**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

**(MarkOne)**

 
| **ý**                                              | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                          |
| **For  the quarterly period ended March 31, 2005** |
|                                                    |       |                                                                                          |
| **OR**                                                  |
|                                                    |       |                                                                                          |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from            to            **

 

**Commissionfile number 000-31511**

 

**@ROAD, INC.**

(Exactname of registrant 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 of principalexecutive offices, including zip code)

 

**510-668-1638**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

**Yes   ****ý     No**     o

 

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

 

**Yes   ****ý     No**     o

 

As of May 2, 2005 there were 60,620,143 shares of the registrant’sCommon Stock outstanding.

 

 

----

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                        | 3  |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
|         | Item 1.  Financial Statements.                                                                                                                              | 3  |
|         | Condensed Consolidated Balance Sheets as  of March 31, 2005 and December 31, 2004.                                                                          | 3  |
|         | Condensed Consolidated  Statements of Operations for the three months ended March 31, 2005 and 2004.                                                             | 4  |
|         | Condensed Consolidated Statements  of Stockholders’ Equity for the three months ended March 31, 2005 and 2004  and the nine months ended December 31, 2004. | 5  |
|         | Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2005 and 2004.                                                             | 6  |
|         | Notes to Condensed Consolidated  Financial Statements.                                                                                                           | 7  |
|         | Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations.                                                       | 20 |
|         | Item 3. Quantitative and Qualitative  Disclosures About Market Risk.                                                                                        | 34 |
|         | Item 4. Controls and Procedures.                                                                                                                            | 35 |
| **PART II.** | **OTHER  INFORMATION**                                                                                                                                           | 35 |
|         | Item 1. Legal Proceedings.                                                                                                                                  | 35 |
|         | Item 6. Exhibits.                                                                                                                                           | 35 |

 

2

----

 

**PARTI.****FINANCIALINFORMATION**

 

**Item 1****. Financial Statements.**

 

**@Road,Inc.**

**Condensed Consolidated BalanceSheets**

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

 
| ** **                                                                                                                                                                                                  | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                                  |       |                |       |                   |       |
| Current assets:                                                                                                                                                                                             |       |                |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                  |       | $                   | 35,758     |                   | $          | 14,494 |   |
| Short-term  investments                                                                                                                                                                                     |       | 75,013              |       | 103,222                |       |
| Accounts  receivable, net                                                                                                                                                                                   |       | 7,827               |       | 7,960                  |       |
| Inventories                                                                                                                                                                                                 |       | 3,702               |       | 3,593                  |       |
| Deferred product  costs                                                                                                                                                                                     |       | 11,626              |       | 11,104                 |       |
| Prepaid expenses  and other                                                                                                                                                                                 |       | 2,316               |       | 1,542                  |       |
| Total current  assets                                                                                                                                                                                       |       | 136,242             |       | 141,915                |       |
| Property and  equipment, net                                                                                                                                                                                |       | 4,963               |       | 3,668                  |       |
| Deferred product  costs                                                                                                                                                                                     |       | 6,695               |       | 5,947                  |       |
| Goodwill                                                                                                                                                                                                    |       | 22,867              |       | —                 |       |
| Intangible  assets, net                                                                                                                                                                                     |       | 32,633              |       | —                 |       |
| Other assets                                                                                                                                                                                                |       | 225                 |       | 680                    |       |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| Total assets                                                                                                                                                                                                |       | $                   | 203,625    |                   | $          | 152,210 |   |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| **LIABILITIES, REDEEMABLE PREFERRED STOCK AND  STOCKHOLDERS’ EQUITY**                                                                                                                                  | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current  liabilities:                                                                                                                                                                                       |       |                |       |                   |       |
| Accounts payable                                                                                                                                                                                            |       | $                   | 6,585      |                   | $          | 5,666 |   |
| Accrued  liabilities                                                                                                                                                                                        |       | 8,449               |       | 5,529                  |       |
| Deferred revenue  and customer deposits                                                                                                                                                                     |       | 12,209              |       | 11,347                 |       |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| Total current  liabilities                                                                                                                                                                                  |       | 27,243              |       | 22,542                 |       |
| Deferred revenue                                                                                                                                                                                            |       | 7,739               |       | 4,830                  |       |
| Deferred tax  liabilities                                                                                                                                                                                   |       | 4,691               |       | —                 |       |
| Other long-term  liabilities                                                                                                                                                                                |       | 323                 |       | 2                      |       |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| Total  liabilities                                                                                                                                                                                          |       | 39,996              |       | 27,374                 |       |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| Commitments and  contingencies (Note 9)                                                                                                                                                                     |       |                |       |                   |       |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| Preferred stock,  $0.0001 par value, 10,000 shares authorized, 98 shares designated as  redeemable preferred stock, shares issued and outstanding: 78 at March 31,  2005 and none at December 31, 2004 |       | 7,805               |       | —                 |       |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                                 |       |                |       |                   |       |
| Common stock,  $0.0001 par value, 250,000 shares authorized, shares issued and outstanding:  60,309 at March 31, 2005 and 54,805 at December 31, 2004                                                  |       | 270,361             |       | 232,016                |       |
| Notes receivable  from stockholders                                                                                                                                                                         |       | (10                 | )          | —                 |       |
| Accumulated  other comprehensive loss                                                                                                                                                                       |       | (148                | )          | (179                   | )          |
| Accumulated  deficit                                                                                                                                                                                        |       | (114,379            | )          | (107,001               | )          |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| Total  stockholders’ equity                                                                                                                                                                            |       | 155,824             |       | 124,836                |       |
|                                                                                                                                                                                                        |       |                |       |                   |       |
| Total  liabilities, redeemable preferred stock and stockholders’ equity                                                                                                                                |       | $                   | 203,625    |                   | $          | 152,210 |   |

 

See notes to condensedconsolidated financial statements.

 

3

----

 

**@Road,Inc.**

**Condensed Consolidated Statementsof Operations**

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

 
| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Revenues:                                                                     |       |                              |       |   |   |
| Hosted                                                                        |       | $                                 | 19,490     |   | $ | 17,892 |   |
| Licensed                                                                      |       | 502                               |       | — |   |
|                                                                          |       |                              |       |   |   |
| Total revenues                                                                |       | 19,992                            |       | 17,892 |   |
|                                                                          |       |                              |       |   |   |
| Costs and  expenses:                                                          |       |                              |       |   |   |
| Cost of hosted  revenue (excluding intangibles amortization included below)   |       | 9,524                             |       | 8,368 |   |
| Cost of licensed  revenue (excluding intangibles amortization included below) |       | 700                               |       | — |   |
| Intangibles  amortization                                                     |       | 457                               |       | 10 |   |
| In-process  research and development                                          |       | 5,640                             |       | — |   |
| Sales and  marketing                                                          |       | 4,647                             |       | 3,111 |   |
| Research and  development                                                     |       | 2,575                             |       | 1,367 |   |
| General and  administrative                                                   |       | 4,447                             |       | 2,182 |   |
| Stock  compensation (*)                                                       |       | —                            |       | 4 |   |
|                                                                          |       |                              |       |   |   |
| Total costs and  expenses                                                     |       | 27,990                            |       | 15,042 |   |
|                                                                          |       |                              |       |   |   |
| (Loss)  income from operations                                           |       | (7,998                            | )          | 2,850 |   |
|                                                                          |       |                              |       |   |   |
| Other income,  net:                                                           |       |                              |       |   |   |
| Interest income,  net                                                         |       | 618                               |       | 254 |   |
| Other income,  net                                                            |       | 2                                 |       | 6 |   |
|                                                                          |       |                              |       |   |   |
| Total other  income, net                                                      |       | 620                               |       | 260 |   |
|                                                                          |       |                              |       |   |   |
| Net (loss)  income                                                            |       | (7,378                            | )          | 3,110 |   |
| Preferred stock  dividends                                                    |       | (57                               | )          | — |   |
|                                                                          |       |                              |       |   |   |
| Net (loss)  income attributable to common stockholders                        |       | $                                 | (7,435     | ) | $ | 3,110 |   |
|                                                                          |       |                              |       |   |   |
| Net (loss)  income per share:                                            |       |                              |       |   |   |
| Basic                                                                         |       | $                                 | (0.13      | ) | $ | 0.06 |   |
|                                                                          |       |                              |       |   |   |
| Diluted                                                                       |       | $                                 | (0.13      | ) | $ | 0.05 |   |
|                                                                          |       |                              |       |   |   |
| Shares used in  calculating net (loss) income per share:                 |       |                              |       |   |   |
| Basic                                                                         |       | 57,385                            |       | 53,771 |   |
|                                                                          |       |                              |       |   |   |
| Diluted                                                                       |       | 57,385                            |       | 58,298 |   |
|                                                                          |       |                              |       |   |   |
| (*) 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 to condensedconsolidated financial statements.

 

4

----

 

**@Road,Inc.**

**Condensed Consolidated Statements of Stockholders’ Equity**

**For theThree Months Ended March 31, 2005 and 2004**

**and theNine Months Ended December 31, 2004**

**(Inthousands) (unaudited)**

 
| ** **                                                              | ** ** | ** **

** **

**Common Stock** | ** ** | **Deferred  Stock Compensation** | ** ** | **Notes Receivable  From Stockholders** | ** ** | **Accumulated  Other Comprehensive Loss** | ** ** | **Accumulated  Deficit** | ** ** | **Stockholders’  Equity** | ** ** | **Total Comprehensive  Income (Loss)** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|----------------------------------------|------------|
| ** **                                                              |
|                                                                    | ** ** | **Shares**                               | ** ** | **Amount**                       | ** ** | ** **                              |
| BALANCES,  January 1, 2004                                         |       | 53,700                                   |       | $                                | 228,441    |                                    | $          | (4                                        | )          | $                        | (87        | )                              | $          | —                                 |       | $ | (116,222 | ) | $ | 112,128 |   |   |   |
| Net income                                                              |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       | 3,110                          |       | 3,110                                  |       | $ | 3,110 |   |
| Unrealized (loss)  on short-term investments                            |       |                                     |       |                             |       |                                    |       |                                      |       | (1                       | )          |                           |       | (1                                     | )          | (1 | ) |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| Comprehensive  income                                                   |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       | $ | 3,109 |   |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| Exercise of stock  options                                              |       | 164                                      |       | 515                              |       |                                    |       |                                      |       |                     |       |                           |       | 515                                    |       |   |   |
| Collection of  notes receivable from stockholders                       |       |                                     |       |                             |       |                                    |       | 50                                        |       |                     |       |                           |       | 50                                     |       |   |   |
| Amortization of  deferred stock compensation                            |       |                                     |       |                             |       | 4                                       |       |                                      |       |                     |       |                           |       | 4                                      |       |   |   |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| BALANCES, March  31, 2004                                               |       | 53,864                                   |       | 228,956                          |       | —                                  |       | (37                                       | )          | (1                       | )          | (113,112                       | )          | 115,806                                |       |   |   |
| Net income                                                         |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       | 6,111                          |       | 6,111                                  |       | $ | 6,111 |   |
| Unrealized (loss)  on short-term investments                            |       |                                     |       |                             |       |                                    |       |                                      |       | (178                     | )          |                           |       | (178                                   | )          | (178 | ) |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| Comprehensive  income                                                   |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       | $ | 5,933 |   |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| Shares issued  under employee stock purchase plan                       |       | 464                                      |       | 2,135                            |       |                                    |       |                                      |       |                     |       |                           |       | 2,135                                  |       |   |   |
| Exercise of stock  options                                              |       | 477                                      |       | 925                              |       |                                    |       |                                      |       |                     |       |                           |       | 925                                    |       |   |   |
| Collection of  notes receivable from stockholders                       |       |                                     |       |                             |       |                                    |       | 37                                        |       |                     |       |                           |       | 37                                     |       |   |   |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| BALANCES,  December 31, 2004                                       |       | 54,805                                   |       | 232,016                          |       | —                                  |       | —                                    |       | (179                     | )          | (107,001                       | )          | 124,836                                |       |   |   |
| Net loss                                                                |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       | (7,378                         | )          | (7,378                                 | )          | $ | (7,378 | ) |
| Unrealized gain  on short-term investments                              |       |                                     |       |                             |       |                                    |       |                                      |       | 31                       |       |                           |       | 31                                     |       | 31 |   |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| Comprehensive  loss                                                     |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       | $ | (7,347 | ) |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| 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                                    |       |   |   |
| Exercise of stock  options                                              |       | 50                                       |       | 172                              |       |                                    |       |                                      |       |                     |       |                           |       | 172                                    |       |   |   |
| Issuance of notes  receivable to stockholder                            |       |                                     |       |                             |       |                                    |       | (11                                       | )          |                     |       |                           |       | (11                                    | )          |   |   |
| Collection of  notes receivable from stockholder                        |       |                                     |       |                             |       |                                    |       | 1                                         |       |                     |       |                           |       | 1                                      |       |   |   |
| Dividends on  redeemable preferred stock                                |       |                                     |       | (57                              | )          |                                    |       |                                      |       |                     |       |                           |       | (57                                    | )          |   |   |
|                                                                    |       |                                     |       |                             |       |                                    |       |                                      |       |                     |       |                           |       |                                   |       |   |   |
| BALANCES, March  31, 2005                                               |       | 60,309                                   |       | $                                | 270,361    |                                    | $          | —                                    |       | $                        | (10        | )                              | $          | (148                                   | )          | $ | (114,379 | ) | $ | 155,824 |   |   |   |

 

See notes to condensedconsolidated financial statements.

