XATA Xrs Corporation (MM)

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2008

or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number: 0-27166

XATA Corporation

(Exact Name of Registrant as Specified in its Charter)

Minnesota		41-1641815
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

965 Prairie Center Drive, Eden Prairie, Minnesota		55344
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (952) 707-5600

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of July 31, 2008, the following securities of the Registrant were outstanding: 8,762,679 shares of Common Stock, $.01 par value per share, 1,925,910 shares of Series B Preferred Stock, 1,269,036 shares of Series C Preferred Stock and 1,566,580 shares of Series D Preferred Stock.

 

 

XATA Corporation
Index

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations for the Three Months and Nine Months Ended June 30, 2008 and 2007			3
Consolidated Balance Sheets as of June 30, 2008 and September 30, 2007			4
Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended June 30, 2008 and the Twelve Months Ended September 30, 2007			5
Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2008 and 2007			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
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			32
Item 5. Other Information			32
Item 6. Exhibits
SIGNATURES
EXHIBITS
Severance Agreement
Section 302 Certification
Section 302 Certification
Section 1350 Certification
Section 1350 Certification

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

XATA CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

		Three months ended								Nine months ended
		June 30,								June 30,
		2008				2007				2008				2007
Net sales		$	16,167			$	7,984			$	35,983			$	23,920
Costs and expenses
Cost of goods sold			8,542				4,282				18,609				13,133
Selling, general and administrative			6,218				3,620				15,693				10,115
Research and development			1,599				1,061				4,078				3,258
Total costs and expenses			16,359				8,963				38,380				26,506
Operating loss			(192	)			(979	)			(2,397	)			(2,586	)
Interest income			86				109				327				298
Interest expense			(531	)			(5	)			(918	)			(18	)
Loss before income taxes			(637	)			(875	)			(2,988	)			(2,306	)
Income tax expense			—				—				—				—
Net loss			(637	)			(875	)			(2,988	)			(2,306	)
Preferred stock dividends			(49	)			(46	)			(143	)			(138	)
Preferred stock deemed dividends			(26	)			(722	)			(69	)			(817	)
Net loss to common shareholders		$	(712	)		$	(1,643	)		$	(3,200	)		$	(3,261	)
Net loss per common share — basic and diluted		$	(0.08	)		$	(0.21	)		$	(0.39	)		$	(0.41	)
Weighted average common and common share equivalents — basic and diluted			8,411				7,959				8,293				7,908

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

XATA CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

		June 30, 2008				September 30, 2007
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	8,284			$	13,675
Accounts receivable, less allowances for doubtful accounts and sales returns of $752 at June 30, 2008 and $256 at September 30, 2007			10,042				3,280
Inventories			3,305				2,672
Deferred product costs			1,260				752
Current portion of investment in sales-type leases			873				—
Prepaid expenses and other current assets			1,250				393
Total current assets			25,014				20,772
Equipment and leasehold improvements, net			3,930				1,583
Intangible assets			12,944				—
Goodwill			1,702				—
Deferred product costs, net of current portion			2,335				1,798
Investment in sales-type leases, net of current portion			523				—
Other assets			871				—
Total assets		$	47,319			$	24,153
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	5,165			$	3,419
Current portion of long-term obligations			2,111				161
Accrued expenses			5,219				3,548
Deferred revenue			4,343				3,105
Total current liabilities			16,838				10,233
Long-term obligations, net of current portion			16,365				220
Deferred rent, net of current portion			825				98
Deferred revenue, net of current portion			7,028				6,524
Total liabilities			41,056				17,075
Shareholders’ Equity
Preferred stock, no par, 10,000 shares authorized:
Series B, 4% convertible, 2,250 shares designated; shares issued and outstanding: 1,926 at June 30, 2008 and 1,851 at September 30, 2007			5,181				4,921
Series C, convertible, 1,400 shares designated; 1,269 shares issued and outstanding at June 30, 2008 and September 30, 2007			4,845				4,845
Series D, convertible, 1,600 shares designated; 1,567 shares issued and outstanding at June 30, 2008 and September 30, 2007			5,937				5,937
Common stock, par value $0.01 per share; 25,000 shares authorized; shares issued and outstanding: 8,763 at June 30, 2008 and 8,516 at September 30, 2007			88				85
Additional paid-in capital			27,882				25,760
Accumulated deficit			(37,670	)			(34,470	)
Total shareholders’ equity			6,263				7,078
Total liabilities and shareholders’ equity		$	47,319			$	24,153

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

XATA CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands)

(Unaudited)

		Series B								Series C								Series D																Additional				Unearned
		Preferred Stock								Preferred Stock								Preferred Stock								Common Stock								Paid-In				Stock-Based				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Compensation				Deficit				Total
Balance at September 30, 2006			1,779			$	4,579				1,269			$	4,845				—			$	—				7,963			$	80			$	23,246			$	(900	)		$	(26,660	)		$	5,190
Common stock issued on exercise of options			—				—				—				—				—				—				14				—				54				—				—				54
Issuance of restricted shares of common stock			—				—				—				—				—				—				450				4				(4	)			—				—				—
Elimination of unearned compensation			—				—				—				—				—				—				—				—				(900	)			900				—				—
Stock based compensation			—				—				—				—				—				—				—				—				2,021				—				—				2,021
Forfeiture of restricted shares of common stock			—				—				—				—				—				—				(23	)			—				—				—				—				—
Issuance of common stock			—				—				—				—				—				—				112				1				604				—				—				605
Issuance of preferred stock and warrants			—				—				—				—				1,567				5,279				—				—				739				—				—				6,018
Preferred stock dividends			72				183				—				—				—				—				—				—				—				—				(185	)			(2	)
Preferred stock deemed dividends			—				159				—				—				—				658				—				—				—				—				(817	)			—
Net loss			—				—				—				—				—				—				—				—				—				—				(6,808	)			(6,808	)
Balance at September 30, 2007			1,851				4,921				1,269				4,845				1,567				5,937				8,516				85				25,760				—				(34,470	)			7,078
Common stock issued on exercise of options			—				—				—				—				—				—				15				—				43				—				—				43
Issuance of restricted shares of common stock											—				—				—				—				151				2				(2	)			—				—				—
Stock based compensation			—				—				—				—				—				—				—				—				1,238				—				—				1,238
Forfeiture of restricted shares of common stock			—				—				—				—				—				—				(10	)			—				—				—				—				—
Issuance of common stock and warrants			—				—				—				—				—				—				91				1				843				—				—				844
Preferred stock dividends			75				191				—				—				—				—				—				—				—				—				(143	)			48
Preferred stock deemed dividends			—				69				—				—				—				—				—				—				—				—				(69	)			—
Net loss			—				—				—				—				—				—				—				—				—				—				(2,988	)			(2,988	)
Balance at June 30, 2008			1,926			$	5,181				1,269			$	4,845				1,567			$	5,937				8,763			$	88			$	27,882			$	—			$	(37,670	)		$	6,263

