SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended February 29, 2004

OR

[   ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the period from                to               

Commission file number 0-26140

MINORPLANET SYSTEMS USA, INC.

     Registrant’s telephone number, including area code (972) 301-2000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [X] No [   ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES

Form 10-Q

INDEX

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MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

See accompanying notes to condensed consolidated financial statements.

4

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

See accompanying notes to condensed consolidated financial statements.

5

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

See accompanying notes to condensed consolidated financial statements.

6

MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

See accompanying notes to condensed consolidated financial statements.

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MINORPLANET SYSTEMS USA, INC. AND SUBSIDIARIES
(Debtors-in-Possession)

1. Reorganization and Going Concern Uncertainty

Voluntary Bankruptcy Filing

     On February 2, 2004, (the “Commencement Date”), Minorplanet Systems USA Inc., a Delaware corporation (the “Company”), and two of its wholly-owned subsidiaries, Caren (292) Limited and Minorplanet Systems USA Limited, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas Dallas Division (the “Bankruptcy Court”), in order to facilitate the restructuring of the Company’s debt, trade liabilities, and other obligations. The Company has remained in possession of its assets and is operating as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. As “debtors-in-possession”, the Company is authorized to continue to operate as an ongoing business but may not engage in transactions outside of the ordinary course of business without obtaining approval from the Bankruptcy Court.

     Under Section 362 of the Bankruptcy Code, the filing of the bankruptcy petition automatically stays most actions against the Company including most actions to collect pre-petition indebtedness or exercise control over the property of the Company’s estate. Unless otherwise ordered by the Bankruptcy Court, substantially all pre-petition liabilities will be addressed under a plan of reorganization to be filed by the Company. The Bankruptcy Court has established April 9, 2004 as the bar date for creditors and other parties-in-interest (other than governmental entities) to file their proofs of claims and proofs of interest. The bar date for governmental entities to file their proofs of claims and proofs of interest is May 10, 2004. Thus, the aggregate amount of all pre-petition claims is not known at this time.

     Under Section 365 of the Bankruptcy Code, the Company may assume or reject certain pre-petition executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Upon rejection of an executory contract or unexpired lease, the debtor is generally excused from further performance under the contract. The contracting party will have a claim for the debtor’s failure to perform as if the breach of contract occurred immediately prior to the filing of the bankruptcy petition. Contracting parties to these rejected contracts or unexpired leases may file proofs of claim against the Company’s estate for damages, if any, relating to such rejections. The Company cannot presently determine with certainty the ultimate aggregate liability that will result from the filing of claims relating to such contracts or unexpired leases that have been or may be rejected.

     The United States Trustee has appointed an official committee of unsecured creditors (the “Creditors Committee”). The Creditors Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court. The rights and claims of various creditors and security holders will be determined by a plan of reorganization that is confirmed by the Bankruptcy Court. There can be no assurance that the Creditor’s Committee will support the Company’s positions or ultimate plan of reorganization, once proposed, and disagreements between the Creditor’s Committee and the Company could protract the Chapter 11 cases and could negatively impact the Company’s ability to operate during the Chapter 11 cases.

     In order to successfully emerge from Chapter 11 bankruptcy, the Company will need to propose a plan of reorganization and obtain confirmation of the plan of reorganization by the Bankruptcy Court. For the first 120 days after the Commencement Date, and if no trustee is appointed, the Company has the exclusive right to file a plan of reorganization in accordance with the Bankruptcy Code. If the Company fails to file a plan of reorganization within this period (or any extended period approved by the Bankruptcy Court), or if such reorganization plan is not accepted by the required number of creditors within the applicable time period, any party in interest may subsequently file its own plan of reorganization. Although the Company intends to file its plan of reorganization timely and expects the plan will fully satisfy all creditor claims, at this time it is not possible to accurately predict the effect of the bankruptcy filing on the Company’s business, creditors, or stockholders, when the Company may emerge from bankruptcy, or what the disposition will be of any claims against the Company. The Company’s future results depend on the timely and successful confirmation and implementation of a plan of reorganization.

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     Any plan of reorganization that is ultimately approved by the Creditors Committee and confirmed by the Bankruptcy Court will likely result in the substantial dilution of the Company’s existing stockholders. Accordingly, the Company urges that extreme caution be exercised with respect to existing and future investments in any of the Company’s securities.

Commitment for Debtor-in-Possession Financing

     The Company has received a minimum commitment for $1.3 million of debtor-in-possession financing, subject to Bankruptcy Court approval. The $1.3 million convertible promissory note principal balance is due 36 months from the date of closing, with an annual interest rate of 12 percent. The Company is required to pay 36 monthly accrued interest-only payments on the principal balance, with the initial interest payment due 30 days from closing. Following the initial year of the note, the Company may elect to repay the loan without premium or penalty.

     The lender may elect at any time prior to the maturity date of the note to convert all or any part of the principal or accrued interest to common stock, discounted at a rate of 20 percent of the market value if the election is made within the initial year of the loan or 15 percent of the market value if the election is made thereafter. Market value for purposes of conversion is defined as the average trading price of the common stock five days before and five days after the date the lender elects to exercise the conversion. The Company intends to obtain approval of the debtor-in-possession financing upon confirmation of its plan of reorganization.

Accounting Impact of Voluntary Bankruptcy Filing

     The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the provisions of Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). In accordance with SOP 90-7, the Company’s pre-petition liabilities that are subject to compromise are reported separately on the balance sheet at an estimated amount that will ultimately be allowed by the Bankruptcy Court. As of February 29, 2004, the Company’s pre-petition liabilities subject to compromise were as follows (in thousands):

     Pursuant to SOP 90-7, an objective of financial statements issued by an entity in Chapter 11 is to reflect its financial evolution during the proceeding. For that purpose, the financial statements of periods including and subsequent to filing the Chapter 11 petition should distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Certain expenses, realized gains and losses and provisions for losses resulting from the reorganization and restructuring of the business should be reported separately as reorganization items pursuant to SOP 90-7. Total reorganization items incurred to date by the Company are as follows (in thousands):

     In accordance with SOP 90-7, the Company stopped accruing interest on its 13.75% senior notes payable due September 15, 2005 as of the Commencement Date. Total interest expense not accrued for the post-petition period after the Commencement Date through February 29, 2004 was approximately $160,000.

     As part of the current plan of reorganization, the Company is required to accept, accept as modified, or reject all executory contracts including the Vehicle Management Information (“VMI”) license rights. In the event the Company elects and obtains approval from the Bankruptcy Court to accept as modified or reject the VMI license rights, such action would result in a material decrease in the carrying value of the license rights. Currently, the Company cannot determine the potential decrease in the carrying value of the license rights should the Company elect and obtain approval from the Bankruptcy Court to accept as modified the VMI license rights. Should the Company elect and obtain approval from the Bankruptcy Court to reject the VMI license rights, a loss of substantially all of the carrying value of the VMI license rights would be recognized. As of February 29, 2004, the carrying value of the license rights was $32.2 million.

     The unaudited condensed consolidated financial statements contained herein have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to a going concern, and do not purport to reflect or to provide all of the possible consequences of the ongoing Chapter 11 reorganization cases. The

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unaudited condensed consolidated financial statements do not present the amount which will ultimately be paid to settle all liabilities and contingencies which may be required in the Chapter 11 reorganization. The Company intends to file its reorganization plan in the near future at which time it will be subject to approval by the required creditors and the Bankruptcy Court.

     Due to the ongoing Chapter 11 reorganization cases, the outcome of which is not presently determinable, the unaudited condensed consolidated financial statements contained herein are subject to material uncertainties and may not be indicative of the results of the Company’s future operations or financial position. No assurance can be given that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings.

