Table of Contents

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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 
| **Mark One**                                                                                                                                                                                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                       |   |   |
| **x**                                                                                                                                                                                                                      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                       |   |   |
| **For The Quarterly Period Ended September 30,  2008**                                                                                                                                                                |
|                                                                                                                                                                                                                       |   |   |
| ** ̈**                                                                                                                                                                                                                 | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                 |
| **For the  Transition Period  from               to               ** |

 

**CommissionFile Number****001-33521**

 

**INFOLOGIX, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **20-1983837**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation or organization) |       | (IRS  Employer Identification Number) |
| ** **                                                      | ** ** | ** **                            |
| **101 E.  County Line Road  Hatboro, PA**                       | ** ** | **19040**                             |
| (Address of  principal executive offices)                       |       | (Zip code)                            |

 

**(215)604-0691**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  No  ̈

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company.  Seedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer ̈                 |   | Accelerated filer ̈     |
|-----------------------------------------------|--------|-----------------------------|
| Non-accelerated filer ̈                   |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

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

 

The number of shares outstanding of each ofthe issuer’s classes of common stock as of the latest practicable date,

 

| **Class**                                      | ** ** | **Outstanding at November 7,  2008** |
|------------------------------------------------|------------|-------------------------------------------|
| **Common Stock, $0.00001 par value per share** | ** ** | **25,517,511 Shares**                     |

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| **PART I –  FINANCIAL INFORMATION** |
|-----------------------------------------------|
|                                          |   |   |   |   |
| Item 1.                                       |   | Financial Statements |   | 3 |
|                                          |   |   |   |   |
|                                          |   | Consolidated  Balance Sheets as of September 30, 2008 (unaudited) and  December 31, 2007 |   | 3 |
|                                          |   |   |   |   |
|                                          |   | Consolidated Statements of Operations  (unaudited) for the three and nine months ended September 30, 2008 and 2007 |   | 4 |
|                                          |   |   |   |   |
|                                          |   | Consolidated Statements of Changes in  Stockholders’ Equity (unaudited) for the nine months ended September 30,  2008 |   | 5 |
|                                          |   |   |   |   |
|                                          |   | Consolidated Statements of Cash Flows  (unaudited) for the nine months ended September 30, 2008 and 2007 |   | 6 |
|                                          |   |   |   |   |
|                                          |   | Notes to Unaudited Consolidated Financial Statements |   | 7 |
|                                          |   |   |   |   |
| Item  2.                                      |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 18 |
|                                          |   |   |   |   |
| Item  3.                                      |   | Quantitative  and Qualitative Disclosures About Market Risk |   | 30 |
|                                          |   |   |   |   |
| Item 4.                                       |   | Controls and  Procedures |   | 30 |
|                                          |   |   |   |   |
| **PART II – OTHER INFORMATION**     |
|                                          |   |   |   |   |
| Item 1.                                       |   | Legal Proceedings |   | 31 |
|                                          |   |   |   |   |
| Item 1a.                                      |   | Risk Factors |   | 31 |
|                                          |   |   |   |   |
| Item  2.                                      |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 31 |
|                                          |   |   |   |   |
| Item  3.                                      |   | Defaults  Upon Senior Securities |   | 31 |
|                                          |   |   |   |   |
| Item  4.                                      |   | Submission  of Matters to a Vote of Security Holders |   | 31 |
|                                          |   |   |   |   |
| Item 5.                                       |   | Other Information |   | 31 |
|                                          |   |   |   |   |
| Item 6.                                       |   | Exhibits |   | 31 |
|                                          |   |   |   |   |
|                                          |   | Signatures |   | 32 |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.        Financial Statements**

 

**INFOLOGIX,INC.Consolidated Balance Sheets(in thousands, except share amounts)**

 
| ** **                                                                                                                                                                                           | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                           |       |                         |       |                        |       |
| Currents assets:                                                                                                                                                                                     |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                            |       | $                            | 6,986      |                        | $          | 6,101 |   |
| Accounts and other receivables (net of  allowance for doubtful accounts in the amount of $324 and $409 as of  September 30, 2008 and December 31, 2007, respectively)                      |       | 17,004                       |       | 20,301                      |       |
| Unbilled revenue                                                                                                                                                                                     |       | 2,670                        |       | 1,052                       |       |
| Inventory, net                                                                                                                                                                                       |       | 2,066                        |       | 1,899                       |       |
| Prepaid expenses and other current assets                                                                                                                                                            |       | 1,173                        |       | 603                         |       |
| Promissory note receivable                                                                                                                                                                           |       | 35                           |       | —                      |       |
| Deferred tax assets - current                                                                                                                                                                        |       | 451                          |       | 451                         |       |
| Total current assets                                                                                                                                                                                 |       | 30,385                       |       | 30,407                      |       |
| Property and equipment, net                                                                                                                                                                          |       | 1,721                        |       | 1,247                       |       |
| Intangible assets, net                                                                                                                                                                               |       | 9,529                        |       | 8,362                       |       |
| Goodwill                                                                                                                                                                                             |       | 10,009                       |       | 5,668                       |       |
| Deferred tax assets - long-term                                                                                                                                                                      |       | 3,890                        |       | 2,956                       |       |
| Deferred financing costs                                                                                                                                                                             |       | 2,199                        |       | 57                          |       |
| Total assets                                                                                                                                                                                         |       | $                            | 57,733     |                        | $          | 48,697 |   |
|                                                                                                                                                                                                 |       |                         |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                       |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                                                 |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                     |       | $                            | 8,673      |                        | $          | 8,650 |   |
| Line of credit                                                                                                                                                                                       |       | 9,000                        |       | 9,959                       |       |
| Current portion of notes payable                                                                                                                                                                     |       | 1,276                        |       | 627                         |       |
| Current portion of capital lease  obligations                                                                                                                                                        |       | 78                           |       | 139                         |       |
| Sales tax payable                                                                                                                                                                                    |       | 284                          |       | 299                         |       |
| Accrued expenses                                                                                                                                                                                     |       | 3,765                        |       | 3,560                       |       |
| Accrued earn out payable                                                                                                                                                                             |       | 2,000                        |       | —                      |       |
| Deferred revenue                                                                                                                                                                                     |       | 345                          |       | 75                          |       |
| Total current liabilities                                                                                                                                                                            |       | 25,421                       |       | 23,309                      |       |
| Notes payable, net of current maturities                                                                                                                                                             |       | 14,949                       |       | 6,818                       |       |
| Capital lease obligations, net of current  maturities                                                                                                                                                |       | 52                           |       | 94                          |       |
| Other long term liabilities                                                                                                                                                                          |       | 900                          |       | —                      |       |
| Total liabilities                                                                                                                                                                                    |       | 41,322                       |       | 30,221                      |       |
| Commitments and Contingencies                                                                                                                                                                        |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                           |       |                         |       |                        |       |
| Preferred stock, par value $.00001;  authorized 10,000,000 shares; none issued or outstanding                                                                                                        |       | —                       |       | —                      |       |
| Common stock, par value $.00001; authorized  100,000,000 shares; issued and outstanding 25,517,511 shares and 24,909,301  shares at September 30, 2008 and December 31, 2007, respectively |       | —                       |       | —                      |       |
| Additional paid in capital                                                                                                                                                                           |       | 25,568                       |       | 23,580                      |       |
| Accumulated deficit                                                                                                                                                                                  |       | (9,157                       | )          | (5,104                      | )          |
| Total stockholders’ equity                                                                                                                                                                      |       | 16,411                       |       | 18,476                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                      |       | $                            | 57,733     |                        | $          | 48,697 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

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**INFOLOGIX,INC.**

**UnauditedConsolidated Statements of Operations**

**(in thousands, except share and per shareamounts)**

 
| ** **                                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                                 |       | $                                                        | 23,824     |                                                    | $          | 20,455 |   | $ | 73,958 |   | $ | 55,442 |   |
| Cost of revenues                                         |       | 17,614                                                   |       | 14,992                                                  |       | 54,255 |   | 40,984 |   |
| Gross profit                                             |       | 6,210                                                    |       | 5,463                                                   |       | 19,703 |   | 14,458 |   |
| Selling, general and adminstrative expenses              |       | 8,186                                                    |       | 6,160                                                   |       | 23,562 |   | 17,535 |   |
| Operating loss                                           |       | (1,976                                                   | )          | (697                                                    | )          | (3,859 | ) | (3,077 | ) |
| Interest expense                                         |       | (587                                                     | )          | (206                                                    | )          | (1,246 | ) | (516 | ) |
| Interest income                                          |       | 43                                                       |       | 108                                                     |       | 122 |   | 400 |   |
| Loss before income tax benefit                           |       | (2,520                                                   | )          | (795                                                    | )          | (4,983 | ) | (3,193 | ) |
| Income tax benefit                                       |       | —                                                   |       | 329                                                     |       | 930 |   | 1,259 |   |
| Net loss                                                 |       | $                                                        | (2,520     | )                                                       | $          | (466 | ) | $ | (4,053 | ) | $ | (1,934 | ) |
| Loss per share - basic and diluted                       |       | $                                                        | (0.10      | )                                                       | $          | (0.02 | ) | $ | (0.16 | ) | $ | (0.08 | ) |
| Weighted average shares outstanding - basic  and diluted |       | 25,477,308                                               |       | 24,152,217                                              |       | 25,196,578 |   | 23,930,389 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

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**INFOLOGIX,INC.Unaudited Consolidated Statement of Changes in Stockholders’ Equity**

**(inthousands, except share amounts)**

 
|                                                |   | **Common Stock** |   | **Additional  Paid-in** |   | **Accumulated** |   | **Total  Stockholders’** |   |
|-----------------------------------------------------|--------|-----------------------|--------|-------------------------|--------|-----------------|--------|-------------------------------|--------|
|                                                |   | **Shares**            |   | **Amount**              |   | **Capital**     |   | **Deficit**                   |   | **Equity** |   |
|                                                |   |                  |   |                    |   |            |   |                          |   |   |   |
| Balances, December 31, 2007                    |   | 24,909,301            |   | $                       | — |            | $      | 23,580                        |   | $ | (5,104 | ) | $ | 18,476 |   |
| Stock-based compensation                            |   | —                |   | —                  |   | 799             |   | —                        |   | 799 |   |
| Common stock issued to advisor                      |   | 20,000                |   | —                  |   | 38              |   | —                        |   | 38 |   |
| Common stock issued - employee stock  purchase plan |   | 88,210                |   | —                  |   | 121             |   | —                        |   | 121 |   |
| Common stock issued - Aware purchase                |   | 500,000               |   | —                  |   | 1,030           |   | —                        |   | 1,030 |   |
| Net loss                                            |   | —                |   | —                  |   | —          |   | (4,053                        | )      | (4,053 | ) |
| Balances, September 30, 2008                   |   | 25,517,511            |   | $                       | — |            | $      | 25,568                        |   | $ | (9,157 | ) | $ | 16,411 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

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**INFOLOGIX,INC.Unaudited Consolidated Statements of Cash Flows**

