worker can use our proprietary hardware device that integratesa GPS receiver, a wireless modem and a Wi-Fi transmitter and which includesembedded operating and diagnostic software. This hardware device is called anInternet Wireless Manager (‘‘*i*WM’’). Wecurrently offer one model of *i*WM devices,but plan to offer several different models. An *i*WMis installed in a mobile worker’s vehicle. Installation is typically completedin less than one hour and is performed by our subcontracted installationagents.

•             A mobile worker can use certain location- or wireless applicationprotocol-enabled mobile telephones offered by several wireless carriers.Customers download our software into these mobile telephones as part ofimplementing our solutions.

 

These hardware device types send and receive a variety of informationfrom time to time and on demand. Such data include location, velocity, time andoperational diagnostics. These data are transmitted to our data centers usingwireless networks and the Internet. If a wireless connection to a hardwaredevice is not available, then the hardware device will typically store up tofive days of captured data and seek to transmit the data when a wirelessconnection is available.

 

In February 2005, we completed the acquisition of Vidus, asoftware company. Vidus was created tohelp enable service delivery companies deliver high-quality service experienceto their customers by providing a unified, up-to-the minute view across thefield service resource network. Through operational research and development,Vidus’ technology was purpose-built to help increase customer profitability byaddressing the disconnection between customer acquisition, customersatisfaction, retention and growth. *taskforce* is the field service automation softwaresolution of Vidus.

 

The *taskforce* solution is designed to enablea predictable and reliable customer experience from commitment to servicefulfillment; and to help synchronize the call center and field serviceoperations. Our*taskforce*solution is customizedfor the customer and our arrangements typically include a licensing fee, installation,training and post-contract customer support services to the end users.

 

Since 1998, we have derived substantially all of our revenues from thesale of our MRM solutions. Our customers generally contract to receive our MRMsolutions for terms of one to five years and can purchase enhanced servicefeatures for additional fees. Upon the completion of the initial term of acustomer’s contract, the customer’s service continues on a month-to-month basis.Our hosted revenue is comprised of monthly fees for our MRM solution andupfront or monthly fees for the hardware device enabling the mobile resource toutilize our MRM solution. As more customers use our MRM solutions, the impacton our hosted revenue is compounded. Our licensed revenue is comprised oflicense, installation and related post-contract customer support fees of our*taskforce* field service automationsoftware solution.

 

To date, we have not sold our MRM solutions outside the United Statesand Canada; however, we intend to expand our MRM solutions to additionalcountries in the future. We have sold and currently sell our*taskforce* field service automationsolution in the United States and Europe. Verizon Communications represented15% and 16% of our revenues for the three and six months ended June 30,2005, respectively, and 18% for the three and six months ended June 30,2004.

 

Since our inception, we have invested substantially in research and development,marketing, the building of our sales channels and our overall infrastructure.We anticipate that such investments may increase in the future. We incurred aloss this quarter and incurred losses in each quarter from inception throughthe quarter ending June 30, 2003, and may incur net losses in the future.At June 30, 2005, we had an accumulated deficit of $115.3 million. Wemay not regain or sustain profitability on a quarterly or annual basis.

 

AT&T Wireless announced that it expected to cease operating itsCellular Digital Packet Data (CDPD) network by June 30, 2005. In October 2004,AT&T Wireless was acquired by Cingular Wireless and is now a directlywholly owned subsidiary of Cingular 

 

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Wireless. We believe that AT&T Wireless has begun to terminate theirCDPD network. We believe that the termination will be done in several stagesand will be completed by September 30, 2005. We are in discussions withAT&T Wireless to minimize any disruption to the delivery of our services toour customers. Similarly it is expected that Verizon Wireless will ceaseoperating its CDPD network at the end of 2005. We are in discussions withVerizon Wireless to minimize any disruption to the delivery of our services to ourcustomers. We have notified customers comprising substantially all of thesubscribers whose services would be affected by the proposed termination ofthese and other CDPD networks. At June 30, 2005, approximately 15,000 ofour core subscribers have yet to complete negotiations with us for theirmigration plans from these CDPD networks. Additionally, at June 30, 2005,Verizon Communications, which represents approximately 16,000 subscribers, hasyet to determine its migration plans from the CDPD networks.

 

To use an alternate network, existing hardware devices would have to bereplaced for subscribers currently using a CDPD network. While we do notanticipate losses on the sale of these replacement hardware devices, if we areunable to migrate these customers in a timely fashion, we may offer priceconcessions. If we were to offer such concessions, they could have a materialadverse impact on our financial results.

 

**Critical accounting policies**

 

Financial Reporting Release No. 60, which was released by the SECin January 2002, requires all companies to include a discussion ofcritical accounting policies or methods used in the preparation of financialstatements. Included in Note 1 of the Notes to the Consolidated FinancialStatements for the year ended December 31, 2004 filed on Form 10-K,is a summary of the significant accounting policies and methods we use. Thefollowing is a discussion of the more significant of these policies andmethods.

 

***Revenue recognition***

 

We follow specific and detailed guidelines in recognizing revenue inaccordance with the provisions of AICPA Statement of Position 97-2,*Software Revenue Recognition*, as amendedby Statement of Position 98-4 and Statement of Position 98-9, as well asAccounting Research Bulletin No. 45,*Long-Term Construction-Type Contracts* and Statement of Position 81-1*, Accounting for Performance of Construction-Type andCertain Production-Type Contracts.* We recognize revenue when theprice is fixed and determinable, upon persuasive evidence of an agreement, whenwe have fulfilled our obligations under any such agreement and upon adetermination that collectibility is probable.

 

Our revenues are derived from two sources, hosted revenues and licensedrevenues. Hosted revenues are derived from monthly fees for our MRM solutionsand upfront or monthly fees for the hardware device enabling the mobileresource to utilize our MRM solution. Licensed revenues are derived fromlicense fees, installation fees and training and post contract customer supportservices to end users.

 

Monthly fees for our MRM hosted solutions are recognized ratably overthe minimum contract period, which commences (a) upon installation wherecustomers have installed our proprietary hardware devices in mobile workervehicles or (b) upon the creation of subscription licenses and a customeraccount on our website where customers have elected to use our MRM solutionwith a location- or wireless application protocol- enabled mobile telephone.Upfront fees for our MRM hosted solution primarily consist of amounts for theInternet Location Manager, Internet Data Terminal and a ruggedized personaldigital assistant. We defer upfront fees at installation and recognize themratably over the minimum contract period, generally one to five years. Renewalrates for our MRM solution are not considered priced at a bargain in comparisonto the upfront fees (as described in Staff Accounting Bulletin No. 104,*Revenue Recognition*). Changes to thepricing of the upfront and monthly fees for our MRM solutions in the futurecould result in the recognition of upfront fees over periods that extend beyondthe minimum contract period.

 

Historically, the fees for our proprietary hardware devices have oftenbeen at or below our costs. Costs not in excess of related contractual revenueare deferred at the time of shipment and amortized ratably over the minimumcontract period. Costs in excess of related contractual revenue are expensed tocost of hosted revenue at the time of shipment.

 

For arrangements with multiple elements, such as licenses,customization services and post-contract customer support services, we allocaterevenue to each element of a transaction based upon its fair value asdetermined in reliance on vendor specific objective evidence. Vendor specificobjective evidence of fair value for all elements of an arrangement is basedupon the normal pricing and discounting practices when sold separately, andpost-contract customer support services is additionally measured by the renewalrate. If we cannot objectively determine the fair value of any undeliveredelement included in license arrangements, we defer revenue until all elementsare delivered, all services have been performed or when only post-contractcustomer support services remain to be delivered, or fair value can objectivelybe determined. When the fair value of a delivered element has not beenestablished, we use the residual method to record license revenue if the fairvalue of all undelivered elements is determinable. Under the residual method,the fair value of the undelivered elements is deferred and the remainingportion of the fee is allocated to the delivered elements and is recognized asrevenue.

 

Licensed revenues associated with the fees for the license of our*taskforce* product and related customizationand installation are generally recognized using the percentage-of-completionmethod of accounting over the period that services are performed. Foragreements accounted for under the percentage-of-completion method, wedetermine progress to completion based on actual direct labor hours incurred todate as a percentage of the estimated total direct labor hours required tocomplete the project. We periodically evaluate the actual status of eachproject to ensure that the estimates to complete each contract remain accurate.A provision for estimated losses on contracts is made in the period in whichthe loss becomes probable and can be reasonably estimated. To date, we have notincurred any such losses. Costs incurred in advance of billings are recorded ascosts in excess of related billings on uncompleted contracts. If the amount ofrevenue recognized exceeds the amounts billed to customers, the excess amountis recorded 

 

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as unbilled accounts receivable. If the amount billed exceeds theamount of revenue recognized, the excess amount is recorded as customerdeposits. Revenue recognized in any period is dependent on our progress towardcompletion of projects in progress. Significant management judgment anddiscretion are used to estimate total direct labor hours. Any changes in ordeviations from these estimates could have a material effect on the amount ofrevenue we recognize in any period.