     As a result of the items discussed above, there is substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon, but not limited to, formulation, approval, and confirmation of a plan of reorganization and the ability of the Company to ultimately achieve positive results of operations. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recorded amounts or reflect any amounts that may ultimately be paid to settle liabilities and contingencies which may be required in the bankruptcy reorganization, or the effect of any changes, which may be made in connection with the Company’s operations resulting from the plan of reorganization.

2. Business Overview

     The Company develops and implements mobile communications solutions for service vehicle fleets, long-haul truck fleets, and other mobile-asset fleets, including integrated voice, data and position location services. As a result of the completion of the transactions contemplated by the Stock Purchase and Exchange Agreement by and among the Company, Minorplanet Systems PLC, a United Kingdom public limited company (“Minorplanet UK”), and Mackay Shields LLC, dated February 14, 2001, the Company commenced marketing the VMI product licensed from Minorplanet Limited, the operating subsidiary of Minorplanet UK, into the automatic vehicle location (“AVL”) market in the United States during the last half of the calendar year 2001. The Company currently markets and sells the VMI product in Dallas, Texas; Houston, Texas; Atlanta, Georgia; Los Angeles, California; and Austin, Texas. VMI is designed to maximize the productivity of a mobile workforce as well as reduce vehicle mileage and fuel-related expenses. The VMI technology consists of: (i) a data control unit (“DCU”) that continually monitors and records a vehicle’s position, speed and distance traveled; (ii) a command and control center (“CCC”) which receives and stores in a database information downloaded from the DCU’s; and (iii) software used for communication, messaging and detailed reporting. VMI uses satellite-based Global Positioning System (“GPS”) location technology to acquire a vehicle location on a minute-by-minute basis and a global system for mobile communications (“GSM”) based cellular network to transmit data between the DCU’s and the CCC. GSM is a digital technology developed in Europe and has been adapted for North America. GSM is the most widely used wireless digital standard in the world. The VMI application is intended to be targeted to small and medium sized fleets in the metro marketplace, which the Company believes represents a total U.S. market of approximately 20 million vehicles.

     VMI provides minute-by-minute visibility into the activities of a mobile workforce via an extensive reporting system that provides real-time and exception-based reporting. Real-time reports provide information regarding a vehicle’s location, idling, stop time, speed and distance traveled. With real-time reporting, the user can view when an employee starts or finishes work, job site arrival times and site visit locations. In addition, exception reports allow the user to set various parameters within which vehicles must operate, and the system will report exceptions including speeding, extended stops, unscheduled stops, route deviations, visits to barred locations and excessive idling.

     The Company’s initial product offering, the Series 5000, was developed for and sold to companies that operate in the long-haul trucking market. The Company provides long-haul trucking companies with a comprehensive package of mobile communications and management information services, thereby enabling its trucking customers to effectively monitor the operations and improve the performance of their fleets. The initial product application was customized and has been sold to and installed in the service vehicle fleets of the member companies of SBC Communications, Inc. (“SBC Companies”), pursuant to the service vehicle contract (the “Service Vehicle Contract”). During the fourth calendar quarter of 1999, the Company entered the mobile asset tracking market with the introduction of its trailer-tracking product, TrackWare®. During the first calendar quarter of 2001, the Company began marketing and selling 20/20V™, a low-cost tracking product designed for small and medium sized fleets in the transportation marketplace.

     On March 15, 2002, the Company completed the sale to Aether of certain assets and licenses related to the Company’s long-haul trucking and asset-tracking businesses pursuant to the Asset Purchase Agreement effective as of

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March 15, 2002, by and between the Company and Aether (the “Sale”). Under the terms of the Sale, the Company sold to Aether assets and related license rights to its Platinum Service software solution, 20/20V™, and TrackWare® asset and trailer-tracking products. In addition, the Company and Aether agreed to form a strategic relationship with respect to the Company’s long-haul customer products, pursuant to which the Company assigned to Aether all service revenues generated post-closing from its Series 5000 customer base. Aether, in turn, agreed to reimburse the Company for the network and airtime service costs related to providing the Series 5000 service.

3. Basis of Presentation & Significant Accounting Policies

     The unaudited condensed consolidated financial statements presented herein include those of Minorplanet Systems USA Inc. and its wholly-owned subsidiaries: HighwayMaster of Canada, LLC, Caren (292) Limited and Minorplanet Systems USA Limited. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all footnote disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto in its Annual Report on Form 10-K and Form 10-K/A for the year ended August 31, 2003. The accompanying condensed consolidated financial statements reflect all adjustments (all of which are of a normal recurring nature), which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods in accordance with accounting principles generally accepted in the United States of America. The results for any interim period are not necessarily indicative of the results for the entire fiscal year.

Reverse Stock Split

     All shares and earnings per share amounts for all periods presented have been restated to reflect the reverse stock split effected December 3, 2003, as described in Note 8.

Revenue Recognition

     The Company recognizes revenue from its long haul trucking Series 5000 mobile units under the provisions of EITF No. 00-21, “Revenue Arrangements With Multiple Deliverables” (“EITF 00-21”) and Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). Under EITF 00-21 and SAB 101, initial sale proceeds received under multiple-element sales arrangements which require the Company to deliver products or services over a period of time and which are not determined by the Company to meet certain criteria are deferred. These criteria include requirements for a separate earnings process, fair value determinations, and that the delivery of future products or services under the arrangement are not required for the delivered items to serve their intended purpose. Sales proceeds related to delivered products that are deferred are recognized over the greater of the contract life or the estimated life of the customer relationship. The Company estimated such periods to range from three to ten years. The Company’s estimate of the life of a customer relationship is determined based upon the Company’s historical experience with its customers together with the Company’s estimate of the remaining life of the applicable product offering. Sales proceeds recognized under this method are portrayed in the accompanying Condensed Consolidated Statement of Operations as “Ratable product revenues.” The related deferred revenue is classified as a current and long term liability on the Condensed Consolidated Balance Sheets under the captions “Deferred product revenues – current portion” and “Deferred product revenues- non-current portion.” If the customer relationship is terminated prior to the end of the estimated customer relationship period, such deferred sales proceeds are recognized as revenue in the period of termination. The Company periodically reviews its estimates of the customer relationship period as compared to historical results and adjusts its estimates prospectively. Under sales arrangements, which meet the three criteria described above, revenues are recognized upon shipment of the products or upon customer acceptance of the delivered products if terms of the sales arrangement give the customer the right of acceptance. Sales arrangements recognized upon delivery and acceptance relate primarily to products delivered under the Service Vehicle Contract.

     The VMI product includes both hardware and software components. Due to the interdependency of the functionality of these components, revenue recognition is governed by EITF 00-21, SAB 101, and Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”). Under EITF 00-21 and SAB 101, initial sale proceeds received under multiple-element sales arrangements which require the Company to deliver products or services over a period of time and which are not determined by the Company to meet certain criteria are deferred. Currently, the Company resells wireless airtime to most customers of its VMI products over the contract term; therefore, in accordance with SAB 101,

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the Company defers these VMI product revenues. In addition, the Company has also deferred revenue consistent with the provisions of SOP 97-2. For those customers that do not purchase wireless airtime service directly from the Company, revenue is deferred under the provisions of SOP 97-2 which requires deferral if a significant portion of the software licensing fee is not due until more than twelve months after delivery and vendor specific objective evidence of fair value for post contract services is not available. VMI product sales are recognized ratably over the customer contract term. Such terms range from one to five years. VMI product sales proceeds recognized under this method are portrayed in the accompanying Condensed Consolidated Statement of Operations as “Ratable product revenues.” The related deferred revenue is classified as a current and long term liability on the Condensed Consolidated Balance Sheets under the captions “Deferred product revenues – current portion” and “Deferred product revenues non-current portion.” If the customer relationship is terminated prior to the end of the customer contract term, such deferred sales proceeds are recognized as revenue in the period of termination.