**(inthousands)**

** **
| ** **                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                        |       |                                                    |       |   |   |
| Operating activities:                                       |       |                                                    |       |   |   |
| Net loss                                                    |       | $                                                       | (4,053     | ) | $ | (1,934 | ) |
| Adjustments to reconcile net loss to  operating cash flow:  |       |                                                    |       |   |   |
| Depreciation and amortization                               |       | 1,885                                                   |       | 1,163 |   |
| Allowance for doubtful accounts receivable                  |       | (85                                                     | )          | 68 |   |
| Loss on sale of property and equipment, net                 |       | 26                                                      |       | 10 |   |
| Inventory obsolesence                                       |       | 198                                                     |       | 380 |   |
| Amortization of deferred financing costs                    |       | 149                                                     |       | — |   |
| Accrued interest expense added to note  payable             |       | 236                                                     |       | — |   |
| Accrued interest income added to note  receivable           |       | (5                                                      | )          | — |   |
| Share based compensation and other share  based payments    |       | 837                                                     |       | 788 |   |
| Deferred income tax benefit                                 |       | (934                                                    | )          | (1,259 | ) |
| Changes in:                                                 |       |                                                    |       |   |   |
| Accounts receivable                                         |       | 3,651                                                   |       | (4,479 | ) |
| Unbilled revenue                                            |       | (1,618                                                  | )          | — |   |
| Inventory                                                   |       | (365                                                    | )          | (510 | ) |
| Prepaid expenses and other current assets                   |       | (552                                                    | )          | 188 |   |
| Accounts payable                                            |       | (112                                                    | )          | 1,686 |   |
| Sales tax payable                                           |       | (15                                                     | )          | (112 | ) |
| Accrued expenses                                            |       | 98                                                      |       | 1,154 |   |
| Deferred revenue                                            |       | 270                                                     |       | — |   |
| Net cash provided (used) in operating  activities           |       | (389                                                    | )          | (2,857 | ) |
| Investing activities:                                       |       |                                                    |       |   |   |
| Acquisitions, net of cash acquired                          |       | (2,976                                                  | )          | (578 | ) |
| Acquisition of property, software and  equipment            |       | (1,857                                                  | )          | (1,335 | ) |
| Disposal of property and equipment                          |       | 80                                                      |       | — |   |
| Promissory notes issued                                     |       | (200                                                    | )          | — |   |
| Repayment of promissory notes                               |       | 15                                                      |       |   |   |
| Net cash used in investing activities                       |       | (4,938                                                  | )          | (1,913 | ) |
| Financing activities:                                       |       |                                                    |       |   |   |
| Payments received from employee stock  purchase plan        |       | 121                                                     |       | — |   |
| Payment of deferred financing costs                         |       | (1,391                                                  | )          | — |   |
| Issuance of Hercules note payable                           |       | 12,000                                                  |       | — |   |
| Issuance of Hercules line of credit                         |       | 7,500                                                   |       | — |   |
| Final repayment of Sovereign notes payable                  |       | (3,292                                                  | )          | — |   |
| Final repayment of Sovereign line of credit                 |       | (9,334                                                  | )          | — |   |
| Repayment of long-term debt and capital  leases             |       | (267                                                    | )          | (683 | ) |
| Net borrowings from line of credit                          |       | 875                                                     |       | 2,233 |   |
| Net cash provided by financing activities                   |       | 6,212                                                   |       | 1,550 |   |
| Net change in cash and cash equivalents                     |       | 1,510                                                   |       | (3,220 | ) |
| Cash and cash equivalents at beginning of  period           |       | 6,101                                                   |       | 12,882 |   |
| Cash and cash equivalents at end of period                  |       | $                                                       | 7,611      |   | $ | 9,662 |   |
| Non-cash investing and financing  activities:               |       |                                                    |       |   |   |
| Issuance of common shares in connection  with acquisitions  |       | $                                                       | 1,030      |   | $ | 4,883 |   |
| Issuance of common shares to advisor for  services rendered |       | $                                                       | 38         |   | $ | 38 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

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**INFOLOGIX,INC.Notes to Unaudited Consolidated Financial Statements**

**(in thousands, except share information)**

 

**NOTE A—Natureof Business**

 

***Basis of Presentation***

 

The accompanying unaudited consolidated financial statements ofInfoLogix, Inc. and subsidiaries (collectively, the “Company”) have beenprepared in accordance with United States generally accepted accountingprinciples (“GAAP”) for interim financial information and with the instructionsfor Form 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by GAAP for completeconsolidated financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. The notes to the consolidated financialstatements contained in the Annual Report on Form 10-K for the year ended December 31,2007 should be read in conjunction with these consolidated financialstatements.  Operating results for thethree and nine months ended September 30, 2008 are not necessarilyindicative of the results that may be expected for the year ending December 31,2008.

 

The consolidated financial statements include the accounts of InfoLogix, Inc.and its wholly-owned subsidiaries: InfoLogix Systems Corporation, OPTAcquisition, LLC, Embedded Technologies, LLC, and InfoLogix–DDMS, Inc. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

***Nature of business***

 

TheCompany provides mobile intelligence technology solutions by enabling real timedata communications anywhere in an enterprise. The Company provides wirelessnetwork design, hardware, software and software implementation, consulting,system integration and network management solutions.

 

**NOTE B—Summary of Significant Accounting Policies**

 

***Useof estimates***

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Many ofthe amounts and percentages presented have been rounded, and all amounts have000’s omitted, except share and per share information.

 

In preparing the financial statements, management has utilizedavailable information, including our past history, industry standards and thecurrent economic environment, among other factors, in forming its estimates andjudgments, giving due consideration to materiality. Actual results may differfrom these estimates. In addition, other companies may utilize differentestimates, which may impact the comparability of our results of operations tothose of companies in similar businesses.

 

***Reclassifications***

 

In 2007, the Company reclassified amounts billed to its customers forshipping and handling fees as revenue in accordance with EITF 00-10, *Accounting for Shipping and Handling Fees and Costs.*TheEITF**requires that all amounts billed to acustomer in a sale transaction related to shipping and handling representsrevenues earned for the goods provided and should be classified asrevenue.  Reclassifications have been made to all prior period financial statementsto conform to the current year presentation as more fullydescribed in Note P.

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)**

**(in thousands, except share information)**

 

**NOTE C—Recent Accounting Pronouncements**

 

InDecember 2007, the Financial Accounting Standards Board (FASB) issued SFASNo. 141(R) *Business Combinations*(SFAS 141(R)). This Statement replaces the original FASB Statement No. 141.SFAS 141R retains the fundamental requirements in Statement 141 that theacquisition method of accounting (which Statement 141 called the *purchase method*) be used for all businesscombinations and for an acquirer to be identified for each businesscombination. The objective of this SFAS 141(R) is to improve therelevance, and comparability of the information that a reporting entityprovides in its financial reports about a business combination and its effects.To accomplish that, SFAS 141(R) establishes principles and requirementsfor how the acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree, recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination.  ThisStatement applies prospectively to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008 and may not be appliedbefore that date.  The Company is in theprocess of evaluating the impact of this pronouncement on its consolidatedfinancial statements.

 

InDecember 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements – an amendment of ARB No. 51*(SFAS 160). This Statement amends the original Accounting Review Board (ARB) No. 51*Consolidated Financial Statements* toestablish accounting and reporting standards for the noncontrolling interest ina subsidiary and for the deconsolidation of a subsidiary. It clarifies that anoncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. This Statement is effective for fiscal years, and interimperiods within those fiscal years, beginning on or after December 15, 2008and may not be applied before that date. The Company does not expect theadoption of SFAS 160 to have a material effect on its consolidated financialstatements.

 

InDecember 2007, the SEC issued SAB No. 110, “*Share-Based Payment*” (SAB 110). SAB 110 establishes thecontinued use of the simplified method for estimating the expected term ofequity based compensation. The simplified method was intended to be eliminatedfor any equity based compensation arrangements granted after December 31,2007. SAB 110 was issued to help companies that may not have adequate exercisehistory to estimate expected terms for future grants. The Company does notexpect the adoption of SAB 110 to have a material effect on its consolidatedfinancial statements.

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)**

**(in thousands, except share information)**

 

**NOTE D—Inventory**

 

Inventory consists of the following:

 
| ** **                                              | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
|                                                    |       |                         |       |                        |       |
| Finished goods                                          |       | $                            | 2,748      |                        | $          | 2,373 |   |
| Work in progress                                        |       | 1                            |       | 11                          |       |
| Less: allowance for slow moving and  obsolete inventory |       | (683                         | )          | (485                        | )          |
| Total inventory, net                                    |       | $                            | 2,066      |                        | $          | 1,899 |   |

 

**NOTE E—Secured Promissory Notes Receivable**

 

On February 8, 2008, the Company made a $150 secured loan to AwareInterweave, Inc. (“Aware”), for which it received a Secured PromissoryNote bearing interest at 12% per annum, payable on a monthly basis commencing March 1,2008. The outstanding principal balance of the note plus accrued and unpaidinterest were applied to and set-off against amounts due to Aware in connectionwith its acquisition by the Company as discussed in Note I.

 

OnMarch 30, 2008, the Company made a $50 secured loan to an entitythat it had been evaluating as an acquisition candidate. On April 1, 2008,the Company received a Secured Promissory Note bearing interest at 12% perannum, payable on a monthly basis commencing May 1, 2008. The amount ofany interest accrued and payable is to be paid-in-kind and added to theprincipal amount of the note. During the third quarter 2008, the Companyreceived principal and interest payments of $15. The remaining principal waspaid on October 17, 2008 together with all interest accrued thereon.

 

**NOTE F—Customer and Vendor Concentrations**

 

For the three and nine months ended September 30, 2008 and 2007,the Company had sales to significant customers, as a percentage of revenues, asfollows:

 
| ** ** | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|       |       |                                                     |       |                                                    |       |   |   |   |   |
| Customer A |       | 6.6                                                      | %          | 8.4                                                     | %          | 11.0 | % | 11.9 | % |
| Customer B |       | 10.9                                                     | %          | 13.4                                                    | %          | 8.2 | % | 14.4 | % |

 

For the three and nine months ended September 30, 2008 and 2007,purchases from the Company’s significant vendor as a percentage of cost ofrevenues, are as follows:

 
| ** ** | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|       |       |                                                     |       |                                                    |       |   |   |   |   |
| Vendor A   |       | 19.8                                                     | %          | 27.9                                                    | %          | 22.8 | % | 32.9 | % |

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)**

**(in thousands, except share information)**

 

**NOTE G—Debt**

 

On May 1, 2008, the Company entered into a Loan and SecurityAgreement with Hercules Technology Growth Capital, Inc. (the“Lender”).  On November 19, 2008, the Company entered into anamendment to the Loan and Security Agreement. Among other things, the amendment reduced the maximum commitment of therevolving credit facility, eliminated the incremental term loan facility of$500, increased the interest rates on outstanding borrowings, required anamendment fee be paid to the Lender in an amount of $315, and amended certainfinancial covenants.  The description ofthe revolving credit facility and term loan facilities set forth belowincorporates the new terms of the Loan and Security Agreement after givingeffect to the amendment.

 

The Loan and Security Agreement provides the Company with a revolvingcredit facility with a maximum commitment of up to $9,000 and a term loanfacility of up to $12,000, subject to certain limitations on the revolving lineof credit.  The proceeds of the loans were used, in part, to refinance theCompany’s indebtedness owing to Sovereign Bank under a Loan and SecurityAgreement that was entered into in March 2006 and terminated on May 2,2008.  Borrowings under the agreement may be used for permittedacquisitions and for general corporate and working capital purposes.  At September 30,2008, the Company had $12,000 of indebtedness outstanding under the Herculesterm loan and $9,000 outstanding under the revolving credit facility.