 

We derive post-contract customer support fees from post-contractcustomer support contracts, which are generally purchased at the same time as alicense for our*taskforce*product. Post-contract customer support can include telephone and email supportand the right to receive unspecified upgrades on a when-and-if-available basis.Post-contract customer support may generally be renewed on an annual basis. Werecognize revenue for post-contract customer support, based on vendor specificobjective evidence of fair value, ratably over the term of the post-contractcustomer support period. We generally determine vendor specific objectiveevidence of post-contract customer support based on the stated fees forpost-contract customer support renewal set forth in the original licenseagreement. If we are unable to establish vendor specific objective evidence offair value, we recognize all fees ratably over the term of the post-contractcustomer support, when the only undelivered element is post-contract customersupport.

 

***BusinessCombinations***

 

In accordance with the provisions of SFAS 141, the purchase price of anacquired company is allocated between intangible assets and the net tangibleassets of the acquired business with the residual of the purchase pricerecorded as goodwill. The determination of the value of the intangible assetsacquired involves certain judgments and estimates. These judgments can include,but are not limited to, the cash flows that an asset is expected to generate inthe future and the appropriate weighted average cost of capital.

 

At June 30, 2005 our goodwill totaled $21.1 million and ouridentifiable intangible assets totaled $31.6 million. In accordance with theprovisions of SFAS 142, we assess the impairment of goodwill and identifiableintangible assets of our reportable units annually, or more often if events orchanges in circumstances indicate that the carrying value may not berecoverable. This assessment is based upon a discounted cash flow analysis andanalysis of our market capitalization. The estimate of cash flow is based upon,among other things, certain assumptions about expected future operatingperformance and an appropriate discount rate determined by our management. Ourestimates of discounted cash flows may differ from actual cash flows due to,among other things, economic conditions, changes to the business model orchanges in operating performance. Significant differences between theseestimates and actual cash flows could materially affect our future financialresults. We plan to conduct our initial annual impairment test in August 2005and annually thereafter. There were no events or circumstances from the closeof the acquisition through June 30, 2005 that would require an interimassessment.

 

***Allowances fordoubtful accounts***

 

Historically, we have had a significant number of small- tomedium-sized companies utilizing our solutions. These customers are involved indiverse businesses. Our payment arrangements with customers generally provide30 to 45 day payment terms. At the time that customers contract with us for oursolutions, we assess their creditworthiness.

 

The nature of our relationship with customers is inherently long-termand we have extended and may extend payment terms on an exception basis. Weregularly review our customers’ ability to satisfy their payment obligations andprovide an allowance for doubtful accounts for all specific receivables that webelieve are not collectible. When these conditions arise, we suspendrecognition of revenue until collection becomes probable or cash is collected.Beyond these specific customer accounts, we record an allowance based on thesize and age of all receivable balances against which we have not established aspecific allowance. These allowances are based on our experience in collectingsuch accounts.

 

Although we believe that we can make reliable estimates for doubtfulaccounts, the size and diversity of our customer base, as well as overalleconomic conditions, may affect our ability to accurately estimate revenue andbad debt expense. Actual results may differ from those estimates.

 

***Income taxes***

 

We have substantial deferred tax assets that relate to prior periodlosses, primarily in the United States and United Kingdom. We evaluate thesedeferred tax assets in each tax jurisdiction by estimating the likelihood ofgenerating future profits to realize these assets. In the United States, wehave assumed that we will not be able to generate sufficient future taxableincome to realize these assets and have recorded valuation reserves to reducethe net asset values to zero and in the United Kingdom we have assumed that we 

 

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will generate sufficient future taxable income to realize the assets.

 

If we generate taxable income and our assumptions regarding thegeneration of future taxable income change, we may be able to reverse thevaluation allowances in future periods. Likewise, the occurrence of negative evidenceregarding our United Kingdom deferred tax assets could result in an increase tothe valuation allowance.  At June 30,2005, we had approximately $42.7 million of valuation allowances related to ournet deferred tax assets domestically.

 

**RESULTS OF OPERATIONS**

 

**The three and six months ended June 30,2005 and 2004.**

 

| ** **                                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Hosted  revenue                                                             |       | $                                     | 19,685     |                                | $          | 18,331 |   | $ | 39,175 |   | $ | 36,223 |   |
|                                                                        |       |                                  |       |                                |       |   |   |   |   |
| Cost of  hosted revenue (excluding intangibles amortization included below) |       | 9,227                                 |       | 8,669                               |       | 18,751 |   | 17,037 |   |
| Intangibles  amortization                                                   |       | —                                |       | 11                                  |       | — |   | 21 |   |
|                                                                        |       |                                  |       |                                |       |   |   |   |   |
| Total cost  of hosted revenue                                               |       | 9,227                                 |       | 8,680                               |       | 18,751 |   | 17,058 |   |
|                                                                        |       |                                  |       |                                |       |   |   |   |   |
| Hosted gross  profit                                                        |       | $                                     | 10,458     |                                | $          | 9,651 |   | $ | 20,424 |   | $ | 19,165 |   |
|                                                                        |       |                                  |       |                                |       |   |   |   |   |
| Hosted gross  margin percentage                                             |       | 53                                    | %          | 53                                  | %          | 52 | % | 53 | % |

 

***Hosted revenue***

 

Hosted revenue increased 7% and 8% for the three and six months ended June 30,2005 from the same period in 2004 as a direct result of the growth in customersusing our services. In addition to customer growth, our hosted revenue isaffected by a number of factors, including the rate at which service featuresor add-ons are adopted, the pricing associated with the size and term ofcustomer contracts, and purchases of our hardware. Given the fixed nature ofour arrangements with our customers and ratable revenue recognition, the impacton revenues of changes in current prices for hosted solutions is tempered. Thisis because revenues from new pricing are layered on top of revenues fromexisting customers.

 

As new customers purchase our hardware or as existing customers chooseto purchase new hardware, the amount of deferred revenue recognized ratablyover the minimum contract period increases. This effect is tempered bycustomers purchasing solutions that are deployed through the use of a location-or wireless application protocol-enabled mobile telephone installed with oursoftware application because we do not sell these devices and, therefore, donot recognize any revenues for such device sales. A similar tempering effectmay occur upon completion of the initial term of a customer’s contract becauserecognition of deferred revenue is complete and those customers may then renewtheir agreements for future services without the purchase of new hardware.

 

Average monthly hosted revenue per subscription was approximately$48.15 for the three months ended June 30, 2005, up from $46.87 for thesame period in 2004. Average monthly hosted revenue per subscription wasapproximately $48.41 for the six months ended June 30, 2005, up from$47.15 for the same period in 2004. The increases of $1.28 and $1.26 primarilyresulted from the price changes associated with the types of services and sizeand term of contracts for new customers as those revenues were layered on topof the revenues from existing customers.

 

Underlying price changes is a trend related to the variety of wirelessprotocols we now offer customers, including General Packet Radio Services, CodeDivision Multiple Access 1xRTT and the Integrated Digital Enhanced Network. Wedescribe those arrangements in which customers contract directly with wirelesscarriers for the wireless airtime component of our solution as “unbundled”.Conversely, we describe arrangements in which we contract directly withcustomers for the wireless airtime portion as “bundled”. The nature of ourrelationship with the wireless carriers dictates whether we will be enteringinto a bundled or unbundled arrangement with the customer. Selection of theappropriate protocol is related primarily to optimal wireless coverage for aspecific customer area of operation. Additionally, we are generally indifferentas to whether a bundled or unbundled arrangement results with a new customerbecause we have priced our solutions such that a similar contribution to grossprofits results from either arrangement. We have observed an increase in theproportion of new subscribers being added on an unbundled basis, resulting indecreased revenue from such customers. We expect that this trend will continuethrough the next 12 to 18 months.

 

***Cost of hostedrevenue (excluding intangibles amortization)***

 

Cost of hosted revenue consists of the amortization of the deferredcost of the*i*LM and relatedparts; costs associated with the final assembly, testing, provisioning,delivery and installation of hardware, and other costs such as provisions forinventory and repair costs; and expenses related to the delivery and support ofour MRM solutions. Cost of hosted revenue increased to $9.2 million from$8.7 million for the three months ended June 30, 2005 and 2004,respectively. The increase was attributed to increases in employee-related

 

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expenses of $516,000, amortization of deferred product costs of$485,000, facilities and communication expenses of $190,000, product repair andrefurbishment costs of $169,000 and provision of inventory valuation of$145,000, offset by reduction in direct service delivery expenses of $1.3million. The reduction in direct service delivery expenses primarily related tothe reversal of an accrual, in the amount of $806,000, in relation totelecommunication taxes upon settlement with the respective carrier. Cost ofhosted revenue headcount increased to 209 at June 30, 2005 from 137 at June 30,2004, respectively. Cost of hosted revenue increased to $18.8 million from$17.0 million for the six months ended June 30, 2005 and 2004,respectively. The increase was attributed to increases in employee-relatedexpenses of $970,000, amortization of deferred product costs of $410,000,facilities and communication expenses of $419,000, product repair andrefurbishment costs of $348,000, equipment and depreciation expenses of$199,000 and provision of inventory valuation of $184,000, offset by reductionin direct service delivery expenses of $1.3 million. We expect cost of hostedrevenue along with its related headcount increases to be moderate during thenext 12 months.