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

XATA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(Unaudited)

		Nine Months Ended June 30,
		2008				2007
Cash flows from operating activities
Net loss		$	(2,988	)		$	(2,306	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of fixed assets and amortization of intangibles			1,701				653
Amortization of debt financing costs			104				—
Issuance of warrants for services rendered			—				33
Stock based compensation			1,238				1,497
Changes in assets and liabilities, net of the impact of acquisitions:
Accounts receivable, net			(2,711	)			1,551
Inventories			2,101				286
Deferred product costs			(1,044	)			2,258
Prepaid expenses and other assets			(651	)			(86	)
Lease equipment receivable			429				—
Accounts payable			(1,205	)			(224	)
Accrued expenses			(913	)			(410	)
Deferred rent			33				—
Deferred revenue			1,741				(1,559	)
Net cash (used in) provided by operating activities			(2,165	)			1,693
Cash flows from investing activities
Purchase of equipment and leasehold improvements			(2,757	)			(202	)
Additions to system development costs			—				(160	)
Purchase of GeoLogic Solutions, Inc., net of cash acquired			(16,277	)			—
Net cash (used in) investing activities			(19,034	)			(362	)
Cash flows from financing activities
Borrowings on long-term obligations			16,224				—
Payments on long-term obligations			(128	)			(80	)
Payments on financing costs			(339	)			—
Proceeds from issuance of common stock			—				605
Proceeds from issuance of preferred stock and warrants			—				5,978
Proceeds from options exercised and warrants issued			51				53
Net cash provided by financing activities			15,808				6,556
(Decrease) increase in cash and cash equivalents			(5,391	)			7,887
Cash and cash equivalents
Beginning			13,675				6,354
Ending		$	8,284			$	14,241
Supplemental disclosures of cash flow information
Cash payments for interest		$	627			$	17
Supplemental schedule of noncash investing and financing activities
Preferred stock deemed dividends			69				817
Preferred stock dividends payable			16				16
Preferred stock dividends paid			191				183
Equipment purchased under capital lease			—				98
Issuance of warrants in consideration for financing fees			535				—
Issuance of sellers note			2,000				—
Issuance of common stock in consideration for GeoLogic purchase			300				—

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

Presentation

The accompanying unaudited consolidated financial statements were prepared by XATA Corporation (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures made herein are adequate to make the information presented not misleading.

In the opinion of management, the consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the financial condition, results of operations, and cash flows for the periods presented. Results of operations for the periods presented are not necessarily indicative of results to be expected for any other interim period or for the full year. These consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto in its Form 10-K for the year ended September 30, 2007 and Annual Report to Shareholders filed with the SEC.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary GeoLogic Solutions, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

The Company derives its revenue from sales of hardware, software and related services, and from application service contracts. The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition , as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions , and Securities and Exchange Commission Staff Accounting Bulletin (SAB) 104, Revenue Recognition in Financial Statements .

Software revenue is recognized under SOP 97-2 and SAB 104 when (i) persuasive evidence of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has occurred, as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or determinable and payable within twelve months, and (iv) collectability is probable and supported by credit checks or past payment history.

With regard to software arrangements involving multiple elements, the Company allocates revenue to the software and service elements based on the relative fair value of each element with the residual amount allocated to the system revenue which is recognized upon delivery. The Company’s determination of fair value relating to the software and service elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged when the same

element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to consulting services and post-contract customer support (PCS) components of its license arrangements. The Company sells its consulting services separately, and has established VSOE on this basis. VSOE for PCS components are determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from licenses is recognized upon delivery, and revenue from PCS components are recognized ratably over the applicable term, typically one year.

Contract terms of some of our multiple element agreements did not meet the requirements described in Emerging Issues Task Force
(EITF) 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware , to account for it under SOP 97-2 and SAB 104 and resulted in the recognition of all revenue ratably over the term of the agreement. During the fiscal year ending September 30, 2006, we changed the terms of all new XATANET contracts, such that all the requirements of EITF 00-03 related to software delivery are met and the contracts are accounted for under SOP 97-2. For these new XATANET contracts, revenue is recognized based on the multiple element arrangement accounting described above.

Use of Estimates

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

Basis of Presentation

Certain amounts from prior year’s financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on net loss to common shareholders or shareholders’ equity.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less when purchased by the Company.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash equivalents, accounts receivable and sales-type leases receivable. The Company’s cash equivalents consist of checking and money market accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts.

The majority of the Company’s accounts receivable and investment in sales-type leases receivable are due from companies with fleet trucking operations in a variety of industries. In general, the Company does not require collateral or other security to support accounts receivable, although sales-type leases receivable are secured by a retained security interest in the leased equipment. Accounts receivable are typically due from customers within 30 days and are stated

at amounts due from customers net of an allowance for doubtful accounts and sales returns. Accounts receivable outstanding longer than the contractual payment terms are considered past due. To reduce credit risk, management performs ongoing evaluations of its customers’ financial condition.

The Company determines its allowance for doubtful accounts based upon a number of factors, including the length of time trade receivables are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The provision for doubtful accounts is recorded as a charge to operating expenses. The balance of the allowance for doubtful accounts at June 30, 2008 and September 30, 2007 was $635,000 and $130,000, respectively.

The Company determines its allowance for sales returns by considering several factors, including history of prior sales credits issued. The Company regularly assesses the allowance for sales returns and increases it as needed. The provision for sales returns is recognized as a reduction of revenues. Unexpected or significant future changes in trends could result in a material impact to future statements of operations or cash flows. At June 30, 2008 and September 30, 2007, the Company had an allowance for sales returns of $117,000 and $126,000, respectively.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, sales-type lease receivables, accounts payable and debt obligations, approximate fair value.

Inventories

Inventories consist of finished goods, parts and accessories, and repaired and refurbished inventories, and are stated at the lower of cost or market. Cost is determined on the standard cost method, which approximates the first-in, first-out method. Inventories consist of (in thousands):

		June 30,				September 30,
		2008				2007
Parts and accessories		$	1,260			$	1,021
Finished goods			2,005				1,651
Repair			40				—
Total inventories		$	3,305			$	2,672

Investment in Sales-Type Leases

As the result of the acquisition of GeoLogic Solutions, Inc. on January 31, 2008, the Company acquired GeoLogic Solutions, Inc.’s investment in sales-type leases. The Company records the investment in sales-type leases at the present value of the future minimum lease payments. There is no guaranteed residual value associated with the leased devices. The receivables generally have terms of five years and are collateralized by a security interest in the related equipment. The Company records subscriber revenue on these leased devices as the ongoing service is provided over the term of the related lease agreement and recognizes interest income as the lease payments are billed to the customers. Future minimum lease payments to the

Company under non-cancelable sales-type leases as of June 30, 2008 are as follows (in thousands):

Years ending September 30,
2008		$	276
2009			901
2010			323
2011			42
Total minimum lease payments			1,542
Less: amount representing interest (at 11.71%)			(146	)
Present value of net minimum sales-type lease payments			1,396
Less: current installments of investment in sales-type leases			(873	)
Investment in sales-type leases, excluding current installments		$	523

Interest income from sales-type leases was approximately $37,000 for the five month period subsequent to the acquisition of GeoLogic Solutions, Inc.