 

The amount that is available to be borrowed under the revolving creditfacility is limited to the lesser of the maximum availability at such time and85% of eligible accounts. Eligible accounts, as defined in the loanagreement, exclude certain account criteria that the lender considers risky.Until the Company’s three month consolidated EBITDA exceeds $1,500, theborrowings under the revolving credit facility may not exceed 85% of eligibleaccounts minus $2,500.

 

The term loan bears interest at an annual rate equal to the greater of13.25% (10.5% prior to the amendment) or the prime rate plus 8.75% (4.5% priorto the amendment), plus an additional 1.75% of interest that will be paid inkind and added to the principal amount of the term loan.  The interestrate for the revolving credit facility is the greater of 11.25% (8.5% prior tothe amendment) or the prime rate plus 6.75% (2.5% prior to the amendment).  The interest rate on outstanding borrowingsunder the revolving credit facility and the term loan will increase by 1% on February15, 2009 and by an additional 1% on May 16, 2009 unless prior to those datesthe Company has executed a definitive agreement to sell or merge the Company orhas raised $5,000 of additional equity or subordinated debt on terms acceptableto the Lender.

 

Interest is payable on the first business day of each month.  Inthe event that any payment is not timely made, a late fee equal to 5% of thepast due amount is payable on the demand of the Lender.  Upon theoccurrence and during the continuance of an event of default, all amounts thenowing to the Lender under the agreement and the other loan documents will bearinterest at the then current rate plus 3%.

 

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The term loan matures on May 1, 2012.  The term loans areinterest-only for the first nine months and then must be repaid monthly basedon the following principal repayment schedule thereafter: February 2, 2009to May 1, 2009 – 5%; June 1, 2009 to May 1, 2010 – 15%; June 1,2010 to May 1, 2011 – 25% and June 1, 2011 to the maturity date –55%. In addition, the Company is required to apply 25% of its excess cash flow,as defined by the agreement, toward prepayments of the term loan. Voluntary prepayments of the term loan are subject to a prepayment charge equalto a percentage of the term loan being prepaid.  Revolving loans mature onNovember 1, 2009.  Upon the earliestto occur of (i) demand from the Lender at any time between November 1,2009 and May 1, 2012, (ii) the acceleration of the Company’sobligations under the agreement, (iii) the term loan maturity date, and (iv) prepaymentin full of the Company’s obligations under the agreement, the Company will berequired to pay to the Lender an amount equal to the greater, as of such dateof determination, of (x) $900 (increased from $625 prior to theamendment), and (y) an amount equal to 3.0% of the amount by which theCompany’s market capitalization exceeds $50,000 (decreased from $100,000 priorto the amendment). The Company’s obligations under the agreement are secured byall of its personal property, including all of the equity interests in itssubsidiaries.

 

The agreement contains various affirmative and negative covenants,including covenants that restrict the Company’s ability to incur indebtedness,make investments, make payments in respect of its capital stock, includingdividends and repurchases of common stock, sell or license its assets, andengage in acquisitions without the prior satisfaction of certainconditions.  The agreement also requires the Company to maintain a minimumconsolidated EBITDA measured on a trailing three month basis (prior to theamendment the test was made on a trailing twelve month basis) as of the lastday of each month during the period from October 2008 through April 2012(prior to the amendment the monthly test only ran through December 2008), anda maximum leverage ratio measured as of the last day of each month during theperiod from December 2009 through April 2012.

 

Upon an event of default under the agreement the Lender may opt toaccelerate and demand payment of all or any part of the Company’s obligationsunder the agreement.

 

Under the amended terms, the Company is not permitted to pay anyamounts owing under the earn-out agreements that were entered into inconnection with the acquisitions of Healthcare Informatics Associates, Inc.or Delta Health, Inc. if the Company’s total leverage after giving effectto such payment is greater than 3.00 to 1.00.

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)(in thousands, except share information)**

 

***Notes payable***

 

Notes payable, except for capital lease obligations,consist of the following:

 
| ** **                                                                                                                                                                                                                                                               | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                               | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                                                                                                     |       |                         |       |                        |       |
| Note payable, bank, principal payable $42  monthly over thirty-five months commencing March 2006. Interest was  payable monthly at the prime rate plus 1.0%. The note was paid in full  May 2008                                                               |       | $                            | —     |                        | $          | 708 |   |
|                                                                                                                                                                                                                                                                     |       |                         |       |                        |       |   |   |
| Note payable, bank, principal payable $28  monthly over thirty-five months commencing December 2006. Interest was  payable monthly at the prime rate plus 1.0%. The note was paid in full  May 2008                                                            |       | —                       |       | 695                         |       |
|                                                                                                                                                                                                                                                                     |       |                         |       |                        |       |
| Convertible note payable pursuant to the  asset purchase agreement with Healthcare Informatics  Associates, Inc.  Principal and interest payable at 9.0% is due  September 30, 2010                                                                       |       | 3,815                        |       | 3,579                       |       |
|                                                                                                                                                                                                                                                                     |       |                         |       |                        |       |
| Amounts payable pursuant to the asset  purchase agreement with AMT Systems, Inc. in monthly installments of $9  interest included, at a rate of 7.84%, maturing May 31, 2013                                                                                   |       | 410                          |       | 463                         |       |
|                                                                                                                                                                                                                                                                     |       |                         |       |                        |       |
| Note payable, bank, principal payable $150  monthly over sixteen months commencing February 2009, payable $251 over  twelve months, commencing June 2010, payable $550 over twelve months  commencing June 2011.                                          |       | 12,000                       |       | —                      |       |
|                                                                                                                                                                                                                                                                     |       |                         |       |                        |       |
| Note payable, bank, principal payable  $55,556 monthly over thirty-six months commencing March 2008; interest  payable monthly , at prime rate plus 1.5% (8.75% at December 31, 2007),  maturing March 16, 2011. The note was paid in full May 2008. |       | —                       |       | 2,000                       |       |
|                                                                                                                                                                                                                                                                     |       |                         |       |                        |       |
| Total notes payable                                                                                                                                                                                                                                                      |       | 16,225                       |       | 7,445                       |       |
|                                                                                                                                                                                                                                                                     |       |                         |       |                        |       |
| Less: current maturities                                                                                                                                                                                                                                                 |       | (1,276                       | )          | (627                        | )          |
|                                                                                                                                                                                                                                                                     |       | $                            | 14,949     |                        | $          | 6,818 |   |

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)(in thousands, except share information)**

 

**NOTE H—****Acquisition of Assets of DeltaHealth Systems, Inc.**

 

On May 2, 2008, the Company, through its wholly-owned subsidiaryInfoLogix Systems Corporation, acquired substantially all of the assets andassumed certain liabilities of Delta Health Systems, Inc. (“Delta”)pursuant to an asset purchase agreement.  The assets acquiredrelate to Delta’s business of providing strategic cost managementconsulting services and web-based management data collection and work-flowanalytics to the healthcare industry, and included cash, accounts receivables, the rights to existingrelationships with customers, vendors and partners, certain tangible personalproperty and certain intangible rights and property.  Theliabilities assumed related to customer contracts and accrued expenses.

 

The purchase price paid by the Company was $1,723, which consisted of$1,473 in cash, $43 in assumed liabilities and $207 in acquisition costs. TheCompany and Delta also entered into an Earn Out Agreement pursuant to whichDelta is eligible to earn additional consideration in the subsequent two yearperiod (each year, an “Earn Out Period”) after the closing of thetransaction.  Delta can earn up to $500 in the first Earn Out Period andup to $500 in the second Earn Out Period upon achievement of gross revenuetargets described in the Earn Out Agreement.  The additional cashconsideration will not be accounted for by the Company until such time aspayment of this additional consideration is considered probable, if anypursuant to the terms of the Earn Out Agreement.  At the end of the two year period, if Deltahas not already earned the $1,000 of additional consideration in respect ofeach of the two Earn Out Periods, Delta may earn an amount equal to the $1,000of additional consideration less any amounts previously paid in respect of thetwo Earn Out Periods upon the achievement of certain cumulative financialmilestones during the two-year earn-out period. At the point the consideration is considered probable, the Company willrecord it as an adjustment to the purchase price. The acquisition was accountedfor under SFAS 141 and results are included in the statement of operations fromMay 2, 2008.

 

The purchase price was allocated to the assets acquired and liabilitiesassumed on a preliminary basis based on their estimated fair values on the dateof acquisition, as follows:

 
| Assets acquired:       | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| Accounts receivable    |       | $          | 28         |   |
| Property and equipment |       | 2          |       |
| Goodwill               |       | 934        |       |
| Customer relationships |       | 601        |       |
| Non-compete agreements |       | 118        |       |
| Trademarks/trade names |       | 40         |       |
| Total assets acquired  |       | 1,723      |       |
|                   |       |       |       |
| Liabilities assumed:   |       |       |       |
| Current liabilities    |       | 43         |       |
| Net assets acquired    |       | $          | 1,680      |   |

 

Thecustomer relationships are being amortized on a straight-line basis over aneight year period; the average expected life for these customers. Thenon-compete agreements are amortized on a straight-line basis over a three yearperiod, which corresponds with the expiration date of the non-compete provisionscontained within the asset purchase agreement. Goodwill and thetrademarks/trade names have indefinite lives and therefore are not amortized,however, they will be evaluated annually for impairment.

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)(in thousands, except share information)**

 

**NOTE I—****Acquisition of Assets of Aware Interweave, Inc.**

 

OnMay 16, 2008, the Company, through its wholly-owned subsidiary InfoLogixSystems Corporation, acquired substantially all of the operating assets andassumed certain liabilities of Aware Interweave, Inc. (Aware) pursuant toan asset purchase agreement.  The assets acquired relate to Aware’sbusiness of providing mobile solutions to a variety of industries including thehealthcare and life sciences industries, and included cash, accountsreceivable, the rights to existing relationships with customers, vendors andpartners, certain tangible personal property and certain intangible rights andproperty.  The liabilities assumed consist of current accounts payable andaccrued expenses.

 

The purchase price paid by the Company consisted of cash and shares ofthe Company’s common stock. The acquisition was accounted for under SFAS141. The results of operations from the business acquired from Aware areincluded in the statement of operations beginning May 17, 2008. The total purchase price paid by theCompany is as follows:

 
| Cash paid, net of cash received |   | $     | 1,318  |   |
|---------------------------------|--------|-------|--------|--------|
| Common stock issued             |   | 1,030 |   |
| Acquisition costs               |   | 131   |   |
|                            |   | $     | 2,479  |   |

 

The cash portion of the purchase price was partially set-off againstthe amounts due from Aware in connection with its Secured Promissory Note (SeeNote E).

 

At closing, the Company issued 500,000 shares of common stock, whichwas valued at $1,030 for accounting purposes. This value of the common stockwas based on the average closing market price of the Company’s common stockfrom May 13, 2008 through May 21, 2008. The issuance of the shares ofcommon stock was unregistered and the shares are initially subject to atwo-year lockup. The Company has placed 105,820 shares of the common stock inan escrow account for a period of eighteen months as security forindemnification obligations under the asset purchase agreement.