 

***IntangiblesAmortization***

 

Intangibles amortization relates to the intangible assets purchasedfrom Differential Corrections, Inc. in April 2000 and ConnectBusiness.com, Inc.in September 2002. The costs were amortized over their estimated usefullives of three and two years, respectively. As of June 30, 2005 theseintangibles were fully amortized.

 

***Hosted gross margin***

 

Hosted gross margins remained at 53% during the three months ended June 30,2005 and 2004. Hosted gross margins decreased to 52% from 53% during the sixmonths ended June 30, 2005 and 2004, as a result of higheremployee-related expenses.

 

| ** **                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Licensed  revenue                                                             |       | $                                     | 941        |                                | $          | — |   | $ | 1,443 |   | $ | — |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Cost of  licensed revenue (excluding intangibles amortization included below) |       | 1,473                                 |       | —                              |       | 2,173 |   | — |   |
| Intangibles  amortization                                                     |       | 1,010                                 |       | —                              |       | 1,467 |   | — |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Total cost  of licensed revenue                                               |       | 2,483                                 |       | —                              |       | 3,640 |   | — |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Licensed  gross deficit                                                       |       | $                                     | (1,542     | )                                   | $          | — |   | $ | (2,197 | ) | $ | — |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Licensed  gross deficit percentage                                            |       | (164%                                 | )          | —                              | %          | (152% | ) | — | % |

 

***Licensed revenue***

 

For the three and six months ended June 30, 2005, licensed revenuewas primarily attributable to post-contract customer support arrangementsrelated to existing contracts acquired in the acquisition of Vidus.

 

***Cost of licensedrevenue (excluding intangibles amortization)***

 

For the three and six months ended June 30, 2005, cost of licensedrevenue primarily consisted of employee related expenses in support of ourongoing post-contract customer support commitments.

 

***Intangiblesamortization***

 

Intangibles amortization of approximately $1.0 million and $1.5 millionduring the three and six months ended June 30, 2005 relates to the Vidusacquisition. The costs are being amortized over their estimated useful lives ofthree to ten years.

 

***Licensed grossdeficit***

 

Licensed gross deficit resulted from cost of licensed revenue being inexcess of licensed revenue.

 

***In-process researchand development***

 

In-process research and development for the six months ended June 30,2005 consists of research projects that had not reached technological feasibilityand had no alternative future use at the time of the acquisition of Vidus.

 

***Sales and marketingexpenses***

 

Sales and marketing expenses consist of employee salaries, salescommissions, marketing and promotional expenses. Sales and marketing expensesincreased to $5.8 million from $3.1 million for the three months ended June 30,2005 and 2004, respectively. The increase was attributable to increases inemployee-related expenses of $1.7 million, promotional expenses of $406,000,

 

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consultant expenses of $326,000, travel expenses of $137,000 andfacilities and communication expenses of $136,000. The increase in employeecompensation expense was associated with an increase in the average headcount.Sales and marketing headcount increased to 137 at June 30, 2005 from 95 atJune 30, 2004, respectively. Sales and marketing expenses increased to$10.5 million from $6.2 million for the six months ended June 30, 2005 and2004. The increase was attributable to increases in employee-related expensesof $2.6 million, promotional expenses of $550,000, consultant expenses of$435,000, facilities and communication expenses of $314,000 and travel expensesof $191,000. We expect that sales and marketing expenses will increase as weexpand our sales and marketing efforts, including, but not limited to, modestheadcount growth and promotional expenses related to new product and serviceofferings.

 

***Research anddevelopment expenses***

 

Research and development expenses consist of employee salaries andexpenses related to development personnel and consultants, as well as expensesassociated with software and hardware development. Research and developmentexpenses increased to $3.8 million from $1.4 million for the three monthsended June 30, 2005 and 2004, respectively. The change was primarily theresult of increases in employee-related expenses of $1.6 million and increasesin consultant expenses of $563,000 and travel expenses of $116,000. Researchand development headcount increased to 159 at June 30, 2005 from 64 at June 30,2004. Research and development expenses increased to $6.4 million from$2.8 million for the six months ended June 30, 2005 and 2004,respectively. The change was primarily the result of increases in employee-relatedexpenses of $2.3 million, consultant expenses of $685,000, equipment anddepreciation expenses of $172,000, travel expenses of $148,000 and facilitiesand communication expenses of $126,000. We expect that research and developmentexpenses will increase in future periods as we develop and introduce newproducts and services.

 

***General andadministrative expenses***

 

General and administrative expenses consist of employee salaries andrelated expenses for executive and administrative costs, accounting and professionalfees, recruiting costs and provisions for doubtful accounts. General andadministrative expenses increased to $3.9 million from $2.4 millionfor the three months ended June 30, 2005 and 2004, respectively. Thechange was primarily the results of increases in employee-related expenses of$838,000, an increase in equipment and depreciation expenses of $209,000,increases in accounting and audit fees of $197,000 and consulting fees andtemporary employee-related expenses of $124,000. Consulting fees and temporaryemployee-related expenses were primarily related to compliance activities inconnection with the Sarbanes-Oxley Act of 2002. General and administrativeheadcount increased to 90 at June 30, 2005 from 51 at June 30, 2004.General and administrative expenses increased to $8.4 million from$4.6 million for the six months ended June 30, 2005 and 2004,respectively. The change was primarily the results of increases inemployee-related expenses of $1.4 million, increases in accounting and audit feesof $655,000 and consulting fees and temporary employee-related expenses of$612,000 and an increase in equipment and depreciation expenses of $431,000. Consultingfees and temporary employee-related expenses were primarily related tocompliance activities in connection with the Sarbanes-Oxley Act of 2002. Weexpect that general and administrative expenses will increase in futureperiods, including modest increases in employee-related expenses.

 

***Terminated Acquisition Costs***

 

On April 12, 2004, we entered into a Combination Agreement withMDSI Mobile Data Solutions, Inc. (“MDSI”) providing for the acquisition ofMDSI. On July 27, 2004, the parties mutually agreed to terminate theCombination Agreement. As a result, for the three months ended June 30,2004, we expensed approximately $2.0 million of acquisition-related costs.

 

***Stock compensationexpense***

 

Deferred stock compensation related to stock option grants to employeesand consultants was fully amortized at June 30, 2005. Deferred stockcompensation was amortized on an accelerated basis over the vesting period ofindividual awards.

 

***Interest income, net***

 

Interest income is composed primarily of interest income on cash, cashequivalents and short-term investments. Interest expense for the three and sixmonths ended June 30, 2005 related to the short-term financing ofinsurance costs. Interest income net of interest expense increased to $729,000from $329,000 in the three months ended June 30, 2005 and 2004,respectively, and increased to $1.3 million from $583,000 in the six monthsended June 30, 2005 and 2004, respectively. The increases are the resultof larger invested balances and higher rates of return during the 2005 periods.

 

***Other income, net***

 

During the three-month periods ended June 30, 2005 and 2004, otherexpense consisted primarily of net foreign currency translation gains relatedto our subsidiaries in India and the United Kingdom.

 

***Benefit from IncomeTaxes***

 

The benefit for income taxes differs from the amount computed byapplying the statutory U.S. federal rate, principally due to prior periodlosses in the United States for which we have not provided. For the three andsix months ended June 30, 2005, we have recorded a benefit for incometaxes principally due to current and prior period losses in the United Kingdom.

 

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***Net (loss) income***

 

We experienced a net loss of $937,000 for the three months ended June 30,2005 compared to net income of $1.1 million for the three months ended June 30,2004 and a net loss of $8.3 million for the six months ended June 30, 2005compared to net income of $4.2 million for the six months ended June 30,2004. Our operating costs increased to $25.3 million from$17.6 million for the three months ended June 30, 2005 and 2004,respectively, and increased to $53.3 million from $32.6 million for the sixmonths ended June 30, 2005 and 2004, respectively. These increases inexpenses were accompanied by increases in revenues to $20.6 million from$18.3 million for the three months ended June 30, 2005 and 2004,respectively, and increases in revenues to $40.6 million from $36.2 million forthe six months ended June 30, 2005 and 2004, respectively.

 

We believe period-to-period comparisons of our operating results arenot necessarily meaningful. You should not rely on them to predict our futureperformance. The amount and timing of our operating expenses may fluctuatesignificantly in the future as a result of a variety of factors.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of June 30, 2005, we held $44.9 million of cash and cashequivalents and $63.3 million of short-term investments. Working capitaltotaled $108.2 million at June 30, 2005.

 

Net cash (used in) provided by operating activities was$(3.9) million and $4.5 million for the six months ended June 30,2005 and 2004, respectively. The $8.4 million decrease in the net cashprovided by operating activities reflects an increase in net loss of$12.5 million, which is offset by an increase of $3.9 million in non-cashcharges. Non-cash charges to earnings included the in-process research anddevelopment, depreciation and amortization, deferred income taxes, provisionfor doubtful accounts and sales returns, and provision for inventory valuation.At June 30, 2005, approximately $942,000 of our gross accounts receivablewere over 90 days old. We believe we have adequately provided allowancesas of June 30, 2005 for any such amounts that may ultimately becomeuncollectible.