 

5

----

 

**@Road,Inc.**

**Condensed Consolidated Statementsof Cash Flows**

**(Inthousands) (unaudited)**

 
| ** **                                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                                    |       |                              |       |   |   |
| Net (loss)  income                                                                                        |       | $                                 | (7,378     | ) | $ | 3,110 |   |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |                              |       |   |   |
| Depreciation and  amortization                                                                            |       | 999                               |       | 300 |   |
| Loss (gain) on  disposal of property and equipment                                                        |       | 33                                |       | (2 | ) |
| Amortization of  deferred stock compensation                                                              |       | —                            |       | 4 |   |
| Provision  (reversal) for inventory reserves                                                              |       | 25                                |       | (14 | ) |
| Provision (reversal)  for doubtful accounts and sales returns                                             |       | 201                               |       | (98 | ) |
| In-process  research and development                                                                      |       | 5,640                             |       | — |   |
| Change in assets  and liabilities:                                                                        |       |                              |       |   |   |
| Accounts  receivable                                                                                      |       | 1,230                             |       | 1,102 |   |
| Inventories                                                                                               |       | (134                              | )          | (1,580 | ) |
| Deferred product  costs                                                                                   |       | (1,270                            | )          | 372 |   |
| Prepaid expenses  and other                                                                               |       | 93                                |       | (647 | ) |
| Accounts payable                                                                                          |       | 379                               |       | (310 | ) |
| Accrued and  other liabilities                                                                            |       | (391                              | )          | 140 |   |
| Deferred revenue  and customer deposits                                                                   |       | (499                              | )          | (83 | ) |
|                                                                                                      |       |                              |       |   |   |
| Net cash (used  in) provided by operating activities                                                      |       | (1,072                            | )          | 2,294 |   |
|                                                                                                      |       |                              |       |   |   |
| Cash flows from  investing activities:                                                                    |       |                              |       |   |   |
| Purchase of  property and equipment                                                                       |       | (848                              | )          | (290 | ) |
| Purchase of  short-term investments                                                                       |       | (35,132                           | )          | (91,628 | ) |
| Proceeds from  the sale of short-term investments                                                         |       | 63,372                            |       | — |   |
| Acquisition of  Vidus, net of cash acquired                                                               |       | (5,229                            | )          | — |   |
|                                                                                                      |       |                              |       |   |   |
| Net cash  provided by (used in) investing activities                                                      |       | 22,163                            |       | (91,918 | ) |
|                                                                                                      |       |                              |       |   |   |
| Cash flows from  financing activities:                                                                    |       |                              |       |   |   |
| Proceeds from  sale of common stock                                                                       |       | 172                               |       | 515 |   |
| Proceeds from  payments on notes receivable issued to stockholders                                        |       | 1                                 |       | 50 |   |
|                                                                                                      |       |                              |       |   |   |
| Net cash  provided by financing activities                                                                |       | 173                               |       | 565 |   |
|                                                                                                      |       |                              |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                |       | 21,264                            |       | (89,059 | ) |
| Cash and cash  equivalents:                                                                               |       |                              |       |   |   |
| Beginning of  period                                                                                      |       | 14,494                            |       | 103,669 |   |
|                                                                                                      |       |                              |       |   |   |
| End of period                                                                                             |       | $                                 | 35,758     |   | $ | 14,610 |   |
|                                                                                                      |       |                              |       |   |   |
| 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                                                                  |       | $                                 | 57         |   | $ | — |   |

 

See notes to condensedconsolidated financial statements.

 

6

----

 

**@Road,Inc.**

**Notes To Condensed****Consolidated Financial Statements**

(unaudited)

 

**Note 1 —Summary of SignificantAccounting Policies**

 

*Basisof Consolidation and Presentation*

 

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

 

Theaccompanying condensed consolidated financial statements were prepared by theCompany, without audit, pursuant to the rules and regulations of the Securitiesand Exchange 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, although theCompany believes the disclosures which are made herein are adequate to make theinformation presented not misleading.

 

In theopinion of management, the financial statements include all adjustments(consisting only of normal recurring adjustments) necessary to fairly presentthe financial condition, results of operations, and cash flows for the periodspresented. Results of operations for the periods presented are not necessarilyindicative of results to be expected for any other interim period or for thefull year. These condensed consolidated financial statements should be read inconjunction with the Company’s consolidated financial statements and notesthereto in its Form 10-K for the year ended December 31, 2004 (Commission FileNo. 000-31511), dated March 15, 2005 and filed with the SEC. Thecondensed consolidated balance sheet as of December 31, 2004 was derived fromthe Company’s audited 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.

 

*Certain Significant Risks and Uncertainties*

* *

TheCompany participates in a dynamic high-technology industry and believes thatchanges in any of the following areas could have a material adverse effect onits future financial position, results of operations or cash flows: the abilityof @Road to integrate Vidus operations successfully; the ability of @Road totransition its customers from CDPD wireless networks; the ability of @Road toaccelerate or continue to grow as a result of its investment initiatives; theability of @Road and its partners to market, sell and support @Road productsand services; the timing of purchasing and implementation decisions by SBC andother prospects and customers; the dependence of @Road on mobile data systemstechnology, wireless networks, network infrastructure and positioning systemsowned and controlled by others; advances and trends in new technologies andindustry standards; competitive pressures in the form of new MRM solutions orprice reductions on current MRM solutions; changes in the overall demand forMRM solutions offered by the Company; market acceptance of the Company’sproducts and services; development of sales channels; changes in third-partymanufacturers, key suppliers, certain strategic or customer relationships;litigation or claims against the Company based on intellectual property,product, regulatory or other factors; and the Company’s ability to attract andretain employees necessary to support its growth.

 

Motorola isthe sole supplier of microcontrollers used in the Company’s products. TheCompany expects to rely on Motorola as the sole source for this component forthe next several years.

 

*Foreign Currency Transactions*

 

Thefunctional currency of the Company’s foreign subsidiaries is the U.S. dollar.Accordingly, all monetary assets and liabilities are translated at the currentexchange rate at the end of the year, non-monetary assets and liabilities aretranslated at historical rates and revenues and expenses are translated ataverage exchange rates in effect during the period. Transaction gains andlosses have not been significant to date and are included in Other income, net.

 

*Stock-BasedCompensation*

 

TheCompany accounts for stock-based employee compensation issued undercompensatory plans using the intrinsic value method, which calculatescompensation expense based on the difference, if any, on the date of the grant,between the fair value of the Company’s stock and the option exercise price.

 

Accounting principles generally accepted in the United Statesrequire companies who choose to account for stock option grants using theintrinsic value method to also determine the fair value of option grants usingan option pricing model, such as the Black-Scholes model, and to disclose theimpact of fair value accounting in a note to the financial statements.

 

7

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InDecember 2002, FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation Transition and Disclosure, anAmendment of SFAS No. 123* (SFAS 148). The Company did notelect to voluntarily change to the fair value based method of accounting forstock based employee compensation and record such amounts as charges tooperating expense. The impact of recognizing the fair value of option grantsand stock grants under the Company’s employee stock purchase plan as an expenseunder SFAS 148 would have substantially reduced the Company’s operatingresults, as follows (in thousands, except per share amounts):

 
| ** **                                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net  (loss) income as reported                                                                           |       | $                                 | (7,378     | ) | $ | 3,110 |   |
| 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 |       | (2,578                            | )          | (2,343 | ) |
|                                                                                                          |       |                              |       |   |   |
| Pro forma net  (loss) income                                                                                  |       | (9,956                            | )          | 771 |   |
| Preferred stock  dividends                                                                                    |       | (57                               | )          | — |   |
|                                                                                                          |       |                              |       |   |   |
| Pro forma net  (loss) income attributable to common stockholders                                              |       | $                                 | (10,013    | ) | $ | 771 |   |
|                                                                                                          |       |                              |       |   |   |
| Basic net  (loss) income per share:                                                                      |       |                              |       |   |   |
| As reported                                                                                                   |       | $                                 | (0.13      | ) | $ | 0.06 |   |
|                                                                                                          |       |                              |       |   |   |
| Pro forma                                                                                                     |       | $                                 | (0.17      | ) | $ | 0.01 |   |
|                                                                                                          |       |                              |       |   |   |
| Diluted net  (loss) income per share:                                                                    |       |                              |       |   |   |
| As reported                                                                                                   |       | $                                 | (0.13      | ) | $ | 0.05 |   |
|                                                                                                          |       |                              |       |   |   |
| Pro forma                                                                                                     |       | $                                 | (0.17      | ) | $ | 0.01 |   |

 

The weighted average fairvalue of options granted in the three months ended March 31, 2005 and 2004,were $3.39 and $10.21, respectively. The Company calculated the fair value ofeach option award on the date of grant using the Black-Scholes option pricingmodel. The Company’s calculations are based on a single option valuationapproach and forfeitures are recognized as they occur. The following weightedaverage assumptions were used for each respective period:

 

| ** **                | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **Stock  Option Plans:**  |       |                              |       |   |   |
| Risk free  interest rate  |       | 3.77                              | %          | 2.79 | % |
| Expected  volatility      |       | 104                               | %          | 106 | % |
| Expected life  (in years) |       | 5                                 |       | 5 |   |
| Expected  dividend        |       | $                                 | 0.00       |   | $ | 0.00 |   |
|                           |            |                                   |            |  |  |  |  |

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **Employee  Stock Purchase Plan:** |       |                              |       |   |   |
| Risk free  interest rate           |       | 2.05                              | %          | 1.02 | % |
| Expected  volatility               |       | 117                               | %          | 71 | % |
| Expected life  (in years)          |       | 0.5                               |       | 0.5 |   |
| Expected  dividend                 |       | $                                 | 0.00       |   | $ | 0.00 |   |
|                                    |            |                                   |            |  |  |  |  |

 

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

 

*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 ofPosition 98-4 and Statement of Position 98-9, as well as Accounting ResearchBulletin No. 45, *Long-Term Construction-TypeContracts* and Statement of Position 81-1*, Accounting for Performance of Construction-Type and CertainProduction-Type Contracts.*TheCompany 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. However, the Company’s judgments may affect the application ofits revenue recognition policy. Revenue in any given period is difficult topredict, and any shortfall in revenue or delay in recognizing revenue couldcause its operating results to vary significantly from quarter to quarter andcould result in future operating losses.

 

The Company’s revenues are derived from two sources,hosted revenues and licensed revenues. Hosted revenues are derived from monthlyfees for its MRM solutions and upfront or monthly fees for the hardware deviceenabling the mobile resource to utilize its MRM solution. Licensed revenues arederived from providing license, installation, training and post contractcustomer support services to end users.

 

8

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Monthly fees for the Company’s MRM hosted solutionsare recognized ratably over the minimum contract period, which commences (a)upon installation where customers have installed its proprietary hardwaredevices in mobile worker vehicles or (b) upon the creation of subscriptionlicenses and a customer account on its website where customers have elected touse its MRM solution with a location- or wireless application protocol- enabledmobile telephone. Upfront fees for the Company’s MRM hosted solution primarilyconsist of amounts for the Internet Location Manager, Internet Data Terminaland a ruggedized personal digital assistant. The Company defers upfront fees atinstallation and recognizes them ratably over the minimum contract period,generally two or three years. Renewal rates for its MRM solution are notconsidered priced at a bargain in comparison to the upfront fees (as describedin 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 fees for the Company’s proprietaryhardware devices have often been at or below its costs. Costs not in excess ofrelated contractual revenue are deferred at the time of shipment and amortizedratably over the minimum contract period. Costs in excess of relatedcontractual revenue are expensed to cost of hosted revenue at the time ofshipment.

 

Licensed revenues associated with the fees for thelicense of the Company’s *taskforce*product and related customization and installation are generally recognizedusing the percentage-of-completion method of accounting over the period thatservices are performed. For agreements accounted for under thepercentage-of-completion method, the Company determines progress to completionbased on actual direct labor hours incurred to date as a percentage of theestimated total direct labor hours required to complete the project. The Companyperiodically evaluates the actual status of each project to ensure that theestimates to complete each contract remain accurate. A provision for estimatedlosses on contracts is made in the period in which the loss becomes probableand can be reasonably estimated. To date, the Company has not incurred any suchlosses. Costs incurred in advance of billings are recorded as costs in excessof related billings on uncompleted contracts. If the amount of revenuerecognized exceeds the amounts billed to customers, the excess amount isrecorded 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 the Company’sprogress toward completion of projects in progress. Significant managementjudgment and discretion are used to estimate total direct labor hours. Anychanges in or deviations from these estimates could have a material effect onthe amount of revenue the Company recognizes in any period.

 

For arrangements with multiple elements, such aslicenses and post-contract customer support services, the Company allocatesrevenue 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 and forpost-contract customer support services is additionally measured by the renewalrate. If the Company cannot objectively determine the fair value of anyundelivered element included in license arrangements, it defers revenue untilall elements are delivered, all services have been performed or fair value canobjectively be determined. When the fair value of a license element has notbeen established, the Company uses the residual method to record licenserevenue if the fair value of all undelivered elements is determinable. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the fee is allocated to the delivered elements and isrecognized as revenue.

 

The Company derivespost-contract customer support fees from post-contract customer supportcontracts, which are generally purchased at the same time as a license for its *taskforce* product. Post-contract customersupport includes telephone and email support and the right to receiveunspecified upgrades on a when-and-if-available basis. Post-contract customersupport may generally be renewed on an annual basis. The Company recognizesrevenue for post-contract customer support, based on vendor specific objectiveevidence of fair value, ratably over the term of the post-contract customersupport period. It generally determines vendor specific objective evidence ofpost-contract customer support based on the stated fees for post-contractcustomer support renewal set forth in the original license agreement. If theCompany is unable to establish vendor specific objective evidence of fairvalue, it recognizes all fees ratably over the term of the post-contractcustomer support, when the only undelivered element is post-contract customersupport.

 

*Comprehensive (Loss) Income*

* *

Statementof Financial Accounting Standards (SFAS) No. 130, *Reporting Comprehensive Income*, requires that an enterprisereport, by major components and as a single total, the change in its net assetsduring the period from non-owner sources. Accumulated other comprehensive loss was composed of unrealized lossesof $148,000 and $179,000 on short-term investments at March 31, 2005 andDecember 31, 2004, respectively.

 

*Goodwill and intangible assets*

* *

Goodwillrepresents the excess of the purchase price over the fair value of the nettangible and identifiable intangible assets acquired in a business combination.Intangible assets resulting from the acquisitions of entities accounted forusing the purchase method of accounting are estimated by management based onthe fair value of assets received. Identifiable intangible assets are comprisedof core developed technology, order backlog, customer relationships, trademarksand trade names, and other intangible assets. Identifiable intangible assetsthat have finite useful lives are being amortized over their useful lives often years for core developed technology, three years for order backlog and tenyears for customer relationships. Trademarks and trade names have indefinitelives and as such are not amortized but are tested at least annually forimpairment.  The fair value assigned toin-process

 

9

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researchand development and other identifiable intangible assets was estimated bydiscounting to present value the cash flows attributable to the technology onceit had reached technological feasibility. The Company follows the provisions of SFAS No. 142, *Goodwill andOther Intangible Assets*, under which goodwill is no longer subjectto amortization. Rather, goodwill is subject to at least an annual assessmentfor impairment, applying a fair-value based test.

 

*Long-lived assets and goodwill*

* *

TheCompany evaluates long-lived assets for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable in accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. An asset isconsidered impaired if its carrying amount exceeds the future net cash flow thatthe asset is expected to generate. If an asset is considered to be impaired, theamount of impairment to be recognized is measured by the amount by which thecarrying amount of the asset exceeds its fair market value. The Companyassesses the recoverability of long-lived and intangible assets by determiningwhether the unamortized balances can be recovered through undiscounted futurenet cash flows of the related assets. The amount of impairment, if any, ismeasured based on projected discounted future net cash flows.