 

The purchase price was allocated to the assets acquired and liabilitiesassumed on a preliminary basis based on their estimated fair values on the dateof acquisition, as follows:

 
| Assets acquired, excluding cash: | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| Accounts receivable              |       | $          | 241        |   |
| Prepaid expenses                 |       | 18         |       |
| Property and equipment           |       | 11         |       |
| Goodwill                         |       | 1,407      |       |
| Customer relationships           |       | 384        |       |
| Software                         |       | 500        |       |
| Trademarks/trade names           |       | 17         |       |
| Non-compete agreements           |       | 102        |       |
| Total assets acquired            |       | 2,680      |       |
|                             |       |       |       |
| Liabilities assumed:             |       |       |       |
| Current liabilities              |       | 201        |       |
| Net assets acquired              |       | $          | 2,479      |   |

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)(in thousands, except share information)**

**NOTE I—****Acquisition of Assets of AwareInterweave, Inc. (continued)**

 

Thecustomer relationships are being amortized on a straight-line basis over a twoyear period, which corresponds with the expected life of the underlyingcustomer contracts. Amortization of the software will not commence until suchtime as the software is available for sale. The non-compete agreements areamortized on a straight-line basis over a three year period, which correspondswith the expiration date of the non-compete provisions contained within theasset purchase agreement. Goodwill and the trademarks/trade names have indefinitelives and therefore are not amortized, however, they will be evaluated annuallyfor impairment.

 

**NOTE J—****Acquisition of Assets of Healthcare Informatics Associates, Inc.**

 

On September 30,2007, the Company, through its wholly-owned subsidiary, InfoLogix SystemsCorporation, acquired substantially all of the operating assets and assumedcertain liabilities of Healthcare Informatics Associates, Inc. (“HIA”)pursuant to an asset purchase agreement. The assets acquired relate to HIA’sbusiness of providing software implementation and consulting services, andincluded cash, accounts receivable, other current assets, the rights toexisting relationships with customers, vendors and partners, certain tangiblepersonal property and certain intangible rights and property.  Theliabilities assumed consist of current accounts payable and accrued expenses.

 

In connection withthe acquisition, the Company and HIA entered into an Earn-out Agreementpursuant to which HIA is eligible to earn additional consideration in respectof the two years (each year, an “Earn-Out Period”) after the closing of thetransaction.  Based on satisfaction of certain financial milestonesdescribed in the Earn-Out Agreement, HIA earned $2,000 in the first Earn-OutPeriod. The Company and HIA entered into an amendment to the Earn-Out Agreementin August 2008 which extended the first earn-out period from twelve monthsto fifteen months ending December 31, 2008, and amended certain financialcalculations used to determine the Company’s earn-out liability. The Companyhas recorded the $2,000 adjustment to the purchase price as an increase togoodwill.

 

**NOTE K—Related Party Transactions**

 

***Support services***

 

In2004, the Company entered into an agreement with an entity owned by astockholder and former officer of the Company whereby that entity providesextended warranties and technical support services to certain customers of theCompany. Under the agreement,the Company was charged $206 and $132 for the three months ended September 30,2008 and 2007, respectively, and made payments under this agreement of $566 and$132 for the three months ended September 30, 2008 and 2007, respectively.The Company was charged $1,098 and $483 for the nine months ended September 30,2008 and 2007, respectively, and made payments under this agreement of $1,131and $481 for the nine months ended September 30, 2008 and 2007,respectively.

 

In May 2006, the Company entered into another agreement with thisstockholder’s company to provide the Company with consulting services withrespect to software development. Under the agreement, the Company wascharged $847 and $437 for the three months ended September 30, 2008 and2007, respectively, and made payments under this agreement of $778 and $510 forthe three months ended September 30, 2008 and 2007, respectively. TheCompany was charged $1,826 and $1,000 for the nine months ended September 30,2008 and 2007, respectively, and made payments under this agreement of $1,645and $1,112 for the nine months ended September 30, 2008 and 2007,respectively.  Pursuant to theterms of the two agreements, the Company has a minimum annual commitment topurchase services of $1,500 per year through 2011.

 

***ProfessionalRecruiting Services***

 

The Company maintains a business relationship with Gulian &Associates, which is owned by the wife of David T. Gulian, the Company’sPresident and Chief Executive Officer and a director and stockholder of theCompany.  Under the terms of thearrangement, Gulian &Associates provides the Company with retainer-based professional recruitingservices on a non-exclusive basis.  Gulian & Associates is paid afee of 20% of a newly hired person’s annual base salary for employees itintroduces to the Company.  One-third ofthe estimated fee is invoiced at the time the hiring request is made.  The remainder is invoiced only uponsuccessful placement of a candidate into the role. During the threemonths ended September 30, 2008 and 2007, the Company paid Gulian &Associates approximately $68 and $50, respectively, in fees. During the ninemonths ended September 30, 2008 and 2007, the Company paid approximately$153 and $96, respectively, in fees.

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)****(in thousands, except share information)**

**NOTE L—Commitments and Contingencies**

 

***Litigation***

 

The Company is involved in disputes or legal actions arising in theordinary course of business. Management does not believe the outcome of suchlegal actions will have a material adverse effect on the Company’s financialposition, results of operations or cash flows.

 

***Letter of Credit***

 

At September 30, 2008, the Company had contingent liabilitiesunder letters of credit of $350.

 

**NOTEM—Income Taxes**

 

The Company has net operating loss carryforwards available in certainjurisdictions to reduce future taxable income. Future tax benefits for net operating loss carryforwards are recognizedto the extent that realization of these benefits is considered more likely thannot.  This determination is based on theexpectation that related operations will be sufficiently profitable or varioustax, business and other planning strategies will enable us to utilize theoperating loss carryforwards.  To theextent that available evidence raises doubt about the realization of a deferredincome tax asset, a valuation allowance is established.  A valuation allowance in the current period of$982 has been recognized to offset the related deferred tax assets due to theuncertainty of realizing the benefits of certain tax credits, and net operatingloss carryforwards before they expire. The Company recognized a deferred taxasset in accordance with the requirements of FASB Statement No. 109 (SFAS109), which includes the assessment of cumulative income over the prior twoyear period.  The Company recorded avaluation allowance based on the estimated utilization of those attributesbased on projections of future taxable income. The Company cannot be assuredthat it will be able to realize future tax benefits or that future valuationallowances will not be required.

 

Forthe three months ended September 30, 2008 and 2007, the Company recordedan income tax benefit amounting to $0 and $329 related to the net operatingloss incurred during those periods. For the nine months ended September 30,2008 and 2007, the Company recorded an income tax benefit amounting to $930 and$1,259 related to the net operating loss incurred during those periods..As of September 30, 2008, the Company has net operating losses ofapproximately $8,090 which will be available to offset future taxable income.Included in the net operating losses are losses of $65 generated by New AgeTranslation, Inc., the predecessor to the Company, which are subject torestrictions under Internal Revenue Code Section 382, due to change inownership in that entity. Therefore, the Company has recorded a valuationallowance against the net operating losses generated by New Age Translation, Inc.If not used, the net operating losses will expire beginning after 2024. TheCompany’s state net operating losses will also be subject to expiration invarying years starting in 2013 through 2027.

 

**NOTE N—2008 Employee Stock Purchase Plan**

 

OnJanuary 1, 2008, the Company established the 2008 Employee Stock PurchasePlan (“ESPP”). The purpose of the ESPP is to provide the Company’s employeesthe opportunity to purchase common stock through accumulated payrolldeductions. The ESPP is administered by the Board of Directors. The Company hasreserved 1,000,000 shares for use in the ESPP. The purchase price of the commonstock is at an amount equal to 85% of the fair market value of a share ofcommon stock on the enrollment date or the exercise date, whichever is lower.The ESPP has consecutive three month offering periods commencing on the firsttrading day of each calendar quarter. An eligible employee may become aparticipant in the ESPP by completing a subscription agreement authorizingpayroll deductions not to exceed 10% of the employee’s compensation. Thesepayroll deductions commence on the first payroll date following the enrollmentdate and end on the last payroll date in the offering period.

 

Onthe enrollment date of each offering period, each eligible participatingemployee is granted an option to purchase on the exercise date of such offeringperiod up to a number of shares of the common stock determined by dividing theemployee’s payroll deductions accumulated prior to such exercise date by theapplicable purchase price. Employees are not permitted to purchase more than2,500 shares during each offering period. The option for the purchase of sharesis exercised automatically and purchases of shares are effective on the lastday of each quarter.  The maximum numberof full shares subject to the option are purchased for such participant at theapplicable purchase price with the accumulated payroll deductions in his or heraccount.  The Company issued

 

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**INFOLOGIX, INC.Notes to Unaudited Consolidated Financial Statements (continued)(in thousands, except share information)**

 

21,955shares for the first quarter of 2008, 25,600 shares for the second quarter of2008 and 40,655 shares for the third quarter of 2008 in connection with theESPP for 2008, for which it received $31, $39 and $51 in cash in the respectiveperiods.

 

**NOTE O—Stock Based Compensation**

 

EffectiveJanuary 1, 2006, the Company adopted the provisions of SFAS 123(R), *Share-Based Payment*, under the modifiedprospective method which requires that stock based compensation transactions beaccounted for using a fair-value-based method. Under the modified prospectivemethod, the Company is required to recognize compensation cost for stock-basedpayments to employees based on their grant-date fair value from the beginningof the fiscal period in which the recognition provisions are first applied. Forthe three months ended September 30, 2008 and 2007, the recognizedcompensation cost for stock options and warrants granted to employees was $274and $250, respectively. In addition, for the three months ended September 30,2008 and 2007, the Company recorded an income tax benefit of $0 and $99,respectively, related to the granting of the nonqualified options and warrants.For the nine months ended September 30, 2008 and 2007, the recognizedcompensation cost for stock options and warrants granted to employees was $799and $750, respectively. In addition, for the nine months ended September 30,2008 and 2007, the Company recorded an income tax benefit of $207 and $297,respectively, related to the granting of the nonqualified options and warrants.

 

**NOTE P—Reclassifications**

 

The Company reclassified shipping andhandling revenue as originally reported for the three and nine months ended September 30,2007 in the amount of $372 and $1,071, respectively.  Prior to the reclassification, shipping andhandling revenue had been netted with freight expense in the selling, generaland administration expense section of the Unaudited Consolidated Statements ofOperations.  These amounts werereclassified to sales revenue and the matching shipping costs were reclassifiedto cost of sales.