 

Net cash provided by investing activities during the six months ended June 30,2005 was $33.1 million, which was comprised of $94.2 million in proceedsfrom sale of short-term investments offset by $54.2 million used to purchaseshort-term investments, $5.2 million used for the acquisition of Vidus, net ofcash acquired, and the purchase of $1.7 million of property and equipment.

 

Net cash provided by financing activities decreased to $1.1 millionfrom $2.4 million for the six months ended June 30, 2005 and 2004,respectively, due to a decrease in stock option exercises.

 

We believe that existing cash, cash equivalents and investments,together with any cash generated from operations, will be sufficient to fundour operating activities, capital expenditures and other obligations for atleast the next twelve months. However, if we are not successful in generatingsufficient cash flows from operations or in raising additional capital whenrequired in sufficient amounts and on terms acceptable to us, our businesscould suffer.

 

We have certain fixed contractual obligations and commitments thatinclude future estimated payments. Changes in our business needs, cancellationprovisions, changing interest rates and other factors may result in actualpayments differing from the estimates. We cannot provide certainty regarding thetiming and amounts of all payments. We have presented below a summary of themost significant assumptions used in our determination of amounts presented inthe tables, in order to assist in the review of this information within thecontext of our consolidated financial position, results of operations and cashflows. Thefollowing table represents our fixed contractual obligations and commitments asof June 30, 2005 (in thousands):

 
| ** **                      | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5  Years** | ** ** |
|---------------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
| Operating  lease commitments    |       | $         | 6,326      |                  | $          | 1,569         |       | $             | 2,580      |                   | $          | 2,177 |   | $ | — |   |
| Inventory  purchase commitments |       | 7,559     |       | 7,559                 |       | —        |       | —        |       | —                 |       |
| Other  purchase obligations     |       | 2,096     |       | 2,096                 |       | —        |       | —        |       | —                 |       |
|                            |       |      |       |                  |       |          |       |          |       |                   |       |
|                            |       | $         | 15,981     |                  | $          | 11,224        |       | $             | 2,580      |                   | $          | 2,177 |   | $ | — |   |

 

Other long-term liabilities in our consolidated balance sheet as of June 30,2005 include a deferred rent liability of $403,000. The payments related tothis amount are included in operating lease commitments above.

 

Operating lease commitments include minimum rental payments under ournon-cancelable operating leases for office facilities, as well as limitedoffice equipment that we utilize under lease arrangements. The amountspresented are consistent with contractual terms and are not expected to differ significantlyunless a substantial change in our headcount needs requires us to exit anoffice facility early or expand our occupied space.

 

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Inventory purchase commitments include minimum payments under non-cancelablecommitments for goods that were entered into through our ordinary course ofbusiness.

 

Other purchase obligation amounts include minimum purchase commitmentsfor marketing, computer equipment, software applications, engineeringdevelopment services and other goods and services that were entered intothrough our ordinary course of business. These contractual arrangements containsignificant performance requirements. Given the significance of the performancerequirements, actual payments could differ significantly from these estimates.

 

**RISKFACTORS**

 

In addition to the other information contained in this Report, thefollowing factors should be carefully considered in evaluating our business andprospects. The risks and uncertainties described below are intended to be onesthat are specific to us or our industry and that we deem material, but they arenot the only ones that we face.

 

**On February 18, 2005, we acquired VidusLimited (“Vidus”). The combined company may not realize expected benefits becauseof integration and other challenges.**

 

If the combined company fails to meet the challenges involved inintegrating its operations and products successfully or otherwise fails torealize any of the anticipated benefits of the acquisition, then the results ofoperations of the combined company could be seriously harmed. Realizing thebenefits of the acquisition, if any, will depend in part on the successfulintegration of technology, operations and personnel. The integration of thecompanies is a complex, time-consuming and expensive process that couldsignificantly disrupt the business of the combined company, and planning andpredicting future growth rates, if any, and operating results will be moredifficult for the combined company.

 

The combined company may not successfully integrate the operations of@Road and Vidus in a timely manner, or at all, and the combined company may notrealize the anticipated benefits of the acquisition to the extent, or in thetimeframe, anticipated. The anticipated benefits of the acquisition are basedon projections and assumptions, including successful integration, not actualexperience. In addition to the integration risks discussed above, the combinedcompany’s ability to realize those benefits could be adversely effected bypractical, legal or accounting constraints.

 

**We have incurred or expect to incursignificant costs associated with the acquisition of Vidus.**

 

In connection with the acquisition of Vidus, we have incurred estimatedacquisition related costs of $2.6 million. There can be no assurance that thecombined company will not incur additional material charges in subsequentquarters to reflect additional costs associated with the acquisition and theintegration of the two companies.

 

Under the purchase method of accounting, we allocated the totalestimated purchase price of $54.6 million to Vidus’ tangible assets,purchased technology and other intangible assets and liabilities assumed ofVidus based on their fair values as of the date of completion of the acquisition,and recorded the excess of the purchase price over those fair values asgoodwill. We will incur amortization expense over the useful lives ofamortizable intangible assets acquired in connection with the acquisition. Inaddition, to the extent the value of goodwill becomes impaired; we may berequired to incur material charges relating to the impairment of that asset.Any potential impairment charge could have a material impact on our results ofoperations and could have a material adverse effect on the market value of ourcommon stock.

 

**We have a history of losses, were recentlyprofitable and may not regain or sustain profitability in the future.**

 

We incurred a loss for the three months ended June 30, 2005. Althoughwe were profitable for each of the three month periods ending September 30,2003 through December 31, 2004, we have a history of losses sinceinception through the three month period ending June 30, 2003 and for thethree month periods ending March 31, 2005 and June 30, 2005. As of June 30,2005, we had an accumulated deficit of approximately $115.3 million. Toregain profitability we will need to generate significant revenues to offsetour cost of revenues and our sales and marketing, research and development andgeneral and administrative expenses. We may not achieve or sustain our revenueor profit goals and may continue to incur losses in the future. To facilitatethe sale of our MRM solutions, the fees for our proprietary hardware deviceshave often been at or below our costs. Changes such as increases in our pricingfor solutions or the pricing of competing solutions may harm our ability toincrease sales of our solutions to new and existing customers. If we are notable to expand our customer base and increase our revenue from new and existingcustomers, we may remain unprofitable.

 

**We face competition from internal developmentteams of potential customers and from existing and potential competitors, andif we fail to compete effectively, our ability to acquire new customers coulddecrease, our revenues would decline and our business would suffer.**

 

The markets for mobile resource management solutions and field serviceautomation software are competitive and are expected to become even morecompetitive in the future. If we do not compete effectively, competition couldharm our business and limit our ability to acquire new customers and growrevenues, which in turn could result in a loss of our market share and declinein revenues. We believe that our solutions face competition from a number ofbusiness productivity solutions, including:

 

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• solutionsdeveloped internally by information technology staff, particularly by largecustomers or prospects;

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

• solutions targeted at specificvertical markets, such as a service offered by Qualcomm that monitors assets inthe long-haul transportation sector; and

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

 

In addition, we believe that our solutions face competition frommanufacturing companies that seek to enter the mobile resource managementmarket, such as Trimble Navigation.

 

We also face competition from our current and potential alliances, suchas wireless carriers, that have developed or may develop their own solutions,solutions with captive and other suppliers or that support the marketing ofsolutions of other competitors.

 

We also face numerous challenges associated with overcoming thefollowing competitive factors:

 

*• Size and resources.*    Manyof our current and potential competitors have access to substantially greaterfinancial, marketing, distribution, engineering and manufacturing resourcesthan we do, which may enable them to react more effectively to new marketopportunities and customer requirements. Furthermore, these competitors may beable to adopt more aggressive pricing policies and offer more attractive termsthan we can.

*• Name recognition.*    Manyof our current and potential competitors have greater name recognition andmarket presence than we do, which may allow them to more effectively market andsell solutions to our current and potential customers.

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

*• Customerrelationships.*    Many of our current and potentialcompetitors have pre-existing relationships with our large customer prospects,which may allow them to more effectively market and sell competitive mobileresource management solutions.

 

**If AT&T Wireless ceases to operate itsCellular Digital Packet Data network by September 30, 2005 and we are unable tomigrate our customers to an alternate wireless network, our financial resultscould be adversely affected.**

 

Beginning March 31, 2003, AT&T Wireless discontinued new salesof its CDPD service. In October 2004, AT&T Wireless was acquired byCingular Wireless and is now a direct wholly owned subsidiary of CingularWireless. AT&T Wireless has also indicated that it expected to ceaseoperating its CDPD network by June 30, 2005. We believe that AT&TWireless has begun to terminate the CDPD network. We believe this will be done inseveral stages and will be completed by September 30, 2005. As of June 30,2005 approximately 8,000 of our core subscribers have yet to completenegotiations with us for their migration plans from the AT&T Wireless CDPDnetwork (“AT&T Subscribers”). We are working with the AT&T Subscribersto migrate them to an alternate wireless protocol. If the AT&T WirelessCDPD network is terminated, then the AT&T Subscribers who have not switchedto an alternate wireless protocol would have to use another CDPD network, ifavailable, or, if no other CDPD network is available, the AT&T Subscriberswould be unable to utilize our services. While we believe that we have thecapability to transition all of the AT&T Subscribers to another protocol ifall of the AT&T Subscribers choose to transition to another protocol, therecan be no assurance that we will be able to migrate all such subscribers ifthey chose to transition at the same time. Any resulting decrease in the totalnumber of subscribers of our services, even if for only a brief period, couldhave a material adverse effect on our financial results.