Other Assets

Included in other assets are debt financing costs which are amortized to interest expense over the term of the related financing agreement on a straight-line basis, which approximates the effective interest method. The carrying value of the prepaid debt financing costs is approximately $770,000, net of accumulated amortization of $104,000 as of June 30, 2008.

Equipment and Leasehold Improvements

Equipment is stated at cost and depreciated using the straight-line method over estimated useful lives of approximately three to seven years. Leasehold improvements are depreciated over the shorter of the lease term or their estimated useful lives (three to fifteen years).

Equipment and leasehold improvements consist of (in thousands):

		June 30,				September 30,
		2008				2007
Office furniture and equipment		$	3,940			$	3,353
Leasehold improvements			2,242				78
Engineering and manufacturing equipment			692				574
Operating-lease equipment			124				—
			6,998				4,005
Less: accumulated depreciation			(3,068	)			(2,422	)
Equipment and leasehold improvements, net		$	3,930			$	1,583

The Company disposed of $342,000 of fully depreciated assets during the nine months ended June 30, 2008.

Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.

Goodwill and Intangible Assets

As of June 30, 2008, the Company had a goodwill balance of $1.7 million that resulted from the Company’s acquisition of GeoLogic Solutions, Inc. on January 31, 2008. The Company records goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company will review goodwill for impairment at least annually or more frequently if an event occurs indicating the potential for impairment. Intangible assets are carried at cost less accumulated amortization. The Company amortizes the cost of identified intangible assets on a straight-line basis over their expected economic lives. In accordance with SFAS No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ,” the Company reviews intangible assets that have finite useful lives when an event occurs indicating the potential for earlier impairment.

The Company reviews for impairment using facts or circumstances, either internal or external, indicating that it may not recover the carrying value of the asset. The Company measures impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values.  The Company measures fair value under SFAS No. 144, which is generally based on the present value of estimated future cash flows. The Company’s analysis is based on available information and on assumptions and projections it considers to be reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company’s best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Based on the preliminary allocation of the purchase price for GeoLogic Solutions, Inc., intangible assets subject to amortization were as follows as of June 30, 2008 (in thousands):

		Weighted
		Average								Accumulated
		Life (years)				Cost				Amortization				Net
Acquired customer contracts			7.6			$	13,500			$	(703	)		$	12,797
Other intangibles			6.3				158				(11	)			147
Total						$	13,658			$	(714	)		$	12,944

Future amortization expense, as of June 30, 2008, is expected to be as follows (in thousands):

Years Ending September 30,
2008		$	429
2009			1,713
2010			1,713
2011			1,713
2012			1,713
Thereafter			5,663
Total expected amortization expense		$	12,944

Product Warranties

The Company sells its hardware products with a limited warranty, with an option to purchase extended warranties. The Company provides for estimated warranty costs at the time of sale and for other costs associated with specific items at the time their existence and amount are determinable. Factors affecting the Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors.

At June 30, 2008 and September 30, 2007, the Company had an accrual for product warranties included in accrued expenses of $1,105,000 and $911,000, respectively.

Shipping Costs

Shipping costs, which are classified as a component of cost of goods sold, were $138,000 and $86,000 for the three months ended June 30, 2008 and 2007 and $331,000 and $242,000 for the nine months ended June 30, 2008 and 2007, respectively. Customer billings related to shipping fees are reported as net sales.

Advertising Costs

Advertising costs consist primarily of ad campaigns, catalog brochures, promotional items and trade show expenses and are expensed as incurred. Advertising costs, which are included in selling, general and administrative expenses, were $375,000 and $56,000 for the three months ended June 30, 2008 and 2007 and $662,000 and $249,000 for the nine months ended June 30, 2008 and 2007, respectively.

Research and Development Costs

Research and development expenses are charged to expense as incurred. Such expenses include product development costs which have not met the capitalization criteria of Statement of Financial Accounting Standards SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed . No research and development costs were capitalized during the nine months ended June 30, 2008, and $160,000 were capitalized during the nine months ended June 30, 2007.

Income taxes

The Company accounts for income taxes following the provisions of SFAS No. 109, Accounting for Income Taxes . SFAS No. 109 requires that deferred income taxes be recognized for the future tax consequences associated with differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable earnings. The effect of changes in tax rates is recognized in the period in which the rate change occurs. Valuation allowances are established by the Company when necessary to reduce deferred tax assets to the amount more likely than not to be realized. The Company has provided a full valuation allowance against the net deferred tax assets as of June 30, 2008 and September 30, 2007.

Recently Issued Accounting Standards

Accounting for Uncertainty in Income Taxes (FIN 48)

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48, an interpretation of FASB Statement No. 109 “Accounting for Income Taxes,” prescribes a recognition threshold and measurement process for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on the de-recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company adopted the provisions of FIN 48 effective for the fiscal year beginning October 1, 2007. FIN 48 had no material effect on the Company’s consolidated financial statements.

Fair Value Measurements (SFAS 157)

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements but does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is determining what impact, if any, this Statement will have on the financial statements.

The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, the adoption of SFAS No. 159 will have on its financial statements.

Note 2. GeoLogic Solutions, Inc. Acquisition

On January 31, 2008, the Company acquired all of the outstanding stock of GeoLogic Solutions, Inc. The results of operations of GeoLogic Solutions, Inc. have been included in the Company’s consolidated results of operations since the date of acquisition. GeoLogic Solutions, Inc.

provides mobile communications and tracking systems for the transportation industry. The acquisition enhanced the Company’s product portfolio and broadened its addressable market.

The total purchase price included $15.3 million in cash, 90,689 shares of common stock (valued at $0.3 million) of the Company and $2.0 million in debt obligations to the seller of GeoLogic Solutions, Inc. The Company also incurred $1.6 million of transaction costs in connection with the acquisition. The Company incurred additional debt of $16.2 million in connection with the acquisition of GeoLogic Solutions, Inc.