     Service revenue generally commences upon product installation and customer acceptance, and is billed and recognized during the period such services are provided.

Stock Based Compensation

     The Company applies the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock option plans. Accordingly, compensation expense would be recorded at the date of grant only if the current market price of the underlying stock exceeded the exercise price. On December 3, 2003, the Company effected a reverse stock split (see Note 8) at which time the terms of all outstanding stock options were not adjusted triggering variable accounting for such options in accordance with Emerging Issues Task Force 00-23. Thus, compensation cost associated with these stock options will be measured and accrued at the end of each accounting period at the amount by which the quoted market value of the Company’s stock exceeds the stock option exercise price.

     Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic-value based method of accounting described above, and has adopted the disclosure requirements of SFAS 123. In accordance with the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” pro forma net loss and net loss per share disclosures, as if the Company recorded compensation expense based on the fair value of stock-based awards, are presented below (in thousands, except per share data):

4. Cash and cash equivalents

     Cash and cash equivalents of $3.2 million at February 29, 2004 included $475,000 in cash held in escrow accounts on behalf of the Company by third parties providing professional services for the Company during the ongoing bankruptcy proceedings. The Bankruptcy Court has not yet approved payment for such professional services.

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5. Commitments and Contingencies

Product Warranty Guarantees

     The Company provides a limited warranty on all VMI product sales, at no additional cost to the customer, that provides for replacement of defective parts during the contract term, typically ranging from one to five years. The Company also provides limited two-year warranties to replace defective parts on units sold to the SBC Companies under the Service Vehicle Contract. The Company establishes an estimated liability for expected future warranty commitments based on a review of historical warranty expenditures associated with these products and other similar products. Changes in the Company’s product warranty liability, which is included in “Other current liabilities” and “Other non-current liabilities” in the accompanying Condensed Consolidated Balance Sheets, are summarized below (in thousands).

Compromise Settlement Agreement

     During the first calendar quarter of 2001, the outsource manufacturer (the “Vendor”) that supplied substantially all of the Company’s finished goods inventory asserted a claim for reimbursement for excess and obsolete inventory purchased in its capacity as the manufacturer of the Company’s products. This claim was disputed by the Company. As a result of this dispute, beginning in April 2001, the Vendor ceased to perform on its contract to provide finished goods inventory and certain other services to the Company. The claims and counterclaims ultimately led to each of the parties filing litigation against the other. The Vendor and the Company executed a Compromise Settlement Agreement on October 9, 2001. The Company recorded a provision of $2.1 million during 2001 and an additional $0.1 million during the eight months ended August 31, 2002 as its estimate of the cost to be incurred to settle this litigation, of which $0.5 million was paid during 2001.

     On April 4, 2003, the Company and the Vendor entered into an amendment to the Compromise Settlement Agreement pursuant to which the Company agreed to issue purchase orders to the Vendor for the manufacture of 6,000 VMI data control units in lieu of and in full and final settlement of the Company’s obligation to make the final $1.7 million payment to the Vendor under the Compromise Settlement Agreement. Specifically, the Company agreed to issue to the Vendor twelve separate purchase orders for the manufacture of a total of 6,000 VMI data control units to be delivered over a twelve-month period. In addition to the agreed upon unit price of the data control units, the Company agreed to pay a $275 surcharge per unit which will compensate the Vendor for the remaining $1.7 million payable under the Compromise Settlement Agreement. The Company agreed to take delivery of the initial lot of 500 units within 30 days of the Company’s approval of the Vendor’s first production article with an additional 500 units being delivered to the Company on the first day of each month thereafter until all 6,000 units have been delivered. Payment for each 500-unit lot is due upon receipt of each shipment. As of February 29, 2004, the Company had not approved the Vendor’s first production article. However, prior to the filing of the bankruptcy petition on February 2, 2004, the Company had agreed to begin making monthly payments to the Vendor with respect to the final $1.7 million payment due to the Vendor under the Compromise Settlement Agreement. Such monthly payments ceased upon filing of the bankruptcy petition and the remaining payable due to the Vendor under the Compromise Settlement Agreement of $1.3 million is included in “Liabilities subject to compromise” on the Company’s Condensed Consolidated Balance Sheet at February 29, 2004.

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6. Related Party Transactions

     As of August 31, 2003, Minorplanet UK owned 62 percent of the Company’s outstanding common stock and thus controlled the Company. On October 6, 2003, Minorplanet UK transferred 42.1 percent of the Company’s outstanding common stock to Erin Mills Investment Corporation, ending Minorplanet UK’s majority ownership position in the Company. As of February 29, 2004, Minorplanet UK retained 19.9 percent of the Company’s outstanding common stock.

     In connection with the Minorplanet UK share transfer to Erin Mills, the Company also obtained an option to repurchase from Erin Mills up to 3.9 million shares of the Company’s common stock at a price of $0.01 for every 1,000 shares, pursuant to that certain Stock Repurchase Option Agreement between the Company and Erin Mills dated August 15, 2003. Gerry Quinn, the president of Erin Mills, currently serves on the Company’s board of directors.

In addition, concurrently with these transactions, the Company also reached the following agreements with Minorplanet UK:

•		Minorplanet UK irrevocably waived certain approval rights granted to the Minorplanet UK Directors, including the right to appoint members to the Company’s board of directors, as are currently provided for in that certain Stock Purchase and Exchange Agreement dated February 14, 2001 and the Company’s bylaws;
•		Minorplanet UK waived $1.76 million of accrued executive consulting fees that it had previously billed to the Company.
•		The exclusive License and Distribution Agreement, which grants to the Company’s United Kingdom-based subsidiary a 99-year, royalty-free, exclusive right and license to market, sell and commercially exploit the VMI technology in the United States, Canada and Mexico, was amended to grant Minorplanet UK, or its designee, the right to market and sell the VMI technology, on a non-exclusive basis, in the Northeast region of the United States. The Company retained the right to market and sell the VMI technology under the Minorplanet name and logo in this Northeast region.
•		Minorplanet UK obtained anti-dilution rights from the Company, under which it has the right to subscribe for and to purchase at the same price per share as the offering or private sale, that number of shares necessary to maintain the lesser of (i) the percentage holdings of the Company’s stock on the date of subscription or (ii) 19.9 percent of the Company’s issued and outstanding common stock.

See the Form 8-K’s filed by the Company on August 27, 2003 and October 14, 2003 respectively, which contain additional information.

Transactions with Minorplanet UK and its operating subsidiaries are summarized below (in thousands).

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     The Company currently pays Minorplanet Limited, the operating subsidiary of Minorplanet UK, an annual fee of $1.0 million to aid in funding research and development of future products covered by the license rights. The research and development costs in the above table represent the pro-rated annual fee for the applicable periods presented.

     On September 26, 2002, the Company entered into a letter addendum to the exclusive license and distribution agreement with Minorplanet Limited to provide executive and non-executive sales and marketing consulting services for the six-month period from August 23, 2002 to February 22, 2003. Under terms of the agreement, the Company was not required to pay the executive consulting fees incurred during this six-month period totaling $1.76 million unless and until the Company filed a Form 10-K reporting net income and positive cash flow for the previous 12-month period. As of August 31, 2003 a liability for the $1.76 million in executive consulting fees, payable to Minorplanet Limited, was included on the Company’s Condensed Consolidated Balance Sheets under “Other non-current liabilities.” On October 6, 2003, Minorplanet UK forever waived and discharged the $1.76 million executive consulting fees owed by the Company. Thus, the $1.76 million liability was reversed and effectively converted to a capital contribution by Minorplanet UK to the Company. In addition, a $0.3 million liability payable to Minorplanet UK for non-executive consulting costs was converted to a capital contribution during the six months ended February 29, 2004. The offsetting credits have been reflected in additional paid-in capital on the Company’s Condensed Consolidated Balance Sheets.