 

**If, pursuant to its announcement, VerizonWireless ceases to operate its Cellular Digital Packet Data network by the endof 2005 and we are unable to migrate our customers to an alternate wirelessnetwork, our financial results could be adversely affected.**

 

Verizon Wireless has indicated that it expects to cease operating itsCDPD network by the end of 2005. As ofJune 30, 2005, approximately 7,000 of our core subscribers have yet tocomplete negotiations with us for their migration plans from the VerizonWireless CDPD network. Additionally, at June 30, 2005, Verizon Communications hadapproximately 16,000 subscribers to our services that were using the VerizonWireless CDPD network (collectively with the 7,000 core subscribers, the"Verizon Subscribers"). At June 30, 2005, Verizon Communications hadyet to determine its migration plans from the CDPD networks. We areworking with the Verizon Subscribers to migrate them to an alternate wirelessprotocol. If the Verizon Wireless CDPD network is terminated, the VerizonSubscribers who have not switched to an alternate wireless protocol would haveto use another CDPD network, if available, or, if no other CDPD network isavailable, Verizon Subscribers would be unable to utilize our services. Whilewe believe that we have the capability to transition all of the VerizonSubscribers to another protocol if all of the Verizon Subscribers choose totransition to another protocol, there can be no assurance that we will be ableto migrate all such subscribers by December 31, 2005. Any resultingdecrease in the total number of subscribers of our services, even if for only abrief period, could have a material adverse effect on our financial results.

 

**Any material weakness or significantdeficiency identified in our internal controls could have an adverse effect onour business.**

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires thatcompanies evaluate and report on their internal control structure andprocedures over financial reporting. In addition, our independent registeredpublic accounting firm must report on management’s evaluation as well asevaluate our internal control structure and procedures. Other than thosedisclosed in Part I, Item 4 herein, there can be no assurance that theremay not be additional significant deficiencies or material weaknesses that wewould be required to report in the future. In addition, we expect any requiredremediation, if applicable, to increase our accounting, legal and other costs, 

 

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and may divert management resources from other business objectives andconcerns.

 

**Our stock price is volatile, which may causeyou to lose money and could lead to costly litigation against us that coulddivert our resources.**

 

From time to time, stock markets experience dramatic price and volumefluctuations, particularly for shares of technology companies. Thesefluctuations can be unrelated to the operating performance of these companies.Broad market fluctuations may reduce the market price of our common stock andcause you to lose some or all of your investment. These fluctuations may beexaggerated if the trading volume of our common stock is low. In addition, dueto the technology-intensive nature and growth rate of our business and themobile resource management market, the market price of our common stock mayrise and fall in response to:

 

• quarterlyvariations in operating results;

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

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

•announcements of technological or competitive developments;

• the gainor loss of a significant customer or order;

•disposition of shares of our common stock held by large investors; and

•acquisitions or strategic alliances by us or our competitors.

 

When the market price of a company’s stock drops significantly,stockholders often institute securities class action lawsuits against thatcompany. A lawsuit against us could cause us to incur substantial costs andcould divert the time and attention of our management and other resources fromour business.

 

**As we seek to serve larger customers, we facecompetition from businesses with greater financial resources, and we may beunable to compete effectively with these businesses.**

 

The existing market is competitive. Competition is particularlyvigorous for larger customers, which is a customer segment we have worked toserve. We expect competition to increase further as companies develop newproducts and/or modify their existing products to compete directly with ours.In addition, competitors may reduce prices to customers and seek to obtain ourcustomers through cost-cutting and other measures. To the extent thesecompanies compete effectively with us, our business could be adversely affectedby extended sales cycles, fewer sales, and lower prices, revenue and margins.

 

**The sales cycle for our products andsolutions is long, which may affect our operating results.**

 

Sales of our products and solutions can be significant decisions forprospective customers, and the Company devotes considerable time and resourcesto sign such customers. In addition, the Company’s software products oftenrequire significant customization for each customer. The Company may notrecognize revenue related to such software until such customization iscompleted and customer acceptance of the software is obtained. As a result, theCompany’s operating results on a quarter-to-quarter basis may fluctuate.Unexpected difficulties in the customization process or the delay of customeracceptance for a large contract could have a material adverse effect on theCompany’s quarterly financial and operating results.

 

**Vidus relies on a small number of customersfor its revenue.**

 

Vidus has only a limited operating history, and historically has beendependent upon a small number of customers for its revenue. If we are unable todevelop additional customers or fail to maintain existing customers, ourbusiness and operating results will be adversely affected.

 

**If wireless communications providers on whichwe depend for services decide to abandon or do not continue to expand theirwireless networks, we may lose customers and our revenues could decrease.**

 

Currently, our MRM solutions function on the following networks: GeneralPacket Radio Services (“GPRS”), Code Division Multiple Access 1xRTT (“CDMA1xRTT”), Integrated Digital Enhanced Networks (“IDEN”), Cellular Digital PacketData (“CDPD”) and Enhanced Data Rates For Global Evolution (“EDGE”). Theseprotocols cover only portions of the United States and Canada. If wirelesscommunications providers abandon these protocols, such as the anticipated 

 

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termination of CDPD networks, in favor of other types of wirelesstechnology, we may not be able to provide services to our MRM customers. Inaddition, if cellular carriers do not expand their coverage areas, we will beunable to meet the needs of MRM customers who may wish to use our servicesoutside the current cellular coverage area.

 

**Our quarterly operating results are subjectto fluctuations, and our stock price may decline if we do not meet theexpectations of investors and analysts.**

 

Our quarterly revenues and operating results are difficult to predictand may fluctuate significantly from quarter to quarter due to a number offactors, many of which are outside our control. These factors include, but arenot limited to:

 

• changesin the market for mobile resource management solutions;

• delays inmarket acceptance or implementation by customers of our solutions;

• delays ofcustomer acceptance of our solutions;

• changesin length of sales cycles of or demand by our customers for existing andadditional solutions;

• changesin the productivity of our distribution channels;

•introduction of new solutions by us or our competitors;

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

• changesin our mix of sources of revenues;

• generaleconomic and political conditions;

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

• any need to migrate to new wirelessnetworks, which could cause our solutions to be incompatible with new wirelessnetworks or become out of date.

 

Our expense levels are based, in part, on our expectation of futurerevenues. Additionally, a substantial portion of our expenses is relativelyfixed. As a result, any shortfall in revenues relative to our expectationscould cause significant changes in our operating results from quarter toquarter. We believe period-to-period comparisons of our revenue levels andoperating results are not meaningful. You should not rely on our quarterlyrevenues and operating results to predict our future performance. Our operatingresults have been, and in some future quarter our operating results may be,below the expectations of public market analysts and investors and, as aresult, the price of our common stock may fall.

 

**Our success depends upon our ability todevelop new solutions and enhance our existing solutions. If we cannot deliverthe features and functionality our customers demand, we will be unable toretain or attract new customers.**

 

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

 

**If one or more of the agreements we have withwireless communications providers is terminated and as a result we are unableto offer our solutions to customers within a wireless communications provider’scoverage area, we may be unable to deliver our solutions, we may losecustomers, and our revenues could decrease.**

 

Our existing agreements with wireless communications providers may insome cases be terminated immediately upon the occurrence of certain conditionsor with prior written notice. In connection with ceasing operation of theirCDPD networks, AT&T Wireless (which is now a direct wholly owned subsidiaryof Cingular Wireless) and Verizon Wireless may seek to terminate or not torenew their contracts for CDPD service with us. If one or more of our wirelesscommunications providers decides to terminate or not to renew its contract withus, we may incur additional costs relating to obtaining alternate coverage fromanother wireless communications provider outside of its primary coverage area,or we may be unable to replace the coverage at all, causing a complete loss ofservices to our customers on that network in that coverage area.

 

**We depend on a limited number of thirdparties to manufacture and supply certain components of our solutions.**

 

We rely on a limited number of sole suppliers for certain components ofour solutions. We do not have long-term agreements with these suppliers. Ifthese parties do not perform their obligations, or if they cease to supply thecomponents needed for our solutions, we may be unable to find other suppliersand our business would be seriously harmed. We cannot be sure that alternativesources for these components will be available when needed, or if available,that these components will be available on commercially reasonable terms. Thesesole suppliers are Motorola, which supplies microcontrollers for use in ourInternet Location Manager, Micronet, which supplies our Internet Data Terminal,and Everex, which supplies our Internet Wireless Manager.

