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, 2007 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)
151 E. Cliff Road, Suite 10, Burnsville, Minnesota 55337
(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)

Check whether the issuer (1) 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

APPLICABLE ONLY TO CORPORATE ISSUERS

As of August 2, 2007, the following securities of the Registrant were outstanding: 8,516,130 shares of Common Stock, $.01 par value per share, 1,851,024 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.	Financial Statements:
		Balance Sheets as of June 30, 2007 and September 30, 2006		4
		Statements of Operations for the Three and Nine Months Ended June 30, 2007 and 2006		5
		Statements of Changes in Shareholders’ Equity as of June 30, 2007 and September 30, 2006		6
		Statements of Cash Flows for the Nine Months Ended June 30, 2007 and 2006		7
		Notes to Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations		18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
	Item 4.	Controls and Procedures		24
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		24
	Item 1A.	Risk Factors		24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
	Item 3.	Defaults upon Senior Securities		25
	Item 4.	Submission of Matters to a Vote of Security Holders		25
	Item 5.	Other Information		25
	Item 6.	Exhibits		25
SIGNATURES
EXHIBITS
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

3

XATA CORPORATION

STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

	Three months ended						Nine months ended
	June 30,						June 30,
	2007			2006			2007			2006
Net sales	$	7,984		$	7,447		$	23,920		$	22,288
Costs and expenses
Cost of goods sold		4,282			4,437			13,133			12,739
Selling, general and administrative		3,620			2,580			10,115			7,895
Research and development		1,061			1,084			3,258			3,028
Total costs and expenses		8,963			8,101			26,506			23,662
Operating loss		(979	)		(654	)		(2,586	)		(1,374	)
Net interest income		104			95			280			129
Loss before income taxes		(875	)		(559	)		(2,306	)		(1,245	)
Income tax expense		—			—			—			—
Net loss		(875	)		(559	)		(2,306	)		(1,245	)
Preferred stock dividends		(46	)		(45	)		(138	)		(133	)
Preferred stock deemed dividends		(722	)		(92	)		(817	)		(144	)
Net loss to common shareholders	$	(1,643	)	$	(696	)	$	(3,261	)	$	(1,522	)
Net loss per common share — basic and diluted	$	(0.21	)		($0.09	)	$	(0.41	)		($0.21	)
Weighted average common and common share equivalents
Basic and Diluted		7,959			7,539			7,908			7,415

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

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XATA CORPORATION

BALANCE SHEETS

(in thousands, except per share amounts)

	June 30,			September 30,
	2007			2006
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	14,241		$	6,354
Accounts receivable, less allowances for doubtful accounts and sales returns of $143 and $278		3,709			5,260
Inventories		1,926			2,212
Deferred product costs		1,006			3,433
Prepaid expenses		356			270
Total current assets		21,238			17,529
Equipment and leasehold improvements, net		1,138			1,316
Captialized system development costs, net		1,177			1,191
Deferred product costs, net of current portion		1,856			1,687
Total assets	$	25,409		$	21,723
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term obligations	$	103		$	94
Accounts payable		1,464			1,688
Accrued expenses		2,220			2,674
Deferred revenue		3,685			6,728
Total current liabilities		7,472			11,184
Long-term obligations, net of current portion		98			88
Deferred revenue, net of current portion		6,745			5,261
Total liabilities		14,315			16,533
Shareholders’ Equity Preferred stock, no par, 10,000 shares authorized:
Series B, 4% convertible, 2,250 shares designated; shares issued and outstanding: 1,851 at June 30, 2007 and 1,779 at September 30, 2006		4,921			4,579
Series C, convertible, 1,400 shares designated; 1,269 shares issued and outstanding at June 30, 2007 and September 30, 2006		4,845			4,845
Series D, convertible, 1,600 shares designated; 1,567 shares issued and outstanding at June 30, 2007 and 0 at September 30, 2006		5,931			—
Common stock, par value $0.01 per share; 25,000 shares authorized; shares issued and outstanding: 8,516 at June 30, 2007 and 7,963 at September 30, 2006		85			80
Additional paid-in capital		25,233			23,246
Unearned stock based compensation		—			(900	)
Accumulated deficit		(29,921	)		(26,660	)
Total shareholders’ equity		11,094			5,190
Total liabilities and shareholders’ equity	$	25,409		$	21,723

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

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XATA CORPORATION

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

PERIODS ENDED JUNE 30, 2007 AND SEPTEMBER 30, 2006

(in thousands)

(Unaudited)