The components of the purchase price and the preliminary allocation to the assets and liabilities based on their estimated fair values at the date of acquisition are as follows (in thousands):

Cash						$	15,277
Debt obligations							2,000
Common stock							300
Transaction costs							1,557
Total purchase price						$	19,134
Cash		$	557
Other current assets			6,589
Property and equipment			578
Intangible and other assets			1,690
Current liabilities			(5,482	)
Net assets							3,932
Acquired customer contracts							13,500
Goodwill							1,702
Total						$	19,134

Unaudited pro forma results of operations for the three and nine month periods ended June 30, 2008 and 2007, as if the purchase had occurred at the beginning of the periods indicated are as follows (in thousands, except per share amounts):

		For the Three Months Ended								For the Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net sales		$	16,167			$	13,605			$	42,936			$	40,475
Net loss to common shareholders		$	(637	)		$	(3,484	)		$	(6,977	)		$	(13,924	)
Net loss per common share — basic and diluted		$	(0.08	)		$	(0.43	)		$	(0.84	)		$	(1.74	)
Weighted average common and common share equivalents — basic and diluted			8,411				8,050				8,293				7,999

Pro forma adjustments relate to amortization of intangible assets, interest expense resulting from acquisition financing and certain other adjustments. The above unaudited pro forma consolidated results of operations are for comparative purposes only and are not necessarily indicative of results that would have occurred had the acquisition been consummated as of the beginning of the periods presented, nor are they necessarily indicative of future results.

Note 3. Stock-Based Compensation

In February 2007 the Company adopted the 2007 Long Term Incentive and Stock Option Plan (the 2007 Plan). The 2007 Plan permits the granting of “incentive stock options” meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified options that do not meet the requirements of Section 422. Stock appreciation rights and restricted stock awards may also be granted under the 2007 Plan. A total of 500,000 shares of the Company’s common stock were originally reserved for issuance pursuant to options granted or shares awarded under the 2007 Plan. The 2007 Plan has an evergreen provision in which the maximum number of Shares that may be issued under the 2007 Plan shall be cumulatively increased on January 1, 2008 and on each January 1 thereafter for nine years by the lesser of (i) 500,000 Common Shares, (ii) 3% of the Company’s outstanding Common Shares, on an as-converted basis, as of the preceding December 31 and (iii) a number of Common Shares determined by the Board or Committee. The Company has 79,625 shares authorized and available for future equity awards as of June 30, 2008. Generally, the options that are granted under the 2007 Plan are exercisable for a period of five to ten years from the date of grant and vest over a period of up to three years from the date of grant.

Stock Options

Effective October 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS 123(R) superseded the Company’s previous accounting methodology using the intrinsic value method under APB Opinion No. 25.

The Company adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, compensation expense is recognized for periods subsequent to adoption date for all share-based awards granted prior to, but not yet vested, as of September 30, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS 123 and compensation expense for all share-based awards granted subsequent to September 30, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s financial statements for periods prior to adoption have not been restated to reflect the impact of SFAS 123(R).

The fair value of each option is estimated at the grant date using the Black-Scholes option-pricing model. The weighted average fair value at the date of grant and the assumptions used to determine such values are indicated in the following table (number of shares in thousands):

		For the Three Months Ended								For the Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Number of shares granted			27				25				323				879
Fair value		$	0.87			$	1.30			$	0.81			$	1.81
Risk-free interest rate			2.47	%			4.65	%			2.24	%			4.65	%
Expected volatility			29.88	%			31.91	%			30.88	%			3.57	%
Expected life (in years)			3.5				3.5				3.7				4.1
Dividend yield			—				—				—				—

The Company estimates the volatility of the common stock at the date of grant based on a historical volatility rate, consistent with SFAS 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB 107). The decision to use historical volatility was based upon the lack of traded common stock options. The expected term is estimated consistent with the simplified method identified in SAB 107, whose use was extended by Securities and Exchange Commission Staff Accounting Bulletin No. 110 (SAB 110). The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the options. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. The fair value of stock options are amortized over the vesting period of the awards utilizing a straight-line method.

The following table summarizes information relating to stock option activity for the period ended June 30, 2008 (number of shares in thousands):

						Weighted
						Average
		Shares				Exercise Price
Options outstanding at September 30, 2007			1,232			$	5.01
Granted			323				3.05
Exercised			(15	)			2.98
Cancelled			(234	)			4.55
Options outstanding at June 30, 2008			1,306			$	4.63

Total intrinsic value of stock options exercised during the nine months ended June 30, 2008 was $2,000. The intrinsic value of stock options outstanding and stock options outstanding and exercisable was $240,000 and $22,000 as of June 30, 2008, respectively. Information regarding options outstanding and exercisable at June 30, 2008 is as follows (number of shares in thousands):

		Options Outstanding												Options Exercisable
						Weighted												Weighted
						Average				Weighted								Average				Weighted
Range of		Number				Remaining				Average								Remaining				Average
exercise		of				Contractual				Exercise				Number				Contractual				Exercise
price		Shares				Life (Years)				Price				of Shares				Life (Years)				Price
$2.85 - $2.95			270				5.1			$	2.99				25				9.5			$	2.99
$3.15 - $3.99			83				3.7				3.60				31				2.4				3.92
$4.33 - $4.98			96				4.5				4.79				46				5.4				4.82
$5.03 - $5.40			857				4.4				5.23				316				4.4				5.22
			1,306				4.5			$	4.63				418				4.7			$	4.94

The Company recognizes compensation expense ratably over the vesting period of the options. Compensation expense was $155,000 and $159,000 for the three months ended June 30, 2008 and 2007, respectively; and $527,000 and $371,000 for the nine months ended June 30, 2008 and 2007, respectively. As of June 30, 2008, there was approximately $970,000 of total unrecognized compensation costs related to stock option awards that are expected to be recognized over a weighted average period of 1.8 years.

Restricted Stock Awards

The Company currently grants restricted shares of common stock in addition to stock options as part of its long-term incentive compensation to employees. The fair value of restricted stock awards is determined based on the closing market price of our stock on the date of grant. Restricted stock awards vests over a period of one to six years for employees and vests immediately for directors. Shares granted may be sold once vested.

The following table summarizes information relating to restricted stock activity for the period ended June 30, 2008 (number of shares in thousands):

						Weighted
						Average Grant
		Shares				Date Fair Value
Restricted stock outstanding at September 30, 2007			361			$	5.22
Granted			151				3.04
Vested			(163	)			4.97
Forfeited			(10	)			5.03
Restricted stock outstanding at June 30, 2008			339			$	4.37

The Company recognizes compensation expense ratably over the vesting period of the restricted stock. Compensation expense was $200,000 and $411,000 for the three months ended June 30, 2008 and 2007; and $711,000 and $1,126,000 for the nine months ended June 30, 2008 and 2007, respectively. The weighted average grant date fair value of restricted stock awards was $3.04 and $5.34 for the nine months ended June 30, 2008 and 2007, respectively.

At June 30, 2008, the Company had $1,206,000 of unrecognized compensation costs related to non-vested restricted stock awards that are expected to be recognized over a weighted average period of 2.2 years.