 

Although we believe that we have sufficient quantities ofmicrocontrollers and Internet Data Terminals to last the next twelve months, andwe believe we have sufficient quantities of Internet Wireless Managers to meetour current obligations,

 

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if our agreements with these or other suppliers and manufacturers areterminated or expire, if we are unable to obtain sufficient quantities of theseproducts or components critical for our solutions, if the quality of theseproducts or components is inadequate, or if the terms for supply of theseproducts or components become commercially unreasonable, our search foradditional or alternate suppliers and manufacturers could result in significantdelays, added expense, contract breaches and our inability to maintain orexpand our customer base. Any of these events could require us to takeunforeseen actions or devote additional resources to provide our products andservices and could harm our ability to compete effectively.

 

**Our success depends on our ability tomaintain and expand our sales channels.**

 

To increase our market awareness, customer base and revenues, we needto expand our direct and indirect sales operations. There is strong competitionfor qualified sales personnel, and we may not be able to attract or retainsufficient new sales personnel to expand our operations. New sales personnelrequire training and it takes time for them to achieve full productivity, if atall. In addition, we believe that our success is dependent on the expansion ofour indirect distribution channels, including our relationships with wirelesscarriers and independent sales agents. These sales channel alliances requiretraining in selling our solutions and it will take time for these alliances toachieve productivity, if at all. We may not be able to establish relationshipswith additional distributors on a timely basis, or at all. Our independentsales agents, many of which are not engaged with us on an exclusive basis, maynot devote adequate resources to promoting and selling our solutions.

 

**We depend on recruiting and retainingqualified personnel and our inability to do so may result in a loss in sales,impair our ability to effectively manage our operations or impair our abilityto develop and support our solutions.**

 

Because of the technical nature of our solutions and the market inwhich we compete, our success depends on the continued services of our currentexecutive officers and our ability to attract and retain qualified personnelwith expertise in wireless communications, Global Positioning Systems, hostedsoftware applications, transaction processing and the Internet. Competitors andothers have recruited our employees in the past and may attempt to do so in thefuture. In addition, new employees generally require substantial training,which requires significant resources and management attention. Even if weinvest significant resources to recruit, train and retain qualified personnel,there can be no assurances that we will be successful in our efforts.

 

**A disruption of our services due toaccidental or intentional security breaches may harm our reputation, cause aloss of revenues and increase our expenses.**

 

Unauthorized access, computer viruses and other accidental or intentionalactions could disrupt our information systems or communications networks. Weexpect to incur significant costs to protect against the threat of securitybreaches and to alleviate problems caused by any breaches. Currently, thewireless transmission of our customers’ proprietary information is notprotected by encryption technology. If a third party were to misappropriate ourcustomers’ proprietary information, we could be subject to claims, litigationor other potential liabilities that could seriously harm our revenues andresult in the loss of customers. Additionally, our European operations aresubject to statutory EU warranties which would require us to fix any errors; ifso invoked, we would incur costs to fix any such errors.

 

**System or network failures could reduce oursales, increase costs or result in liability claims.**

 

Any disruption to our services, information systems or communicationsnetworks or those of third parties could result in the inability of ourcustomers to receive our services for an indeterminate period of time. Ouroperations depend upon our ability to maintain and protect our computer systemsat data centers located in Ashburn, Virginia and Redwood City, California, andour network operations center in Fremont, California. The facilities inCalifornia are in or near earthquake fault zones. Our services may not functionproperly if our systems fail, or if there is an interruption in the supply ofpower, or if there is an earthquake, fire, flood or other natural disaster, oran act of war or terrorism. Within each of our data centers, we have fullyredundant systems; however, in the event of a system or network failure, theprocess of shifting access to customer data from one data center to the otherwould be performed manually, and could result in a further disruption to ourservices. Any disruption to our services could cause us to lose customers orrevenue, or face litigation, customer service or repair work that would involvesubstantial costs and could distract management from operating our business.

 

**We may establish alliances or acquiretechnologies or companies in the future, which could result in the dilution ofour stockholders and disruption of our business, which could reduce ourrevenues or increase our costs.**

 

We are continually evaluating business alliances and externalinvestments in technologies related to our business. Acquisitions of companies,divisions of companies, businesses or products and strategic alliances entailnumerous risks, any of which could materially harm our business in severalways, including:

 

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

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

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

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

•assumption of liabilities of the acquired company.

 

Some or all of these problems may result from current or futurealliances, acquisitions or investments. Furthermore, we may not realize anyvalue from these alliances, acquisitions or investments.

 

**Our success and ability to compete dependsupon our ability to secure and protect patents, trademarks and otherproprietary rights.**

 

Our success depends on our ability to protect our proprietary rights tothe technologies used to implement and operate our services in the UnitedStates and in foreign countries. In the event that a third party breaches theconfidentiality provisions or other obligations in one or more of ouragreements or misappropriates or infringes our intellectual property rights orthe intellectual property rights licensed to us by third parties, our businesscould be seriously harmed. To protect our proprietary rights, we rely on acombination of trade secrets, confidentiality and other contractual provisionsand agreements, and patent, copyright and trademark laws, which afford us only limitedprotection. Third parties may independently discover or invent competingtechnologies or reverse engineer our trade secrets, software or othertechnology. Furthermore, laws in some foreign countries may not protect ourproprietary rights to the same extent as the laws of the United States.Therefore, the measures we take to protect our proprietary rights may not beadequate.

 

**Claims that we infringe third-partyproprietary rights could result in significant expenses or restrictions on ourability to provide our solutions.**

 

Third parties may claim that our current or future solutions infringetheir proprietary rights or assert other claims against us. As the number ofentrants into our market increases, the possibility of an intellectual propertyor other claim against us grows. Any 

 

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intellectual property or other claim, with or without merit, would betime-consuming and expensive to litigate or settle and could divert managementattention from focusing on our core business. As a result of such a dispute, wemay have to pay damages, incur substantial legal fees, develop costlynon-infringing technology, if possible, or enter into license agreements, whichmay not be available on terms acceptable to us, if at all. Any of these resultswould increase our expenses and could decrease the functionality of oursolutions, which would make our solutions less attractive to our current orpotential customers. We have agreed in some of our agreements, and may agree inthe future, to indemnify other parties for any expenses or liabilitiesresulting from claimed infringements of the proprietary rights of thirdparties.

 

**If our customers do not have access tosufficient capacity on reliable wireless networks, we may be unable to deliverour services, our customer satisfaction could decline and our revenues coulddecrease.**

 

Our ability to grow and maintain profitability depends on the abilityof wireless carriers to provide sufficient network capacity, reliability and securityto our MRM customers. Even where wireless carriers provide coverage to entiremetropolitan areas, there are occasional lapses in coverage, for example due totunnels blocking the transmission of data to and from wireless modems used withour solutions. These effects could make our services less reliable and lessuseful, and customer satisfaction could suffer.

 

**We depend on Global Positioning Systemtechnology owned and controlled by others. If we do not have continued accessto GPS technology or satellites, we will be unable to deliver our solutions andrevenues will decrease.**

 

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

 

In addition, the U.S. government could decide not to continue tooperate and maintain GPS satellites over a long period of time or to charge forthe use of the Global Positioning System. Furthermore, because ofever-increasing commercial applications of the Global Positioning System andinternational political unrest, U.S. government agencies may becomeincreasingly involved in the administration or the regulation of the use of GPSsignals in the future. If factors such as the foregoing affect the GlobalPositioning System, for example by affecting the availability, quality,accuracy or pricing of GPS technology, our business will suffer.

 

**Defects or errors in our solutions couldresult in the cancellation of or delays in the implementation of our solutions,which would damage our reputation and harm our financial condition.**

 

We must develop our MRM solutions quickly to keep pace with the rapidlychanging MRM market. Solutions that address this market are likely to containundetected errors or defects, especially when first introduced or when newversions are introduced. We may be forced to delay commercial release of newsolutions or updated versions of existing solutions until such errors ordefects are corrected, and in some cases, we may need to implement enhancementsto correct errors that were not detected until after deployment of oursolutions. Even after testing and release, our solutions may not be free fromerrors or defects, which could result in the cancellation or disruption of ourservices or dissatisfaction of customers. Such customer dissatisfaction woulddamage our reputation and result in lost revenues, diverted developmentresources, and increased service and warranty costs.

 

**The reporting of inaccurate location-relevantinformation could cause the loss of customers and expose us to legal liability.**

 

The accurate reporting of location-relevant information is critical toour MRM customers’ businesses. If we fail to accurately reportlocation-relevant information, we could lose customers, our reputation andability to attract new customers could be harmed, and we could be exposed tolegal liability. We may not have insurance adequate to cover losses we mayincur as a result of these inaccuracies.