							Series B				Series C				Series D				Additional			Unearned
	Common Stock						Preferred Stock				Preferred Stock				Preferred Stock				Paid-In			Stock-Based			Accumulated
	Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount		Capital			Compensation			Deficit			Total
Balance, September 30, 2005		7,549		$	76			1,710	$	4,260		1,269	$	4,845		—	$	—	$	21,458		$	(1,007	)	$	(24,595	)	$	5,037
Common stock issued on exercise of options		344			3			—		—		—		—		—		—		1,255						—			1,258
Common stock issued on exercise of warrants		9			—			—		—		—		—		—		—		—						—			—
Issuance of restricted shares of common stock		199			2			—		—		—		—		—		—		963			(965	)					—
Amortization of unearned stock based compensation		—			—			—		—		—		—		—		—		—			566			—			566
Elimination of unearned compensation related to terminated employees		—			—			—		—		—		—		—		—		(506	)		506			—			—
Forfeiture of restricted shares of common stock		(138	)		(1	)		—		—		—		—		—		—		1			—			—			—
Issuance of common stock warrants		—			—			—		—		—		—		—		—		75			—			—			75
Preferred stock dividends		—			—			69		175		—		—		—		—		—			—			(178	)		(3	)
Preferred stock deemed dividends		—			—			—		144		—		—		—		—		—			—			(144	)		—
Net loss		—			—			—		—		—		—		—		—		—			—			(1,743	)		(1,743	)
Balance, September 30, 2006		7,963			80			1,779		4,579		1,269		4,845		—		—		23,246			(900	)		(26,660	)		5,190
Common stock issued on exercise of options		14			—			—		—		—		—		—		—		53			—			—			53
Issuance of restricted shares of common stock		450			4			—		—		—		—		—		—		(4	)		—						—
Elimination of unearned compensation		—			—			—		—		—		—		—		—		(900	)		900			—			—
Stock based compensation		—			—			—		—		—		—		—		—		1,496			—			—			1,496
Forfeiture of restricted shares of common stock		(23	)		—			—		—		—		—		—		—		—			—			—			—
Purchase of common stock		112			1			—		—		—		—		—		—		604			—			—			605
Issuance of preferred stock and warrants		—			—			—		—		—		—		1,567		5,273		738			—			—			6,011
Preferred stock dividends		—			—			72		183		—		—		—		—		—			—			(138	)		45
Preferred stock deemed dividends		—			—			—		159		—		—		—		658		—			—			(817	)		—
Net loss		—			—			—		—		—		—		—		—		—			—			(2,306	)		(2,306	)
Balance, June 30, 2007		8,516		$	85			1,851	$	4,921		1,269	$	4,845		1,567	$	5,931	$	25,233		$	—		$	(29,921	)	$	11,094

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

6

XATA CORPORATION

STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine months ended
	June 30,
	2007			2006
Cash provided by operating activities
Net loss	$	(2,306	)	$	(1,245	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and impairment costs		653			303
Issuance of warrants for services rendered		33			25
Stock based compensation		1,497			414
Changes in assets and liabilities:
Accounts receivable, net		1,551			2,968
Inventories		286			(438	)
Deferred product costs		2,258			(196	)
Prepaid expenses		(86	)		(139	)
Accounts payable		(224	)		126
Accrued expenses		(410	)		332
Deferred revenue		(1,559	)		1,897
Net cash provided by operating activities		1,693			4,047
Cash used in investing activities
Purchase of equipment and leasehold improvements		(202	)		(695	)
Additions to system development costs		(160	)		(593	)
Net cash used in investing activities		(362	)		(1,288	)
Cash provided by financing activities
Borrowings on bank line of credit		—			200
Payments on bank line of credit		—			(2,000	)
Borrowings on long-term obligations		—			49
Payments on long-term obligations		(80	)		(57	)
Proceeds from issuance of common stock		605			—
Proceeds from issuance of preferred stock and warrants		5,978
Proceeds from options and warrants exercised		53			846
Net cash provided by (used in) financing activities		6,556			(962	)
Increase in cash and cash equivalents		7,887			1,797
Cash and cash equivalents
Beginning		6,354			6,473
Ending	$	14,241		$	8,270
Supplemental disclosures of cash flow information
Cash payments for interest	$	17		$	79
Supplemental schedule of noncash investing and financing activities
Issuance of restricted stock	$	—		$	966
Preferred stock deemed dividends		817			144
Unearned compensation for terminated employees		—			158
Preferred stock dividends payable		16			15
Preferred stock dividends paid		183			175
Equipment purchased under capital lease		98			212

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

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NOTES TO FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

Presentation

The accompanying unaudited financial statements were prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in 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 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 financial statements should be read in conjunction with the Company’s financial statements and notes thereto in its Form 10-KSB for the year ended September 30, 2006 and Annual Report to Shareholders filed with the SEC.