     Other current liabilities in the above table included the unpaid portion of the non-executive sales and marketing contract services and research and development costs as of August 31, 2003. As of February 29, 2004, liabilities subject to compromise and other current liabilities in the above table include accruals for research and development costs.

7. Segment Reporting

     The Company’s reportable segments offer different products and/or services. Each segment also requires different technology and marketing strategies. The Company’s two reportable segments are VMI and Network Service Center Systems (“NSC Systems”).

     During the last half of the 2001 calendar year, the Company commenced marketing the VMI product licensed from Minorplanet Limited into the AVL marketplace in the United States. VMI is designed to maximize the productivity of a mobile workforce as well as reduce vehicle mileage and fuel related expenses. The VMI technology consists of: (i) a data control unit that continually monitors and records a vehicle’s position, speed and distance traveled; (ii) a command and control center which receives and stores in a database information downloaded from the DCU’s; and (iii) software used for communication, messaging and detailed reporting. VMI uses the satellite-based global positioning system to acquire a vehicle location on a minute-by-minute basis and a global system for mobile communications based cellular network to transmit data between the DCU’s and the CCC. The VMI application is targeted to small and medium-sized fleets in the metro marketplace, which the Company believes represents a total U.S. market of approximately 20 million vehicles.

     Through its NSC Systems segment, the Company provides long-haul trucking companies with a comprehensive package of mobile communications and management information services, thereby enabling its trucking customers to effectively monitor the operations and improve the performance of their fleets. The initial product application was customized and has been sold to and installed in the service vehicle fleets of the member companies of SBC Communications, Inc., pursuant to the Service Vehicle Contract. Prior to the Sale to Aether, the Company also provided mobile asset tracking solutions with its trailer-tracking products, TrackWare® and 20/20V™. Pursuant to the terms of the Sale, these products continued to use the Company’s Network Service Center to relay voice and messages between the mobile units and the customer’s dispatchers.

     On March 15, 2002, the Company completed the Sale to Aether of certain NSC Systems assets and licenses related to the Company’s long-haul trucking and asset-tracking businesses pursuant to an Asset Purchase Agreement effective as of March 15, 2002, by and between the Company and Aether.

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     Operating expenses are allocated to each segment based on management’s estimate of the utilization of financial resources by each segment. The following tables set forth segment financial information (in thousands).

8. Nasdaq Listing Notice and Reverse Stock Split

     On October 8, 2003, the Company received notice from the Nasdaq Listings Qualifications Staff stating that the Company was not in compliance with Marketplace Rule 4310(c)(4), which requires the closing bid price of the Company’s common stock to be at least $1.00 per share. As Nasdaq had previously granted two 180-day extensions, the Company was given 90 additional calendar days, or until January 6, 2004, to demonstrate 10 consecutive trading days whereby the minimum bid price for the Company’s common stock closes at $1.00 per share or more.

     On October 9, 2003, the Company’s board of directors approved the amendment of Article IV of the Company’s certificate of incorporation, and additional actions, to effect a one-for-five reverse stock split of the Company’s outstanding common stock. On November 7, 2003, Mackay Shields LLC (“Mackay”) and Erin Mills Investment Corporation (“Erin Mills”), stockholders collectively holding more than 50% of the Company’s outstanding common stock, executed a stockholder consent approving the one-for-five reverse stock split. As of November 7, 2003, prior to the reverse stock split, Mackay owned 10,699,794 shares and Erin Mills owned 22,196,182 shares of the Company’s common stock, respectively, which was approximately 22% and 46%, respectively, of the total number of outstanding shares of the Company’s common stock, its sole voting security. Under Delaware law, any action that is required to be taken, or that may be taken, at any annual or special meeting of stockholders of a Delaware corporation may be taken, without a meeting, without prior notice and without a vote, if a written consent, setting forth the action taken, is signed by the holder or holders of the outstanding voting securities having not less than the minimum number of votes necessary to authorize such action.

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     On November 12, 2003, the Company filed a Definitive Information Statement on Schedule 14C with the SEC, and mailed the Information Statement to stockholders of record as of November 7, 2003. On December 3, 2003, the Company announced that the one-for-five reverse stock split took effect at the opening of trading on the Nasdaq SmallCap Market. The reverse split reduced the Company’s outstanding shares of common stock to 9,669,832 from 48,349,161 shares previously outstanding. All shares and earnings per share amounts for all periods presented have been restated to reflect the reverse stock split.

     On December 17, 2003, Nasdaq notified the Company that it had complied with the Nasdaq requirement to record 10 consecutive trading days in which the Company’s common stock closed with a minimum bid price of $1.00 per share or higher and that the Company’s listing on the Nasdaq SmallCap Market was in good standing.

     On February 2, 2004, the Company also received a letter from the Nasdaq Listing Qualifications Staff indicating that, as a result of the Company’s Chapter 11 bankruptcy filing (See Note 1) in accordance with the Staff’s authority under Nasdaq Marketplace Rules 4330(a)(1) and 4300, the Company’s securities would be delisted from The Nasdaq Stock Market at the opening of business on Feb. 11, 2004, unless the Company requested a hearing in accordance with the Marketplace Rule 4800 Series. The Company requested and attended an oral hearing on March 11, 2004 before the Nasdaq Listing Qualifications Panel to appeal the Staff’s decision in accordance with Marketplace Rule 4800 Series. At the time of the filing of this Form 10-Q, the Company had not yet received notification from the Nasdaq Listing Qualifications Panel of its decision.

9. Change in Principal Independent Public Accountants

     On March 15, 2004, the Audit Committee of the Board of Directors of the Company approved the dismissal of and dismissed Deloitte Touche LLP (“Deloitte”) who previously served as the Company’s principal independent public accountants.

     On November 7, 2003 Deloitte completed its audit of the consolidated financial statements of the Company as of August 31, 2003 and 2002, and for the fiscal year ended August 31, 2003 and the eight month period ended August 31, 2002, and issued a report thereon dated November 7, 2003 which expressed an unqualified opinion and included explanatory paragraphs concerning the Company’s ability to continue as a going concern (the “November 7, 2003 Report”). The November 7, 2003 Report is included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003 which was previously filed by the Company with the Securities and Exchange Commission (the “Commission”) on December 1, 2003.

     Except as contained in Deloitte’s November 7, 2003 Report, Deloitte’s reports on the consolidated financial statements of the Company for the eight month transition period ended August 31, 2002 and for the fiscal year ended August 31, 2003 do not contain an adverse opinion or disclaimer of opinion or a qualification or modification as to uncertainty, audit scope or accounting principles.

     During the Company’s two most recent fiscal years and through March 19, 2004, there were no disagreements with Deloitte on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Deloitte’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company’s consolidated financial statements for such years, and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K.

     On March 19, 2004, following their review of the Company’s disclosure contained herein in response to Item 304(a) of Regulation S-K, Deloitte furnished the Company with a letter addressed to the Commission stating that it agrees with the statements made by the Company contained herein in response to Item 304(a) of Regulation S-K.

     On March 15, 2004, the Audit Committee of the Company’s Board of Directors approved the engagement of BDO Seidman LLP (“BDO”), to serve as the Company’s principal independent public accountants to audit the Company’s financial statements for the fiscal year 2004, subject to the final approval of the United States Bankruptcy Court for the Northern District of Texas (Dallas Division).