 

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**From time to time, we are or may be subjectto litigation that could result in significant costs to us.**

 

From time to time, we are or may be subject to litigation in theordinary course of business relating to any number or type of claims, includingclaims for damages related to errors and malfunctions of our products andservices or their deployment. A securities, product liability or other claimcould seriously harm our business because of the costs of defending the lawsuit,diversion of employees’ time and attention, and potential damage to ourreputation. Some of our agreements with customers, suppliers and other thirdparties contain provisions designed to limit exposure to potential claims.Limitation of liability provisions contained in our agreements may not beenforceable under the laws of some jurisdictions. As a result, we could berequired to pay substantial amounts of damages in settlement or upon thedetermination of any of these types of claims. Although we carry generalliability and directors and officers insurance, our insurance may not coverpotential claims or may not be adequate to cover all costs incurred in defenseof potential claims or to indemnify us for all liability that may be imposed.

 

**Government regulations and standards couldsubject us to increased regulation, increase our costs of operations or reduceour opportunities to earn revenue.**

 

In addition to regulations applicable to businesses in general, we mayalso be subject to direct regulation by U.S. governmental agencies, includingthe Federal Communications Commission, Department of Defense, Department ofCommerce or the State Department. These regulations may impose licensingrequirements, privacy safeguards relating to certain subscriber information, orsafety standards, for example with respect to human exposure to electromagneticradiation and signal leakage. A number of legislative and regulatory proposalsunder consideration by federal, state, provincial, local and foreigngovernmental organizations may lead to laws or regulations concerning variousaspects of the Internet, wireless communications and GPS technology, includingon-line content, user privacy, taxation, access charges and liability forthird-party activities. Additionally, it is uncertain how existing lawsgoverning issues such as taxation on the use of wireless networks, intellectualproperty, libel, user privacy and property ownership will be applied to oursolutions. The adoption of new laws or the application of existing laws mayexpose us to significant liabilities and additional operational requirements,which could decrease the demand for our solutions and increase our cost ofdoing business. Wireless communications providers who supply us with airtimeare subject to regulation by the Federal Communications Commission, andregulations that affect them could also increase our costs or limit theprovision of our solutions.

 

**Fluctuations in the value of foreigncurrencies could result in decreased revenues, increased product costs andoperating expenses.**

 

We have customers, suppliers and manufacturers that are located outsidethe United States. Some transactions relating to supply and developmentagreements may be conducted in currencies other than the U.S. dollar, such asthe Sterling pound and the Euro, and fluctuations in the value of foreigncurrencies relative to the U.S. dollar could cause us to incur currencyexchange costs. In addition, some of our transactions denominated in U.S.dollars may be subject to currency exchange rate risk. We cannot predict theeffect of exchange rate fluctuations on our future operating results. Shouldthere be a sustained increase in average exchange rates for the localcurrencies in these countries, our suppliers and manufacturers may request aprice increase at the end of the contract period.

 

**Geopolitical, economic and militaryconditions, including terrorist attacks and other acts of war, may materiallyand adversely affect the markets on which our common stock trades, the marketsin which we operate, our operations and our profitability.**

 

Terrorist attacks and other acts of war, and any response to them, maylead to armed hostilities and such developments would likely cause instabilityin financial markets. Armed hostilities and terrorism may directly impact ourfacilities, personnel and operations which are located in the United States,Europe and India, as well as those of our customers. Furthermore, severeterrorist attacks or acts of war may result in temporary halts of commercialactivity in the affected regions, and may result in reduced demand for oursolutions. These developments could have a material adverse effect on ourbusiness and the trading price of our common stock.

 

**As of June 30, 2005, a limited number ofstockholders own approximately 40% of our stock and may act, or prevent certaintypes of corporate actions, to the detriment of other stockholders.**

 

Our directors, officers and greater than 5% stockholders own, as of June 30,2005, approximately 40% of our outstanding common stock. Accordingly, thesestockholders may, if they act together, exercise significant influence over allmatters requiring stockholder approval, including the election of a majority ofthe directors and the determination of significant corporate actions. Thisconcentration could also have the effect of delaying or preventing a change incontrol that could otherwise be beneficial to our stockholders.

 

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

 

We have adopted a certificate of incorporation and bylaws, which inaddition to state law, may discourage, delay or prevent a merger or acquisitionthat a stockholder may consider favorable. These provisions include thefollowing:

 

•establishing a classified board in which only a portion of the total boardmembers will be elected at each annual meeting;

•authorizing the board to issue preferred stock;

 

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•prohibiting cumulative voting in the election of directors;

• limitingthe persons who may call special meetings of stockholders;

•prohibiting stockholder action by written consent; and

•establishing advance notice requirements for nominations for election to theboard of directors or for proposing matters that can be acted on bystockholders at stockholder meetings.

 

We have adopted a certificate of incorporation that permits our boardto issue shares of preferred stock without stockholder approval, which meansthat our board could issue shares with special voting rights or otherprovisions that could deter a takeover. In addition to delaying or preventingan acquisition, the issuance of a substantial number of shares of preferredstock could adversely affect the price of our common stock and dilute existingstockholders.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk.**

 

**Interest rate risk**

 

We are exposed to the impact of interest rate changes and changes inthe market values of our marketable securities. We have not used derivativefinancial instruments in our investment portfolio. We invest our excess cash indebt instruments of high-quality corporate issuers and the U.S. government orits agencies. Our investment policy limits the amount of credit exposure to anyone issuer and limits our investments to maturity dates of less than one year.We are averse to principal loss and seek to preserve our invested funds bylimiting default risk, market risk and reinvestment risk. We mitigate defaultrisk by investing in high quality credit securities and by positioning ourportfolio to respond appropriately to a significant reduction in a creditrating of any investment issuer or guarantor. The portfolio includes onlymarketable securities with active secondary or resale markets to provideportfolio liquidity.

 

Cash, cash equivalents and marketable securities in both fixed andfloating rate interest-earning instruments carry a degree of interest raterisk. Fixed rate securities may have their fair market value adversely impacteddue to rising interest rates, while floating rate securities may produce lessincome than expected if interest rates fall. Due in part to these factors, ourfuture interest income may fall short of expectations due to changes ininterest rates or we may suffer losses in principal if forced to sellsecurities that have declined in market value due to changes in interest rates.

 

The table below presents the carrying value and related weightedaverage interest rates for our cash, cash equivalents and marketable securities.The carrying values approximate fair values as of June 30, 2005 and December 31,2004. As of June 30, 2005, marketable securities consisted of $44.9million with original maturity dates of 90 days or less and$63.3 million with original maturity dates of greater than 90 days.As of December 31, 2004, marketable securities consisted of$14.5 million with original maturity dates of 90 days or less and$103.2 million with original maturity dates of greater than 90 days.

 
| ** **                                              | ** ** | **Carrying  value at  June 30,  2005** | ** ** | **Average  rate of  return at  June 30,  2005** | ** ** | **Carrying  value at  December 31,  2004** | ** ** | **Average  rate of  return at  December 31,  2004** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                              | ** ** | **(in thousands)**                          | ** ** | **(annualized)**                                     | ** ** | **(in thousands)**                              | ** ** | **(annualized)**                                         | ** ** |
| **Cash,  cash equivalents and marketable securities**   |       |                                        |       |                                                 |       |                                            |       |                                                     |       |
| Cash and  cash equivalents—variable rate           |       | $                                           | 3,860      |                                                 | 1.8        | %                                               | $          | 3,022                                                    |       | 1.3 | % |
| Money market  funds—variable rate                  |       | 10,471                                      |       | 3.0                                                  | %          | 951                                             |       | 2.0                                                      | %          |
| Cash and  cash equivalents—fixed rate              |       | 30,543                                      |       | 3.0                                                  | %          | 10,521                                          |       | 2.3                                                      | %          |
|                                                    |       |                                        |       |                                                 |       |                                            |       |                                                     |       |
| Total cash  and cash equivalents                        |       | 44,874                                      |       | 2.9                                                  | %          | 14,494                                          |       | 2.1                                                      | %          |
| Marketable  securities—fixed rate                  |       | 63,309                                      |       | 2.9                                                  | %          | 103,222                                         |       | 2.0                                                      | %          |
|                                                    |       |                                        |       |                                                 |       |                                            |       |                                                     |       |
| Total cash,  cash equivalents and marketable securities |       | $                                           | 108,183    |                                                 | 2.9        | %                                               | $          | 117,716                                                  |       | 2.0 | % |

 

**Foreign Currency Exchange**

 

We transact business primarily in U.S. dollars. We are subject,however, to adverse movements in foreign currency exchange rates in thosecountries where we conduct business. To date, the effect of fluctuations inforeign currency exchange rates on expenses has not been material. Operatingexpenses incurred by our subsidiaries in India and United Kingdom aredenominated in Indian Rupees and British Pounds, respectively. We holdfixed-price agreements denominated in U.S. dollars with key foreign-basedsuppliers: Orient Semiconductor Electronics, in Taiwan, manufactures theInternet Location Manager; Taiwan Semiconductor Manufacturing Company, inTaiwan, manufactures our Global Positioning System digital receiver chips;Sierra Wireless, in Canada, provides the modem for some versions of theInternet Location Manager; and Micronet, in Israel, supplies our Internet DataTerminal. Should there be a sustained increase in average exchange rates forthe local currency in any of the foregoing countries, our suppliers may requestincreased pricing on any new agreements. If this were to occur for all of thesecurrencies and with each of these suppliers, a 10 percent increase inaverage exchange rates could increase our product costs by approximately 5.4percent.