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) 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 the Company’s warehouse pending the receipt of delivery instructions from the customer. At September 30, 2006, the Company had approximately $20,000 of systems on hand that had been billed to those customers awaiting specific delivery instructions. At June 30, 2007, all systems that had been billed to customers had been shipped.

With regard to software arrangements involving multiple elements, the Company allocates revenue to each element based on the relative fair value of each element. The Company’s determination of fair value of each element 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.

Prior to January 1, 2006, certain Company software sales included application service contracts. The terms of those contracts did not meet the delivery requirements of SOP 97-2 and SAB 104 and resulted in the recognition of all revenue ratably over the term of the agreement. During fiscal 2006 and going forward, the Company changed the terms of all new contracts, such that all the requirements of SOP 97-2 and SAB 104 are met, including delivery. For these new contracts, revenue is recognized based on the multiple element arrangement accounting described above.

8

The Company accounts for the resale of certain satellite and other wireless communication services in conjunction with its products based on the gross amount billed to customers.

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.

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 and accounts 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 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. 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 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.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short-term nature of these instruments.

Inventories

Inventories consist of parts and accessories and finished goods, 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):

9

	June 30,		September 30,
	2007		2006
Parts and accessories	$	1,394	$	786
Finished goods		532		1,426
Total inventories	$	1,926	$	2,212

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,
	2007			2006
Office furniture and equipment	$	2,832		$	2,543
Engineering and manufacturing equipment		574			564
Leasehold improvements		35			34
		3,441			3,141
Less: accumulated depreciation		(2,303	)		(1,825	)
Equipment and leasehold improvements, net	$	1,138		$	1,316

Depreciation for income tax reporting purposes are computed using accelerated methods.

Capitalized System Development Costs

System development costs incurred after establishing technological feasibility are capitalized and amortized to cost of goods sold beginning when the product is first released for sale to the general public. Amortization is 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 (two to five years). There was no accumulated amortization at June 30, 2007 or September 30, 2006.

For the nine months ended June 30, 2007, the Company expensed $174,000 of capitalized system development costs associated with a product that will not be marketed. This expense is included within selling, general and administrative expense.

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.

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

10

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, 2007 and September 30, 2006, the Company had an accrual for product warranties of $928,000 and $877,000, respectively.

Shipping Costs

Shipping costs, which are classified as a component of cost of goods sold, were $86,000 and $107,000 for the three months ended June 30, 2007 and 2006, respectively; and $242,000 and $288,000 for the nine months ended June 30, 2007 and 2006, respectively. Customer billings related to shipping fees are reported as net sales.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs, which are included in selling, general and administrative expenses, were $56,000 and $53,000 for the three months ended June 30, 2007 and 2006; and $249,000 and $130,000 for the nine months ended June 30, 2007 and 2006, respectively. Advertising costs consist primarily of ad campaigns, catalog brochures, promotional items and trade show expenses.

Research and Development Costs

Research and development expenses are charged 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 Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). During the quarters ended June 30, 2007 and 2006, $0 and $118,000, respectively, of research and development costs were capitalized in accordance with Statement of Financial Accounting Standards SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. During the nine months ended June 30, 2007 and 2006, $160,000 and $593,000, respectively, of research and development costs were capitalized.

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, 2007 and September 30, 2006.

Reclassifications

Certain amounts from prior years’ financial statements have been reclassified to conform to the current year presentation. Costs of $203,000 and $581,000 for the three months and nine months ended June 30, 2006 were reclassified from selling, general and administrative expense to research and development expense. These reclassifications had no effect on net loss to common shareholders or shareholders’ equity.

Recently Issued Accounting Standards

Accounting Changes and Error Corrections (Statement 154)

In May 2005, the FASB issued Statement 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3, as part of its short-term convergence project with the International

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Accounting Standards Board. Statement 154 requires that all voluntary changes in accounting principles and changes required by a new accounting pronouncement that do not include specific transition provisions be applied retrospectively to prior periods’ financial statements, unless it is impractical to do so. Opinion 20, Accounting Changes, required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle as a component of net income in the period of the change. Statement 154 is effective prospectively for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Statement 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of the Statement. The adoption of this pronouncement did not have a material effect on the Company’s results of operations.

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 derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for the Company beginning October 1, 2007. FIN 48 is not expected to have a material effect on the Company’s financial statements.

Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statement (SAB 108)

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. The SAB requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 does not change the guidance in SAB 99, “Materiality”, when evaluating the materiality of misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. Upon initial application, SAB 108 permits a one-time cumulative effect adjustment to beginning retained earnings. The Company does not believe the adoption of this pronouncement will have a material effect on the Company’s results of operations.

Fair Value Measurements (FAS 157)

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 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. FAS 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.