 

TheCompany evaluates goodwill, at a minimum, on an annual basis and wheneverevents and changes in circumstances suggest that the carrying amount may not berecoverable. Impairment of goodwill is tested at the reporting unit level bycomparing the reporting unit’s carrying amount, including goodwill, to the fairvalue of the reporting unit. The fair values of the reporting units areestimated using a combination of the income, or discounted cash flows, approachand the market approach, which utilizes comparable companies’ data. If thecarrying amount of the reporting unit exceeds its fair value, goodwill isconsidered impaired and a second step is performed to measure the amount ofimpairment loss, if any. The Company plans to conduct its initial annualimpairment test in August 2005 and annually thereafter. There were no events orcircumstances from the close of the acquisition through March 31, 2005 thatwould require an interim assessment.

 

*RecentlyIssued Accounting Pronouncements*

* *

InDecember 2004, the Financial Accounting Standards Board (FASB) issued SFASNo. 123 (revised 2004), *Share-BasedPayments* (SFAS 123R), that addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for either equity instruments of the enterprise orliabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.

 

Thestatement eliminates the ability to account for share-based compensationtransactions using the intrinsic value method as prescribed by AccountingPrinciples Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and generally requires that suchtransactions be accounted for using a fair value based method and recognized asexpenses in the consolidated statement of operations. The statement requirescompanies to assess the most appropriate model to calculate the value of theoptions. The Company currently uses the Black-Scholes option pricing model tovalue options and is assessing which model it may use upon adoption of suchstandard. The use of an alternative model to value options may result in adifferent fair value than the use of the Black-Scholes option pricing model.

 

Thereare a number of other requirements under the new standard that will result indiffering accounting treatment than that currently required. These differencesinclude, but are not limited to, the accounting for the tax benefit on employeestock options and for stock issued under the Company’s employee stock purchaseplan.

 

TheCompany will also be required to determine the transition method to be used atdate of adoption. The allowed transition methods include modified prospectiveand modified retroactive adoption alternatives. Under the modified retroactivemethod, prior periods may be restated either as of the beginning of the year ofadoption or for all periods presented. This method would record compensationexpense for all unvested stock options and restricted stock beginning with thefirst period restated. The modified prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS 123R. InApril 2005, the SEC announced the adoption of a new rule that amends theeffective date of SFAS 123R. The effective date of the new standard underthese new rules for the Company’s consolidated financial statements isJanuary 1, 2006.

 

Uponadoption, this statement will have a significant impact on the Company’sconsolidated statement of operations as the Company will be required to expensethe 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.

 

InNovember 2004, the FASB issued SFAS No. 151, *Inventory Costs, an amendment of ARB No. 43,Chapter 4* (SFAS 151). SFAS 151 clarifies that abnormalinventory costs such as the costs of idle facilities, excess freight andhandling costs, and wasted materials (spoilage) are required to be recognizedas current period charges. The provisions of SFAS 151 are effective forfiscal years beginning after July 1, 2005. The Company is currentlyevaluating the effect that the adoption of SFAS 151 will have on itsconsolidated statement of operations and financial condition, and the Companydoes not expect it to have a material impact.

 

InDecember 2004, the FASB issued SFAS No. 153, *Exchanges of Nonmonetary Assets—An Amendment of APBOpinion No. 29, Accounting for Nonmonetary Transactions*(SFAS 153). SFAS 153 eliminates the exception from fair valuemeasurement for nonmonetary exchanges of similar productive assets inparagraph 21(b) of APB Opinion No. 29, *Accounting for Nonmonetary*

 

10

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*Transactions*, and replaces it with an exception forexchanges that do not have commercial substance. SFAS 153 specifies that anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. Theeffective date of this standard is for fiscal periods beginning afterJune 15, 2005. The Company is currently evaluating the effect that theadoption of SFAS 153 will have on its consolidated statement of operationsand financial condition, and the Company does not expect it to have a materialimpact.

 

**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 commonshares and 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  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net (loss)  income attributable to common stockholders (numerator) |       | $                                 | (7,435     | ) | $ | 3,110 |   |
| Shares  (denominator):                                             |       |                              |       |   |   |
| Basic                                                              |       |                              |       |   |   |
| Weighted average  common shares outstanding                        |       | 57,385                            |       | 53,795 |   |
| Weighted average  common shares outstanding subject to repurchase  |       | —                            |       | (24 | ) |
|                                                               |       |                              |       |   |   |
| Shares used in  computation                                        |       | 57,385                            |       | 53,771 |   |
| Diluted                                                            |       |                              |       |   |   |
| Dilution impact  from option equivalent shares                     |       | —                            |       | 4,317 |   |
| Dilution impact  from employee stock purchase plan                 |       | —                            |       | 186 |   |
| Add back  weighted average common shares subject to repurchase     |       | —                            |       | 24 |   |
|                                                               |       |                              |       |   |   |
| Shares used in  computation                                        |       | 57,385                            |       | 58,298 |   |
|                                                               |       |                              |       |   |   |
| Net (loss)  income per share                                       |       |                              |       |   |   |
| Basic                                                              |       | $                                 | (0.13      | ) | $ | 0.06 |   |
| Diluted                                                            |       | $                                 | (0.13      | ) | $ | 0.05 |   |

 

Employee stock options to purchase approximately 9.4 million shareswith a weighted average exercise price of $5.06 and approximately 386,000shares with a weighted average exercise price of $13.44 for the three monthsended March 31, 2005 and 2004, respectively, were outstanding, but were notincluded in the computation of diluted earnings per share because their effectwould have been anti-dilutive.

 

**Note 3 — Acquisition of Vidus**

 

OnFebruary 18, 2005, the Company completed the acquisition of Vidus Limited (“Vidus”)in a transaction accounted for as a business combination using the purchasemethod. As consideration for the acquisition, the Company issued approximately5.5 million shares of its common stock valued at $38.2 million and newlycreated redeemable preferred stock (“preferred stock”) in face amount ofapproximately $7.7 million and extinguished for cash existing debt ofapproximately $5.5 million in exchange for all of the outstanding shares ofVidus capital stock, and the Company issued approximately 146,000 vestedoptions with a fair value of $531,000. Under the terms of the grants, eachoption has been classified as a non-qualified stock option, is fully vested,has an exercise price ranging from $0.67 to $2.00 per share and has a one-yearterm. The Company incurred estimated acquisition related costs of $2.5 million,of which $478,000 was allocated to the issuance of common stock. The purchaseprice of approximately $54.5 million was preliminarily allocated among thetangible and identifiable intangible assets acquired and liabilities assumed onthe basis of their estimated fair values on the acquisition date.

 

The total estimated considerationis subject to an adjustment in approximately one year if the average closingprice of the Company’s common stock for any ten consecutive trading days duringsuch period does not meet at least an average market price per share of $7.00.The fair value of the Company’s common stock was derived from this guaranteedmarket price per share of $7.00.  Thefair value of the stock options was determined using the Black-Scholes optionpricing model with the following assumptions: no dividend yield, expectedvolatility of 96%, expected life of one year and a risk-free interest rate of3.09%.

 

TheVidus acquisition was accounted for under SFAS No. 141, *Business Combinations* (SFAS 141) andcertain specified provisions of SFAS No. 142, *Goodwilland Other Intangible Assets* (SFAS 142).  The results of operations of Vidus wereincluded in the Company’s Condensed Consolidated Statement of Operations fromFebruary 19, 2005.

 

11

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

 

| Cash                                |   | $      | 1,514  |   |
|-------------------------------------|--------|--------|--------|--------|
| Accounts  receivable                |   | 1,298  |   |
| Prepaid expenses  and other         |   | 412    |   |
| Property and  equipment             |   | 1,022  |   |
| Notes receivable  from stockholder  |   | 11     |   |
|                                |   |   |   |
| Total tangible  assets acquired     |   | 4,257  |   |
|                                |   |   |   |
| Accounts payable                    |   | (540   | )      |
| Accrued  liabilities                |   | (2,148 | )      |
| Deferred revenue                    |   | (4,270 | )      |
|                                |   |   |   |
| Total tangible  liabilities assumed |   | (6,958 | )      |
|                                |   |   |   |
| Net tangible  liabilities assumed   |   | $      | (2,701 | )      |

 

Underthe purchase method of accounting, the Company allocated the total purchaseprice to the acquired net tangible and intangible assets based upon theirestimated fair market value as of the date of acquisition, February 18, 2005.The intangible assets recognized, apart from goodwill, represented contractualor other legal rights of Vidus and those intangible assets of Vidus that couldbe clearly identified. These intangible assets were identified and valuedthrough interviews and analysis of data provided by Vidus concerning developmentprojects, their stage of development, the time and resources needed to completethem and, if applicable, their expected income generating ability. There wereno other contractual or other legal rights of Vidus clearly identifiable bymanagement, other than those identified below. The 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 |   | $      | (2,701 | )      |
|-------------------------------------------------|--------|--------|--------|--------|
| 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                         |   | (4,901 | )      |
| Goodwill                                        |   | 22,867 |   |
|                                            |   |   |   |
| Purchase price                                  |   | $      | 54,473 |   |

 

12

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*Coredeveloped technology*. Core developed technology ofapproximately $18.4 million relates to the Vidus *taskforce*****technology.At the date of acquisition, the developed technology was complete and hadreached technological feasibility. Any costs to be incurred in the future willrelate to the ongoing maintenance of the developed technology and will beexpensed as incurred. To estimate the fair value of the developed technology,an income approach was used with a discount rate of 35%, which included ananalysis of future cash flows and the risks associated with achieving such cashflows. The developed technology is being amortized over its estimated usefullife of ten years.

 

*Order backlog and Customerrelationships.*The Order backlog of approximately $5.5million and the Customer relationships of approximately $3.7 millionrepresented the fair value of the post-contract customer support obligationsand existing customer relationships. To estimate the fair value of the Orderbacklog and the Customer relationships, an income approach was used with adiscount 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 recognition inEuropean 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 theVidus trade name in Europe. Therefore, an analysis of various economic factorsindicated there was no limit to the period of time the trademark and tradenames would contribute to future cash flows. Because cash flow is expected tocontinue indefinitely, the trademark and trade names are not being amortized,but tested for impairment annually and whenever events indicate that animpairment 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 $6.6 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 $22.9 million represented theexcess of the purchase price over the fair value of the net tangible andintangible assets acquired. The acquisition allows the Company to integrate itstechnology with Vidus’ technology for dynamic scheduling, dispatching, routingand appointment booking of mobile workers, cross-sell the companies’ solutionsand further develop the combined technologies to provide customers seamlesslyintegrated services. The acquisition also creates the ability to expand theCompany’s business to Europe and other international markets. Theseopportunities, along with the ability to hire the Vidus workforce, weresignificant contributing factors to the establishment of the purchase price,resulting in the recognition of a significant amount of goodwill. In accordancewith SFAS 142, the Company is not amortizing goodwill. The Company will carrythe goodwill at cost and test it for impairment annually and whenever eventsindicate that an impairment may have occurred. All the goodwill and intangible assets was allocated to its licensedreporting segment.  The goodwill is notdeductible for tax purposes as the Company allocated all amounts deductible fortax purposes to the intangible assets.

 

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 and net loss per share would have been as follows (in thousands,except per share amount):

 

| ** **                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                       | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Revenue                                                          |       | $                                 | 20,685     |   | $ | 19,828 |   |
| Net loss                                                         |       |                              | (10,063    | ) |   | (88 | ) |
| Net loss  attributable to common stockholders                    |       | (10,189                           | )          | (214 | ) |
| Net loss per  share (basic and diluted)                          |       | (0.17                             | )          | (0.00 | ) |
| Shares used in  computing net loss per share (basic and diluted) |       | 60,294                            |       | 59,225 |   |

 

These results are notnecessarily indicative of what the actual results of operations would have beenif the acquisition of Vidus had in fact occurred on the dates or for theperiods indicated, nor do they purport to project the results of operations forany future periods or as of any date. These results do not give effect to anycost savings, operating synergies, and revenue enhancements which may resultfrom the acquisition of Vidus or the costs of achieving these cost savings,operating synergies, and revenue enhancements. The in-process research and development charge of approximately $5.6million is included in the net loss attributable to common stockholders for thethree months ended March 31, 2005 and excluded for the three months ended March31, 2004.

 

13

----

 

**Note 4 —Goodwill and PurchasedIntangible Assets**

 

The changes in the carrying amount of goodwillin relation to the Company’s licensed segment for the three months ended March31, 2005 were as follows (in thousands):

 

| Acquisition of  Vidus         |   | $      | 22,867 |   |
|-------------------------------|--------|--------|--------|--------|
|                          |   |   |   |
| Balance as of  March 31, 2005 |   | $      | 22,867 |   |

 

SFAS142 requires purchased intangible assets other than goodwill to be amortizedover their expected useful lives unless these lives are determined to beindefinite. Purchased intangible assets are carried at cost less accumulatedamortization. Amortization is

 

14

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computed over the estimated useful lives of the respective assets.

