  We analyze the RXTE observations of the April 1998 outburst of SAX
J1808.4-3658. We show that the soft blackbody component of the X-ray spectrum
is from the hotspot on the neutron star surface, while the hard component is
from Comptonization of these blackbody photons in the plasma heated by the
accretion shock. The disc cannot provide enough seed photons for
Comptonization. It is truncated into an optically thin flow at ~20-40 R_g by
some generic mechanisms common for black holes and neutron stars. Only below
the truncation radius the flow is disrupted by the magnetic field and
collimated onto the surface. The pulse profiles of both spectral components
imply several constraints on the geometry of the system: the inclination angle,
location and size of the hotspot and the shock.