Note 2. Stock-Based Compensation

Stock Options

At June 30, 2007, the Company had one stock-based compensation plan (the 2007 Long-Term Incentive and Stock Option Plan) approved by the shareholders at the February 2007 Shareholder Meeting. Stock options granted under this plan generally vest ratably over three years of service, have a contractual life of 5-10 years and provide for accelerated vesting if there is a change in control, as defined. At June 30, 2007, the Company had 59,500 shares available for future grant under this stock option plan.

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On October 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123R, Share Based Payment (SFAS 123R), which requires the fair value of all share-based payment transactions, including stock options, to be recognized in the statement of operations as an operating expense, based on their fair value over the requisite service period. For the three and nine months ended June 30, 2007, the Company recorded compensation expense of $159,000 and $370,000, respectively, related to the adoption of SFAS 123R. Total stock-based compensation expense related to stock options reduced both basic and diluted earnings per share by $.02 and $.05 for the three and nine months ended June 30, 2007, respectively.

Prior to adopting SFAS 123R, the Company accounted for option plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in net loss, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The Company has elected the modified prospective transition method in applying SFAS 123R. Accordingly, periods prior to adoption have not been restated. Under this transition method, the Company will apply the provisions of SFAS 123R to new awards and to awards modified, repurchased, or cancelled after October 1, 2006. Additionally, the Company will recognize compensation cost for the portion of awards for which the requisite service has not been rendered (unvested awards) that are outstanding as of October 1, 2006, as the remaining service is rendered. The compensation cost recorded for these awards will be based on their grant-date fair value as calculated for the pro forma disclosures required by FAS 123. At June 30, 2007, the Company had $1,432,000 of unrecognized compensation costs related to non-vested stock options that are expected to be recognized over a weighted average period of 2.5 years.

The following table illustrates the effect on net loss to common shareholders and net loss to common shareholders per share had the fair value based method been applied to the comparable periods in the prior fiscal year (in thousands, except per share amounts):

	Three months			Nine months ended
	ended June 30, 2006			June 30, 2006
Net loss to common shareholders, as reported	$	(696	)	$	(1,522	)
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(1	)		(61	)
Pro forma net loss to common shareholders	$	(697	)	$	(1,583	)
Basic and diluted net loss to common shareholders per common share
As reported	$	(0.09	)	$	(0.21	)
Pro forma		(0.09	)		(0.21	)

The following tables summarize information relating to outstanding stock options as of June 30, 2007 (in thousands, except per share amounts):

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				Weighted Average
	Shares			Exercise Price
Options outstanding at September 30, 2006		388		$	4.60
Granted		879			5.18
Exercised		(14	)		3.73
Cancelled		(33	)		4.94
Options outstanding at June 30, 2007		1,220		$	5.02

Total intrinsic value of options exercised during the three and nine months ended June 30, 2007 was $1,000 and $12,000, respectively.

Information regarding options outstanding and exercisable at June 30, 2007 is as follows (in thousands, except per share amounts):

	Options Outstanding								Options Exercisable
			Weighted								Weighted
			Average		Weighted						Average
			Remaining		Average						Remaining		Weighted
Range of	Number		Contractual		Exercise		Aggregate		Number		Contractual		Average		Aggregate
exercise	of		Life		Average		Intrinsic		of		Life		Exercise		Intrinsic
price	Shares		(Years)		Price		Value		Shares		(Years)		Price		Value
$2.85 — $2.95		13		0.71	$	2.95				13		0.71	$	2.95
$3.03 — $3.99		95		0.69		3.79				95		0.69		3.79
$4.18 — $4.98		116		4.58		4.68				41		4.36		4.53
$5.03 — $5.40		996		5.24		5.21				45		5.73		5.17
		1,220		4.78	$	5.02	$	34		194		2.64	$	4.21	$	34

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 (in thousands, except per share amounts):

	Three months ended					Nine months ended
	June 30,					June 30,
	2007			2006		2007			2006
Number of shares granted		25			—		879			20
Fair value	$	1.30		$	—	$	1.81		$	2.95
Risk-free interest rate		4.65	%		—		4.65	%		4.55	%
Expected volatility		31.91	%		—		35.57	%		41.76	%
Expected life (in years)		3.50			—		4.05			10.0
Dividend yield		—			—		—			—

The expected term of the options is based on the simplified method identified in SAB 107 for share-based awards granted during fiscal 2007 and expected future employee exercise behavior. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The risk-free interest rate is based on the US Treasury rate at the date of grant with maturity date approximately equal to the expected life at the grant date. Volatility is based on the historical volatility of the Company’s common stock. The Company has not historically issued any dividends and does not expect to in the future.