 

The following table summarizes the changes tooriginally reported amounts and subtotals in the Unaudited ConsolidatedStatements of Operations for the three and nine months ended September 30,2007:

 
| ** **                                    | ** ** | **Three Months Ended September 30, 2007** | ** ** | **Nine Months Ended September 30, 2007** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **As Originally  Reported**                                   | ** ** | **As Reclassifed**                                           | ** ** | **As Originally  Reported** | ** ** | **As Reclassifed** | ** ** |
|                                          |       |                                                               |       |                                                              |       |   |   |   |   |
| Revenues                                      |       | $                                                                  | 20,083     |                                                              | $          | 20,455 |   | $ | 54,371 |   | $ | 55,442 |   |
| Cost of revenues                              |       | 14,540                                                             |       | 14,992                                                            |       | 39,833 |   | 40,984 |   |
| Gross profit                                  |       | 5,543                                                              |       | 5,463                                                             |       | 14,538 |   | 14,458 |   |
| Selling, general and adminstrative expenses   |       | 6,240                                                              |       | 6,160                                                             |       | 17,615 |   | 17,535 |   |
| Operating loss (1)                            |       | (697                                                               | )          | (697                                                              | )          | (3,077 | ) | (3,077 | ) |
| Interest expense, net of interest income  (1) |       | (98                                                                | )          | (98                                                               | )          | (116 | ) | (116 | ) |
| Loss before provision for income taxes (1)    |       | $                                                                  | (795       | )                                                                 | $          | (795 | ) | $ | (3,193 | ) | $ | (3,193 | ) |

 

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(1) - Not reclassified, for presentationonly)

 

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**Item 2.       ****Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

The following discussion and analysis of ourfinancial condition and results of operations is intended to assist you inunderstanding our financial condition and results of operations.  This discussion and analysis should be readin conjunction with our unaudited consolidated financial statements and thenotes thereto included elsewhere in this report and our annual report filedwith the U.S. Securities and Exchange Commission on Form 10-K for the yearended December 31, 2007.  Many ofthe amounts and percentages presented in this discussion and analysis have beenrounded for convenience of presentation, and all amounts are presented inthousands.

 

**Overviewand Outlook**

** **

InfoLogix is a provider of enterprise mobility and radio frequencyidentification (RFID) solutions. We provide solutions to our customers byutilizing a combination of products and services, including consulting,application software, managed services, mobile workstations and devices, andwireless infrastructure. Our solutions are designed to allow the real timeusage of data throughout a customer’s enterprise in order to enhance workflow, improvecustomer service, increase revenue and reduce costs.  We sell wireless communication and computingdevices, including mobile workstations that connect to a customer’s wirelessnetwork so that information can be accessed from any location within theenterprise.  We also implement customizedsoftware applications and provide RFID technology, a data-exchange method usingtransponders that store and remotely send or retrieve information, to enablethe transmission and processing of that information between the customer’sinformation system and its wireless communication and computing devices.  We also offer professional services thatsupport and complement a customer’s workflow requirements, major softwareimplementations, and wireless computing systems, including consulting, managedservices, training, engineering, technical support, and network monitoring.

 

Historically, the sale of mobile workstations and other wirelessdevices has represented a majority of our revenues.  During the past three years, we have beentransitioning our business to provide more software applications andprofessional services.  With our newfocus on selling software and services, we believe that we can offer morecomprehensive enterprise mobility solutions that provide greater value to ourcustomers and generate higher and more recurring revenue for our business.

 

We conduct substantially all of our operations through our wholly-ownedsubsidiary, InfoLogix Systems Corporation. We own certain patents and patent applications through our wholly-ownedsubsidiaries OPT Acquisition LLC, Embedded Technologies, LLC and InfoLogix-DDMS, Inc.  We consolidate OPT Acquisition LLC, EmbeddedTechnologies, LLC, InfoLogix-DDMS, Inc. and InfoLogix Systems Corporationfor financial reporting purposes.

 

**2008 Acquisitions**

 

In May 2008, we acquired substantially all of the assets of DeltaHealth Systems, Inc., or Delta.  The assets acquired relate toDelta’s business of providing strategic cost management consultingservices and web-based management data collection and work-flow analytics tothe healthcare industry. We expect this acquisition to further our strategicplans by enabling us to combine our existing solutions with higher marginprofessional services.  We believe theDelta acquisition will allow us to reach further into our healthcare customerorganization’s to bring critical workflow and human resource utilizationefficiencies that support our mobile solutions.

 

InMay 2008, we acquired substantially all of the assets of Aware Interweave, Inc.,or Aware. The assets acquired relate to Aware’s business of providing mobilesoftware solutions to a variety of customers including federal governmentagencies, fortune 1000 companies and healthcare and life science organizations.The acquisition is consistent with our strategic plan to add intellectualproperty and higher-margin services and application software licensing, whileallowing us to provide our customers with access to new solutions. We believethe acquisition of Aware allows us the opportunity to enable users of SAP®software and applications to significantly improve their visibility, responsetime, and revenues by providing access to business-critical applicationswithout being tied to the office or desktop computer. Aware has developed a mobileproduct solution suite, the Co-Pilot series, which is tailored specifically forusers of SAP software, while adaptable to other back-end systems. The Co-PilotMobile Foundation achieved “Powered by NetWeaver” certification in August 2006.

 

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**Characteristics ofour revenue and expenses**

 

We generate revenue through the resale of wireless and mobile hardwareand systems, including mobile workstations, computers, peripherals, and relatedproducts.  Sales revenue on product isrecognized when both the title and risk of loss transfer to the customer,generally upon shipment. We also generate revenue from the sale of extendedwarranties on certain components. Revenue from the sale of component warrantiesis recognized upon execution of the warranty agreement. There is no associatedwarranty risk as we have contracted with third parties to fully assume allrisks and obligations. We also generate revenue from professional services oneither a fixed fee or time and expense basis. Revenue from our professionalconsulting services is recognized on a time and expense basis at the time theservice is delivered and the expenses are incurred. Revenue from the sale ofour proprietary learning technologies and any professional consulting orengineering services provided on a fixed-fee basis is recognized according to aproportionate performance method of revenue recognition.

 

Payments received in advance of services performed are recorded asdeferred revenue. Certain contract payment terms may result in customer billingoccurring at a pace slower than revenue recognition. The resulting revenuerecognized in excess of amounts billed and project cost is included in unbilledrevenue on our balance sheet.

 

Cost of revenue consists of all expenses that are directly attributableto the costs associated with the purchase, for resale, of wireless and mobilehardware and systems, including computers, peripherals, and related products.Fluctuations in our gross margin may occur due to changes in our ability toobtain discounts on product sales or our ability to negotiate higher margins onsales contracts with large customers. Cost of revenue also consists of thedirect costs associated with those employees or sub-contractors that performour professional consulting services on behalf of our customers.

 

Selling expenses primarily consist of the salaries, benefits, traveland other costs of our regional and national account sales representatives,sales and indirect project management and business development expenses.General and administrative expenses primarily consist of the costs attributableto the support of our operations, such as: costs related to informationsystems, salaries, expenses and office space costs for executive management,inside sales and customer support, warehousing, technical support, financialaccounting, purchasing, depreciation, amortization, administrative and humanresources personnel, insurance, recruiting fees, legal, accounting and otherprofessional services.

 

**Critical Accounting Estimates and Policies**

 

Our consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States of America(GAAP), which require us to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. Critical accounting policies are those that require theapplication of management’s most difficult, subjective, or complex judgments,often because of the need to make estimates about the effect of matters thatare inherently uncertain and that may change in subsequent periods. Inpreparing the consolidated financial statements, management has made estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements, and the reported amounts of revenues andexpenses during the reporting periods. In preparing the financial statements,management has utilized available information, including our past history,industry standards and the current economic environment, among other factors,in forming its estimates and judgments, giving due consideration tomateriality. Actual results may differ from these estimates. In addition, othercompanies may utilize different estimates, which may impact the comparabilityof our results of operations to those of companies in similar businesses. Webelieve that of our significant accounting policies, the following may involvea higher degree of judgment and estimation.

 

***Accounts receivable***

 

We grant credit, generally without collateral, to our customers, whichare primarily in the healthcare and commercial markets. Consequently, we aresubject to potential credit risk related to changes in economic conditionswithin those markets. However, we believe that our billing and collectionpolicies are adequate to minimize the potential credit risk.

 

We have a policy of reserving for uncollectible accounts based on ourbest estimate of the amount of probable credit losses in our existing accountsreceivable. We periodically review our accounts receivable to determine whetheran allowance is necessary based on an analysis of past due accounts and otherfactors that may indicate that the realization of an account may be in doubt,including historical experience and current economic and market conditions.Account balances that we deem to be uncollectible are charged to the allowanceafter we have exhausted all means of collection and when the potential forrecovery is considered remote.

 

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***Intangible assets***

 

We account for intangible assets in accordance with Statement ofFinancial Accounting Standards (SFAS) 142,*Goodwill and Other Intangible Assets*. The costs of successfulregistrations for patents are amortized over the estimated useful lives of theassets, which is generally sixteen years, using the straight-line method. Thecosts of unsuccessful registrations are charged to expense. Acquired technologyis recorded at its fair value at the date of acquisition and amortized over theestimated useful lives of the assets, which averages four years, using thestraight-line method. Developed technology is also amortized using thestraight-line method, generally over five years. License fees will be amortizedover the license period using the straight-line method.  The valuation attributable to customer listsis amortized over a period of six to ten years.

 

***Revenue recognition***

 

Revenue is generated through product sales, warranty and maintenanceagreements, professional consulting, programming and engineering services,long-term support services, and educational learning programs. Revenue fromproduct sales is recognized when both the title and risk of loss transfer tothe customer, generally upon shipment. Warranty revenue is recognized upon execution of the warranty agreement.We do not believe there is any associated warranty risk as we have contractedwith other parties to fully assume all risks and obligations. We also generaterevenue from professional services on either a fee-for service or fixed feebasis. Revenue from our professional consulting services is contracted asfee-for-service and is recognized in the period in which the services are performed.  Direct costs for travel and accommodationsare reimbursable in accordance with the contract terms and are recognized asrevenue in the period the related expense is incurred. Revenue from the sale ofour proprietary learning technologies and those professional consulting orengineering services provided on a fixed-fee basis is recognized ratably overthe contract period based upon actual project hours as compared to budgetedproject hours.

 

***Income taxes***

 

We account for income taxes in accordance withSFAS 109,*Accounting for Income Taxes*.Under SFAS 109, deferred tax assets and liabilities are determined basedon the differences between the financial statement carrying amounts and the taxbases of existing assets and liabilities, and are measured at the prevailingenacted tax rates that will be in effect when these differences are settled orrealized. SFAS 109 also requires that deferred tax assets be reduced by avaluation allowance if it is more likely than not that some portion or all ofthe deferred tax asset will not be realized. We believe it is more likely thannot that our current deferred tax asset will be realizable as the result ofachieving taxable income in the applicable periods prior to related expirationdates.