 

Intangibleassets were as follows (in thousands):

 

| ** **                      | ** ** | **As of March 31, 2005** | ** ** | **As of December 31, 2004**   | ** ** |
|---------------------------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **Carrying  Amount**     | ** ** | **Accumulated  Depreciation** | ** ** | **Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Depreciation** | ** ** | **Net** | ** ** |
| Amortized  intangible assets:   |       |                     |       |                          |       |   |   |   |   |   |   |   |   |
| Core developed  technology      |       | $                        | 23,462     |                          | $          | (5,260 | ) | $ | 18,202 |   | $ | 5,052 |   | $ | (5,052 | ) | $ | — |   |
| Order backlog                   |       | 5,500                    |       | (207                          | )          | 5,293 |   | — |   | — |   | — |   |
| Customer  relationships         |       | 3,660                    |       | (42                           | )          | 3,618 |   | — |   | — |   | — |   |
|                            |       |                     |       |                          |       |   |   |   |   |   |   |   |   |
| Total                           |       | 32,622                   |       | (5,509                        | )          | 27,113 |   | 5,052 |   | (5,052 | ) | — |   |
|                            |       |                     |       |                          |       |   |   |   |   |   |   |   |   |
| Unamortized  intangible assets: |       |                     |       |                          |       |   |   |   |   |   |   |   |   |
| Trademarks and  trade names     |       | 5,520                    |       | —                        |       | 5,520 |   | — |   | — |   | — |   |
|                            |       |                     |       |                          |       |   |   |   |   |   |   |   |   |
| Total intangible  assets        |       | $                        | 38,142     |                          | $          | (5,509 | ) | $ | 32,633 |   | $ | 5,052 |   | $ | (5,052 | ) | $ | — |   |

 

For the three months ended March 31, 2005 and 2004, amortization ofintangible assets was $457,000 and $10,000, respectively. The estimated futureamortization expense of purchased intangible assets as of March 31, 2005 is asfollows (in thousands):

 

| Remainder of  2005 |   | $      | 3,030  |   |
|--------------------|--------|--------|--------|--------|
| 2006               |   | 4,040  |   |
| 2007               |   | 4,041  |   |
| 2008               |   | 2,458  |   |
| 2009               |   | 2,207  |   |
| Thereafter         |   | 11,337 |   |
|               |   |   |   |
| Total              |   | $      | 27,113 |   |
|                    |        |        |        |        |  |

 

**Note 5 — Short-Term Investments**

 

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

 
| ** **                       | ** ** | **March 31, 2005**  | ** ** |
|----------------------------------|------------|---------------------|------------|
| ** **                       | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. Government  debt securities |       | $                   | 52,362     |   | $ | 1 |   | $ | (111 | ) | $ | 52,252 |   |
| Corporate debt  securities       |       | 12,323              |       | — |   | (30 | ) | 12,293 |   |
| Municipal debt  securities       |       | 9,380               |       | — |   | (8 | ) | 9,372 |   |
| Commercial paper                 |       | 1,096               |       | — |   | — |   | 1,096 |   |
|                             |       |                |       |   |   |   |   |   |   |
| Total                            |       | $                   | 75,161     |   | $ | 1 |   | $ | (149 | ) | $ | 75,013 |   |
|                                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **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 |   |
|                                  |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

15

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**Note 6 — Balance Sheet Components**

 

Inventoriesconsist of raw materials, work in process and finished goods, and are stated atthe lower of cost (average cost) or market and consisted of (in thousands):

 

| ** **      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|---------------------|------------|------------------------|------------|
| Raw materials   |       | $                   | 1,126      |                   | $          | 1,025 |   |
| Work in process |       | 1,176               |       | 746                    |       |
| Finished goods  |       | 1,400               |       | 1,822                  |       |
|            |       |                |       |                   |       |
| Total           |       | $                   | 3,702      |                   | $          | 3,593 |   |

 

Property andequipment consist of (in thousands):

 

| ** **                                 | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Computers and  software                    |       | $                   | 14,235     |                   | $          | 13,196 |   |
| Manufacturing  and office equipment        |       | 565                 |       | 352                    |       |
| Furniture and  fixtures                    |       | 517                 |       | 494                    |       |
| Leasehold  improvements                    |       | 610                 |       | 307                    |       |
|                                       |       |                |       |                   |       |
| Total                                      |       | $                   | 15,927     |                   | $          | 14,349 |   |
| Accumulated  depreciation and amortization |       | (10,964             | )          | (10,681                | )          |
|                                       |       |                |       |                   |       |
| Property and  equipment, net               |       | $                   | 4,963      |                   | $          | 3,668 |   |

 

Accruedliabilities consist of (in thousands):

 

| ** **                                 | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Accrued  operating expenses                |       | $                   | 4,555      |                   | $          | 2,278 |   |
| Accrued  compensation and related benefits |       | 3,259               |       | 2,855                  |       |
| Accrued  installation charges              |       | 635                 |       | 396                    |       |
|                                       |       |                |       |                   |       |
| Total                                      |       | $                   | 8,449      |                   | $          | 5,529 |   |

 

**Note 7 — Redeemable Preferred Stock**

 

OnFebruary 18, 2005, the Board of Directors of the Company authorized thecreation of four series 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 preferredstock, respectively, of which approximately 24,000, 44,000, 5,000, and 5,000shares of Series A-1, A-2, B-1, and B-2 preferred stock, respectively, wereissued and outstanding as of March 31, 2005.

 

16

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*Dividends*

 

Theholders of the Series A-1, A-2, B-1, and B-2 preferred stock are entitled toreceive dividends at the rate of $6.50 per share annually.  The dividends are accrued from day to day,whether or not earned or declared, starting on February 18, 2005. The dividendsare payable when and if declared by the Board of Directors. Any accumulation ofunpaid dividends on the preferred stock does not bear interest.

 

*Redemption*

 

The holders of the SeriesA-1 and B-1 preferred stock may elect to redeem all or a portion of the shareson or 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 afterFebruary 18, 2007.

 

Eachshare of Series A-1 and A-2 preferred stock is redeemable for an amount equalto (i) $100 plus (ii) all declared or accumulated but unpaid dividends. Eachshare of Series B-1 and B-2 preferred stock is redeemable for an amount equalto (i) $100, plus (ii) all declared or accumulated but unpaid dividends, plus(iii) additional consideration if the Company’s common stock’s average closingsales price per share is not at least $7.00 for any 10 consecutive trading dayperiod during the first year following the acquisition.

 

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*

 

SeriesA-1, A-2, B-1, and B-2 preferred stockholders are entitled to receive, uponliquidation, an amount equal to their respective redemption price. The holdersof the Series A-1, A-2, B-1, and B-2 preferred stock rank on a pari passu basisas to the receipt of such distributions and in preference to the holders ofcommon stock.

 

*Voting*

 

Eachoutstanding share of preferred stock is entitled to eleven (11) votes onall matters, voting with the shares of common stock as a class.

 

Thefollowing table illustrates the activity for each series of preferred stockthrough March 31, 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 |   |

 

**Note 8 — Segment Reporting**

 

Reportingsegments are based upon the Company’s internal organization structure, themanner in which the operations are managed, the criteria used by the Company’schief operating decision-maker to evaluate segment performance, theavailability of separate financial information and overall materialityconsiderations.

 

17

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TheCompany reports the results of its operations in two segments: Hosted andLicensed. The operating segments are managed separately because each offersdifferent products and serves different markets. The Hosted segment providesMRM solutions that provide location, reporting, dispatch, messaging, and othermanagement services and are designed to be easy to implement and use. Customersusing the Hosted MRM solutions can manage their mobile workers in several ways,including by logging onto the Company’s website, receiving their data directlyinto their existing software applications, using any telephone to access theCompany’s speech-to-text voice portal or requesting information from its datacenters using application programming interfaces. Licensed segment provides theCompany’s *taskforce* product offering, anintelligent field service automation solution, to customers.  *taskforce* enablesa predictable and reliable customer experience from commitment to servicefulfillment; synchronizing the call center and field service operations.  

 

Hostedrevenues are derived from monthly fees for the Company’s MRM solution andmonthly or upfront fees for the hardware device enabling the mobile resource toutilize the MRM solution. Licensed revenues are derived from license fees,installation fees and training and post contract customer support services toend users.

 

Theprofitability measure employed by the Company and its chief operating decision-makerfor making decisions about allocating resources to segments and assessingsegment performance is segment gross margin.

 

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

 

| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **March 31, 2005**     | ** ** |
| ** **                           | ** ** | **Hosted**             | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
|                                 |       |                   |       |   |   |   |   |
| Net revenue from  external customers |       | $                      | 19,490     |   | $ | 502 |   | $ | 19,992 |   |
|                                 |       |                   |       |   |   |   |   |
| Cost of revenue                      |       | 9,524                  |       | 700 |   | 10,224 |   |
| Intangibles  amortization            |       | —                 |       | 457 |   | 457 |   |
|                                 |       |                   |       |   |   |   |   |
| Total cost of  revenue               |       | 9,524                  |       | 1,157 |   | 10,681 |   |
| ** **                           |       |                   |       |   |   |   |   |
| **Gross  margin**                    |       | $                      | 9,966      |   | $ | (655 | ) | $ | 9,311 |   |
|                                 |       |                   |       |   |   |   |   |
| Gross margin  percentage             |       | 51                     | %          | (130 | )% |   |   |

 

| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **March 31, 2004**     | ** ** |
| ** **                           | ** ** | **Hosted**             | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
|                                 |       |                   |       |   |   |   |   |
| Net revenue from  external customers |       | $                      | 17,892     |   | $ | — |   | $ | 17,892 |   |
|                                 |       |                   |       |   |   |   |   |
| Cost of revenue                      |       | 8,368                  |       | — |   | 8,368 |   |
| Intangibles  amortization            |       | 10                     |       | — |   | 10 |   |
|                                 |       |                   |       |   |   |   |   |
| Total cost of  revenue               |       | 8,378                  |       | — |   | 8,378 |   |
| ** **                           |       |                   |       |   |   |   |   |
| **Gross  margin**                    |       | $                      | 9,514      |   | $ | — |   | $ | 9,514 |   |
|                                 |       |                   |       |   |   |   |   |
| Gross margin  percentage             |       | 53                     | %          | — | % |   |   |

 

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

 

| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **March 31,**          | ** ** |
| ** **                                | ** ** | **2005**               | ** ** | **2004** | ** ** |
| **Revenue  from Unaffiliated Customers:** |       |                   |       |   |   |
| United States  and Canada                 |       | $                      | 19,490     |   | $ | 17,892 |   |
| Europe                                    |       | 502                    |       | — |   |
|                                      |       |                   |       |   |   |
|                                      |       | $                      | 19,992     |   | $ | 17,892 |   |
|                                           |            |                        |            |  |  |  |  |  |

 

18

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

 

| ** **                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|---------------|------------|------------------|------------|
| ** **                   | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| **Long-Lived  Assets, Net:** |       |          |       |             |       |
| United States                |       | $             | 10,620     |             | $          | 10,039 |   |
| Europe                       |       | 56,552        |       | —           |       |
| Asia                         |       | 211           |       | 256              |       |
|                         |       |          |       |             |       |
|                         |       | $             | 67,383     |             | $          | 10,295 |   |

 

**Note 9 — Commitments andContingencies**

 

*LeaseCommitments*

* *

Thefollowing table represents the future minimum lease payments undernon-cancelable operating leases as of March 31, 2005 (in thousands):

 
| Remainder of  2005            |   | $      | 1,253  |   |
|-------------------------------|--------|--------|--------|--------|
| 2006                          |   | 1,317  |   |
| 2007                          |   | 1,295  |   |
| 2008                          |   | 1,243  |   |
| 2009                          |   | 1,110  |   |
| Thereafter                    |   | 476    |   |
|                          |   |   |   |
| Total minimum  lease payments |   | $      | 6,694  |   |

 

TheCompany recognizes rent expense on a straight-line basis over the lease periodand has accrued for rent expense incurred but not paid. Rent expense wasapproximately $667,000 and $407,000 for the three months ended March 31, 2005and 2004, respectively.

 

*Contingencies*

* *

Inthe third quarter of 2002, AT&T Wireless announced that it expected tocease operating its Cellular Digital Packet Data (CDPD) network byJune 30, 2004. On March 11, 2004, the Company received notice thatAT&T Wireless would continue to operate its CDPD network for “certainvaluable partners,” including @Road, until at least September 30, 2004.The letter also stated that this extension of CDPD network availabilityextended across all AT&T Wireless geographic locations. On May 28,2004, the Company received notice that AT&T Wireless extended availabilityof its CDPD network to June 30, 2005. In October 2004, AT&T Wireless was acquired by Cingular Wireless andis now a direct wholly owned subsidiary of Cingular Wireless.

 

TheCompany is in discussions with AT&T Wireless to minimize any disruption tothe 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 the AT&T Wireless CDPD network.At March 31, 2005, less than 20% of the Company’s total subscribers utilize theAT&T Wireless CDPD network. The majority of those subscribers have yet tocomplete their negotiations with @Road for migration to an alternate network.

 

In its Report on Form 10-K filed with theSecurities and Exchange Commission on March 27, 2003, Verizon Wirelessdisclosed that it expects to cease operating its CDPD network at the end of2005. The Company is in discussions with Verizon Wireless to minimize anydisruption to the delivery of its services to @Road customers. The Company hasnotified customers comprising substantially all of the subscribers whoseservice would be affected by the proposed termination of the Verizon WirelessCDPD network. At March 31, 2005, approximately 20% of the Company’s totalsubscribers utilize the Verizon Wireless CDPD network.

 

Touse an alternate network, existing hardware devices would have to be replacedfor subscribers currently using a CDPD network. While the Company does notanticipate losses on the sale of these replacement hardware devices, if it isunable to migrate these customers in a timely fashion, the Company may offerprice concessions. If the Company were to offer such concessions, they couldhave a material adverse impact on the Company’s financial results.

 

19

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*LegalProceedings*

* *

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

 

*OtherContingencies*

* *

TheCompany from time to time enters into certain types of agreements thatcontingently require it to indemnify parties against third party claims. Theseagreements primarily relate to: (i) certain agreements with the Company’sofficers, directors and employees and third parties, under which the Companymay be required to indemnify such persons for liabilities arising out of theirduties to the Company and (ii) certain agreements under which the Companyindemnifies customers and alliances for claims such as those arising fromintellectual property infringement, personal injury, or non-performance underthe agreement. Such indemnification provisions are accounted for in accordancewith SFAS No. 5, *Accounting forContingencies*. To date, the Company has not incurred any costsrelated to any claims under such indemnification provisions.

 

Theterms of such obligations vary. Because the amounts of the obligation in thesetypes of agreements often are not explicitly stated, the overall maximum amountof the obligations cannot be reasonably estimated. Historically, the Companyhas not been obligated to make any payments for these obligations, and noliabilities have been recorded for these obligations on the Company’s balancesheet as of March 31, 2005.

 

Ingeneral, the Company provides its customers a 12-month limited warranty thatthe hardware furnished under the agreement will be free from defects inmaterials and workmanship and will substantially conform to the specificationsfor such hardware. The Company’s policy is to expense such costs as incurred.To date, the Company has incurred minimal costs related to this limitedwarranty obligation.

 

The Company also provides its European customersEuropean Union statutory warranties of 90 days. If the warranty is invoked, theCompany would have to fix any errors in the software rather than refund anyfees under the arrangement. As of March 31, 2005, this warranty has notbeen invoked by any of the Company’s customers.

 

**Item 2****. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

Except for the historicalinformation contained herein, the matters discussed in this Form 10-Q areforward-looking statements involving risks and uncertainties that could causeactual results to differ materially from those in such forward-looking statements.Potential risks and uncertainties include, but are not limited to, generaleconomic and political conditions; our future losses, operating results andprofitability; limited operating history; the impact of the termination, ifany, of CDPD wireless networks; our ability to adapt to rapid technologicalchange; competition; and our dependence on wireless networks, networkinfrastructure and positioning systems owned and controlled by others. Furtherinformation regarding these and other risks is included in this Form 10-Q, inour annual report on Form 10-K for the year ended December 31, 2004 (CommissionFile No. 000-31511), dated March 15, 2005, and in our otherfilings with the SEC. You should read the following description of ourfinancial condition and results of operations in conjunction with our financialstatements and notes thereto included in this Form 10-Q, in our Form 10-K forthe year ended December 31, 2004 and in our other filings with the SEC.

 

**Overview**

 

@Road, Inc.is a global provider of solutions that intelligently automate the management ofmobile resources to help optimize the service delivery process for customersacross a variety of industries. Through mobile resource management (“MRM”)infrastructure integrating wireless communications, location-basedtechnologies, software applications, transaction processing and the Internet,our solutions are designed to increase productivity by way of continuoussynchronization of field service delivery resources. Our solutions are designedto provide a secure, scalable and upgradeable platform.