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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. Each grant of restricted stock vests over one to six years for employees and vest immediately for directors. Shares granted may be sold once vested. Information regarding restricted stock awards at June 30, 2007 is as follows (in thousands, except per share amounts):

	Number of			Weighted Average
	Shares			Fair Value
Restricted stock outstanding at September 30, 2006		213		$	4.95
Granted		450			5.34
Vested		(106	)		4.96
Cancelled		(23	)		4.98
Restricted stock outstanding at June 30, 2007		534		$	5.27

The Company recognizes compensation expense ratably over the vesting period of the restricted stock. Compensation expense was $411,000 and $94,000 for the three months ended June 30, 2007 and 2006, respectively; and $1,126,000 and $414,000 for the nine months ended June 30, 2007 and 2006, respectively.

During the fiscal quarter ended June 30, 2006, Company adjusted previously recorded deferred compensation expense for the periods beginning in fiscal year 2004 through June 2006 due to a change in estimated expected forfeitures of restricted stock awards. This cumulative effect on current and prior periods was recognized in the current period resulting in a $100,000 reduction of deferred compensation expense.

As the result of the adoption of SFAS 123R the Company eliminated the unearned stock based compensation component of stockholders’ equity. The elimination resulted in a reclassification of $900,000 to additional paid in capital. Net loss and total shareholders’ equity were not impacted as a result of this elimination.

At June 30, 2007, the Company had $1,836,000 of unrecognized compensation costs related to non-vested restricted stock awards that are expected to be recognized over a weighted average period of 2.0 years.

Note 3. Commitments

Leases

The Company leases its office, warehouse, and certain office equipment under noncancelable operating leases. The facility lease requires that the Company pay a portion of the real estate taxes, maintenance, utilities and insurance. Rental expense, including common area costs and net of rental income, was $77,000 and $71,000 for the three months ended June 30, 2007 and 2006, respectively, and $224,000 and $195,000 for the nine months ended June 30, 2007 and 2006, respectively.

Reseller Commitment

On July 31, 2006, the Company entered into an International Value Added Reseller Agreement with ORBCOMM LLC. The Company has committed to certain volume minimums in exchange for favorable pricing in this agreement. Approximate future minimum purchases in excess of units already activated under customer agreements to secure this favorable pricing are $0 in fiscal 2007 and $25,000 each in fiscal 2008 and fiscal 2009.

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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 $40,000 and $35,000 for the three months ended June 30, 2007 and 2006, respectively, and $111,000 and $74,000 for the nine months ended June 30, 2007 and 2006, respectively.

Note 4. Bank Line of Credit

The Company has a $5.0 million line of credit with Silicon Valley Bank. Advances under the line of credit accrue interest at the prime rate, which was 8.25% as of June 30, 2007. The line is subject to borrowing base requirements and is collateralized by substantially all the assets of the Company. The Company is required to meet a quick ratio level of no less than 1:1 under this agreement. All amounts owed under this line of credit must be repaid not later than December 15, 2007. The outstanding balance under this line of credit was $0 at June 30, 2007 and September 30, 2006.

Note 5. 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 have authorized the sale of up to 1,700,000 shares of Series B Preferred Stock through a private placement and 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, 2007 and 2006, the Company issued 71,877 and 69,087 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 $342,000 and $319,000, for the nine months ended June 30, 2007 and 2006, 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

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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 have authorized the sale of up to 1,400,000 shares of Series C Preferred Stock through a private placement and 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 have authorized the sale of up to 1,600,000 shares of Series D Preferred Stock through a private placement and 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, on occasion, 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 following table summarizes information relating to outstanding common stock warrants as of June 30, 2007 (in thousands, except per share amounts):

					Weighted Average
					Remaining		Aggregate
	Number of		Weighted Average		Contractual Life		Intrinsic
	Shares		Exercise Price		(Years)		Value
Warrants outstanding at September 30, 2006		1,033	$	3.49		2.99	$	1,983
Granted		505		3.86		4.97
Exercised		—		—
Cancelled		—		—
Warrants outstanding at June 30, 2007		1,538	$	3.49		3.14	$	681

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As of June 30, 2007, 1,503,000 common stock warrants were exercisable.

Note 6. Income (Loss) Per Share

Basic income (loss) per share is computed based on dividing income (loss) applicable to common shareholders by the weighted average number of common shares outstanding less unvested restricted stock for the period. Diluted income (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 of the Company. For all periods presented, diluted income (loss) per share is equal to basic income (loss) per share because the effect of including such securities or obligations would have been anti-dilutive.

At June 30, 2007 and 2006, the Company had options and warrants outstanding to purchase a total of 2,758,000 and 1,341,000 shares of common stock, at a weighted-average exercise price of $4.24 and $3.59, respectively. Because the Company incurred net losses for the three months and the nine months ended June 30, 2007 and 2006, the inclusion of potential common shares in the calculation of diluted loss per common share would have an anti-dilutive effect.