Note 4. Commitments

401(k) Plan

The Company has a 401(k) plan covering substantially all employees and the plan is operated on a calendar year basis. The Company provides an employer matching contribution equal to 50% of an employee’s contribution for employee deferrals of up to 6% of their compensation. Matching contributions were $95,000 and $40,000 for the three months ended June 30, 2008 and 2007, respectively, and $203,000 and $111,000 for the nine months ended June 30, 2008 and 2007, respectively.

Note 5. Financing Arrangements

In connection with the financing of the acquisition of GeoLogic Solutions, Inc., the Company entered into a three-year secured credit facility with Silicon Valley Bank (“SVB”) consisting of a $10.0 million revolving line of credit bearing interest at a floating rate equal to 0.5% over SVB’s Prime Rate. The credit facility is secured by substantially all the assets of the Company. Interest is paid monthly in arrears, and the entire amount of any outstanding principal is due at maturity on January 30, 2011. The credit agreement contains certain financial covenants which impose a minimum level of net worth and fixed charge coverage ratio.

Also in connection with the acquisition of GeoLogic Solutions, Inc., the Company entered into a four year secured credit facility consisting of an $8.0 million term loan with Partner’s for Growth II, L.P. (“PFG”) bearing interest at a fixed rate of 14.5%, subject to adjustment under various circumstances. Under the terms of the loan agreement, the Company must comply with financial covenants specifying minimum levels of net worth and fixed charge coverage ratio. The loan is secured by substantially all the assets of the Company and is subordinate to the security interest of SVB. Interest is payable monthly, and the Company is required to make periodic principal payments on specified dates over the term of the loan with the remainder of the unpaid principal due at maturity on January 31, 2012.

In addition to the preceding sources of financing, the Company also issued $2.0 million of debt obligations to the seller (the “Seller Notes”) in conjunction with the acquisition of GeoLogic Solutions, Inc. The Seller Notes bear interest at an annual rate of 11% and mature in full on January 31, 2009. A portion of the Seller Notes with a principal amount of $525,000 are convertible into common stock of the Company upon maturity, in the event the Company does not repay such Seller Notes in full. The conversion amount for such Seller Notes is $3.308 per share. The Seller Notes are subordinate to the security interests of SVB and PFG.

Long- term obligations and notes payable consist of the following (in thousands):

		June 30, 2008				September 30, 2007
Senior secured revolving credit facility		$	8,223			$	—
Secured term loan			8,000				—
Capitalized leases			253				381
			16,476				381
Less current maturities			2,111				161
Total long-term obligations		$	14,365			$	220
Subordinated notes		$	1,475			$	—
Subordinated convertible notes			525				—
Total notes payable		$	2,000			$	—

Note 6. Shareholders’ Equity

Common Stock

The Company is authorized to issue up to 25,000,000 shares of common stock.

Preferred Stock

The Company has authorized an undesignated class of preferred stock of 10,000,000 shares. The Board of Directors can issue preferred stock in one or more series and fix the terms of such stock without shareholder approval. Preferred stock may include the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions.

Series B

The Company’s Board of Directors has authorized the sale of up to 1,700,000 shares of Series B Preferred Stock through a private placement. In December 2003, the Company sold 1,613,000 shares of Series B Preferred Stock for $4,097,000, or $2.54 per share. Each share of the Preferred Stock is convertible into one share of the Company’s common stock. The price per share of the Series B Preferred Stock and the conversion price for the common stock were equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series B Preferred Stock pays an annual cumulative dividend of 4% of the original issue price (payable semi-annually). The dividend is payable in additional shares of Series B Preferred Stock rather than cash, at the option of the holders, and has a non-participating preferred liquidation right equal to the original issue price plus accrued unpaid dividends.

For the nine months ended June 30, 2008 and 2007, the Company issued 74,885 and 71,877 shares, respectively, of Series B Preferred Stock for payment of accrued dividends. Based on the market value of the Company’s common stock on the date of the dividend payment, the payment of the dividend in additional shares of Series B Preferred Stock resulted in a non-cash dividend of $260,000 and $342,000, for the nine months ended June 30, 2008 and 2007, respectively.

The Series B Preferred Stock is redeemable at the option of the holder at 100% of the original purchase price plus accrued and unpaid dividends at any time after five years from the date of issuance, or at any time if there is a significant adverse judgment against the Company, the Company defaults on its debts or files for bankruptcy, or in the event of a change of control. However, the Company may decline to redeem any or all of the Preferred Stock at its sole option and discretion, and in such case the annual cumulative dividend on the Series B Preferred Stock will increase from 4% to 10%. The Company may redeem the Series B Preferred Stock at its option after five years from the date of issuance if the market price of its common stock is greater than three times the conversion price on each of the sixty consecutive days prior to the redemption date.

Series C

The Company’s Board of Directors has authorized the sale of up to 1,400,000 shares of Series C Preferred Stock through a private placement. In September 2005, the Company sold 1,269,000 shares of Series C Preferred Stock for $5,000,000, or $3.94 per share. Each share of the Series C Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series C Preferred Stock and the conversion price for the common stock is equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series C Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series C Preferred Stock). In that case, the Series C Preferred Stock pays an annual cumulative dividend of 4% of the original issue price (payable in cash). The Series C Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to our common stock and junior to the Series B Preferred Stock. The Company may redeem the Series C Preferred Stock at its option after five years from the date of issuance at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.

Series D

The Company’s Board of Directors has authorized the sale of up to 1,600,000 shares of Series D Preferred Stock through a private placement. In June 2007, the Company sold 1,567,000 shares of Series D Preferred Stock for $6,000,000, or $3.83 per share. Each share of the Series D Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series D Preferred Stock and the conversion price for the common stock is equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series D Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series D Preferred Stock). In that case, the Series D Preferred Stock pays an annual cumulative dividend of 4% of the original issue price (payable in cash). The Series D Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to our common stock and junior to the Series B and Series C Preferred Stock. The Company may redeem the Series D Preferred Stock at its option after five years from the date of issuance

at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.

Common Stock Warrants

The Company has issued warrants for the purchase of common stock to directors, consultants and placement agents. Compensation expense associated with the warrants has not been material. The Company has also issued warrants as a component of preferred stock offerings and debt financing.

The following table summarizes information relating to common stock warrants for the period ended June 30, 2008 (number of shares and intrinsic value in thousands):

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
		Shares				Price				Life (Years)				Value
Warrants outstanding at September 30, 2007			1,538			$	3.61				2.89			$	44
Granted			457				3.31				4.59
Exercised			—				—				—
Cancelled			—				—				—
Warrants outstanding at June 30, 2008			1,995			$	3.54				2.85			$	683

During the three months ended March 31, 2008, 457,000 warrants were issued in connection with the debt incurred to finance the acquisition of GeoLogic Solutions, Inc. As of June 30, 2008, all common stock warrants were exercisable.