 

Oursolutions are designed to help customers improve their productivity by enablingthe effective management of the activities of their mobile workers, assets,goods and services. In addition, our solutions are designed to enable customersto increase the utility of their mobile resources and decrease their costs ofoperations by facilitating business processes, such as event confirmation,signature verification, forms processing, project management and timekeepingwhile their workers are in the field.

 

Our MRMsolutions also provide location, reporting, dispatch, messaging, and othermanagement services and are designed to be easy to implement and use. Ourcustomers can manage their mobile workers in several ways, including by loggingonto our website, receiving data directly into their existing softwareapplications, using any telephone to access our speech-to-text voice portal orrequesting information from our data centers using application programming interfaces.

 

Our *taskforce*productoffering is an intelligent field service automation software solution.  This solution is designed to enable apredictable and reliable customer experience from commitment to servicefulfillment; and to synchronize the call center and field service operations.

 

20

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FromJuly 1996 through June 1998, our operations consisted primarily of variousstart-up activities relating to our MRM solutions, including development ofGlobal Positioning System technologies, recruiting personnel and raisingcapital. We did not recognize any revenue prior to June 1998, and our expensesconsisted of research and development, sales and marketing and general andadministrative expenses. In 1998, we expanded our strategy and redirected ourfocus to provide location-relevant and time-sensitive information solutions tocompanies managing mobile resources. In the second half of 1998, we introducedthe first version of a MRM solution that is now called GeoManager, which is asolution that leverages existing infrastructure, including the GlobalPositioning System, wireless networks and the Internet along with integratedtransaction processing and software applications, to enable companies toefficiently manage their mobile resources. Subsequent to the introduction ofGeoManager, we have introduced a number of new MRM solutions, such as:

 

•                  GeoManager PE—asolution that uses a location-enabled mobile telephone to provide theGeoManager service.

•                  @Road Pathway *i*LM—a mid-level MRM solution that deliversmetrics to measure mobile workforce performance and manage compliance withbusiness rules.

•                  @Road PathwayPE—a solution that uses a location-enabled mobile telephone to provide the@Road Pathway *i*LM service.

•                  @Road Portico *i*LM—an entry-level offering providing acost-effective MRM solution.

 

In addition, we have developed and packaged aspecified set of MRM solutions for three of our target vertical markets. Theseapplication suites are designed to provide industry appropriate solutions. Wecurrently offer the following solution suites:

 

•                  The @Road Telco,Cable and Utilities Suite

•                  The @RoadTransportation and Distribution Suite

•                  The @RoadFacilities Management Suite

 

Our MRM solutions provide current and historical datarelating to a customer’s mobile resources in a variety of formats, includingactivity reports, maps and completed business forms. We provide these formatsin a standard configuration, and customers can configure certain elements andviews themselves 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 withthe deployment of a hardware device to each of the customer’s mobile resources.We call each mobile resource with such a hardware device a ‘‘subscriber.’’ Ourservices operate with two hardware device types:

 

•                  A mobile workercan use our proprietary hardware device that integrates a GPS receiver and awireless modem and which includes embedded operating and diagnostic software.This hardware device is called an Internet Location Manager (‘‘*i*LM’’). We offer several different modelsof *i*LM devices. An *i*LM is installed in a mobile worker’svehicle. Installation is typically completed in less than one hour and isperformed by our subcontracted installation agents.

•                  A mobile workercan use certain location- or wireless application protocol-enabled mobiletelephones offered by several wireless carriers. Customers download oursoftware into these mobile telephones as part of implementing our solutions.

 

These hardware device types send and receive a varietyof information from time to time and on demand. Such data include location,velocity, time and operational diagnostics. These data are transmitted to ourdata centers using wireless networks and the Internet. If a wireless connectionto a hardware device is not available, then the hardware device will store upto five days of captured data and seek to transmit the data when a wirelessconnection is available.

 

Since 1998, we have derived substantially all of ourrevenues from the sale of our MRM solutions. Our customers generally contractto receive our MRM solutions for terms of one, two or three years and canpurchase enhanced service features for additional fees. Upon the completion ofthe initial term of a customer’s contract, the customer’s service continues ona month-to-month basis.  Our hosted revenueis comprised of monthly fees for our MRM solution and upfront or monthly feesfor the hardware device enabling the mobile resource to utilize our MRMsolution. As more customers use our MRM solutions, the impact on our hostedrevenue is compounded. Our licensed revenue is comprised of license,installation and related post contract customer support fees of our *taskforce* field service automation software solution.

 

To date, we do not sell our MRM solutions outside theUnited States and Canada; however, we intend to expand our MRM solutions toadditional countries in the future and currently sell our *taskforce*field service automation in the United States and Europe. VerizonCommunications represented 15% and 17% of our revenues for the three monthsended March 31, 2005 and 2004, respectively.

 

Since inception we have invested substantially inresearch and development, marketing, the building of our sales channels and ouroverall infrastructure. We anticipate that such investments may increase in thefuture. We incurred a loss this quarter and incurred losses in each quarterfrom inception through the quarter ending June 30, 2003, and may incur netlosses in the future. At March 31, 2005, we had an accumulated deficit of$114.4 million. Our limited operating history makes it difficult toforecast future operating results. We may not regain or sustain profitabilityon a quarterly or annual basis.

 

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In the third quarter of 2002, AT&T Wirelessannounced that it expected to cease operating its Cellular Digital Packet Data(CDPD) network by June 30, 2004. On March 11, 2004, we receivednotice that AT&T Wireless would continue to operate its CDPD network for “certainvaluable partners,” including us, until at least September 30, 2004. Theletter also stated that this extension of CDPD network availability extendsacross all AT&T Wireless geographic locations. On May 28, 2004, wereceived notice that AT&T Wireless extended availability of its CDPDnetwork to June 30, 2005.

 

We are in discussions with AT&T Wireless tominimize any disruption to the delivery of our services to our customers. Wehave notified those subscribers whose service would be affected by the proposedtermination of the AT&T Wireless CDPD network. At March 31, 2005, less than20% of our total subscribers utilize the AT&T Wireless CDPD network. Themajority of those subscribers have yet to complete their negotiations with usfor migration to an alternate network.

 

In its Report on Form 10-K filed with the SEC onMarch 27, 2003, Verizon Wireless disclosed that it expects to 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 toour customers. We have notified those subscribers whose service would beaffected by the proposed termination of the Verizon Wireless CDPD network. AtMarch 31, 2005, approximately 20% of our total subscribers utilize the VerizonWireless CDPD network.

 

To use an alternate network, existing hardwareplatforms would have to be replaced for subscribers currently using a CDPDnetwork. While we do not anticipate losses on the sale of these replacementhardware platforms, if we are unable to migrate our customers in a timelyfashion, we may offer price concessions. If we were to offer such concessions,they could have a material adverse impact on our financial results.

 

**Critical accounting policies**

 

Financial Reporting Release No. 60, which wasreleased by the SEC in January 2002, requires all companies to include adiscussion of critical accounting policies or methods used in the preparationof financial statements. Included in Note 1 of the Notes to the ConsolidatedFinancial Statements for the year ended December 31, 2004 filed on Form10-K, is a summary of the significant accounting policies and methods we use.The following is a discussion of the more significant of these policies andmethods.

 

***Revenue recognition***

 

We follow specific anddetailed guidelines in recognizing revenue in accordance with the provisions ofAICPA Statement of Position 97-2, *SoftwareRevenue Recognition*, as amended by Statement of Position 98-4 andStatement 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.*We recognize revenue when the price is fixedand determinable, upon persuasive evidence of an agreement, when we havefulfilled our obligations under any such agreement and upon a determinationthat collectibility is probable. However, our judgments may affect theapplication of our revenue recognition policy. Revenue in any given period isdifficult to predict, and any shortfall in revenue or delay in recognizingrevenue could cause our operating results to vary significantly from quarter toquarter and could result in future operating losses.

 

Our revenues are derived from two sources, hostedrevenues and licensed revenues. Hosted revenues are derived from monthly feesfor our MRM solutions and upfront or monthly fees for the hardware deviceenabling the mobile resource to utilize our MRM solution. Licensed revenues arederived from license fees, installation fees and training and post contractcustomer support services to end users.

 

Monthly fees for our MRM hosted solutions arerecognized ratably over the minimum contract period, which commences (a) uponinstallation where customers have installed our proprietary hardware devices inmobile worker vehicles or (b) upon the creation of subscription licenses and acustomer account on our website where customers have elected to use our MRMsolution with a location- or wireless application protocol- enabled mobiletelephone. Upfront fees for our MRM hosted solution primarily consist ofamounts for the Internet Location Manager, Internet Data Terminal and aruggedized personal digital assistant. We defer upfront fees at installation andrecognize them ratably over the minimum contract period, generally two or threeyears. Renewal rates for our MRM solution are not considered priced at abargain in comparison to the upfront fees (as described in Staff AccountingBulletin No. 104, *Revenue Recognition*). Changes tothe pricing 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 hardwaredevices have often been at or below our costs. Costs not in excess of relatedcontractual revenue are deferred at the time of shipment and amortized ratablyover the minimum contract period. Costs in excess of related contractualrevenue are expensed to cost of hosted revenue at the time of shipment.

 

Licensed revenues associated with the fees for thelicense of our *taskforce* productand related customization 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, we determine progress to completion based on actual direct labor hoursincurred to date as a percentage of the estimated total direct labor hoursrequired to complete the project. We periodically evaluate the actual status ofeach project to ensure that the estimates to complete each contract remainaccurate. A provision for estimated losses on contracts is made in the periodin which the loss becomes probable and can be reasonably estimated. To date, wehave not incurred any such losses. Costs incurred in advance of billings arerecorded as costs in excess of related billings on

 

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uncompleted contracts. If the amount of revenue recognized exceeds theamounts billed to customers, the excess amount is recorded as unbilled accountsreceivable. If the amount billed exceeds the amount of revenue recognized, theexcess amount is recorded as customer deposits. Revenue recognized in anyperiod is dependent on our progress toward completion of projects in progress.Significant management judgment and discretion are used to estimate totaldirect labor hours. Any changes in or deviations from these estimates couldhave a material effect on the amount of revenue we recognize in any period.

 

For arrangements with multiple elements, such aslicenses and post-contract customer support services, we allocate revenue toeach element of a transaction based upon its fair value as determined inreliance on vendor specific objective evidence. Vendor specific objectiveevidence of fair value for all elements of an arrangement is based upon thenormal pricing and discounting practices when sold separately and forpost-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 license 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.

 

We derive post-contractcustomer support fees from post-contract customer support contracts, which aregenerally purchased at the same time as a license for our *taskforce* product. Post-contract customersupport includes telephone and email support and the right to receiveunspecified upgrades on a when-and-if-available basis. Post-contract customersupport may generally be renewed on an annual basis. We recognize revenue forpost-contract customer support, based on vendor specific objective evidence offair value, ratably over the term of the post-contract customer support period.We generally determine vendor specific objective evidence of post-contractcustomer support based on the stated fees for post-contract customer supportrenewal set forth in the original license agreement. If we are unable toestablish vendor specific objective evidence of fair value, we recognize allfees ratably over the term of the post-contract customer support, when the onlyundelivered element is post-contract customer support.

 

***BusinessCombinations***

 

In accordance with theprovisions of SFAS 141, the purchase price of an acquired company is allocatedbetween intangible assets and the net tangible assets of the acquired businesswith the residual of the purchase price recorded as goodwill. The determinationof the value of the intangible assets acquired involves certain judgments andestimates. These judgments can include, but are not limited to, the cash flowsthat an asset is expected to generate in the future and the appropriateweighted average cost of capital.

 

At March 31, 2005 ourgoodwill totaled $22.9 million and our identifiable intangible assets totaled$32.6 million. In accordance with the provisions of SFAS 142, we assess theimpairment of goodwill and identifiable intangible assets of our reportableunits annually, or more often if events or changes in circumstances indicatethat the carrying value may not be recoverable. This assessment is based upon adiscounted cash flow analysis and analysis of our market capitalization. Theestimate of cash flow is based upon, among other things, certain assumptionsabout expected future operating performance and an appropriate discount ratedetermined by our management. Our estimates of discounted cash flows may differfrom actual cash flows due to, among other things, economic conditions, changesto the business model or changes in operating performance. Significantdifferences between these estimates and actual cash flows could materiallyaffect our future financial results.  Weplan to conduct our initial annual impairment test in August 2005 and annuallythereafter. There were no events or circumstances from the close of theacquisition through March 31, 2005 that would require an interim assessment.

 

***Allowances fordoubtful accounts***

 

Historically,we have had a significant number of small- to medium-sized companies utilizingour solutions. These customers are involved in diverse businesses. Our paymentarrangements with customers generally provide 30-day payment terms. At the timethat customers contract with us for our solutions, we assess theircreditworthiness.

 

The nature of our relationship with customersis inherently long-term and we have extended and may extend payment terms on anexception basis. We regularly review our customers’ ability to satisfy theirpayment obligations and provide an allowance for doubtful accounts for allspecific receivables that we believe are not collectible. When these conditionsarise, we suspend recognition of revenue until collection becomes probable orcash is collected. Beyond these specific customer accounts, we record anallowance based on the size and age of all receivable balances against which wehave not established a specific allowance. These allowances are based on ourexperience in collecting such accounts.

 

Althoughwe believe that we can make reliable estimates for doubtful accounts, the sizeand diversity of our customer base, as well as overall economic conditions, mayaffect our ability to accurately estimate revenue and bad debt expense. Actualresults may differ from those estimates.

 

***Income taxes***

 

Wehave substantial deferred tax assets that relate to prior period losses,primarily in the United States and United Kingdom. We evaluate these deferredtax assets in each tax jurisdiction by estimating the likelihood of generatingfuture profits to realize these assets. In most cases, we have assumed that wewill not be able to generate sufficient future taxable income to realize theseassets and have recorded valuation reserves to reduce the net asset values tozero. 

 

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If we generate taxable income and ourassumptions regarding the generation of future taxable income change, we may beable to reverse the valuation allowances in future periods.  At March 31, 2005, we had approximately$43.1 million of valuation allowances related to our net deferred taxassets domestically and approximately $3.3 million foreign valuation allowancesrelated to our net deferred tax assets.