Note 7. Legal Proceedings

The Company has been named as one of many defendants in a lawsuit, filed January 16, 2007. The plaintiff has sued for infringement of certain patents and has requested that the court assess compensatory and treble damages against each defendant and enjoin further infringing activities by the defendants. At this time, the Company cannot estimate the amount of monetary damages, if any, or other consequences that might result from this lawsuit. The Company has answered the complaint, denied infringement and has counterclaimed for a declaration that the asserted patents are invalid and not infringed. Substantial money damages or an injunction against the manufacture, sale or use of the Company’s allegedly infringing products could have a material adverse effect on the Company.

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 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;

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• 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 “Investment Considerations and Risk Factors” in Part 1, Item 1 of our annual Report on Form 10-KSB for the fiscal year, in this Form 10-Q and in our other filings with the SEC.

Overview

XATA is the leading provider of fleet management solutions to the truck transportation industry. Our innovative technologies and value-added services enable customers to optimize the utilization of their assets and enhance the productivity of fleet operations across the entire supply chain, resulting in decreased costs, improved customer service and overall business productivity.

Founded in 1985, XATA has leveraged 20 years of experience developing solutions for North America’s premier private fleets. That knowledge has resulted in a clear understanding of the features and functions that matter most to drivers and fleet operators.

Our product offerings consist of OpCenter, our comprehensive Windows-based fleet management system, and XATANET, our Web-based fleet management system. Our products perform the following functions to enable fleet operators to control costs and maximize vehicle and driver performance:

• Mobile two-way messaging and real-time vehicle location.

• Automation of DOT driver log requirements and state fuel tax reporting.

• Comprehensive vehicle and driver performance reporting.

• Efficient routing, trip optimization and stop activity scheduling.

• Diagnostic and accident data capture.

These systems integrate data generated within the truck as well as data received via GPS (Global Positioning System) into either a Windows- or Web-based user interface, enabling fleet managers to measure fleet performance, resolve exception conditions, monitor ongoing operations and perform detailed analysis.

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,

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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, we allocate revenue to each element based on the relative fair value of each element. Our determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to the price charged when the same element is sold separately. We have analyzed all of the elements included in our multiple-element arrangements and have determined that the arrangements have sufficient VSOE to allocate revenue to consulting services and post-contract customer support (PCS) components. We sell our consulting services separately, and have 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.

Prior to January 1, 2006, certain software sales included application service contracts. The terms of those contracts did not meet the delivery requirements of 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 contracts, such that all the requirements of SOP 97-2 and SAB 104 are met, including delivery. For these new 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 receivables are due from companies with fleet trucking operations in a variety of industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. 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. 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 was $278,000 and $286,000 for June 30, 2007 and September 30, 2006, 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. The balance of the allowance for sales returns was $143,000 and $186,000 as of June 30, 2007 and September 30, 2006, respectively.

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, 2007 and September 30, 2006, the product warranty allowance was $928,000 and $877,000, respectively.

Capitalized system development costs. System development costs incurred after establishing technological feasibility are capitalized. These costs are amortized to cost of goods sold beginning when the product is first released for sale to the general public. The dollar amount amortized is 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 (two to five years).

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 Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1).

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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, 2007 and September 30, 2006.

Results of Operations for the three and nine months ended June 30, 2007 and 2006

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,
	2007			2006			2007			2006
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit		46.4	%		40.4	%		45.1	%		42.8	%
Selling, general and administrative		45.3	%		34.6	%		42.3	%		35.4	%
Research and development		13.3	%		14.6	%		13.6	%		13.6	%
Operating loss		(12.3	%)		(8.8	%)		(10.8	%)		(6.2	%)
Net loss		(11.0	%)		(7.5	%)		(9.6	%)		(5.6	%)

Net Sales

Net sales increased 7.2% to $8.0 million for the three months ended June 30, 2007 compared to $7.4 million for the same period in fiscal 2006. Net sales for the nine months ended June 30, 2007 increased by 7.3% to $23.9 million compared to $22.3 million from the same period in fiscal 2006. Fiscal 2006 net sales reflect the fulfillment of a large OpCenter order from a customer in the government sector. Net sales for the nine months ended June 30, 2007 reflects a 58.6% increase in XATANET revenue over the prior year’s comparable period.

We changed our XATANET contract terms, which now meet the revenue recognition requirements for immediate revenue recognition related to the software and hardware components of a sale for most new system sales. The effect of this change was additional revenue of $628,000 and $1.7 million for three and nine months ended June 30, 2007, respectively. XATANET sales were 63.2% and 71.2% of total net sales for the three and nine months ended June 30, 2007, respectively compared to 57.6% and 48.2% of net sales for the three and nine months ended June 30, 2006, respectively.