 

**Results ofOperations**

 

Results of operations expressed as a percentage of revenues were asfollows:

 
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                    |       | 100.0                                                    | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                            |       | 73.9                                                     | %          | 73.3                                                    | %          | 73.4 | % | 73.9 | % |
| Gross profit                                |       | 26.1                                                     | %          | 26.7                                                    | %          | 26.6 | % | 26.1 | % |
| Selling, general and adminstrative expenses |       | 34.4                                                     | %          | 30.1                                                    | %          | 31.8 | % | 31.6 | % |
| Operating loss                              |       | (8.3                                                     | )%         | (3.4                                                    | )%         | (5.2 | )% | (5.5 | )% |
| Interest expense                            |       | (2.5                                                     | )%         | (1.0                                                    | )%         | (1.7 | )% | (1.0 | )% |
| Interest income                             |       | 0.2                                                      | %          | 0.5                                                     | %          | 0.2 | % | 0.7 | % |
| Loss before income tax benefits             |       | (10.6                                                    | )%         | (3.9                                                    | )%         | (6.7 | )% | (5.8 | )% |
| Income tax benefit                          |       | 0.0                                                      | %          | 1.6                                                     | %          | 1.3 | % | 2.3 | % |
| Net loss                                    |       | (10.6                                                    | )%         | (2.3                                                    | )%         | (5.4 | )% | (3.5 | )% |

 

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***Three Months endedSeptember 30, 2008 compared with the Three Months ended September 30,2007***

 

***Revenue***

 

Revenue for the three months ended September 30, 2008 and 2007 wasas follows:

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|----------------|------------|
| ** **                  | ** ** | **2008**                                                 | ** ** | **2007**           | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                        |       |                                                     |       |               |       |           |       |   |   |
| Revenues:                   |       |                                                     |       |               |       |           |       |   |   |
| Infrastructure and hardware |       | $                                                        | 12,997     |               | $          | 15,271         |       | $ | (2,274 | ) | (14.9 | )% |
| Professional services       |       | 8,739                                                    |       | 2,829              |       | 5,910          |       | 208.9 | % |
| Other                       |       | 2,088                                                    |       | 2,355              |       | (267           | )          | (11.3 | )% |
| Total revenues              |       | $                                                        | 23,824     |               | $          | 20,455         |       | $ | 3,369 |   | 16.5 | % |

 

The increase in revenue was due primarily to the expansion of ourprofessional services across the organization, including revenue contributed asa result of the acquisitions of the businesses of Healthcare InformaticsAssociates, Inc. (“HIA”), Delta and Aware, and partially offset by adecline in infrastructure and hardware related revenue. The revenue associatedwith the acquisition of HIA, Delta and Aware totaled $6,193 for the threemonths ended September 30, 2008. As we continue to shift our business fromthe resale of hardware and infrastructure toward delivering professionalservices and software applications, we expect that revenues generated from thesale of hardware and infrastructure products may continue to decline as apercentage of our total revenue, and we expect that revenues from the deliveryof professional services and software will continue to increase as a percentageof our total revenue. Revenue for the three months ended September 30,2008 was also impacted by certain customers electing to delay new projects intothe fourth quarter of 2008 and early 2009. We expect that these delays are of atemporary nature and the projects will be undertaken in accordance with theirrevised timetables.

 

***Cost of revenue***

 

Cost of revenues for the three months ended September 30, 2008 and2007 were as follows:

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|----------------|------------|
| ** **                  | ** ** | **2008**                                                 | ** ** | **2007**           | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                        |       |                                                     |       |               |       |           |       |   |   |
| Cost of revenues:           |       |                                                     |       |               |       |           |       |   |   |
| Infrastructure and hardware |       | $                                                        | 10,531     |               | $          | 11,338         |       | $ | (807 | ) | (7.1 | )% |
| Professional services       |       | 5,258                                                    |       | 2,172              |       | 3,086          |       | 142.1 | % |
| Other                       |       | 1,825                                                    |       | 1,482              |       | 343            |       | 23.1 | % |
| Total cost of revenues      |       | $                                                        | 17,614     |               | $          | 14,992         |       | $ | 2,622 |   | 17.5 | % |

 

The increase in our cost of revenue was the result of costs incurredfrom higher sales of our expanded professional services.****Thecost of revenue associated with the businesses of HIA, Delta and Aware totaled$3,442 for the three months ended September 30, 2008.

 

***Gross profit***

 

Gross profit and gross margin for the three months ended September 30,2008 and 2007 was as follows:

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|----------------|------------|
| ** **                  | ** ** | **2008**                                                 | ** ** | **2007**           | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                        |       |                                                     |       |               |       |           |       |   |   |
| Gross profit:               |       |                                                     |       |               |       |           |       |   |   |
| Infrastructure and hardware |       | $                                                        | 2,466      |               | $          | 3,933          |       | $ | (1,467 | ) | (37.3 | )% |
| Professional services       |       | 3,481                                                    |       | 657                |       | 2,824          |       | 429.8 | % |
| Other                       |       | 263                                                      |       | 873                |       | (610           | )          | (69.9 | )% |
| Total gross profit          |       | $                                                        | 6,210      |               | $          | 5,463          |       | $ | 747 |   | 13.7 | % |
|                        |       |                                                     |       |               |       |           |       |   |   |
| Gross profit:               |       |                                                     |       |               |       |           |       |   |   |
| Infrastructure and hardware |       | 19.0                                                     | %          | 25.8               | %          | (6.8           | )%         | (26.3 | )% |
| Professional services       |       | 39.8                                                     | %          | 23.2               | %          | 16.6           | %          | 71.5 | % |
| Other                       |       | 12.6                                                     | %          | 37.1               | %          | (24.5          | )%         | (66.0 | )% |
| Total gross profit          |       | 26.1                                                     | %          | 26.7               | %          | (0.6           | )%         | (2.4 | )% |

 

The decrease in our gross margin is the result of low margin sales ofinfrastructure and third-party hardware, partially offset by increased sales ofour more profitable professional and consulting services related to our mobilesolutions and software implementation services.

 

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***Selling, general and administrative expenses***

 

Our selling expenses were $2,963 for the three months ended September 30,2008, compared with $2,512 for the three months ended September 30, 2007,an increase of $451 or 18.0%.  The increase in our selling expenses forthe comparable periods was primarily attributable to an increase in wagesrelated to the expanded sales staff hired in 2007, and sales support relatedcosts attributable to HIA during the three months ended September 30,2008.  General and administrativeexpenses were $5,223 for the three months ended September 30, 2008,compared with $3,648 for the three months ended September 30, 2007, anincrease of $1,575 or 43.2%.  The increase in our general andadministrative expenses for the comparable periods was primarily attributableto an increase in amortization expenses related to acquisitions, and anincrease in salary expenses related to the addition of key members of ourmanagement and professional services staff.

 

***Interest expense and interest income***

 

Our interest expense, which is derived from our credit line and termloan, was $587 for the three months ended September 30, 2008, compared toapproximately $206 for the three months ended September 30, 2007, anincrease of $381 or 185.0%. The increase in interest expense is a result ofhigher interest costs and greater amounts outstanding under our asset-basedline of credit facility, term loans and notes payable issued in connection withour acquisitions.

 

Our interest income was $43 for the three months ended September 30,2008, compared to $108 for the three months ended September 30, 2007, adecrease of $65 or 60.2%. The decrease in interest income is primarily theresult of a lower average cash and cash equivalents balance during the threemonths ended September 30, 2008 when compared to the same period of 2007.

 

***Depreciation and amortization***

 

Our depreciation and amortization expense increased to $701 for thethree months ended September 30, 2008 from $452 for the three months endedSeptember 30, 2007, an increase of $249 or 55.1% as a result of a greaternumber of demonstration units deployed to our sales force and amortizationexpense related to our recent acquisitions of intangible assets fromAMTSystems, HIA, Delta and Aware.

 

***Net loss***

 

Our net loss was $2,520 for the three months ended September 30,2008 compared with a net loss of $466 for the three months ended September 30,2007, an increase of $2,054 or 440.8%. Our net loss in the comparable periodsincreased primarily due to additional overhead costs, including hiringmanagement and professional services staff and experienced sales,administrative and operations personnel to support our organizational growthand the costs associated with our growth through acquisitions.

 

***NineMonths ended September 30, 2008 compared with the Nine Months ended September 30,2007***

 

***Revenue***

 

Revenues for the nine months ended September 30, 2008 and 2007were as follows:

 
| ** **                  | ** ** | **Nine Months Ended September 30,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------------|------------|---------------------------------------------------------|------------|--------------------|------------|----------------|------------|
| ** **                  | ** ** | **2008**                                                | ** ** | **2007**           | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                        |       |                                                    |       |               |       |           |       |   |   |
| Revenues:                   |       |                                                    |       |               |       |           |       |   |   |
| Infrastructure and hardware |       | $                                                       | 44,057     |               | $          | 43,148         |       | $ | 909 |   | 2.1 | % |
| Professional services       |       | 23,211                                                  |       | 5,783              |       | 17,428         |       | 301.4 | % |
| Other                       |       | 6,690                                                   |       | 6,511              |       | 179            |       | 2.7 | % |
| Total revenues              |       | $                                                       | 73,958     |               | $          | 55,442         |       | $ | 18,516 |   | 33.4 | % |

 

The increase in revenue was due primarily to the expansion of ourprofessional services across the organization, including revenue contributed asa result of the acquisitions of the businesses of HIA, Delta and Aware, and anincrease in infrastructure and hardware related revenue. The revenue associatedwith the acquisition of HIA, Delta and Aware totaled $14,965 for the ninemonths ended September 30, 2008.

 

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***Cost of revenue***

 

Cost of revenues for the nine months ended September 30, 2008 and2007 were as follows:

 
|                        |   | **Nine Months Ended September 30** |       | **Amount of** | ** ** | **Percentage** |       |
|-----------------------------|--------|--------------------------------------------------------|------------|--------------------|------------|----------------|------------|
|                        |   | **2008**                                               | ** ** | **2007**           | ** ** | **Change**     | ** ** | **Change** |   |
|                        |   |                                                   |       |               |       |           |       |   |   |
| Cost of revenues:           |   |                                                   |       |               |       |           |       |   |   |
| Infrastructure and hardware |   | $                                                      | 34,815     |               | $          | 31,895         |       | $ | 2,920 |   | 9.2 | % |
| Professional services       |   | 13,152                                                 |       | 4,905              |       | 8,247          |       | 168.1 | % |
| Other                       |   | 6,288                                                  |       | 4,184              |       | 2,104          |       | 50.3 | % |
| Total cost of revenues      |   | $                                                      | 54,255     |               | $          | 40,984         |       | $ | 13,271 |   | 32.4 | % |

 

The increase in our cost of revenue was the result of costs incurred asa result of higher sales of wireless infrastructure, mobile point-of-careworkstations and our expanded professional services.****Thecost of revenue associated with the acquisition of HIA, Delta and Aware totaled$8,907 for the nine months ended September 30, 2008.

 

***Gross profit***

 

Gross profit and gross margin for the nine months ended September 30,2008 and 2007 were as follows:

 
|                        |   | **Nine Months Ended September 30,** | ** ** | **Amount of** | ** ** | **Percentage** |       |
|-----------------------------|--------|---------------------------------------------------------|------------|--------------------|------------|----------------|------------|
|                        |   | **2008**                                                | ** ** | **2007**           | ** ** | **Change**     | ** ** | **Change** |   |
|                        |   |                                                    |       |               |       |           |       |   |   |
| Gross profit:               |   |                                                    |       |               |       |           |       |   |   |
| Infrastructure and hardware |   | $                                                       | 9,242      |               | $          | 11,253         |       | $ | (2,011 | ) | (17.9 | )% |
| Professional services       |   | 10,059                                                  |       | 878                |       | 9,181          |       | 1045.7 | % |
| Other                       |   | 402                                                     |       | 2,327              |       | (1,925         | )          | (82.7 | )% |
| Total gross profit          |   | $                                                       | 19,703     |               | $          | 14,458         |       | $ | 5,245 |   | 36.3 | % |
|                        |   |                                                    |       |               |       |           |       |   |   |
| Gross profit:               |   |                                                    |       |               |       |           |       |   |   |
| Infrastructure and hardware |   | 21.0                                                    | %          | 26.1               | %          | (5.1           | )%         | (19.6 | )% |
| Professional services       |   | 43.3                                                    | %          | 15.2               | %          | 28.2           | %          | 185.4 | % |
| Other                       |   | 6.0                                                     | %          | 35.7               | %          | (29.7          | )%         | (83.2 | )% |
| Total gross profit          |   | 26.6                                                    | %          | 26.1               | %          | 0.6            | %          | 2.2 | % |

 

The increase in our gross margin is the result of increased sales ofour more profitable professional and consulting services related to our mobilesolutions and software implementation services, partially offset by low marginsales of infrastructure and third-party hardware.