 

**RESULTS OF OPERATIONS**

 

**The three months ended March 31, 2005and 2004.**

** **

| ** **                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Hosted revenue                                                              |       | $                                 | 19,490     |   | $ | 17,892 |   |
|                                                                        |       |                              |       |   |   |
| Cost of hosted  revenue (excluding intangibles amortization included below) |       | 9,524                             |       | 8,368 |   |
| Intangibles  amortization                                                   |       | —                            |       | 10 |   |
|                                                                        |       |                              |       |   |   |
| Total cost of  hosted revenue                                               |       | 9,524                             |       | 8,378 |   |
|                                                                        |       |                              |       |   |   |
| Hosted gross  margin                                                        |       | $                                 | 9,966      |   | $ | 9,514 |   |
|                                                                        |       |                              |       |   |   |
| Hosted gross  margin percentage                                             |       | 51                                | %          | 53 | % |

 

***Hosted revenue***

 

Hosted revenue increased 9% for the three months endedMarch 31, 2005 from the same period in 2004 as a direct result of the growth incustomers using our services. In addition to customer growth, our hostedrevenue is affected by a number of factors, including the rate at which servicefeatures or add-ons are adopted, the pricing associated with the size and termof customer contracts, and purchases of our hardware.  Given the fixed nature of our arrangementswith our customers and ratable revenue recognition, the impact on revenues ofchanges in current prices for hosted solutions is tempered. This is alsobecause revenues from new pricing are layered on top of revenues from existingcustomers.

 

As new customers purchase our hardware or as existingcustomers choose to purchase new hardware, the amount of deferred revenuerecognized ratably over the minimum contract period increases.  This effect is tempered by customerspurchasing solutions that are deployed through the use of a location- or wirelessapplication protocol-enabled mobile telephone installed with our softwareapplication because we do not sell these devices and, therefore, do notrecognize any revenues for such device sales. A similar tempering effect may occur upon completion of the initial termof a customer’s contract because recognition of deferred revenue is completeand those customers may then renew their agreements for future services withoutthe purchase of new hardware.

 

Average monthly hosted revenue per subscription wasapproximately $48.56 for the three months ended March 31, 2005, up from $47.00for the same period in 2004. The increase of $1.56 primarily resulted from theprice changes associated with the types of services and size and term ofcontracts for new customers as those revenues were layered on top of therevenues from existing customers.

 

Underlyingprice changes is a trend related to the variety of wireless protocols we nowoffer customers, including General Packet Radio Services, Code DivisionMultiple Access 1XRTT and the Integrated Digital Enhanced Network. We describethose arrangements in which customers contract directly with wireless carriersfor the wireless airtime component of our solution as “unbundled”. Conversely,we describe arrangements in which we contract directly with customers for thewireless airtime portion as “bundled”. The nature of our relationship with thewireless carriers dictates whether we will be entering into a bundled orunbundled arrangement with the customer. Selection of the appropriate protocolis related primarily to optimal wireless coverage for a specific customer areaof operation. Additionally, we are generally indifferent as to whether abundled or unbundled arrangement results with a new customer because we havepriced our solutions such that a similar contribution to gross profits resultsfrom either arrangement. We have observed an increase in the proportion of newsubscribers being added on an unbundled basis. We expect that this trend willcontinue through the next 12 to 18 months.

 

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

 

Cost of hosted revenueconsists of the amortization of the deferred cost of the *i*LMand related parts; costs associated with the final assembly, testing,provisioning, delivery and installation of hardware, and other costs such asprovisions for inventory and repair costs; and expenses related to thedelivery and support of our MRM solutions. Cost of hosted revenue increased to$9.5 million from $8.4 million for the three months ended March 31, 2005and 2004, respectively. The increase was attributed to increases inemployee-related expenses of $453,000, other product costs of $268,000,facilities and communication expenses of $228,000 and equipment anddepreciation expenses of $189,000. Cost of hosted revenue headcount increasedto 177 at March 31, 2005 from 136 at March 31, 2004, respectively. We expectcost of hosted revenue along with its related headcount increases to bemoderate during the next 12 months.

 

***Intangibles Amortization***

 

Intangibles amortization relates to the intangibleassets purchased from Differential Corrections, Inc. in April 2000 andConnectBusiness.com, Inc. in September 2002. The costs were amortized overtheir estimated useful lives of three and two years, respectively. As of March31, 2005 these intangibles were fully amortized.

 

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***Hosted gross margin***

 

Hosted gross marginsdecreased to 51% from 53% during the three months ended March 31, 2005 and2004, as a result of higher employee-related expenses.

 
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **March 31,**          | ** ** |
| ** **                                                                    | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Licensed revenue                                                              |       | $                      | 502        |   | $ | — |   |
|                                                                          |       |                   |       |   |   |
| Cost of licensed  revenue (excluding intangibles amortization included below) |       | 700                    |       | — |   |
| Intangibles  amortization                                                     |       | 457                    |       | — |   |
|                                                                          |       |                   |       |   |   |
| Total cost of  licensed revenue                                               |       | 1,157                  |       | — |   |
|                                                                          |       |                   |       |   |   |
| License gross  deficit                                                        |       | $                      | (655       | ) | $ | — |   |
|                                                                          |       |                   |       |   |   |
| License gross  deficit percentage                                             |       | (130                   | )%         | — | % |

 

***Licensed revenue***

 

Forthe three months ended March 31, 2005, licensed revenue was primarilyattributable to post-contract customer support arrangements related to existingcontracts acquired in the acquisition of Vidus.

 

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

 

Forthe three months ended March 31, 2005, cost of licensed revenue primarilyconsisted of employee related expenses in support of our ongoing post-contractcustomer support commitments.

 

***Intangiblesamortization***

 

Intangiblesamortization of approximately $457,000 during the three months ended March 31,2005 relates to the Vidus acquisition. The costs are being amortized over theirestimated useful lives of three to ten years.

 

***Licensed gross deficit***

 

Licensedgross deficit resulted from cost of licensed revenue being in excess oflicensed revenue.

 

***In-process research and development***

 

In-processresearch and development consists of research projects that had not reachedtechnological feasibility and had no alternative future use at the time of theacquisition of Vidus.

 

***Sales and marketingexpenses***

 

Sales and marketingexpenses consist of employee salaries, sales commissions, marketing andpromotional expenses. Sales and marketing expenses increased to $4.6 millionfrom $3.1 million for the three months ended March 31, 2005 and 2004. Theincrease was attributable to increases in employee-related expenses of$901,000, facilities and communication expenses of $179,000, promotionalexpenses of $144,000, consultant expenses of $109,000, and sales commissionexpenses of $83,000. The increase in employee compensation expense wasassociated with an increase in the average headcount. Sales and marketingheadcount increased to 125 at March 31, 2005 from 93 at March 31, 2004. Weexpect that sales and marketing expenses will increase as we expand our salesand marketing efforts, including, but not limited to, modest headcount growthand promotional expenses related to new product and service offerings.

 

***Research anddevelopment expenses***

 

Research and developmentexpenses consist of employee salaries and expenses related to developmentpersonnel and consultants, as well as expenses associated with software andhardware development. Research and development expenses increased to$2.6 million from $1.4 million for the three months ended March 31,2005 and 2004, respectively. The change was primarily the result of increases inemployee-related expenses of $768,000 and an increase in consultant fees of$122,000. Research and development headcount increased to 131 at March 31, 2005from 54 at March 31, 2004. We expect that research and development expenseswill increase in future periods as we develop and introduce new products andservices.

 

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***General andadministrative expenses***

 

General andadministrative expenses consist of employee salaries and related expenses forexecutive and administrative costs, accounting and professional fees,recruiting costs and provisions for doubtful accounts. General andadministrative expenses increased to $4.4 million from $2.2 millionfor the three months ended March 31, 2005 and 2004, respectively. The changewas primarily the results of increases in employee-related expenses of$605,000, increases in consulting fees and temporary employee-related expensesof $487,000 and in accounting and audit fees of $458,000 which were mostly dueto our Sarbanes-Oxley compliance effort, an increase in equipment anddepreciation expenses of $223,000, and an increase in facilities andcommunication expenses of $105,000. General and administrative headcountincreased to 80 at March 31, 2005 from 53 at March 31, 2004. We expect thatgeneral and administrative expenses will increase in future periods, includingmodest increases in employee-related expenses.

 

***Stock compensationexpense***

 

Deferred stockcompensation related to stock option grants to employees and consultants wasfully amortized at March 31, 2005. Deferred stock compensation was amortized onan accelerated basis over the vesting period of individual awards.

 

***Interest income,net***

 

Interest income iscomposed primarily of interest income on cash, cash equivalents and short-terminvestments. Interest expense for the three months ended March 31, 2005 relatedto the short-term financing of insurance costs. Interest income net of interestexpense increased to $618,000 from $254,000 in the three months ended March 31,2005 and 2004, respectively. The increases are the result of larger investedbalances and higher rates of return during the 2005 periods.

 

***Other income, net***

 

During the three-monthperiods ended March 31, 2005 and 2004, other expense consisted primarily of netforeign currency translation gains related to our subsidiaries in India and theUnited Kingdom.

*** ***

***Net (loss) income***

 

We experienced a net lossof $7.4 million for the three months ended March 31, 2005 from net incomeof $3.1 million for the three months ended March 31, 2004. Our operatingcosts increased to $28.0 million from $15.0 million for the threemonths ended March 31, 2005 and 2004, respectively. The impact of theseincreases in expenses was accompanied by increases in revenues to $20.0 millionfrom $17.9 million for the three months ended March 31, 2005 and 2004,respectively.

 

We believeperiod-to-period comparisons of our operating results are not necessarilymeaningful. You should not rely on them to predict our future performance. Theamount and timing of our operating expenses may fluctuate significantly in thefuture as a result of a variety of factors.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of March 31, 2005, weheld $35.8 million of cash and cash equivalents and $75.0 million ofshort-term investments. Working capital totaled $109.0 million at March31, 2005.

 

Net cash (used in)provided by operating activities was $(1.1) million and $2.3 million forthe three months ended March 31, 2005 and 2004, respectively. The$3.4 million decrease in the net cash provided by operating activitiesreflects an increase in net loss of $10.5 million, which is offset by anincrease of $6.7 million in non-cash charges. Non-cash charges to earnings included the in-process research anddevelopment, depreciation and amortization, provision for doubtful accounts andsales returns, and provision for inventory valuation. At March 31, 2005,approximately $1.4 million of our gross accounts receivable were over90 days old. We believe we have adequately provided allowances as of March31, 2005 for any such amounts that may ultimately become uncollectible.

 

Net cash provided byinvesting activities during the three months ended March 31, 2005 was$22.2 million, which was comprised of $63.4 million proceeds from saleof short-term investments, offset by $35.1 million used to purchase short-terminvestments, $5.2 million used for the acquisition of Vidus, net of cashacquired, and the purchase of $848,000 of property and equipment.

 

Net cash provided byfinancing activities decreased to $173,000 from $565,000 for the threemonths ended March 31, 2005 and 2004, respectively, due to a decrease in stockoption exercises.

 

Webelieve that existing cash, cash equivalents and investments, together with anycash generated from operations, will be sufficient to fund our operatingactivities, capital expenditures and other obligations for at least the nexttwelve months. However, if we are not successful in generating sufficient cashflows from operations or in raising additional capital when required insufficient amounts and on terms acceptable to us, our business could suffer.

 

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

 
| ** **                      | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|---------------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
| Operating lease  commitments    |       | $         | 6,694      |                  | $          | 1,582         |       | $             | 2,607      |                   | $          | 2,314 |   | $ | 191 |   |
| Inventory  purchase commitments |       | 12,586    |       | 12,586                |       | —        |       | —        |       | —                 |       |
| Other purchase  obligations     |       | 1,395     |       | 1,395                 |       | —        |       | —        |       | —                 |       |
|                            |       |      |       |                  |       |          |       |          |       |                   |       |
|                            |       | $         | 20,675     |                  | $          | 15,563        |       | $             | 2,607      |                   | $          | 2,314 |   | $ | 191 |   |

 

Otherlong-term liabilities in our consolidated balance sheet as of March 31, 2005include a deferred rent liability of $230,000. The payments related to thisamount are included in operating lease commitments above.

 

Operatinglease commitments include minimum rental payments under our non-cancelableoperating leases for office facilities, as well as limited office equipmentthat we utilize under lease arrangements. The amounts presented are consistentwith contractual terms and are not expected to differ significantly unless asubstantial change in our headcount needs requires us to exit an officefacility early or expand our occupied space.

 

Inventorypurchase commitments include minimum payments under non-cancelable commitmentsfor goods that were entered into through our ordinary course of business.

 

Otherpurchase obligation amounts include minimum purchase commitments for marketing,computer equipment, software applications, engineering development services andother goods and services that were entered into through our ordinary course ofbusiness.  These contractual arrangementscontain significant performance requirements. Given the significance of the performance requirements, actual paymentscould differ significantly from these estimates.

 

**RISK FACTORS**

 

In addition to the otherinformation contained in this Report, the following factors should be carefullyconsidered in evaluating our business and prospects. The risks anduncertainties described below are intended to be ones that are specific to usor our industry and that we deem material, but they are not the only ones thatwe face.

 

**On February 18, 2005, we acquired Vidus Limited (“Vidus”).The combined company may not realize expected benefits because of integrationand other challenges.**

 

If the combined company fails to meet thechallenges involved in integrating their operations and products successfullyor otherwise fails to realize any of the anticipated benefits of theacquisition, then the results of operations of the combined company could beseriously harmed. Realizing the benefits of the acquisition, if any, willdepend in part on the successful integration of technology, operations andpersonnel. The integration of the companies is a complex, time-consuming andexpensive process that could significantly disrupt the business of the combinedcompany, and planning and predicting future growth rates, if any, and operatingresults will be more difficult for the combined company.

 

The combined company may not successfullyintegrate the operations of @Road and Vidus in a timely manner, or at all, andthe combined company may not realize the anticipated benefits of theacquisition to the extent, or in the timeframe, anticipated. The anticipatedbenefits of the acquisition are based on projections and assumptions, includingsuccessful integration, not actual experience. In addition to the integrationrisks discussed above, the combined company’s ability to realize those benefitscould be adversely effected by practical or legal constraints on its ability tocombine operations.

 

**We have incurred or expect to incur significant costsassociated with the acquisition of Vidus.**

 

In connection with the acquisition of Vidus, we incurred estimated acquisition relatedcosts of $2.5 million. There can be noassurance that the combined company will not incur additional material chargesin subsequent quarters to reflect additional costs associated with theacquisition and the integration of the two companies.

 

Under the purchase method of accounting, weallocated the total estimated purchase price of $54.5 million to Vidus’tangible assets, purchased technology and other intangible assets andliabilities assumed of Vidus based on their fair values as of the date of 

 

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completionof the acquisition, and recorded the excess of the purchase price over thosefair values as goodwill.  We will incuramortization expense over the useful lives of amortizable intangible assetsacquired in connection with the acquisition. In addition, to the extent thevalue of goodwill becomes impaired, we may be required to incur materialcharges relating to the impairment of that asset. Any potential impairmentcharge could have a material impact on our results of operations and could havea material adverse effect on the market value of our common stock.