     During the Company’s two most recent fiscal years and through March 19, 2004, the Company did not consult BDO with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or any other matters or reportable events listed in Items 304 (a)(2)(i) and (ii) of Regulation S-K. See Form 8-K filed by the Company on March 19, 2004 that contains additional information.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

     As a result of the completion of the transactions contemplated by the Stock Purchase and Exchange Agreement by and among Minorplanet Systems USA Inc., a Delaware corporation (the “Company”), Minorplanet Systems PLC, a United Kingdom public limited company (“Minorplanet UK”), and Mackay Shields LLC, dated February 14, 2001, the Company commenced marketing the Vehicle Management Information ™ (“VMI”) product licensed from Minorplanet Limited, the operating subsidiary of Minorplanet UK, into the automatic vehicle location (“AVL”) market in the United States during the last half of 2001. VMI is designed to maximize the productivity of a mobile workforce as well as reduce vehicle mileage and fuel related expenses. The VMI technology consists of: (i) a data control unit (“DCU”) that continually monitors and records a vehicle’s position, speed and distance traveled; (ii) a command and control center (“CCC”) which receives and stores in a database information downloaded from the DCU’s; and (iii) software used for communication, messaging and detailed reporting. VMI uses satellite-based Global Positioning System (“GPS”) location technology to acquire a vehicle location on a minute-by-minute basis and a global system for mobile communications (“GSM”) based cellular network to transmit data between the DCU’s and the CCC. GSM is a digital technology developed in Europe and has been adapted for North America. GSM is the most widely used wireless digital standard in the world. The VMI application is intended to be targeted to small and medium sized fleets in the metro marketplace, which the Company believes represents a total U.S. market of approximately 20 million vehicles.

     VMI provides minute-by-minute visibility into the activities of a mobile workforce via an extensive reporting system that provides real-time and exception-based reporting. Real-time reports provide information regarding a vehicle’s location, idling, stop time, speed and distance traveled. With real-time reporting, the user can view when an employee starts or finishes work, job site arrival times and site visit locations. In addition, exception reports allow the user to set various parameters within which vehicles must operate, and the system will report exceptions including speeding, extended stops, unscheduled stops, route deviations, visits to barred locations and excessive idling.

     Through its NSC Systems segment, the Company provides long-haul trucking companies with a comprehensive package of mobile communications and management information services, thereby enabling its trucking customers to effectively monitor the operations and improve the performance of their fleets. The initial product application was customized and has been sold to and installed in the service vehicle fleets of the member companies of SBC Communications, Inc. (“SBC Companies”), pursuant to the service vehicle contract (the “Service Vehicle Contract” or “Contract”). Prior to the sale to Aether Systems Inc. of certain assets and licenses, the Company also provided mobile asset tracking solutions with its trailer-tracking products, TrackWare® and 20/20V™.

     On March 15, 2002, the Company completed the sale to Aether Systems, Inc. (“Aether”) of certain assets and licenses related to the Company’s long-haul trucking and asset-tracking businesses pursuant to an Asset Purchase Agreement effective as of March 15, 2002, by and between the Company and Aether (the “Sale”). Under the terms of the Sale, the Company sold to Aether assets and related license rights to its Platinum Service software solution, 20/20V™, and TrackWare® asset and trailer-tracking products. In addition, the Company and Aether agreed to form a strategic relationship with respect to the Company’s long-haul customer products, pursuant to which the Company assigned to Aether all service revenues generated post-closing from its HighwayMaster Series 5000 (“Series 5000”) customer base. Aether, in turn, agreed to reimburse the Company for the network and airtime service costs related to providing the Series 5000 service. Hereinafter, Series 5000 units for which the Company provides network services are referred to as network services subscribers.

Bankruptcy Proceedings

     On February 2, 2004, (the “Commencement Date”), the “Company”, and two of its wholly-owned subsidiaries, Caren (292) Limited and Minorplanet Systems USA Limited, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas Dallas Division (the “Bankruptcy Court”), in order to facilitate the restructuring of the Company’s debt, trade liabilities, and other obligations. The Company has remained in possession of its assets and is operating as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. As “debtors-in-possession”, the Company is authorized to

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continue to operate as an ongoing business but may not engage in transactions outside of the ordinary course of business without obtaining approval from the Bankruptcy Court.

     Under Section 362 of the Bankruptcy Code, the filing of the bankruptcy petition automatically stays most actions against the Company including most actions to collect pre-petition indebtedness or exercise control over the property of the Company’s estate. Unless otherwise ordered by the Bankruptcy Court, substantially all pre-petition liabilities will be addressed under a plan of reorganization to be filed by the Company. The Bankruptcy Court has established April 9, 2004 as the bar date for creditors and other parties-in-interest (other than governmental entities) to file their proofs of claims and proofs of interest. The bar date for governmental entities to file their proofs of claims and proofs of interest is May 10, 2004. Thus, the aggregate amount of all pre-petition claims is not known at this time.

     Under Section 365 of the Bankruptcy Code, the Company may assume or reject certain pre-petition executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Upon rejection of an executory contract or unexpired lease, the debtor is generally excused from further performance under the contract. The contracting party will have a claim for the debtor’s failure to perform as if the breach of contract occurred immediately prior to the filing of the bankruptcy petition. Contracting parties to these rejected contracts or unexpired leases may file proofs of claim against the Company’s estate for damages, if any, relating to such rejections. The Company cannot presently determine with certainty the ultimate aggregate liability that will result from the filing of claims relating to such contracts or unexpired leases that have been or may be rejected.

     In accordance with of Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”), the Company’s pre-petition liabilities that are subject to compromise have been reclassified and reported separately on the balance sheet at an estimated amount that will ultimately be allowed by the Bankruptcy Court. See Note 1 to the Company’s unaudited condensed consolidated financial statements.

     The United States Trustee has appointed an official committee of unsecured creditors (the “Creditors Committee”). The Creditors Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court. The rights and claims of various creditors and security holders will be determined by a plan of reorganization that is confirmed by the Bankruptcy Court. There can be no assurance that the Creditor’s Committee will support the Company’s positions or ultimate plan of reorganization, once proposed, and disagreements between the Creditor’s Committee and the Company could protract the Chapter 11 cases and could negatively impact the Company’s ability to operate during the Chapter 11 cases.

     In order to successfully emerge from Chapter 11 bankruptcy, the Company will need to propose a plan of reorganization and obtain confirmation of the plan of reorganization by the Bankruptcy Court. For the first 120 days after the Commencement Date, and if no trustee is appointed, the Company has the exclusive right to file a plan of reorganization in accordance with the Bankruptcy Code. If the Company fails to file a plan of reorganization within this period (or any extended period approved by the Bankruptcy Court), or if such reorganization plan is not accepted by the required number of creditors within the applicable time period, any party in interest may subsequently file its own plan of reorganization. Although the Company intends to file its plan of reorganization timely and expects the plan will fully satisfy all creditor claims, at this time it is not possible to accurately predict the effect of the bankruptcy filing on the Company’s business, creditors, or stockholders, when the Company may emerge from bankruptcy, or what the disposition will be of any claims against the Company. The Company’s future results depend on the timely and successful confirmation and implementation of a plan of reorganization.

     Any plan of reorganization that is ultimately approved by the Creditors Committee and confirmed by the Bankruptcy Court will likely result in the substantial dilution of the Company’s existing stockholders. Accordingly, the Company urges that extreme caution be exercised with respect to existing and future investments in any of the Company’s securities.

     Due to the ongoing Chapter 11 reorganization cases, the outcome of which is not presently determinable, the unaudited condensed consolidated financial statements contained herein are subject to material uncertainties and may not be indicative of the results of the Company’s future operations or financial position. No assurance can be given that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings.

     As a result of the items discussed above, there is substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon, but not limited to, formulation, approval, and confirmation of a plan of reorganization and the ability of the company to ultimately achieve

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positive results of operations. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recorded amounts or reflect any amounts that may ultimately be paid to settle liabilities and contingencies which may be required in the bankruptcy reorganization, or the effect of any changes, which may be made in connection with the Company’s operations resulting from the plan of reorganization.