 

***Selling, general and administrative expenses***

 

Our selling, general and administrative expenses were $23,562 for thenine months ended September 30, 2008, compared with $17,535 for the ninemonths ended September 30, 2007, an increase of $6,027 or34.4%. Selling expenses were $8,566 for the nine months ended September 30,2008, compared with $7,234 for the nine months ended September 30, 2007,an increase of $1,332 or 18.4%. The increase in our selling expenses for thecomparable periods was primarily attributable to an increase in wages relatedto the expanded sales staff hired in 2007, and sales support related costsattributable to HIA during the nine months ended September 30, 2008.  General and administrative expenses were$14,996 for the nine months ended September 30, 2008, compared with$10,301 for the nine months ended September 30, 2007, an increase of$4,695 or 45.6%.  The increase in our general and administrative expensesfor the comparable periods was primarily attributable to an increase inamortization expenses related to acquisitions, an increase in salary expensesrelated to the addition of key members of our management and professionalservices staff hired in 2007; and an increase in professional fees related tolegal, and accounting.

 

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*** ***

***Interest expense and interest income***

 

Our interest expense, which is derived from our credit line and termloan was $1,246 for the nine months ended September 30, 2008, compared toapproximately $516 for the nine months ended September 30, 2007, anincrease of $730 or 141.5%. The increase in interest expense is a result ofhigher interest costs and greater amounts outstanding under our asset-basedline of credit facility, term loans and notes payable issued in connection withour acquisitions.

 

Our interest income was $122 for the nine months ended September 30,2008, compared to $400 for the nine months ended September 30, 2007, adecrease of $278 or 69.5%. The decrease in interest income is primarily theresult of a lower average cash and cash equivalents balance during the ninemonths ended September 30, 2008 when compared to the same period of 2007.

 

***Depreciation and amortization***

 

Our depreciation and amortization expense increased to $1,885 for thenine months ended September 30, 2008 from $1,163 for the nine months endedSeptember 30, 2007, an increase of $722 or 62.1% as the result of agreater number of demonstration units deployed to our expanded sales force andamortization expense related to our recent acquisitions of intangible assetsfrom AMTSystems, HIA, Delta and Aware.

 

***Net loss***

 

Our net loss was $4,053 for the nine months ended September 30,2008 compared with a net loss of $1,934 for the nine months ended September 30,2007, an increase of $2,119 or 109.6%. Our net loss in the comparable periodsincreased primarily due to additional overhead costs, including hiring managementand professional services staff and experienced sales, administrative andoperations personnel to support our organizational growth, elimination of thetax benefit and the costs associated with our growth through acquisitions.

 

***Liquidity and Capital Resources***

 

AtSeptember 30, 2008, we had cash and cash equivalents of $6,986, compared to$6,101 at December 31, 2007.  In connection with the amendment to our Loanand Security Agreement described below, we agreed to maintain a minimum cashbalance (tested monthly) of $2,500 through December 2010. We have used, andplan to use, our unrestricted cash for general corporate purposes, includingworking capital as well as acquisitions. We have funded our growth primarilythrough the private sale of equity securities and through current and long termdebt and working capital.  At September30, 2008, our total liabilities were $41,322 and were comprised mostly of termdebt and borrowings outstanding under our credit line, and outstanding accountspayable.  Net cash used inoperating activities for the nine months ended September 30, 2008 was $389,primarily the result of the net loss incurred, partially offset by collectionof trade receivables and changes in various non-cash items. Net cash used ininvesting activities was $4,938 for the nine months ended September 30, 2008,primarily used to acquire the assets of Delta and Aware, to purchasedemonstration equipment, office equipment, and third-party software and forloans made pursuant to certain promissory note agreements entered into withpotential acquisition targets.  Net cashprovided by financing activities was $6,212 for the nine months ended September30, 2008, primarily due to the increased borrowings under our Loan and SecurityAgreement described below.

 

Given the amount of our current unrestricted cash and cashequivalents, short-term investments and accounts receivable, we believe that wewill have sufficient liquidity to meet our capital requirements for at leastthe next 12 months. We may increase our expenditures consistent with theanticipated growth of our business and we may seek to acquire complementarybusinesses or technologies, which may require us to raise additional fundssooner than expected. We may seek to raise additional funds through either oneof or a combination of the following: the sale or issuance of equitysecurities, the issuance of debt securities, or obtaining additional creditfacilities. The sale of equity securities or issuance of equity securities infuture acquisitions could result in dilution to our stockholders and theincurrence of debt would result in an increase in our interest expense. Anydebt financing obtained by us in the future could involve restrictive covenantssimilar to those contained in our current loan and security agreement relatingto capital raising activities and other financial and operational matters thatmight make it more difficult for us to pursue business opportunities, includingpotential acquisitions.  There can be noassurance that we will be able to sell additional equity or debt securities, orbe able to obtain financing on acceptable terms, if at all.

 

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***Lineof Credit and Term Loan***

 

Hercules Technology LoanAgreement

 

On May 1, 2008, we entered into a Loanand Security Agreement with Hercules Technology Growth Capital, Inc. (the“Lender”).  On November 19, 2008, we entered into an amendment to the Loanand Security Agreement.  Among otherthings, the amendment reduced the maximum commitment of the revolving creditfacility, eliminated the incremental term loan facility of $500, increased theinterest rates on outstanding borrowings and amended certain financialcovenants.  The description of therevolving credit facility and term loan facilities set forth below incorporatesthe new terms of the Loan and Security Agreement after giving effect to theamendment.

 

The Loan and Security Agreement provides uswith a revolving credit facility with a maximum commitment of up to $9,000 anda term loan facility of up to $12,000, subject to certain limitations on therevolving line of credit.  The proceeds of the loans were used, in part,to refinance our indebtedness owing to Sovereign Bank under a Loan and SecurityAgreement that was entered into in March 2006 and terminated onMay 2, 2008.  Borrowings under the agreement may be used forpermitted acquisitions and for general corporate and working capitalpurposes.  At September 30, 2008, we had $12,000 of indebtednessoutstanding under the Hercules term loan and $9,000 outstanding under therevolving credit facility. 

 

The amount that is available to be borrowedunder the revolving credit facility is limited to the lesser of the maximumavailability at such time and 85% of our eligible accounts. Eligibleaccounts, as defined in the loan agreement, exclude certain account criteriathat the lender considers risky. Until our three month consolidated EBITDAexceeds $1,500, the borrowings under the revolving credit facility may notexceed 85% of our eligible accounts minus $2,500.

 

The term loan bears interest at an annualrate equal to the greater of 13.25% (10.5% prior to the amendment) or the primerate plus 8.75% (4.5% prior to the amendment), plus an additional 1.75% ofinterest that will be paid in kind and added to the principal amount of theterm loan.  The interest rate for the revolving credit facility is thegreater of 11.25% (8.5% prior to the amendment) or the prime rate plus 6.75%(2.5% prior to the amendment).  Theinterest rate on outstanding borrowings under the revolving credit facility andthe term loan will increase by 1% on February 15, 2009 and by an additional 1%on May 16, 2009 unless prior to those dates we have executed a definitiveagreement to sell or merge the Company or we have raised $5,000 of additionalequity or subordinated debt on terms acceptable to the Lender.  We cannot guarantee that we can execute suchan agreement of sale or merger or raise additional equity or subordinated debtby those dates.

 

Interest is payable on the first business dayof each month.  In the event that any payment is not timely made, a latefee equal to 5% of the past due amount is payable on the demand of theLender.  Upon the occurrence and during the continuance of an event ofdefault, all amounts then owing to the Lender under the agreement and the otherloan documents will bear interest at the then current rate plus 3%.

 

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The term loan matures on May 1,2012.  The principal amount of the term loan is required to be repaid ininstallments on the first business day of each calendar month commencing onJanuary 1, 2009 and continuing through the maturity date.  Inaddition, we are required to apply 25% of our excess cash flow, as defined bythe agreement, toward prepayments of the term loan.  Voluntary prepaymentsof the term loan are subject to a prepayment charge equal to a percentage ofthe term loan being prepaid.  Revolving loans mature on November 1,2009.  Upon the earliest to occur of(i) demand from the Lender at any time between November 1, 2009 andMay 1, 2012, (ii) the acceleration of our obligations under theagreement, (iii) the term loan maturity date, and (iv) prepayment in fullof our obligations under the agreement, we will be required to pay to theLender an amount equal to the greater, as of such date of determination, of(x)  $900 (increased from $625 prior to theamendment), and (y) an amount equal to 3.0% of the amount by which our marketcapitalization exceeds $50,000 (decreased from $100,000 prior to theamendment).  Our obligations under the agreement aresecured by all of our personal property, including all of the equity interestsof in our subsidiaries.

 

The agreement contains various affirmativeand negative covenants, including covenants that restrict our ability to incurindebtedness, make investments, make payments in respect of our capital stock,including dividends and repurchases of common stock, sell or license ourassets, and engage in acquisitions without the prior satisfaction of certainconditions.  The agreement also requires us to maintain a minimumconsolidated EBITDA measured on a trailing three month basis (prior to theamendment the test was made on a trailing twelve month basis)****as of the last day of each month during the period from October 2008through April 2012 (prior to the amendment the monthly test only ran throughDecember 2008), and a maximum leverage ratio measured as of the last day ofeach month during the period from December 2009 through April 2012.  Theamended monthly minimum EBITDA test and monthly maximum leverage ratio are as follows:

 

Theamended monthly minimum EBITDA test is as follows:

 

| **Measurement Period Ending** | ** ** | **Consolidated  Adjusted EBITDA** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| October 31, 2008                        |       | $                                      | (600,000   | ) |
| November 30, 2008 to April 30, 2009     |       | $                                      | 100,000    |   |
| May 31, 2009 to July 31, 2009           |       | $                                      | 250,000    |   |
| August 31, 2009                         |       | $                                      | 500,000    |   |
| September 30, 2009                      |       | $                                      | 1,000,000  |   |
| October 31, 2009                        |       | $                                      | 2,500,000  |   |
| November 30, 2009                       |       | $                                      | 2,500,000  |   |
| December 31, 2009 to April 30, 2012     |       | $                                      | 3,000,000  |   |

 

The amended consolidated total adjusted leverage ratio for any twelvemonth measurement period ending during any fiscal month commencing with themonth ending December 31, 2009, to be greater than the amount set forth belowopposite such Measurement Period ending date: 

 

| **Measurement Period Ending**                                                                                                                                           | ** ** | **Consolidated Total  Adjusted Leverage  Ratio** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|--------|
| December 31, 2009                                                                                                                                                                 |       | 3.0 to 1                                                   |   |
| January 30, 2010                                                                                                                                                                  |       | 3.0 to 1                                                   |   |
| February 28, 2010                                                                                                                                                                 |       | 3.0 to 1                                                   |   |
| March 31, 2010                                                                                                                                                                    |       | 2.75 to 1                                                  |   |
| April 30, 2010                                                                                                                                                                    |       | 2.75 to 1                                                  |   |
| May 31, 2010                                                                                                                                                                      |       | 2.75 to 1                                                  |   |
| June 30, 2010                                                                                                                                                                     |       | 2.5 to 1                                                   |   |
| July 31, 2010                                                                                                                                                                     |       | 2.5 to 1                                                   |   |
| August 31, 2010                                                                                                                                                                   |       | 2.5 to 1                                                   |   |
| September 30, 2010                                                                                                                                                                |       | 2.25 to 1                                                  |   |
| October 31, 2010                                                                                                                                                                  |       | 2.25 to 1                                                  |   |
| November 30, 2010                                                                                                                                                                 |       | 2.25 to 1                                                  |   |
| For each Twelve Month Measurement Period  ending on during any fiscal month commencing with the month ending December  31, 2010, to and including the month ending April 30, 2012 |       | 2.0 to 1                                                   |   |

 

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Upon an event of default under the agreement the Lender may opt toaccelerate and demand payment of all or any part of our obligations under theagreement.