 

**If, pursuant to its announcements, AT&T Wireless ceasesto operate its Cellular Digital Packet Data network in June 2005, we maybe unable to migrate some of our customers to an alternate wireless network andour financial results could be adversely affected.**

 

Beginning March 31, 2003, AT&T Wirelessdiscontinued new sales of its CDPD service. AT&T Wireless has alsoindicated that it expects to cease operating its CDPD network by June 30,2005.  As of March 31, 2005, lessthan 20% our total subscribers utilize the AT&T Wireless CDPD network (“AT&TSubscribers”). We are working with the AT&T Subscribers to migrate them toan alternate wireless protocol. If the AT&T Wireless CDPD network isterminated, the AT&T Subscribers who have not switched to an alternatewireless protocol would have to use another CDPD network, if available, or, ifno other CDPD network is available, the AT&T Subscribers would be unable toutilize our services. While we believe that we have the capability to transitionall of the AT&T Subscribers to another protocol if all of the AT&TSubscribers choose to transition to another protocol, there can be no assurancethat we will be able to migrate all such subscribers by June 30, 2005. Anyresulting decrease in the total number of subscribers of our services, even iffor only a brief period, could have a material adverse effect on our financialresults. If a large percentage of the AT&T Subscribers choose not tomigrate to an alternate wireless protocol or other CDPD network, if available,or seek to terminate their @Road services, such loss of customers would have amaterial adverse impact on our financial results. In October 2004, AT&TWireless was acquired by Cingular Wireless and is now a direct wholly owned subsidiaryof Cingular Wireless.

 

**If, pursuant to its announcement, Verizon Wireless ceases tooperate its Cellular Digital Packet Data network by the end of 2005, we may beunable to migrate some of our customers to an alternate wireless network andour financial results could be adversely affected.**

 

Verizon Wireless has indicated that it expectsto cease operating its CDPD network by the end of 2005. As of March 31, 2005,approximately 20% of our total subscribers utilize the Verizon Wireless CDPDnetwork (“Verizon Subscribers”). We are working with the Verizon Subscribers tomigrate them to an alternate wireless protocol. If the Verizon Wireless CDPDnetwork is terminated, the Verizon Subscribers who have not switched to analternate wireless protocol would have to use another CDPD network, ifavailable, or, if no other CDPD network is available, Verizon Subscribers wouldbe unable to utilize our services. While we believe that we have the capabilityto transition all of the Verizon Subscribers to another protocol if all of theVerizon Subscribers choose to transition to another protocol, there can be noassurance that we will be able to migrate all such subscribers byDecember 31, 2005. Any resulting decrease in the total number ofsubscribers of our services, even if for only a brief period, could have amaterial adverse effect on our financial results. If a large percentage of theVerizon Subscribers choose not to migrate to an alternate wireless protocol orother CDPD network, if available, or seek to terminate their @Road services,such loss of customers would have a material adverse impact on our financialresults.

 

**We have a history of losses, were recently profitable and maynot regain or sustain profitability in the future.**

 

We incurred a loss for the three months endedMarch 31, 2005.  Although we wereprofitable for each of the three month periods ending September 30, 2003through December 31, 2004, we have a history of losses since inception throughthe three month period ending June 30, 2003. As of March 31, 2005, we had an accumulated deficit of approximately$114.4 million. To regain profitability we will need to generatesignificant revenues to offset our cost of revenues and our sales andmarketing, research and development and general and administrative expenses. Wemay not achieve or sustain our revenue or profit goals and may continue toincur losses in the future. To facilitate the sale of our MRM solutions, thefees for our proprietary hardware devices have often been at or below ourcosts. Changes such as increases in our pricing for solutions or the pricing ofcompeting solutions may harm our ability to increase sales of our solutions tonew and existing customers. If we are not able to expand our customer base andincrease our revenue from new and existing customers, we may be unprofitable.

 

**Any material weakness or significant deficiency identified inour internal controls could have an adverse effect on our business.**

 

Section 404 of the Sarbanes-Oxley Act of2002 requires that companies evaluate and report on their internal controlstructure and procedures over financial reporting. In addition, our independentregistered public accounting firm must report on management’s evaluation aswell as evaluate our internal control structure and procedures. Other thanthose disclosed herein, there can be no assurance that there may not be additionalsignificant deficiencies or material weaknesses that we would be required toreport in the future. In addition, we expect any required remediation, ifapplicable, to increase our accounting, legal and other costs, and may divertmanagement resources from other business objectives and concerns.

 

**Our stock price is volatile, which may cause you to losemoney and could lead to costly litigation against us that could divert ourresources.**

 

From time to time, stock markets experiencedramatic price and volume fluctuations, particularly for shares of technologycompanies. These fluctuations can be unrelated to the operating performance ofthese companies. Broad market fluctuations may

 

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reducethe market price of our common stock and cause you to lose some or all of yourinvestment. These fluctuations may be exaggerated if the trading volume of ourcommon stock is low. In addition, due to the technology-intensive nature andgrowth rate of our business and the mobile resource management market, themarket price of our common stock may rise and fall in response to:

 

• quarterlyvariations in operating results;

• failure toachieve operating results anticipated by securities analysts and investors;

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

•announcements of technological or competitive developments;

• the gain orloss of a significant customer or order;

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

• acquisitionsor strategic alliances by us or our competitors.

 

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

 

**If wireless carriers or their roaming alliances cease tooperate or maintain some or all of their Cellular Digital Packet Data networks,we may lose customers and our revenues could decrease.**

 

Certain CDPD carriers have entered intoagreements with other carriers to enable subscribers to use the wirelessnetworks of other carriers in multi-carrier CDPD coverage areas. Thisfunctionality is called roaming, and wireless carriers who enter into theseagreements are called roaming alliances. Certain roaming alliances of AT&T Wirelesshave terminated their CDPD networks, resulting in areas of non-coverage withinthis multi-carrier coverage area. In addition, we believe that certain CDPDcarriers are limiting the support and maintenance of portions of their wirelessnetworks, which can result in lower quality and availability of CDPD servicefor some of our customers and a decrease in customer satisfaction for thosecustomers. If such degradation of CDPD networks continues, we may losecustomers and our revenues would decrease.

 

**We face competition from internal development teams ofpotential customers and from existing and potential competitors, and if we failto compete effectively, our ability to acquire new customers could decrease,our revenues would decline and our business would suffer.**

 

The markets for mobile resource managementsolutions and scheduling software are competitive and is expected to becomeeven more competitive in the future. If we do not compete effectively,competition could harm our business and limit our ability to acquire newcustomers and grow revenues, which in turn could result in a loss of our marketshare and decline in revenues. We believe that our solutions face competitionfrom a number of business productivity solutions, including:

 

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

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

• solutions targetedat specific vertical markets, such as a service offered by Qualcomm thatmonitors assets in the 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 facecompetition from manufacturing companies that seek to enter the mobile resourcemanagement market, such as Trimble Navigation.

 

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

 

We also face numerous challenges associated withovercoming the following 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 product and service offerings.*    Althoughwe offer a broad range of mobile resource management solutions, a customerprospect may require functionality that we do not offer, which may enablecurrent and potential competitors to exploit the areas in which we do notdevelop solutions.

•*Customer relationships.*    Manyof our current and potential competitors have pre-existing relationships withour large customer prospects, which may allow them to more effectively marketand sell competitive mobile resource management solutions.

 

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**As we seek to serve larger customers, we face competitionfrom businesses with greater financial resources, and we may be unable tocompete effectively with these businesses.**

 

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

 

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

 

Sales of our productsand solutions can be significant decisions for prospective customers, and theCompany devotes considerable time and resources to sign such customers. Inaddition, the Company’s software products often require significantcustomization for each customer. The Company may not recognize revenue relatedto such software until such customization is completed and customer acceptanceof the software is obtained. As a result, the Company’s operating results on aquarter-to-quarter basis may fluctuate. Unexpected difficulties in thecustomization process or the delay of customer acceptance for a large contractcould have a material adverse effect on the Company’s quarterly financial andoperating results.

 

**Vidus relies on a small number of customers for its revenue.**

 

Vidus has only a limited operating history, andhistorically has been dependent upon a small number of customers for itsrevenue. If we are unable to develop additional customers or fail to maintainexisting customers, our business and operating results will be adverselyaffected.

 

**If wireless communications providers on which we depend forservices decide to abandon or do not continue to expand their wirelessnetworks, we may lose customers and our revenues could decrease.**

 

Currently, our solutions function on GeneralPacket Radio Services networks, Code Division Multiple Access 1xRTT networks,Integrated Digital Enhanced Networks and Cellular Digital Packet Data networks.These protocols cover only portions of the United States and Canada. Ifwireless communications providers abandon these protocols, such as theanticipated termination of CDPD networks, in favor of other types of wirelesstechnology, we may not be able to provide services to our customers. Inaddition, if cellular carriers do not expand their coverage areas, we will beunable to meet the needs of customers who may wish to use our services outsidethe current cellular coverage area.

 

**Our quarterly operating results are subject to fluctuations,and our stock price may decline if we do not meet the expectations of investorsand analysts.**

 

Our quarterly revenues and operating results aredifficult to predict and may fluctuate significantly from quarter to quarterdue to a number of factors, many of which are outside our control. Thesefactors include, but are not limited to:

 

• changes inthe market for mobile resource management solutions;

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

• delays ofcustomer acceptance of our solutions;

• changes inlength of sales cycles of or demand by our customers for existing andadditional solutions;

• changes inthe productivity of our distribution channels;

• introductionof new solutions by us or our competitors;

• changes inour pricing policies or those of our competitors or suppliers;

• changes inour mix of sources of revenues;

• generaleconomic and political conditions;

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

• any need tomigrate to new wireless networks, which could cause our solutions to beincompatible with new wireless networks or become out of date.

 

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

 

**Our success depends upon our ability to develop new solutionsand enhance our existing solutions. If we cannot deliver the features andfunctionality our customers demand, we will be unable to retain or attract newcustomers.**

 

If we are unable to develop new solutions, areunable to enhance and improve our solutions successfully in a timely manner, orfail to position and/or price our solutions to meet market demand, we may notattract new customers and existing customers may

 

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notexpand their use of our solutions, and our business and operating results willbe adversely affected. If our enhancements to existing solutions do not deliverthe functionality that our customer base demands, our customers may choose notto renew their agreements with us when they reach the end of their initialcontract periods, and our business and operating results will be adverselyaffected. If we cannot effectively deploy, maintain and enhance our solutions,our revenues may decrease, we may not be able to recover our costs and ourcompetitive position may be harmed.

 

**If one or more of the agreements we have with wirelesscommunications providers is terminated and as a result we are unable to offerour solutions to customers within a wireless communications provider’s coveragearea, we may be unable to deliver our solutions, we may lose customers, and ourrevenues could decrease.**

 

Our existing agreements with wirelesscommunications providers may in some cases be terminated immediately upon theoccurrence of certain conditions or with prior written notice. In connectionwith ceasing operation of their CDPD networks, AT&T Wireless (which is nowa direct wholly owned subsidiary of Cingular Wireless) and Verizon Wireless mayseek to terminate or not to renew their contracts for CDPD service with us. Ifone or more of our wireless communications providers decides to terminate ornot to renew its contract with us, we may incur additional costs relating toobtaining alternate coverage from another wireless communications provideroutside of its primary coverage area, or we may be unable to replace thecoverage at all, causing a complete loss of services to our customers in thatcoverage area.

 

**We depend on a limited number of third parties to manufactureand supply certain components of our solutions.**

 

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

 

Although we believe that we have sufficientquantities of microcontrollers and Internet Data Terminals to last the nexttwelve months, if our agreements with these or other suppliers andmanufacturers are terminated or expire, if we are unable to obtain sufficientquantities of these products or components critical for our solutions, if thequality of these products or components is inadequate, or if the terms forsupply of these products or components become commercially unreasonable, oursearch for additional or alternate suppliers and manufacturers could result insignificant delays, added expense and our inability to maintain or expand ourcustomer base. Any of these events could require us to take unforeseen actionsor devote additional resources to provide our products and services and couldharm our ability to compete effectively.

 

**A disruption of our services due to accidental or intentionalsecurity breaches may harm our reputation, cause a loss of revenues andincrease our expenses.**

 

Unauthorized access, computer viruses and otheraccidental or intentional actions could disrupt our information systems orcommunications networks. We expect to incur significant costs to protectagainst the threat of security breaches and to alleviate problems caused by anybreaches. Currently, the wireless transmission of our customers’ proprietaryinformation is not protected by encryption technology. If a third party were tomisappropriate our customers’ proprietary information, we could be subject toclaims, litigation or other potential liabilities that could seriously harm ourrevenues and result in the loss of customers. Additionally, our Europeanoperations are subject to statutory EU warranties which would require us to fixany errors; if so invoked, we would incur costs to fix any such errors.

 

**System or network failures could reduce our sales, increasecosts or result in liability claims.**

 

Any disruption to our services, informationsystems or communications networks or those of third parties could result inthe inability of our customers to receive our services for an indeterminateperiod of time. Our operations depend upon our ability to maintain and protectour computer systems at data centers located in Ashburn, Virginia and RedwoodCity, California, and our network operations center in Fremont, California. Thefacilities in California are in or near earthquake fault zones. Our servicesmay not function properly if our systems fail, or if there is an interruptionin the supply of power, or if there is an earthquake, fire, flood or othernatural disaster, or an act of war or terrorism. Within each of our datacenters, we have fully redundant systems; however, in the event of a system ornetwork failure, the process of shifting access to customer data from one datacenter to the other would be performed manually, and could result in a furtherdisruption to our services. Any disruption to our services could cause us tolose customers or revenue, or face litigation, customer service or repair workthat would involve substantial costs and could distract management fromoperating our business.

 

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**We may establish alliances or acquire technologies orcompanies in the future, which could result in the dilution of our stockholdersand disruption of our business, which could reduce our revenues or increase ourcosts.**

 

We are continually evaluating business alliancesand external investments in technologies related to our business. Acquisitionsof companies, divisions of companies, businesses or products and strategicalliances entail numerous risks, any of which could materially harm ourbusiness in several ways, including:

 

• diversion ofmanagement’s attention from our core business objectives and other businessconcerns;

• failure tointegrate 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;

• dilution ofour existing stockholders as a result of issuing equity securities; and

• assumptionof liabilities of the acquired company.

 

Some or all of these problems may result fromcurrent or future alliances, acquisitions or investments. Furthermore, we maynot realize any value from these alliances, acquisitions or investments.

 

**Our success and ability to compete depends upon our abilityto secure and protect patents, trademarks and other proprietary rights.**

 

Our success depends on our ability to protectour proprietary rights to the technologies used to implement and operate ourservices in the United States and in foreign countries. In the event that athird party breaches the confidentiality provisions or other obligations in oneor more of our agreements or misappropriates or infringes our intellectualproperty rights or the intellectual property rights licensed to us by thirdparties, our business could be seriously harmed. To protect our proprietaryrights, we rely on a combination of trade secrets, confidentiality and othercontractual provisions and agreements, and patent, copyright and trademarklaws, which afford us only limited protection. Third parties may independentlydiscover or invent competing technologies or reverse engineer our tradesecrets, software or other technology. Furthermore, laws in some foreigncountries may not protect our proprietary rights to the same extent as the lawsof the United States. Therefore, the measures we take to protect ourproprietary rights may not be adequate.