Note 7. Net Loss Per Share

Basic net loss per share is computed based on dividing the net loss applicable to common shareholders by the weighted average number of common shares outstanding less unvested restricted stock for the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other obligations to issue common stock such as options, warrants or convertible preferred stock, were exercised or converted into common stock that then shared in the earnings/(losses) of the Company. For all periods presented, diluted net loss per share is equal to basic net loss per share because the effect of including such securities or obligations would have been anti-dilutive.

At June 30, 2008 and 2007, the Company had options and warrants outstanding to purchase a total of 3,301,000 and 2,758,000 shares of common stock, at a weighted-average exercise price of $3.97 and $4.24, respectively. Because the Company incurred net losses for the three and nine months ended June 30, 2008 and 2007, the inclusion of potential common shares in the calculation of diluted net loss per common share would have an anti-dilutive effect.

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

Forward-looking Statements

Except for the historical information contained herein, the matters discussed in this Report on Form 10-Q are forward-looking statements involving risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Numerous factors, risks and uncertainties affect the Company’s operating results and could cause the Company’s actual results to differ materially from forecasts and estimates or from any other forward-looking statements made by, or on behalf of, the Company, and there can be no assurance that future results will meet expectations, estimates or projections. Risks and uncertainties about us include, but are not limited to, the following:

	•		although we expect to incur operating losses in the current fiscal year, these losses may continue beyond the expected timeframe or in excess of the expected magnitude, and we may be dependent upon external investment to support our operations during periods in which we incur operating losses;
	•		we may encounter unexpected costs or difficulties relating to the integration of the XATA and GeoLogic Solutions, Inc. businesses;
	•		we may be unable to adapt to technological change quickly enough to grow or to retain our customer base;
	•		we will continue to be dependent upon positioning systems and communication networks owned and controlled by others, and accordingly, their problems may adversely impact us;
	•		for the foreseeable future, we are dependent upon the continued receipt and fulfillment of new orders for our current products;
	•		our growth and profitability depend on our timely introduction and market acceptance of new products, our ability to continue to fund research and development activities, and our ability to establish and maintain strategic partner relationships.

Further information regarding these and other risks is included in “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2007, in this Form 10-Q and in our other filings we make with the SEC.

Overview

XATA is a leading provider of fleet management solutions to the truck transportation industry. Our software-as-a-service (SaaS) fleet solution and value-added services enable customers to enhance the productivity of fleet operations across the entire supply chain, resulting in reduced costs, improved regulatory compliance and improved driver safety.

Over the past two decades, XATA has partnered with the nation’s largest private fleets and leasing companies, including Sysco, Kellogg’s snack division, xpedx, Georgia-Pacific and Penske, to find and develop technologies that provide information about their fleets and transform that data into actionable intelligence.

On January 31, 2008, XATA completed its acquisition of GeoLogic Solutions, Inc., which provides the commercial trucking industry with wireless asset management solutions in the for-hire segment of the over-the-road transportation sector. GeoLogic Solutions, Inc.’s mobile communications and tracking system, MobileMax™ (“MobileMax”), has approximately 35,000 licensed users across North America.

XATA pioneered innovations, such as learned standards and paperless driver logs. We engineer software that improves overall transportation operations and integrates fleet data with back-office billing, payroll and routing systems.

Technology, People, Processes

XATA takes a three-prong approach to meeting its customer’s fleet management needs:

	•		Technology. Our web-based, on-demand scalable software includes a variety of web-based enterprise applications, including XATANET ® , our flagship application. XATANET provides critical real-time information about our customers’ fleets, allows for paperless driver logs and provides summary and granular reports on driver and vehicle performance. XATANET can also integrate with back-office applications, for a seamless flow of information, and our software works with a variety of in-cab communications devices.
	•		People. Several XATA employees have been with our company for more than 15 years, providing a thorough understanding of the trucking industry. With employee expertise in safety, fleet management and technology, XATA is able to provide consultation services to help organizations implement best practices for fleet productivity and develop specific customer hardware and reporting requirements.
	•		Processes. All XATA processes are designed to make managing fleets easier. Drawing on hundreds of successful implementations with a wide variety of fleets including multibillion-dollar organizations, XATA carefully plans each phase of the implementation and follows well established methodologies. The process begins with assessing our customers’ objectives. Then, we develop a detailed implementation schedule that includes all aspects of the project, from implementation to conversion, integration, training and problem solving.

Critical Accounting Policies

Accounting policies, methods and estimates are an integral part of our financial statements and are based upon management’s current judgments. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements. Note 1 of the Notes to Financial Statements includes a summary of the significant accounting

policies and methods we use. The following is a discussion of what we believe to be the most critical of these policies and methods.

Revenue Recognition. We derive our revenue from sales of hardware, software and related services, and from application service contracts. We recognize revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition , as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions , and Securities and Exchange Commission Staff Accounting Bulletin (SAB) 104, Revenue Recognition in Financial Statements . Software revenue is recognized under SOP 97-2 and SAB 104 when (i) persuasive evidence of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has occurred, as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or determinable and payable within twelve months, and (iv) collectibility is probable and supported by credit checks or past payment history. Pursuant to certain contractual arrangements, revenues are recognized for completed systems held at our warehouse pending the receipt of delivery instructions from the customer.

With regard to software arrangements involving multiple elements, the Company allocates revenue to the software and service elements based on the relative fair value of each element with the residual amount allocated to the system revenue which is recognized upon delivery. The Company’s determination of fair value relating to the software and service elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to consulting services and post-contract customer support (PCS) components of its license arrangements. The Company sells its consulting services separately, and has established VSOE on this basis. VSOE for PCS components are determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from licenses is recognized upon delivery, and revenue from PCS components are recognized ratably over the applicable term, typically one year.

Contract terms of some of our multiple element agreements did not meet the requirements described in Emerging Issues Task Force (EITF) 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware , to account for it under SOP 97-2 and SAB 104 and resulted in the recognition of all revenue ratably over the term of the agreement. During the fiscal year ending September 30, 2006, we changed the terms of all new XATANET contracts, such that all the requirements of EITF 00-03 related to software delivery are met and the contracts are accounted for under SOP 97-2. For these new XATANET contracts, revenue is recognized based on the multiple element arrangement accounting described above.

Allowance for doubtful accounts and sales returns. We grant credit to customers in the normal course of business. The majority of our accounts receivable and investment in sales-type leases receivable are due from companies with fleet trucking operations in a variety of industries. In general, we do not require collateral or other security to support accounts receivable, although sales-type leases receivable are secured by a retained security interest in the leased equipment.