Net sales derived from our OpCenter product line decreased 7.0% and 40.4% for three months and nine months ended June 30, 2007 compared to the same periods of fiscal 2006. OpCenter sales for the quarter were favorably impacted as the result of customers upgrading their systems in preparation for the transition to the XATANET platform. On year over year basis OpCenter sales decreased largely due to the fulfillment of a large order from a customer in the government sector during the nine months ended June 30, 2006.

The Company ended the third quarter of fiscal 2007 with $10.4 million of deferred revenue in comparison to $12.0 million as of September 30, 2006. Revenue associated with XATANET systems that are not under the Company’s new contract format will continue to be recognized over the initial term of each subscription rather than at the time of delivery. XATANET subscription terms are a minimum of twelve months.

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

21

associated with the enhancement of released products. Total cost of goods sold decreased to $4.3 million for the three months ended June 30, 2007 compared to $4.4 million for the same period in fiscal 2006. Gross margin as a percentage of net sales increased 6.0 percentage points to 46.4% for the three months ended June 30, 2007 versus 40.4% in the same period last year. The increase in gross margin was driven by an increase in XATANET subscriptions compared to the prior year period. We expect the cost of goods sold relating to XATANET systems to decrease as a percentage of sales during the next 12 months as the result of lower communication costs and system costs.

For the nine months ended June 30, 2007 total cost of goods sold increased $400,000 to $13.1 million compared to $12.7 million for the same period in 2006. The increase was primarily driven by increased XATANET system and subscription sales.

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 $3.6 million for the three months ended June 30, 2007 compared to $2.6 million for the same period in fiscal 2006. The increase of $1.0 million was mainly due to a $476,000 increase in stock-based compensation costs and a $208,000 increase in legal costs relating to current litigation.

Selling, general and administrative expenses were $10.1 million for the nine months ended June 30, 2007 compared to $7.9 million for the same period in 2006. The increase of $2.2 million reflects a $1.1 million increase in stock-based compensation costs, a $329,000 increase in legal costs, a $119,000 increase in advertising and user conference costs, and a $174,000 write-off of capitalized development costs related to a product that will not be going to market.

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 remained flat at $1.1 million for the three months ended June 30, 2007 and 2006. The Company did not capitalize any development costs for the three months ended June 30, 2007, compared to capitalized costs of $118,000 for the same period in fiscal 2006. These costs were capitalized after the establishment of technological feasibility consistent with FAS 86. These costs will be amortized to cost of goods sold over the anticipated useful life of the product, which is determined based upon its anticipated future net revenues.

Research and development expenses were $3.3 million for the nine months ended June 30, 2007 compared to $3.0 million for the same period in 2006. The increase of $300,000 reflects a reduction in capitalized development costs for the nine months ended June 30, 2007 compared to the same period in fiscal 2006. The Company capitalized $160,000 of development costs for the nine months ended June 30, 2007, compared to capitalized costs of $593,000 for the same period in fiscal 2006.

Net Interest Income

Net interest income was $280,000 and $129,000 for the nine months ended June 30, 2007 and 2006, respectively. The increase in net interest income is the result of larger cash balances and improved interest rates for fiscal 2007.

Income Taxes

No income tax benefit or expense was recorded in the first nine months of fiscal 2007 or fiscal 2006. 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

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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, 2006, we had federal net operating loss carryforwards of approximately $22.1 million.

Net Loss to Common Shareholders

We generated net losses to common shareholders of $1.6 million and $3.3 million for the three and nine months ended June 30, 2007, compared to net losses to common shareholder of $696,000 and $1.5 million for the three and nine months ended June 30, 2006. For all periods 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 and Series D Preferred Stock.

Liquidity and Capital Resources

As of June 30, 2007, we held $14.2 million in cash and cash equivalents, and working capital totaled $13.8 million. We generated free cash flow for the nine months ended June 30, 2007 of $1.3 million compared to $2.8 million for the nine months ended June 30, 2006. Free cash flow represents cash provided by operating activities less cash used by investing activities.

Cash provided by operating activities for the nine months ended June 30, 2007 was $1.7 million compared to cash provided by operating activities of $4.0 million for the same period in fiscal 2006. Cash provided by operating activities for fiscal 2007 resulted primarily from working capital changes of $1.8 million and non-cash expenses of $2.2 million offsetting our net loss of $2.3 million.

Deferred product costs decreased by $2.3 million to $2.9 million as of June 30, 2007 compared to $5.1 million as of September 30, 2006. This decrease was driven by the implementation of the new contract in second quarter of fiscal 2006. Accounts receivable decreased by approximately $1.6 million to $3.7 million at June 30, 2007 from $5.3 million at September 30, 2006. This decrease was the result of improved collections in fiscal 2007.