 

**Claims that we infringe third-party proprietary rights couldresult in significant expenses or restrictions on our ability to provide oursolutions.**

 

Third parties may claim that our current orfuture solutions infringe their proprietary rights or assert other claimsagainst us. As the number of entrants into our market increases, thepossibility of an intellectual property or other claim against us grows. Anyintellectual property or other claim, with or without merit, would betime-consuming and expensive to litigate or settle and could divert managementattention from focusing on our core business. As a result of such a dispute, wemay have to pay damages, incur substantial legal fees, develop costlynon-infringing technology, if possible, or enter into license agreements, whichmay not be available on terms acceptable to us, if at all. Any of these resultswould increase our expenses and could decrease the functionality of 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 to sufficient capacity onreliable wireless networks, we may be unable to deliver our services, ourcustomer satisfaction could decline and our revenues could decrease.**

 

Our ability to grow and maintain profitabilitydepends on the ability of wireless carriers to provide sufficient networkcapacity, reliability and security to our customers. Even where wirelesscarriers provide coverage to entire metropolitan areas, there are occasionallapses in coverage, for example due to tunnels blocking the transmission ofdata to and from wireless modems used with our solutions. These effects couldmake our services less reliable and less useful, and customer satisfactioncould suffer.

 

**We depend on Global Positioning System technology owned andcontrolled by others. If we do not have continued access to GPS technology orsatellites, we will be unable to deliver our solutions and revenues willdecrease.**

 

Our solutions rely on signals from GlobalPositioning System satellites built and maintained by the U.S. Department ofDefense. GPS satellites and their ground support systems are subject toelectronic and mechanical failures and sabotage. If one or more satellitesmalfunction, there could be a substantial delay before they are repaired orreplaced, if at all, and our products and services may cease to function andcustomer satisfaction would suffer.

 

In addition, the U.S. government could decidenot to continue to operate and maintain GPS satellites over a long period oftime or to charge for the use of the Global Positioning System. Furthermore,because of ever-increasing commercial applications of the Global PositioningSystem and international 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 Global PositioningSystem, for example by affecting the availability, quality, accuracy or pricingof GPS technology, our business will suffer.

 

**Defects or errors in our solutions could result in thecancellation of or delays in the implementation of our solutions, which woulddamage our reputation and harm our financial condition.**

 

We must develop our solutions quickly to keeppace with the rapidly changing MRM market. Solutions that address this marketare likely to contain undetected errors or defects, especially when firstintroduced or when new versions are introduced. We may be forced to delaycommercial release of new solutions or updated versions of existing solutionsuntil such errors or defects are 

 

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corrected,and in some cases, we may need to implement enhancements to correct errors thatwere not detected until after deployment of our solutions. Even after testingand release, our solutions may not be free from errors or defects, which couldresult in the cancellation or disruption of our services or dissatisfaction ofcustomers. Such customer dissatisfaction would damage our reputation and resultin lost revenues, diverted development resources, and increased service andwarranty costs.

 

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

 

The accurate reporting of location-relevantinformation is critical to our customers’ businesses. If we fail to accuratelyreport location-relevant information, we could lose customers, our reputationand ability to attract new customers could be harmed, and we could be exposedto legal liability. We may not have insurance adequate to cover losses we mayincur as a result of these inaccuracies.

 

**Our success depends on our ability to maintain and expand oursales channels.**

 

To increase our market awareness, customer baseand revenues, we need to expand our direct and indirect sales operations. Thereis strong competition for qualified sales personnel, and we may not be able toattract or retain sufficient new sales personnel to expand our operations. Newsales personnel require training and it takes time for them to achieve fullproductivity, if at all. In addition, we believe that our success is dependenton the expansion of our indirect distribution channels, including ourrelationships with wireless carriers and independent sales agents. These saleschannel alliances require training in selling our solutions and it will taketime for these alliances to achieve productivity, if at all. We may not be ableto establish relationships with additional distributors on a timely basis, orat all. Our independent sales agents, many of which are not engaged with us onan exclusive basis, may not devote adequate resources to promoting and sellingour solutions.

 

**We depend on recruiting and retaining qualified personnel andour inability to do so may result in a loss in sales, impair our ability toeffectively manage our operations or impair our ability to develop and supportour solutions.**

 

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

 

**From time to time, we are or may be subject to litigationthat could result in significant costs to us.**

 

From time to time, we are or may be subject tolitigation in the ordinary course of business relating to any number or type ofclaims, including claims for damages related to errors and malfunctions of ourproducts and services or their deployment. A securities, product liability orother claim could seriously harm our business because of the costs of defendingthe lawsuit, diversion of employees’ time and attention, and potential damageto our reputation. Some of our agreements with customers, suppliers and otherthird parties contain provisions designed to limit exposure to potentialclaims. Limitation of liability provisions contained in our agreements may notbe enforceable 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 general liabilityand directors and officers insurance, our insurance may not cover potentialclaims or may not be adequate to cover all costs incurred in defense ofpotential claims or to indemnify us for all liability that may be imposed.

 

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

 

In addition to regulations applicable tobusinesses in general, we may also be subject to direct regulation by U.S.governmental agencies, including the Federal Communications Commission,Department of Defense, Department of Commerce or the State Department. Theseregulations may impose licensing requirements, privacy safeguards relating tocertain subscriber information, or safety standards, for example with respectto human exposure to electromagnetic radiation and signal leakage. A number oflegislative and regulatory proposals under consideration by federal, state,provincial, local and foreign governmental organizations may lead to laws orregulations concerning various aspects of the Internet, wireless communicationsand GPS technology, including on-line content, user privacy, taxation, accesscharges and liability for third-party activities. Additionally, it is uncertainhow existing laws governing issues such as taxation on the use of wirelessnetworks, intellectual property, libel, user privacy and property ownershipwill be applied to our solutions. The adoption of new laws or the applicationof existing laws may expose us to significant liabilities and additionaloperational requirements, which could decrease the demand for our solutions andincrease our cost of doing business. Wireless communications providers whosupply us with airtime are subject to regulation by the Federal CommunicationsCommission, and regulations that affect them could also increase our costs orlimit the provision of our solutions.

 

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

 

We have customers, suppliers and manufacturersthat are located outside the United States. Some transactions relating tosupply and development agreements may be conducted in currencies other than theU.S. dollar, such as the Sterling pound and the

 

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Euro,and fluctuations in the value of foreign currencies relative to the U.S. dollarcould cause us to incur currency exchange costs. In addition, some of ourtransactions denominated in U.S. dollars may be subject to currency exchangerate risk. We cannot predict the effect of exchange rate fluctuations on ourfuture operating results. Should there be a sustained increase in averageexchange rates for the local currencies in these countries, our suppliers andmanufacturers may request a price increase at the end of the contract period.

 

**Geopolitical, economic and military conditions, includingterrorist attacks and other acts of war, may materially and adversely affectthe markets on which our common stock trades, the markets in which we operate,our operations and our profitability.**

 

Terrorist attacks and other acts of war, and anyresponse to them, may lead to armed hostilities and such developments wouldlikely cause instability in financial markets. Armed hostilities and terrorismmay directly impact our facilities, personnel and operations which are locatedin the United States and India, as well as those of our customers. Furthermore,severe terrorist attacks or acts of war may result in temporary halts ofcommercial activity in the affected regions, and may result in reduced demandfor our solutions. These developments could have a material adverse effect onour business and the trading price of our common stock.

 

**As of March 31, 2005, a limited number of stockholders ownapproximately 40% of our stock and may act, or prevent certain types ofcorporate actions, to the detriment of other stockholders.**

 

Our directors, officers and greater than 5%stockholders own, as of March 31, 2005, approximately 40% of our outstandingcommon stock. Accordingly, these stockholders may, if they act together,exercise significant influence over all matters requiring stockholder approval,including the election of a majority of the directors and the determination ofsignificant corporate actions. This concentration could also have the effect ofdelaying or preventing a change in control that could otherwise be beneficialto our stockholders.

 

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

 

We have adopted a certificate of incorporationand bylaws, which in addition to state law, may discourage, delay or prevent amerger or acquisition that a stockholder may consider favorable. Theseprovisions include the following:

 

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

• authorizingthe board to issue preferred stock;

• prohibitingcumulative voting in the election of directors;

• limiting thepersons who may call special meetings of stockholders;

• prohibitingstockholder action by written consent; and

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

 

We have adopted a certificate of incorporationthat permits our board to issue shares of preferred stock without stockholderapproval, which means that our board could issue shares with special voting rightsor other provisions that could deter a takeover. In addition to delaying orpreventing an acquisition, the issuance of a substantial number of shares ofpreferred stock could adversely affect the price of our common stock and diluteexisting stockholders.

 

**Item 3****. Quantitative and Qualitative Disclosures AboutMarket 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.

 

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The table belowpresents the carrying value and related weighted average interest rates for ourcash, cash equivalents and marketable securities. The carrying valuesapproximate fair values as of March 31, 2005 and December 31, 2004. As of March31, 2005, marketable securities consisted of $35.8 million with originalmaturity dates of 90 days or less and $75.0 million with originalmaturity dates of greater than 90 days. As of December 31, 2004,marketable securities consisted of $14.5 million with original maturitydates of 90 days or less and $103.2 million with original maturitydates of greater than 90 days.

 
| ** **                                              | ** ** | **Carrying  value at  March 31,  2005** | ** ** | **Average  rate of  return at  March 31,  2005** | ** ** | **Carrying  value at  December 31,  2004** | ** ** | **Average  rate of  return at  December 31,  2004** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                              | ** ** | **(in thousands)**                      | ** ** | **(annualized)**                                 | ** ** | **(in thousands)**                         | ** ** | **(annualized)**                                    | ** ** |
| **Cash, cash equivalents and marketable securities**    |       |                                    |       |                                             |       |                                       |       |                                                |       |
| Cash and cash equivalents—variable rate            |       | $                                       | 3,016      |                                             | 1.5        | %                                          | $          | 3,022                                               |       | 1.3 | % |
| Money market funds—variable rate                   |       | 143                                     |       | 2.7                                              | %          | 951                                        |       | 2.0                                                 | %          |
| Cash and cash equivalents—fixed rate               |       | 32,599                                  |       | 2.6                                              | %          | 10,521                                     |       | 2.3                                                 | %          |
|                                                    |       |                                    |       |                                             |       |                                       |       |                                                |       |
| Total cash and cash equivalents                         |       | 35,758                                  |       | 2.5                                              | %          | 14,494                                     |       | 2.1                                                 | %          |
| Marketable securities—fixed rate                   |       | 75,013                                  |       | 2.4                                              | %          | 103,222                                    |       | 2.0                                                 | %          |
|                                                    |       |                                    |       |                                             |       |                                       |       |                                                |       |
| Total cash, cash equivalents and marketable  securities |       | $                                       | 110,771    |                                             | 2.5        | %                                          | $          | 117,716                                             |       | 2.0 | % |

 

**ForeignCurrency Exchange**

 

We transactbusiness primarily in U.S. dollars. We are subject, however, to adversemovements in foreign currency exchange rates in those countries where weconduct business. To date, the effect of fluctuations in foreign currencyexchange rates on expenses has not been material. Operating expenses incurredby our subsidiaries in India and United Kingdom are denominated in Indianrupees and British Pounds, respectively. We hold fixed-price agreementsdenominated in U.S. dollars with key foreign-based suppliers: OrientSemiconductor Electronics, in Taiwan, manufactures the Internet LocationManager; Taiwan Semiconductor Manufacturing Company, in Taiwan, manufacturesour Global Positioning System digital receiver chips; Sierra Wireless, inCanada, provides the modem for some versions of the Internet Location Manager;and Micronet, in Israel, supplies our Internet Data Terminal. Should there be asustained increase in average exchange rates for the local currency in any ofthe foregoing countries, our suppliers may request increased pricing on any newagreements. If this were to occur for all of these currencies and with each ofthese suppliers, a 10 percent increase in average exchange rates couldincrease our product costs by approximately 3.8 percent.

 

We do not usederivative financial instruments for speculative trading purposes, nor do wecurrently hedge any foreign currency exposure to offset the effects of changesin foreign exchange rates. Similarly, we do not use financial instruments tohedge operating expenses of our subsidiaries in India and United Kingdom.

 

**Item 4****. Controls and Procedures.**

 

Within90 days prior to the date of this Report, we carried out an evaluation,under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, of theeffectiveness of our disclosure controls and procedures as defined in Rules13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “ExchangeAct”). Based upon that evaluation, as of March 31, 2005 our principal executiveofficer and principal financial officer have concluded that our disclosurecontrols and procedures are effective. Our disclosure controls and proceduresare designed to provide a reasonable level of assurance of reaching our desireddisclosure control objectives and are effective in doing so.

 

A disclosurecontrol system, no matter how well conceived and implemented, can provide onlyreasonable assurance that the objectives of such control system are satisfied.Because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues, if any, withinthe company have been detected.

 

As part ofmanagement’s on-going assessment of internal control over financial reporting,we identified an internal control deficiency that constituted a “materialweakness,” as defined by the Public Company Accounting Oversight Board’sAccounting Standard No. 2, and we are in the process of remediatingsuch material weakness. The material weakness concerned the interpretation andimplementation of various complex accounting principles, in the area of uniquenon-recurring transactions, including our recent acquisition of Vidus andcertain significant customer contracts. We believe that, from time to time, wemay need outside consulting expertise with respect to the application of someof these more complex accounting principles. To correct the deficiency, we areexpanding our external consulting expertise to enable us to properly applythese complex accounting principles to our financial statements.

 

Other than theexpansion of our external consulting expertise, there have been no changes inour internal controls over financial reporting identified in connection withour evaluation that occurred during the last fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

 

**PART II****. OTHER INFORMATION**

 

**Item 1****. Legal Proceedings.**

 

From time to time,we are subject to claims in legal proceedings arising in the normal course ofour business. Based on our evaluation of these matters, we believe that thesematters will not have a material adverse effect on our operations or financialposition.

 

**Item 6****. Exhibits.**

** **
| 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             |

 

35

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | **@ROAD, INC.**                     |
|--------|-------------------------------------|
|   |                                |
|   | By:                                 | /s/ Carol Rice-Murphy |   |
|   |                                |
|   | Carol Rice-Murphy                   |
|   | Interim Chief Financial Officer     |
|   | (Principal Financial and Accounting |
|   | Officer)                            |
|   |                                |
|   | Date: May 10, 2005                  |

 

36

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***Exhibit Index***

 

**Exhibits**

 
| 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.             |

 

37

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