Accounts receivable are typically due from customers within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts and sales returns. Accounts receivable outstanding longer than the contractual payment terms are considered past due. To reduce credit risk, management performs ongoing evaluations of its customers’ financial condition. We determine the adequacy of the allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The bad debt expense is included as a selling, general and administrative expense. The balance of the allowance for doubtful accounts at June 30, 2008 and September 30, 2007 was $635,000 and $130,000, respectively.

We determine our allowance for sales returns by considering several factors, including history of prior sales credits issued. We regularly assess the allowance for sales returns and increase it as needed. When we accept a product return or issue a sales credit for which we had specifically increased the allowance, we write-off the associated accounts receivable and decrease the allowance for sales returns. At June 30, 2008 and September 30, 2007, the Company had an allowance for sales returns of $117,000 and $126,000, respectively.

Goodwill and Intangible Assets. The Company records goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company reviews goodwill for impairment at least annually or more frequently if an event occurs indicating the potential for impairment. Intangible assets are carried at cost less accumulated amortization. The Company amortizes the cost of identified intangible assets on a straight-line basis over their expected economic lives. In accordance with SFAS No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ,” the Company reviews intangible assets that have finite useful lives when an event occurs indicating the potential for earlier impairment.

The Company reviews for impairment using facts or circumstances, either internal or external, indicating that it may not recover the carrying value of the asset. The Company measures impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values.  The Company measures fair value under SFAS No. 144, which is generally based on the present value of estimated future cash flows. The Company’s analysis is based on information available and on assumptions and projections it considers reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company’s best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Product Warranties . We sell our hardware products with a limited warranty, with an option to purchase extended warranties. We provide for estimated warranty costs at the time of sale and for other costs associated with specific items at the time their existence and amount are determinable. Factors affecting the product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. We periodically assess the adequacy of the product warranty liability based on changes in these factors. At June 30, 2008

and September 30, 2007, the Company had an accrual for product warranties of $1,105,000 and $911,000, respectively.

Capitalized system development costs . System development costs incurred after establishing technological feasibility are capitalized as capitalized system development costs in accordance with Statement of Financial Accounting Standards No. 86, (SFAS No. 86), Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed . Costs that are capitalized are amortized to cost of goods sold beginning when the product is first released for sale to the general public. Amortization is at the greater of the amount computed using the ratio of current gross revenues for the product to the total of current and anticipated future gross revenues or the straight-line method over the estimated economic life of the product.

Research and development costs. We charge expenditures for research and development activities to expense as incurred. Such expenses include product development costs and costs related to the Company’s internally developed software systems, which have not met the capitalization criteria of Statement of Financial Accounting Standards SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.

Income taxes . We account for income taxes following the provisions of SFAS No. 109, Accounting for Income Taxes . SFAS No. 109 requires that deferred income taxes be recognized for the future tax consequences associated with differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable earnings. The effect of changes in tax rates is recognized in the period in which the rate change occurs. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. We have provided a full valuation allowance against the net deferred tax assets as of June 30, 2008 and September 30, 2007.

Results of Operations for the three months and nine months ended June 30, 2008 and 2007

The following table sets forth certain Statements of Operations data as a percentage of net sales:

		Three months ended								Nine months ended
		June 30,								June 30,
		2008				2007				2008				2007
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			47.2	%			46.4	%			48.3	%			45.1	%
Selling, general and administrative expenses			38.5	%			45.3	%			43.6	%			42.3	%
Research and development expenses			9.9	%			13.3	%			11.3	%			13.6	%
Operating loss			(1.2	%)			(12.3	%)			(6.7	%)			(10.8	%)
Net loss			(3.9	%)			(11.0	%)			(8.3	%)			(9.6	%)

Net Sales

Net sales increased 102.5% to $16.2 million for the three months ended June 30, 2008 compared to $8.0 million for the same period in fiscal 2007. The increase in sales for the three months

ended June 30, 2008 was driven by an 84.4% increase in XATANET platform revenue reflecting an increase in XATANET subscription revenue of 50.9%, and five months of sales relating to the acquisition of GeoLogic Solutions, Inc. Comparable net sales, excluding GeoLogic Solutions, Inc. sales, for the three months ended June 30, 2008 increased by 36.3% or $2.9 million versus the same period of fiscal 2007 as the Company’s legacy OpCenter product sales continue to decline consistent with expectations as new and existing customers launch or migrate to XATANET systems. Net sales derived from recurring revenue increased 157.4% for the three months ended June 30, 2008 compared to the same period in fiscal 2007, including recurring revenue associated with the GeoLogic Solutions, Inc. acquisition. Sales from recurring products continue to increase as the result of increasing unit sales and low customer attrition. For the three months ended June 30, 2008, recurring revenue contributed 44.6% of total revenue compared to 35.1% of total revenue for the comparable period in fiscal 2007.

Net sales increased 50.4% to $36.0 million for the nine months ended June 30, 2008 compared to $23.9 million for the same period in fiscal 2007. Net sales for the nine months ended June 30, 2008 reflects the additional sales relating to the acquisition of GeoLogic Solutions, Inc. For the nine months ended June 30, 2008, comparable net sales, excluding GeoLogic Solutions, Inc. sales, increased by 14.8% or $3.5 million over the same period in fiscal 2007 reflecting strong XATANET sales partially offset set by the continuing decline in the Company’s legacy OpCenter product. The net sales for the nine months ended June 30, 2008 reflects an increase in XATANET subscription revenue of 47.0%. Sales derived from recurring revenue increased 106.9% for the nine months ended June 30, 2008 compared to the same period in fiscal 2007, including recurring revenue associated with the GeoLogic Solutions, Inc. acquisition. For the nine months ended June 30, 2008, recurring revenue contributed 44.9% of total revenue compared to 32.7% of total revenue for the comparable period in fiscal 2007.

Cost of Goods Sold

Cost of goods sold includes the direct product costs associated with fulfilling customer orders, warranty costs related to previously sold systems, communication and facility costs, product repair and refurbishment costs, and expenses associated with the enhancement of released products. Total cost of goods sold was $8.5 million for the three months ended June 30, 2008 compared to $4.3 million for the three months ended June 30, 2007. Gross margin as a percentage of net sales increased .8 percentage points to 47.2% for the three months ended June 30, 2008 versus 46.4% in the same period last year.

Total cost of goods sold was $18.6 million for the nine months ended June 30, 2008 compared to $13.1 million for the nine months ended June 30, 2007. Gross margin as a percentage of net sales increased 3.2 percentage points to 48.3% for the nine months ended June 30, 2008 versus 45.1% in the same period of fiscal 2007.