Cash used in investing activities of $362,000 for the nine months ended June 30, 2007 included $202,000 for purchases of equipment and $160,000 for capitalized software development.

Cash provided by financing activities of $6.6 million for the nine months ended June 30, 2007 reflects the impact of $6.0 million of proceeds from the sale of Series D Preferred Stock and $605,000 from direct purchases of common stock.

The Company has a $5.0 million line of credit with Silicon Valley Bank. Advances under the line of credit accrue interest at the prime rate, which was 8.25% as of June 30, 2007. The line is subject to borrowing base requirements and is collateralized by substantially all the assets of the Company. The Company is required to meet a quick ratio level of no less than 1:1 under the agreement with Silicon Valley Bank. All amounts owed under this line of credit must be repaid not later than December 15, 2007. The outstanding balance under this line of credit was $0 as of both June 30, 2007 and September 30, 2006.

We believe our existing funds, line of credit and vendor terms will provide adequate cash to fund operating needs 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.

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

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additional shares of Series B Preferred Stock rather than cash. For the nine months ended June 30, 2007 and 2006, the Company issued 71,877 and 69,087 shares, respectively, of Series B Preferred Stock to the preferred stock holder for payment of accrued stock dividends. We are further restricted from dividend payments by our primary lender.

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.

Item 4. Controls and Procedures

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

On June 30, 2007, 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 such controls.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 103 XATA has been named as one of many defendants in a lawsuit, filed January 16, 2007 in the United States District Court, Northern District of Georgia, Atlanta Division (1:07-CV-0105). The plaintiff, Telematics Corporation, has sued United Parcel Service Co., @Road, Inc., Motorola Inc., Ryder System, Inc., Sprint Nextel Corporation, Teletrac, Inc., Verizon Communications, and XATA Corporation for infringement of certain patents and has requested that the court assess compensatory and treble damages against each defendant and enjoin further infringing activities by the defendants. In addition, Telematics has demanded that the defendants pay pre- and post-judgment interest, plus attorney fees and costs. At this time, XATA cannot estimate the amount of monetary damages or other consequences that might result from this lawsuit. Substantial money damages or an injunction against the manufacture, sale or use of XATA’s allegedly infringing products could have a material adverse effect on XATA. Xata has answered the complaint and has denied infringement. Additionally, XATA has counterclaimed for a declaration that the asserted patents are invalid and not infringed.

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 “Investment considerations and Risk Factors” in Part I, Item 1 of our Annual Report on Form 10-KSB for the year ended September 30, 2006, 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-KSB are not the only risks we face. Additional risks and uncertainties not presently known to us or

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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

On May 14, 2007, the Company issued a 5 year warrant for the purchase of 35,000 shares of its common stock to Shedhorn Consulting in exchange for consulting services provided to the Company by Shedhorn Consulting. No underwriter or placement agent was involved and there were no cash proceeds from the issuances. The Company relied on the exemption from registration provided by Section 4(2) of the Securities Act for this issuance. The warrant is exercisable by Shedhorn Consulting between May 14, 2008 and May 14, 2012 at an exercise price of $4.33 per share of common stock.

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

Exhibit
	3.1	Certificate of Designations for Series D Preferred Stock dated June 18, 2007. **
	4.1	Investor Rights Agreement dated as of June 19, 2007 by and among XATA Corporation, Trident Capital Fund-V, L.P., Trident Capital Fund-V Affiliates Fund, L.P., Trident Capital Fund-V Affiliates Fund (Q), L.P., Trident Capital Fund-V Principals Fund, L.P. and Trident Capital Parallel Fund-V, C.V. **
	4.2	Form of Warrant issued to Trident Capital Fund-V, L.P., Trident Capital Fund-V Affiliates Fund, L.P., Trident Capital Fund-V Affiliates Fund (Q), L.P., Trident Capital Fund-V Principals Fund, L.P. and Trident Capital Parallel Fund-V, C.V. on June 19, 2007. **
	10.1	Common Stock Warrant and Series D Preferred Stock Purchase Agreement dated as of June 18, 2007 by and among XATA Corporation, Trident Capital Fund-V, L.P., Trident Capital Fund-V Affiliates Fund, L.P., Trident Capital Fund-V Affiliates Fund (Q), L.P., Trident Capital Fund-V Principals Fund, L.P. and Trident Capital Parallel Fund-V, C.V. **
	10.2	Lease Agreement, dated as of July 9, 2007, between 965 Partnership LLP and XATA Corporation. #
	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 *

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*	Filed herewith.
**	Incorporated by reference to the corresponding exhibit to the Company’s Current Report on Form 8-K dated June 18, 2007.
#	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 9, 2007.

SIGNATURES

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

Dated: August 3, 2007	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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