Results of Operations

Three Months Ended February 29, 2004, Compared to Three Months Ended February 28, 2003

     Revenue decreased from $12.0 million during the three months ended February 28, 2003 to $6.0 million during the three months ended February 29, 2004 primarily due to a $6.5 million reduction in NSC Systems revenue. NSC Systems service revenues decreased from $8.5 million during the three months ended February 28, 2003 to $4.0 million during the three months ended February 29, 2004 primarily due to the anticipated reduction in the number of NSC Systems network services subscriber units from 20,261 at February 28, 2003 to 6,420 as of February 29, 2004. This decrease in network services subscriber units was anticipated after the Sale to Aether as many of these units have converted to either Aether’s network or to other carrier networks. The number of active units under the Service Vehicle Contract with SBC decreased from 34,479 at February 28, 2003 to 32,528 at February 29, 2004 also contributing to the drop in NSC Systems service revenue. NSC Systems product revenue, including ratable product revenue, decreased from $2.3 million during the three months ended February 28, 2003 to $0.3 million during the three months ended February 29, 2004 primarily due to the lower ratable product revenue recognition associated with the declining network subscriber unit base. New NSC Systems product sales during the three months ended February 29, 2004 were minimal consisting primarily of part sales under the Service Vehicle Contract.

     VMI revenue increased to $1.6 million during the three months ended February 29, 2004 from $1.2 million during the three months ended February 28, 2003. Total unit sales decreased to 530 units during the three months ended February 29, 2004 from 1,450 units sold during the same period of the previous fiscal year due primarily to a temporary reduction in sales personnel as management is actively working to revise the current sales model. In accordance with the Company’s revenue recognition policies, VMI revenue and the associated cost of sales are deferred and recognized over the contract life. Thus, the increase in VMI revenue during the three months ended February 29, 2004 is primarily due to the ratable recognition of previously deferred revenue associated with the VMI installed base. As of February 29, 2004, total VMI deferred product revenue reflected on the Company’s balance sheet, net of amortization, was $8.0 million.

     Total gross profit margin increased to 51% during the three months ended February 29, 2004 in comparison to 43% during the same period of the previous fiscal year. The improvement in gross profit margin was primarily due to higher product margins on VMI sales and a decrease in VMI airtime service costs due to cost reduction efforts and credits obtained from airtime providers. Also contributing to the improved margin was a decrease in network subscriber unit ratable gross profit recognition (network subscriber product sales have historically low margins) due to the network subscriber unit churn discussed above.

     Total operating expenses decreased to $4.1 million during the three months ended February 29, 2004 from $9.1 million during the three months ended February 28, 2003. During the same respective periods, sales and marketing costs decreased from $3.6 million to $0.6 million primarily due to a $1.2 million decrease in executive and non-executive consulting fees incurred under the addendum to the exclusive license and distribution agreement with Minorplanet Limited and the temporary reduction in sales and marketing personnel, and related operating costs, discussed above. General and administrative expenses decreased from $2.5 million during the three months ended February 28, 2003 to $1.5 million during the three months ended February 29, 2004 primarily due to personnel reductions, a decrease in professional fees (non-reorganization items) and other expenses associated with cost-cutting efforts, and a reversal of property tax accruals. During the three months ended February 29, 2004, the Company reversed property tax accruals of approximately $0.3 million in order to properly reflect the Company’s liability due to recent changes in Texas property tax laws. Customer service expenses decreased to $0.5 million during the three months ended February 29, 2004 from $1.0 million during the same period of the prior fiscal year primarily due to staffing reductions and other cost-cutting efforts.

     Depreciation and amortization expense decreased to $1.1 million during the three months ended February 29, 2004 from $1.5 million during the same period in the prior year primarily due to several network service center assets becoming fully depreciated.

     Operating losses improved to $1.1 million during the three months ended February 29, 2004 from $3.9

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million during the three months ended February 28, 2003. A $2.2 million reduction in gross profit margin, primarily due to the decrease in NSC Systems revenue discussed above, was offset by a $5.0 million decrease in operating expenses. The Company’s NSC Systems segment reported operating income of $1.3 million for the three months ended February 29, 2004, which was offset by a $2.4 million VMI segment operating loss.

     Other income and expense for the three months ended February 29, 2004 included income of $0.4 million associated with the reversal of an accrual for a commitment by the Company to modify certain previously sold circuit boards. The Company has determined that such modifications will not be required. The Company accrued $0.4 million in reorganization expenses, primarily professional fees, associated with its Chapter 11 bankruptcy filing during the three months ended February 29, 2004. The Company’s net loss before reorganization items improved from $4.4 million during the three months ended February 28, 2003 to $1.0 million during the three months ended February 29, 2004.

Six Months Ended February 29, 2004, Compared to Six Months Ended February 29, 2003

     Total revenue of $12.8 million for the six months ended February 29, 2004 decreased from $25.7 million during the same period of the prior fiscal year. NSC Systems revenue decreased from $23.6 million during the six months ended February 28, 2003 to $9.5 million during the six months ended February 29, 2004 primarily due to a reduction in active network subscriber units from 20,261 at February 28, 2003 to 6,420 as of February 29, 2004. This decrease in network services subscriber units was anticipated after the Sale to Aether as many of these units have converted to either Aether’s network or to other carrier networks. NSC Systems service revenue decreased from $18.6 million during the six months ended February 28, 2003 to $8.7 million during the six months ended February 29, 2004 while NSC Systems product revenue, including ratable product revenue, decreased from $5.0 million to $0.8 million for the same periods respectively. New NSC Systems product sales during the six months ended February 29, 2004 were minimal consisting primarily of parts sales under the Service Vehicle Contract.

     VMI revenue for the six months ended February 29, 2004 was $3.3 million up from $2.1 million during the same period of the prior fiscal year. Total unit sales decreased to approximately 1,200 units during the six months ended February 29, 2004 from 3,200 units sold during the same period of the previous fiscal year due primarily to a temporary reduction in sales personnel as management is actively working to revise the current sales model. In accordance with the Company’s revenue recognition policies, VMI revenue and the associated cost of sales are deferred and recognized over the contract life. Thus, the increase in VMI revenue during the six months ended February 29, 2004 is primarily due to the ratable recognition of previously deferred revenue associated with the VMI installed base.

     Total gross profit margin of 46% during the six months ended February 29, 2004 improved from 42% during the six months ended February 28, 2003. Contributing to the improvement in margin was a decrease in network subscriber unit ratable gross profit recognition (network subscriber product sales have historically low margins) due to the network subscriber unit churn discussed above. Also contributing were higher margins on VMI product sales and part sales under the Service Vehicle Contract, and a decrease in VMI airtime service costs due to cost reduction efforts and credits obtained from airtime providers.

     On September 26, 2002, the Company entered into a letter addendum to the exclusive license and distribution agreement with Minorplanet Limited, the operating subsidiary of Minorplanet UK, to provide executive and non-executive sales and marketing consulting services for the six-month period from August 23, 2002 to February 22, 2003. Under terms of the agreement, the Company was not required to pay the executive consulting fees incurred during this six-month period totaling $1.76 million unless and until the Company filed a Form 10-K reporting net income and positive cash flow for the previous 12-month period. As of August 31, 2003 a liability for the $1.76 million in executive consulting fees, payable to Minorplanet Limited, was included on the Company’s Condensed Consolidated Balance Sheets under “Other non-current liabilities.” On October 6, 2003, Minorplanet UK forever waived and discharged the $1.76 million executive consulting fees owed by the Company. Thus, the $1.76 million liability was reversed and effectively converted to a capital contribution by Minorplanet UK to the Company. In addition, a $0.3 million liability payable to Minorplanet Limited for non-executive consulting costs was converted to a capital contribution during the six months ended February 29, 2004. The offsetting credits have been reflected in additional paid-in capital on the Company’s Condensed Consolidated Balance Sheets.