The improvement in gross margin for the three and nine months ended June 30, 2008 were driven by growth in the higher gross margin XATANET revenue and continuing growth in the higher margin recurring revenue products. The mix of revenue between system and subscription revenue has caused fluctuations in the quarter to quarter gross margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of employee wages in our support, sales and administration functions, marketing and promotional expenses, executive and administrative costs, accounting and professional fees, recruiting costs and provision for doubtful accounts. Selling, general and administrative expenses were $6.2 million and $15.7 million for the three months and nine months ended June 30, 2008, respectively. Selling, general and administrative expense reflects the increased size of the organization, quarterly amortization of $0.4 million relating to intangibles associated with the acquisition of GeoLogic Solutions, Inc. and investments in our brand strategy, professional services and direct sales model.

Research & Development Expenses

Research and development expenses consist of employee salaries and expenses related to development personnel and consultants, as well as expenses associated with software and hardware development. Research and development expenses were $1.6 million and $4.1 million for the three months and nine months ended June 30, 2008, respectively.

Interest Income and Expense

Interest income increased by $29,000 for the nine months ended June 30, 2008 as a result of additional interest income relating to sales type leases associated with the GeoLogic Solutions, Inc. acquisition offset by a decrease in the effective interest rates on investments compared to the same period of fiscal 2007.

Interest expense increased by $0.9 million for the nine months ended June 30, 2008 as the result of the $18.2 million of debt incurred to finance the acquisition of GeoLogic Solutions, Inc.

Income Taxes

No income tax benefit or expense was recorded for the nine months ended June 30, 2008 or 2007. Because we have had continued operating losses and do not have objectively verifiable positive evidence of future taxable income as prescribed by SFAS No. 109, we concluded that a full valuation allowance was appropriate. Realization of deferred tax assets is dependent on future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The amount of the net deferred tax asset considered realizable could be increased in the future if we return to profitability and actual future taxable income is higher than currently estimated. At September 30, 2007, we had federal net operating loss carryforwards of approximately $24.8 million.

Net Loss to Common Shareholders

We generated net losses to common shareholders of $3.2 million for the nine months ended June 30, 2008, compared to net losses to common shareholder of $3.3 million for the nine months ended June 30, 2007. The difference between net loss applicable to common shareholders and net loss relates to the paid dividends and deemed dividends to the holders of the Series B Preferred Stock.

Liquidity and Capital Resources

As of June 30, 2008, we held approximately $8.3 million in cash and cash equivalents, and working capital totaled $8.2 million. Cash used in operations was $2.2 million for the nine months ended June 30, 2008 driven by changes to working capital.

Cash used in investing activities of $19.0 million for the nine months ended June 30, 2008 reflects capital investments made for computer equipment and the new office facility and acquisition related expenditures.

Our Series B Preferred Stock prohibits payment of dividends to the holders of any other capital stock unless and until we have paid dividends accrued on the Series B Preferred Stock, which pays an annual cumulative dividend of 4% of the original issue price. At the option of the Series B Preferred Stock holders, such dividends are payable in additional shares of Series B Preferred Stock rather than cash. For the nine months ended June 30, 2008 and 2007, the Company issued 74,885 and 71,877 shares, respectively, of Series B Preferred Stock to the holders thereof for payment of accrued stock dividends. We are further restricted from dividend payments by our primary lender.

On January 31, 2008, the Company acquired all of the outstanding stock of GeoLogic Solutions, Inc. for a total purchase price consisting of $15.3 million in cash, 90,689 shares of common stock of the Company, and $2.0 million in Seller Notes. The Seller Notes bear interest at an annual rate of 11% and mature in full on January 31, 2009. A portion of the Seller Notes with a principal amount of $525,000 are convertible into common stock of the Company upon maturity, in the event the Company does not repay such Seller Notes in full. The conversion price for such Seller Notes is $3.308 per share.

In connection with financing the acquisition of GeoLogic Solutions, Inc., the Company entered into a three-year senior secured credit facility with Silicon Valley Bank (“SVB”) consisting of a $10.0 million revolving line of credit bearing interest at a floating rate equal to 0.5% over SVB’s Prime Rate. In addition, the Company entered into a four-year senior secured credit facility consisting of a total of $8.0 million in term loans from Partners for Growth II, L.P. (“PFG”) and SVB bearing interest at a fixed rate of 14.5%, subject to adjustment under various circumstances. In connection with these loans, the Company issued warrants to purchase a total of 457,144 shares of common stock of the Company to PFG and SVB. PFG and SVB paid an aggregate purchase price of $8,382 for these warrants, which have an exercise price of $3.31 per share and are exercisable anytime on or before January 30, 2013.

We believe our existing funds, debt facilities and vendor terms will provide adequate cash to fund operating needs and remain compliant with our debt covenants for the foreseeable future. However, a protracted decline in revenue, significant revenue growth or an increase in product development in the near term may require us to obtain external funding. No assurance can be given that we will be able to secure any required additional financing when needed, or that such financing, if obtained at all, will be on terms favorable or acceptable to us. If additional financing is required and we are unable to secure such additional financing, we may need to implement measures to slow our growth or reduce operating costs, including reductions to product development, marketing and other operating activities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We have no history of investing in derivative financial instruments, derivative commodity instruments or other such financial instruments, and do not anticipate making such investments in the future. Transactions with international customers are entered into in U.S. dollars, precluding the need for foreign currency hedges. Additionally, we invest in money market funds and fixed rate U.S. government and corporate obligations, which experience minimal volatility. Thus, the exposure to market risk is not material.

In connection with financing the acquisition of GeoLogic Solutions, Inc., the Company entered into a three-year secured credit facility with Silicon Valley Bank (“SVB”) consisting of a $10.0 million revolving line of credit bearing interest at a floating rate equal to 0.5% over SVB’s Prime Rate. As a result of this financing agreement, the Company is subject to market risk based on interest rate volatility.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting

On June 30, 2008, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Rule 13a-15(e)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.

There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As previously announced, we acquired GeoLogic Solutions, Inc. during the second quarter of fiscal 2008. We are continuing to evaluate the internal controls over financial reporting associated with this acquisition and therefore any material changes that may result from this acquisition have not been disclosed in this report. We intend to disclose all material changes resulting from this acquisition within, or prior to the time of, our first annual assessment of internal control over financial reporting that is required to include this entity.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

     None

Item 1A. Risk Factors.

In addition to the other information set forth in this report and our other SEC filings, you should carefully consider the factors discussed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2007, as updated by our subsequent SEC filings, which could have a material impact on our business, financial condition or results of operations. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

     None

Item 3. Defaults Upon Senior Securities.

     None

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

     None

Item 5. Other Information.

     None

Item 6. Exhibits.

	10.1		Severance Agreement between Mark E. Ties and the Company dated May 8, 2008
	31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2		Certification 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

SIGNATURES

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

Dated: August 8, 2008		XATA Corporation
		(Registrant)
		by:		/s/ Mark E. Ties   Mark E. Ties Chief Financial Officer
				(Signing as Principal Financial and Accounting Officer, and as Authorized Signatory of Registrant)

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