 

Underthe amended terms, we are notpermitted to pay any amounts owing under the earn-out agreements that weentered into in connection with our acquisitions of HIA or Delta if our totalleverage after giving effect to such payment is greater than 3.00 to 1.00.  We are currently seeking the consent of theother parties to these earn-out agreements. There can be no assurance that we will be able to obtain these consentson terms favorable to us or at all.

 

***Significant Contractual Obligations***

 

As of September 30, 2008, our significant contractual obligationswere as follows:

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
|                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt obligations  |       | $                                         | 16,225     |   | $ | 1,276 |   | $ | 10,385 |   | $ | 4,564 |   | $ | — |   |
| Capital lease obligations   |       | 130                                       |       | 78 |   | 52 |   | — |   | — |   |
| Operating lease obligations |       | 1,227                                     |       | 565 |   | 641 |   | 21 |   | — |   |
| Vendor obligations          |       | 4,875                                     |       | 1,500 |   | 3,000 |   | 375 |   | — |   |
|                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Inflation***

 

To date, the effects of inflation on our financial results have notbeen significant; however, we cannot be certain that inflation will not affectus materially in the future.

 

***OffBalance Sheet Arrangements***

 

We do not currently haveany off-balance sheet arrangements.

 

***New Accounting Standards***

 

Several new accounting standards have been issued and are beingevaluated. None of these standards are expected to have a material impact onour financial position, results of operations, or liquidity.

 

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In December 2007, FASB issued SFAS No. 141(R) *Business Combinations* (SFAS 141(R)). This Statement replacesthe original FASB Statement No. 141. This Statement retains thefundamental requirements in Statement 141 that the acquisition method ofaccounting (which Statement 141 called the *purchasemethod*) be used for all business combinations and for an acquirer tobe identified for each business combination. The objective of this SFAS 141(R) isto improve the relevance, and comparability of the information that a reportingentity provides in its financial reports about a business combination and itseffects. To accomplish that, SFAS 141(R) establishes principles andrequirements for how the acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynon-controlling interest in the acquiree, recognizes and measures the goodwillacquired in the business combination or a gain from a bargain purchase anddetermines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination.  This Statement applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008 andmay not be applied before that date. We are in the process of evaluating theimpact of this pronouncement on our consolidated financial statements.

 

In December 2007, FASB issued SFAS No. 160 *Noncontrolling Interests in Consolidated Financial Statements – anamendment of ARB No. 51* (SFAS 160). This Statement amends theoriginal Accounting Review Board (ARB) No. 51 “Consolidated FinancialStatements” to establish accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. Itclarifies that a noncontrolling interest in a subsidiary is an ownershipinterest in the consolidated entity that should be reported as equity in theconsolidated financial statements. This Statement is effective for fiscal yearsand interim periods within those fiscal years, beginning on or after December 15,2008 and may not be applied before that date. We do not expect theadoption of SFA 160 to have a material effect on our consolidated financialstatements.

 

InDecember 2007, the SEC issued SAB No. 110, “*Share-Based Payment*” (“SAB 110”). SAB 110 establishes thecontinued use of the simplified method for estimating the expected term ofequity based compensation. The simplified method was intended to be eliminatedfor any equity based compensation arrangements granted after December 31,2007. SAB 110 was issued to help companies that may not have adequate exercisehistory to estimate expected terms for future grants. We do not expect theadoption of SAB 110 to have a material effect on our consolidated financialstatements.

 

*Forward-Looking Statements*

 

This report contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995 that involve risks and uncertainties, many of which are beyond ourcontrol.  Our actual results could differmaterially and adversely from those anticipated in such forward-lookingstatements as a result of certain factors, including those set forth in ourAnnual Report on Form 10-K for the year ended December 31, 2007.  Important factors that may cause actualresults to differ from projections include, but are not limited to, forexample:

 
| · |   | our limited  operating history and the limited information available to evaluate our  business;              |
|--------|--------|--------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                         |
| · |   | our ability  to operate profitably and manage the growth of our business;                                    |
|   |   |                                                                                                         |
| · |   | changes in  economic, business or industry conditions;                                                       |
|   |   |                                                                                                         |
| · |   | our ability  to find additional financing necessary to support our operations and our  strategic objectives; |
|   |   |                                                                                                         |
| · |   | our ability  to successfully integrate acquisitions with our existing operations;                            |
|   |   |                                                                                                         |
| · |   | our ability  to retain, replace and hire experienced senior management;                                      |
|   |   |                                                                                                         |
| · |   | our  relationships with our customers, key industry relationships and other third  parties on which we rely; |
|   |   |                                                                                                         |
| · |   | competition  in the industries in which we compete;                                                          |
|   |   |                                                                                                         |
| · |   | our ability  to introduce new products and services and maintain products and service  quality;              |
|   |   |                                                                                                         |
| · |   | our ability  to protect our intellectual property rights; and                                                |
|   |   |                                                                                                         |
| · |   | restrictions  on our operations contained in our loan and security agreement.                                |

 

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All statements, otherthan statements of historical facts, included in this report regarding ourstrategy, future operations, financial position, estimated revenue or losses,projected costs, prospects, current expectations, forecasts, and plans andobjectives of management are forward-looking statements.  When used in this report, the words “will,” “may,”“believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan”and similar expressions are intended to identify forward-looking statements,although not all forward-looking statements contain such identifyingwords.  All forward-looking statementsspeak only as of the date of this report. We do not undertake any obligation to update any forward-lookingstatements or other information contained herein, except as required by federalsecurities laws.  You should not placeundue reliance on these forward-looking statements.  Although we believe that our plans,intentions and expectations reflected in or suggested by the forward-lookingstatements in this report are reasonable, we cannot assure you that theseplans, intentions or expectations will be achieved.  We have disclosed important factors thatcould cause our actual results to differ materially from our expectations under“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2007 and elsewhere in this report.  Thesecautionary statements qualify all forward-looking statements attributable to usor persons acting on our behalf.

 

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**Item3.****                       Quantitativeand Qualitative Disclosures About Market Risk**

 

The primary objective ofour investment activities is to preserve principal. Our funds are currentlyheld in checking accounts and money market funds which do not subject us torisk of a loss of principal due to changes in prevailing interest rates and ina portfolio of cash and cash equivalents that include investments ininvestment-grade securities, such as commercial paper, money market funds,government debt securities and certificates of deposit with maturities of lessthan nine months. Some of these securities may be subject to market risk due tochanges in prevailing interest rates, which may cause fluctuations in marketvalue.

 

Two of the main risks associated with these investments are interestrate risk and credit risk.  Typically, when interest rates rise, there isa corresponding decline in the market value of debt securities. Fluctuations in interest rates would not have a material effect on ourfinancial statements because of the short-term nature of the securities inwhich we invest and our intention to hold the securities to maturity. Credit risk refers to the possibility that the issuer of the debt securitieswill not be able to make principal and interest payments.  We have limitedthe investments to investment grade or comparable securities and have notexperienced any losses on our investments to date due to credit risk.

 

The fair value of ourcash and short-term investment portfolio at September 30, 2008,approximated its carrying value due to the short-term maturities of theseinvestments. The potential decrease in fair value resulting from a hypothetical10% increase in interest rates for our investment portfolio is not material.

 

The carrying value of ourlong-term debt at September 30, 2008 approximates its fair value. Ourlong-term debt is set at the higher of 13.25% or 7.25% over the then currentprime interest rate.  An increase inmarket rates of interest would have to change by greater than 1.0% to have animpact on our annual interest expense. An increase in the prime rate of 1.25%would increase our annual interest expense by approximately $20 and a decreasein market interest rates by 1.25% would not have any effect on our annualinterest expense.

 

The balance of our otherlong term liabilities consists of two notes, bearing interest at fixed rates of7.84% per annum and 9.0% per annum, issued in connection with acquisitions thattook place during 2007. A change in interest rates would not have any effect onour annual interest expense for this debt.

 

**Item 4.        Controls and Procedures**

 

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our reports filed under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

As required by SEC Rule 13a-15(b), we carried out an evaluation,under the supervision and with the participation of our management, includingthe Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures as of theend of the period covered by this report. Based on the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective to provide reasonable assurance that wewould meet our disclosure obligations.

 

There was no change in our internal controls over financial reportingthat occurred during the period covered by this report that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

 

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**PART II— OTHER INFORMATION**

 

**Item 1.        Legal Proceedings**

 

In the normal course of business, we havebecome and might in the future become involved in legal actions relating to ourbusiness. In management’s opinion, the resolution of any such pending legalactions is not expected to have a material adverse effect on our consolidatedfinancial position or results of operations.

 

**Item 1A.     Risk Factors**

 

There have been no material changes in our risk factors from theinformation set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2007.

 

**Item 2.        Unregistered Sales of Equity Securitiesand Use of Proceeds**

 

None.

 

**Item 3.        Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.        Other Information**

 

None.

 

**Item 6.        Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                       |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                  |
| 10.1                 |       | First  Amendment to Earn Out Agreement by and between InfoLogix Systems Corporation  and Healthcare Informatics Associates, Inc. dated as of August 23,  2008.*                                                                                             |
| 10.2                 |       | First  Amendment to Loan and Security Agreement by and between InfoLogix, Inc., InfoLogix  Systems Corporation, Embedded Technologies, LLC, OPT Acquisition LLC, and  InfoLogix - DDMS, Inc., and Hercules Technology Growth Capital, Inc. dated  November 19, 2008.* |
| 31.1                 |       | Certification  pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                  |
| 31.2                 |       | Certification pursuant to Exchange Act  Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.*                                                                                                                  |
| 32.1                 |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                  |
| 32.2                 |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                  |

 

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| (*)    |   | Filed herewith.     |
|--------|--------|---------------------|
| (+)    |   | Furnished herewith. |
|   |   |                |

 

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**SIGNATURES**

 

Pursuant to the requirements of section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned; thereuntoduly authorized, in Hatboro, Pennsylvania on November 19, 2008.

 
|     | INFOLOGIX, INC.                                                   |
|----------|-------------------------------------------------------------------|
|     |                                                              |
|     | By:                                                               |    /s/  David T. Gulian |
|     |  David T.  Gulian                                            |
| * * | * President  and Chief Executive Officer*                    |
| * * | * *                                                          |
|     | By:                                                               |    /s/  John A. Roberts |
|     |  John A.  Roberts                                            |
| * * | * Chief  Financial Officer and Principal Accounting Officer* |

 

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