     Total operating expenses decreased from $18.6 million during the six months ended February 28, 2003 to $9.8 million during the six months ended February 29, 2004. Sales and marketing costs decreased by $6.1 million during the same periods respectively primarily due to a $2.5 million decrease in executive and non-executive consulting fees

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incurred under the addendum to the exclusive license and distribution agreement with Minorplanet Limited and the temporary reduction in sales and marketing personnel, and related operating costs, discussed above. General and administrative expenses decreased from $5.0 million during the six months ended February 28, 2003 to $3.6 million during the six months ended February 29, 2004 primarily due to personnel reductions, lower bad debt expense, a decrease in professional fees (non-reorganization items) and other expenses due to cost-cutting efforts, and a reversal of property tax accruals. During the six months ended February 29, 2004, the Company reversed property tax accruals of approximately $0.3 million in order to properly reflect the Company’s liability due to recent changes in Texas property tax laws. Customer service expenses decreased to $1.3 million during the six months ended February 29, 2004 from $2.0 million during the same period of the prior fiscal year primarily due to staffing reductions and other cost cutting efforts. Depreciation and amortization expense decreased to $2.2 million during the six months ended February 29, 2004 from $2.9 million during the same period in the prior year primarily due to several network service center assets becoming fully depreciated.

     Operating losses improved to $3.9 million during the six months ended February 29, 2004 from $7.8 million during the six months ended February 28, 2003. The Company’s NSC Systems segment reported operating income of $2.2 million for the six months ended February 29, 2004, which was offset by a $6.1 million VMI segment operating loss.

     The Company accrued $0.4 million in reorganization expenses, primarily professional fees, associated with its Chapter 11 bankruptcy filing during the six months ended February 29, 2004. The Company’s net loss before reorganization items improved from $8.9 million during the six months ended February 28, 2003 to $4.3 million during the six months ended February 29, 2004.

Critical Accounting Policies and Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

     The significant accounting policies and estimates, which are believed to be the most critical to aid in fully understanding and evaluating reported financial results, are stated in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K and Form 10-K/A for the year ended August 31, 2003.

Liquidity and Capital Resources

     The Company has incurred significant operating losses since inception and has limited financial resources to support itself until such time that it is able to generate positive cash flow from operations. The Company had cash and cash equivalents of $3.2 million as of February 29, 2004, which included $0.5 million in cash held in escrow accounts on behalf of the Company by third parties providing professional services for the Company during the ongoing bankruptcy proceedings. The Bankruptcy Court has not yet approved payment for such professional services.

     Net cash used in operating activities was $1.6 million and $8.0 million during the three and six months ended February 29, 2004 respectively and was primarily attributable to the ongoing VMI operations. Interest paid on senior notes during the three and six months ended February 29, 2004 was $1.0 million.

     On February 2, 2004, the Company filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in order to facilitate the restructuring of the Company’s debt, trade liabilities, and other obligations. As of February 29, 2004, the Company had $20.4 million in outstanding liabilities subject to compromise including $14.2 million in senior notes payable. Although the Company expects to exit the Chapter 11 process as a stronger and more financially viable entity, at this time it is not possible to accurately predict the effect of the bankruptcy filing on the Company’s business, creditors, or stockholders, when the Company may emerge from bankruptcy, or what the disposition will be of any claims against the Company. It is possible that if the debt reduction is not enough, because of operating performance or other factors, the Company may not be able to continue as a going concern. The Company’s future

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results depend on the timely and successful confirmation and implementation of a plan of reorganization.

     Any plan of reorganization that is ultimately approved by the creditors and confirmed by the Bankruptcy Court will likely result in the substantial dilution of the Company’s existing stockholders. Accordingly, the Company urges that extreme caution be exercised with respect to existing and future investments in any of the Company’s securities.

     The Company recently received a minimum commitment for $1.3 million of debtor-in-possession financing, subject to Bankruptcy Court approval. The $1.3 million convertible promissory note principal balance is due 36 months from the date of closing, with an annual interest rate of 12 percent. The Company is required to pay 36 monthly accrued interest-only payments on the principal balance, with the initial interest payment due 30 days from closing. Following the initial year of the note, the Company may elect to repay the loan without premium or penalty. The lender may elect at any time prior to the maturity date of the note to convert all or any part of the principal or accrued interest to common stock, discounted at a rate of 20 percent of the market value if the election is made within the initial year of the loan or 15 percent of the market value if the election is made thereafter. Market value for purposes of conversion is defined as the average trading price of the common stock five days before and five days after the date the lender elects to exercise the conversion. The Company intends to obtain approval of the debtor-in-possession financing upon confirmation of its plan of reorganization.

     The Company believes the market potential for mobile data and communications to private fleets in the United States is substantial. The Company believes the total market potential to be approximately 20 million vehicles and that this market is approximately 5 percent penetrated. The Company is currently positioned with product offerings and integrated and proven operations support to take advantage of the significant market potential. In addition, the Company renewed its service vehicle contract with SBC (the “Service Vehicle Contract”) for an additional term which ends on January 30, 2005. Moreover, as a result of the sale to Aether of certain assets and licenses related to the Company’s long-haul trucking and asset-tracking businesses, Aether is contractually obligated to continue to reimburse the Company for the network and airtime service costs related to providing service for HighwayMaster Series 5000 (“Series 5000”) units as long as such units remain active on the Company’s network. On July 8, 2003, the Company and Aether extended the transition period during which such Series 5000 units remain active on the Company’s network until January 30, 2005.

Critical success factors in management’s plans to achieve positive cash flow from operations include:

•		Obtaining confirmation of a plan of reorganization by the Bankruptcy Court and successful implementation of such plan of reorganization.
•		Ability to raise additional capital resources.
•		Renewal of the Service Vehicle Contract and entering into a new agreement with SBC to upgrade their fleets to new General Packet Radio Service (“GPRS”) -based technologies.
•		Significant market acceptance of the Company’s product offerings in the United States.
•		Maintain and expand the Company’s direct sales channel and expand into new markets not currently served by the Company. New salespersons will require training and time to become productive. In addition, there is significant competition for qualified salespersons, and the Company must continue to offer attractive compensation plans and opportunities to attract qualified salespersons.
•		Maintain and expand indirect distribution channels.
•		Secure and maintain adequate third party leasing sources for customers who purchase the Company’s products.
•		Ability to develop GPRS based mobile unit for SBC and AVL market.

There can be no assurances that any of these success factors will be realized or maintained.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company does not have any material exposure to market risk associated with its cash and cash equivalents. The Company’s 13 3/4% Senior Notes due September 15, 2005 are at a fixed rate and, thus, are not exposed to interest rate risk.

Forward Looking Statements

     This report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based upon management’s current beliefs and projections, as well as assumptions made by and information currently available to management. When used in this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect” and similar

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expressions are intended to identify forward-looking statements. Any statement or conclusion concerning future events is a forward-looking statement, and should not be interpreted as a promise or conclusion that the event will occur. The Company’s actual operating results or the actual occurrence of any such event could differ materially from those projected in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in this report, and the Company’s Annual Report on Form 10-K for the year ended August 31, 2003.

ITEM 4: CONTROLS AND PROCEDURES

     The Company maintains disclosure controls and procedures, which it has designed to ensure that material information related to the Company, including its consolidated subsidiaries, is made known to the Company’s disclosure committee on a regular basis. The Company has a disclosure committee, which consists of certain members of the Company’s senior management.

     Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), an evaluation of the effectiveness of the Company’s disclosure controls and procedures was performed as of February 29, 2004. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s public disclosure obligations under the relevant federal securities laws and the SEC rules promulgated thereunder.

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Voluntary Bankruptcy Filing

     On February 2, 2004, (the “Commencement Date”), Minorplanet Systems USA Inc., a Delaware corporation (the “Company”), and two of its wholly-owned subsidiaries, Caren (292) Limited and Minorplanet Systems USA Limited, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas Dallas Division (the “Bankruptcy Court”), in order to facilitate the restructuring of the Company’s debt, trade liabilities, and other obligations. The Company has remained in possession of its assets and is operating as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. The bankruptcy cases for Minorplanet Systems USA, Inc., Caren (292) Limited, and Minorplanet Systems USA Limited are being jointly administered under Case No. 04-31200 HDH-11 currently pending in the United States Bankruptcy Court for the Northern District of Texas (Dallas Division). As “debtors-in-possession”, the Company is authorized to continue to operate as an ongoing business but may not engage in transactions outside of the ordinary course of business without obtaining approval from the Bankruptcy Court.

     Under Section 362 of the Bankruptcy Code, the filing of the bankruptcy petition automatically stays most actions against the Company including most actions to collect pre-petition indebtedness or exercise control over the property of the Company’s estate. Unless otherwise ordered by the Bankruptcy Court, substantially all pre-petition liabilities will be addressed under a plan of reorganization to be filed by the Company. The Bankruptcy Court has established April 9, 2004 as the bar date for creditors and other parties-in-interest (other than governmental entities) to file their proofs of claims and proofs of interest. The bar date for governmental entities to file their proofs of claims and proofs of interest is May 10, 2004. Thus, the aggregate amount of all pre-petition claims is not known at this time.

     Under Section 365 of the Bankruptcy Code, the Company may assume or reject certain pre-petition executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Upon rejection of an executory contract or unexpired lease, the debtor is generally excused from further performance under the contract. The contracting party will have a claim for the debtor’s failure to perform as if the breach of contract occurred immediately prior to the filing of the bankruptcy petition. Contracting parties to these rejected contracts or unexpired leases may file proofs of claim against the Company’s estate for damages, if any, relating to such rejections. The Company cannot presently determine with certainty the ultimate aggregate liability that will result from the filing of claims relating to such contracts or unexpired leases that have been or may be rejected.

     The United States Trustee has appointed an official committee of unsecured creditors (the “Creditors

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Committee”). The Creditors Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court. The rights and claims of various creditors and security holders will be determined by a plan of reorganization that is confirmed by the Bankruptcy Court. There can be no assurance that the Creditor’s Committee will support the Company’s positions or ultimate plan of reorganization, once proposed, and disagreements between the Creditor’s Committee and the Company could protract the Chapter 11 cases and could negatively impact the Company’s ability to operate during the Chapter 11 cases.

     In order to successfully emerge from Chapter 11 bankruptcy, the Company will need to propose a plan of reorganization and obtain confirmation of the plan of reorganization by the Bankruptcy Court. For the first 120 days after the Commencement Date, and if no trustee is appointed, the Company has the exclusive right to file a plan of reorganization in accordance with the Bankruptcy Code. If the Company fails to file a plan of reorganization within this period (or any extended period approved by the Bankruptcy Court), or if such reorganization plan is not accepted by the required number of creditors within the applicable time period, any party in interest may subsequently file its own plan of reorganization. Although, the Company intends to file its plan of reorganization timely and expects the plan will fully satisfy all creditor claims, at this time it is not possible to accurately predict the effect of the bankruptcy filing on the Company’s business, creditors, or stockholders, when the Company may emerge from bankruptcy, or what the disposition will be of any claims against the Company. The Company’s future results depend on the timely and successful confirmation and implementation of a plan of reorganization.

     Any plan of reorganization that is ultimately approved by the Creditors Committee and confirmed by the Bankruptcy Court will likely result in the substantial dilution of the Company’s existing stockholders. Accordingly, the Company urges that extreme caution be exercised with respect to existing and future investments in any of the Company’s securities.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     On October 9, 2003, the Company’s board of directors approved the amendment of Article IV of the Company’s certificate of incorporation, and additional actions, to effect a one-for-five reverse stock split of the Company’s outstanding common stock. On November 7, 2003, Mackay Shields LLC (“Mackay”) and Erin Mills Investment Corporation (“Erin Mills”), stockholders collectively holding more than 50% of the Company’s outstanding common stock, executed a stockholder consent approving the one-for-five reverse stock split. As of November 7, 2003, prior to the reverse stock split, Mackay owned 10,699,794 shares and Erin Mills owned 22,196,182 shares of the Company’s common stock, respectively, which was approximately 22% and 46%, respectively, of the total number of outstanding shares of the Company’s common stock, its sole voting security. Under Delaware law, any action that is required to be taken, or that may be taken, at any annual or special meeting of stockholders of a Delaware corporation may be taken, without a meeting, without prior notice and without a vote, if a written consent, setting forth the action taken, is signed by the holder or holders of the outstanding voting securities having not less than the minimum number of votes necessary to authorize such action.

     On November 12, 2003, the Company filed a Definitive Information Statement on Schedule 14C with the SEC, and mailed the Information Statement to stockholders of record as of November 7, 2003. On December 3, 2003, the Company announced that the one-for-five reverse stock split took effect at the opening of trading on the Nasdaq SmallCap Market. The reverse split reduced the Company’s outstanding shares of common stock to 9,669,832 from 48,349,161 shares previously outstanding. All shares and earnings per share amounts for all periods presented have been restated to reflect the reverse stock split.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits - See the attached Index to Exhibits.
(b)		Reports on Form 8-K. The following current reports on Form 8-K have been filed by the Company subsequent to November 30, 2003:
		(1) On December 30, 2003, the Company reported under Item 5 that the Company had received notice from the Nasdaq Staff on December 17, 2003 stating that the Company had regained compliance with Nasdaq Marketplace Rule 4310(c)(4) and that the Company’s listing on the Nasdaq SmallCap Market was in good standing.

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(2)		On February 17, 2004, the Company reported under:
(a)		Item 3 that on February 2, 2004, Minorplanet Systems USA, Inc. (“Minorplanet”) and its subsidiaries Caren (292) Limited (“Caren”) and Minorplanet Systems USA Limited (“Limited”) (collectively referred to as the “Company”) filed a voluntary petition for reorganization under Chapter 11, Title 11 of the United States Bankruptcy Code in the Northern District of Texas (Dallas Division) to restructure its financial affairs;
(b)		Item 5 that: (i) on January 30, 2004, the Company had secured a firm commitment for debtor-in-possession financing in the amount of $1.3 million subject to Bankruptcy Court approval; (ii) on February 2, 2004, the Company had received notice from the Nasdaq Listing Qualifications Staff that the Company’s securities would be delisted from the Nasdaq Stock Market due to the Company’s bankruptcy filing unless the Company requested a hearing before the Nasdaq Listing Qualifications Panel and that the Company had requested such a hearing before the Panel; and (iii) effective January 31, 2004, the Company had engaged Dennis R. Casey to serve as its President and Chief Executive Officer.
(3)		On March 19, 2004, the Company reported under Item 4 that:

•		On March 15, 2004, the Audit Committee of the Board of Directors of the Company approved the dismissal of and dismissed Deloitte Touche LLP who previously served as the Company’s principal independent public accountants.
•		On March 15, 2004, the Audit Committee of the Company’s Board of Directors approved the engagement of BDO Seidman LLP, to serve as the Company’s principal independent public accountants to audit the Company’s financial statements for the fiscal year 2004, subject to the final approval of the United States Bankruptcy Court for the Northern District of Texas (Dallas Division).

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.

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INDEX TO EXHIBITS