 

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We do not use derivative financial instruments for speculative tradingpurposes, nor do we currently hedge any foreign currency exposure to offset theeffects of changes in foreign exchange rates. Similarly, we do not usefinancial instruments to hedge operating expenses of our subsidiaries in Indiaand United Kingdom.

 

**Item 4. Controls and Procedures.**

 

*Evaluation of Disclosure Controls andProcedures*

 

As of June 30, 2005, we carried outan evaluation, under the supervision and with the participation of ourmanagement, including our principal executive officer and principal financialofficer, of the effectiveness of our disclosure controls and procedures asdefined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934 (the “Exchange Act”). A disclosure control system, nomatter how well conceived and implemented, can provide only reasonableassurance that the objectives of such disclosure control system are satisfied.Because of the inherent limitations in all disclosure control systems, noevaluation of disclosure controls can provide absolute assurance that all disclosurecontrol issues, if any, within the company have been detected. As part of ourevaluation, we considered factors such as whether data, if any, concerning significantchanges to the Company’s business, new agreements entered into during thequarter, changes in relationships with suppliers and customers, new resourcecommitments, litigation matters, the material weakness described below andchanges in accounting interpretations were disclosed in connection with thedisclosure committee’s investigation of such matters. In addition,we considered the comments, if any, of process owners regarding their awarenessof any matters that could give rise to additional disclosure. Based upon thatevaluation, as of June 30, 2005 our principal executive officer andprincipal financial officer have concluded, to the reasonable assurance levelof certainty that a disclosure system can provide, that our disclosure controlsand procedures are effective. Our disclosure controls and procedures aredesigned to provide a reasonable level of assurance of reaching our desireddisclosure control objectives and are effective in doing so. There were nosignificant changes in our disclosure controls or in other factors that couldsignificantly affect these disclosure controls subsequent to the date of theirevaluation.

 

*Management’s Report on InternalControl over Financial Reporting*

 

As part of our first quarter 2005 closingprocess and assessment of internal control over financial reporting, weidentified an internal control deficiency that constituted a “materialweakness,” as defined by the Public Company Accounting Oversight Board AuditingStandard No. 2. The material weakness occurred during the first quarter of2005. The material weakness concerned our interpretation and implementation ofvarious complex accounting principles in the area of unique non-recurringtransactions, specifically (a) our recent acquisition of Vidus and (b) certainsignificant customer contracts.

 

With respect to the Vidus acquisition,the complex accounting principles included (i) accounting for acquisitionand integration costs incurred by Vidus as a result of its acquisition by us, (ii) thevaluation of Vidus’ deferred revenue, (iii) revenue recognition of apre-existing customer contract and (iv) deferred tax liability, asset andvaluation allowance. The phrase “certain significant customer contracts” refersto the pre-existing Vidus customer contract noted above and a customer contractto provide our mobile resource management solutions, which included morecomplex contractual elements than are typically found in our customeragreements. The material weakness related to these transactions including theprocess of determining the proper accounting to be applied to activitiesoccurring under the agreements and, with respect to the Vidus acquisition,certain estimates and assumptions.

 

With respect to such unique non-recurringtransactions, we performed additional analysis relating to accounting for suchagreements in the context of preparing our financial statements. Afterdialogues with our independent registered public accountants and independentvaluation specialists, we revised our accounting treatment and conclusions andestimates and made adjustments to the balances that we ultimately used inpreparing our financial statements. Upon a determination that it wasappropriate to make such adjustments, we concluded that we had a materialweakness in our internal controls over financial reporting.

 

*Changes to Internal Control overFinancial Reporting*

 

There have been changes to our internal controls over financialreporting during the second quarter of 2005. 

 

As of June 30, 2005, the Company had not fully remediated the materialweakness described above.  During thesecond quarter of 2005, we commenced implementation of a remediation plan tosupplement our existing processes to (a) identify internally uniquenon-recurring transactions occurring during the quarter and (b) assess theaccounting treatment to be used in connection with such transactions. Thesesupplemental elements include (a) additional internal reviews of the underlyingtransactions and related accounting conclusions and (b) the use of externalconsulting expertise to provide additional advice relating to our accountinginterpretations. The phrase “external consulting expertise” means that the Company would engage the services of anindependent registered public accounting firm or third party with appropriateaccounting knowledge and expertise.

 

To date, the Company has not incurred,nor does it expect to incur in the future, any material costs in connectionwith the remediation plan.

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

From time to time, we are subject to claims in legal proceedingsarising in the normal course of our business. Based on our evaluation of thesematters, we believe that these matters will not have a material adverse effecton our operations or financial position.

 

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

 

On June 9, 2005, we held our annual meetingof stockholders. The following summarizes the matters submitted to a vote ofthe stockholders:

 

1.                                       Theelection of the following nominee to serve as a member of our Board ofDirectors:

 

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| **Nominee**        | ** ** | **Votes in Favor** | ** ** | **Votes Against** | ** ** |
|--------------------|------------|--------------------|------------|-------------------|------------|
| Charles E.  Levine |       | 46,920,109         |       | 2,820,432         |       |

 

2.                                       Theratification of the appointment of Deloitte & Touche LLP as ourindependent registered public accounting firm for the year ending December 31,2005:

 

 

| Votes in Favor: 49,391,194 |   | Votes Against: 327,780 |   | Votes Abstaining: 21,566 |   |
|----------------------------|--------|------------------------|--------|--------------------------|--------|

 

The names of each director whose term of officeas a director continued after the annual meeting of stockholders are thefollowing:

 

KrishPanuKris ChellamCharles E. LevineT. Peter Thomas

JamesW. Davis

 

**Item 6.Exhibits.**

** **
| 10.53  |   | Lease agreement among a subsidiary of  Registrant, Prime Holdings Limited and Melbourne Business Court Management  Company Limited, dated October 15, 2003                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                         |
| 10.54  |   | Lease agreement among a subsidiary of  Registrant, Felaw Maltings Ipswich (No. 1) Limited, Felaw Maltings Ipswich  (No. 2) Limited and Mars Pension Trustees Limited, dated December 9, 2004 |
|   |   |                                                                                                                                                                                         |
| 10.55  |   | Lease agreement among a subsidiary of  Registrant, Felaw Maltings Ipswich (No. 1) Limited, Felaw Maltings Ipswich  (No. 2) Limited and Mars Pension Trustees Limited, dated December 9, 2004 |
|   |   |                                                                                                                                                                                         |
| 10.56  |   | Lease agreement between a subsidiary of  Registrant and Riverdale Estates Limited, dated July 12, 2004                                                                                       |
|   |   |                                                                                                                                                                                         |
| 10.57  |   | Lease agreement between a subsidiary of  Registrant and Riverdale Estates Limited, dated July 12, 2004                                                                                       |
|   |   |                                                                                                                                                                                         |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                             |
|   |   |                                                                                                                                                                                         |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                             |
|   |   |                                                                                                                                                                                         |
| 32.1   |   | Section 1350 Certification                                                                                                                                                              |
|   |   |                                                                                                                                                                                         |
| 32.2   |   | Section 1350 Certification                                                                                                                                                              |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|   | **@ROAD, INC.**                     |
|--------|-------------------------------------|
|   |                                |
|   | By:                                 | /s/ Michael Martini |   |
|   |                                |
|   | Michael Martini                     |
|   | Chief Financial Officer             |
|   | (Principal Financial and Accounting |
|   | Officer)                            |
|   |                                |
|   | Date: August 9, 2005           |

 

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***Exhibit Index***

 

**Exhibits**

 
| 10.53  |   | Lease agreement among a subsidiary of  Registrant, Prime Holdings Limited and Melbourne Business Court Management  Company Limited, dated October 15, 2003.                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                          |
| 10.54  |   | Lease agreement among a subsidiary of  Registrant, Felaw Maltings Ipswich (No. 1) Limited, Felaw Maltings Ipswich  (No. 2) Limited and Mars Pension Trustees Limited, dated December 9, 2004. |
|   |   |                                                                                                                                                                                          |
| 10.55  |   | Lease agreement among a subsidiary of  Registrant, Felaw Maltings Ipswich (No. 1) Limited, Felaw Maltings Ipswich  (No. 2) Limited and Mars Pension Trustees Limited, dated December 9, 2004. |
|   |   |                                                                                                                                                                                          |
| 10.56  |   | Lease agreement between a subsidiary of  Registrant and Riverdale Estates Limited, dated July 12, 2004.                                                                                       |
|   |   |                                                                                                                                                                                          |
| 10.57  |   | Lease agreement between a subsidiary of  Registrant and Riverdale Estates Limited, dated July 12, 2004.                                                                                       |
|   |   |                                                                                                                                                                                          |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                             |
|   |   |                                                                                                                                                                                          |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                             |
|   |   |                                                                                                                                                                                          |
| 32.1   |   | Section 1350 Certification.                                                                                                                                                              |
|   |   |                                                                                                                                                                                          |
| 32.2   |   | Section 1350 Certification.                                                                                                                                                              |

 

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