**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**
| **(Mark One)**                                         |
|--------------------------------------------------------|
| **x**                                                  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                   |
| **For the  quarterly period ended September 30, 2006** |
|                                                   |
| **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: 000-51746**

**Traffic.com,Inc.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                              |   | **25-1823631**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State of  Incorporation)                 |   | (IRS Employer  Identification Number) |
|                                      |   |                                  |
| **851  Duportail Road**                   |   | ** **                            |
| **Wayne,  Pennsylvania**                  |   | **19087**                             |
| (Address of  principal executive offices) |   | (Zip Code)                            |

 

Registrant’stelephone number, including area code: ** (610) 725-9700**

**Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.**

| **YES****x            NO****o** |
|------------------------------------------------------------------------------|

 

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.**

 
| **Large Accelerated Filer  ****o** | **Accelerated filer  ****o** | **Non-Accelerated Filer  ****x** |
|-----------------------------------------|-----------------------------------|---------------------------------------|

 

**Indicateby checkmark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act)**

| **YES****o        NO****x** |
|------------------------------------------------------|

 

**AtOctober 31, 2006, there were 20,597,273 shares of common stock outstanding.**

 

 

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**TRAFFIC.COM, INC.**

INDEX
|                 | ** ** | ** **            | ** ** | ** **                                                                                                                                            | ** ** | ** ** |
|-----------------|------------|-----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Part I.         |       | Financial Information |       |                                                                                                                                                  |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       | Item 1.               |       | Unaudited Condensed Consolidated Financial  Statements                                                                                                |       |       |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       |                  |       | Condensed Consolidated Balance Sheets at September 30,  2006 (unaudited) and December 31, 2005                                                   |       | 2          |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       |                  |       | Condensed Consolidated Statements of Operations  (unaudited) for the three and nine months ended September 30, 2006 and  September 30, 2005 |       | 3          |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       |                  |       | Condensed Consolidated Statements of Cash Flows  (unaudited) for the nine months ended September 30, 2006 and  September 30, 2005           |       | 4          |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       |                  |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                                       |       | 5          |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       | Item 2.               |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                           |       | 11         |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       | Item 3                |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                           |       | 19         |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       | Item 4.               |       | Controls and Procedures                                                                                                                               |       | 19         |
|            |       |                  |       |                                                                                                                                                  |       |       |
|  Part  II. |       | Other  Information    |       |                                                                                                                                                  |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       | Item  1.              |       | Legal  Proceedings                                                                                                                                    |       | 19         |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       | Item 1A.              |       | Risk Factors                                                                                                                                          |       | 20         |
|            |       |                  |       |                                                                                                                                                  |       |       |
|            |       | Item 6.               |       | Exhibits                                                                                                                                              |       | 20         |
|            |       |                  |       |                                                                                                                                                  |       |       |
| Signatures      |       |                  |       | 21                                                                                                                                                    |
|            |       |                  |       |                                                                                                                                                  |       |       |
| Exhibits        |       |                  |       | 22                                                                                                                                                    |

 

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**Traffic.com, Inc.****Condensed Consolidated Balance Sheets*****(In Thousands, ExceptShare Amounts)***
| ** **                                                                                                                                                                                | ** ** | **As of   September 30,  2006** | ** ** | **As of   December 31,   2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **(unaudited)**                                | ** ** | ** **                                          | ** ** |
| **Assets**                                                                                                                                                                                |       |                                           |       |                                                |       |
| Current assets:                                                                                                                                                                           |       |                                           |       |                                                |       |
| Cash and cash  equivalents                                                                                                                                                                |       | $                                              | 13,621     |                                                | $          | 13,143 |   |
| Short-term  investments                                                                                                                                                                   |       | 8,402                                          |       | —                                              |       |
| Accounts  receivable, net of allowance of $697 and $779 at September 30, 2006 and  December 31, 2005, respectively                                                                   |       | 12,798                                         |       | 10,177                                              |       |
| Government  services receivables                                                                                                                                                          |       | 1,806                                          |       | 2,091                                               |       |
| Deferred  offering costs                                                                                                                                                                  |       | —                                         |       | 2,368                                               |       |
| Other current  assets                                                                                                                                                                     |       | 1,666                                          |       | 723                                                 |       |
| Total current assets                                                                                                                                                                      |       | 38,293                                         |       | 28,502                                              |       |
| Property and equipment,  net                                                                                                                                                              |       | 25,494                                         |       | 23,816                                              |       |
| Other long-term assets                                                                                                                                                                    |       | 795                                            |       | 2,660                                               |       |
| Total assets                                                                                                                                                                              |       | $                                              | 64,582     |                                                | $          | 54,978 |   |
| **Liabilities, redeemable  convertible preferred stock, and stockholders’ deficit**                                                                                                  |       |                                           |       |                                                |       |
| Current liabilities:                                                                                                                                                                      |       |                                           |       |                                                |       |
| Accounts payable                                                                                                                                                                          |       | $                                              | 1,926      |                                                | $          | 3,023 |   |
| Accrued station  compensation                                                                                                                                                             |       | 3,442                                          |       | 3,032                                               |       |
| Accrued legal  settlements                                                                                                                                                                |       | —                                         |       | 7,125                                               |       |
| Other accrued  expenses                                                                                                                                                                   |       | 2,738                                          |       | 4,528                                               |       |
| Revolving credit  facility                                                                                                                                                                |       | —                                         |       | 4,128                                               |       |
| Current portion  of deferred revenue                                                                                                                                                      |       | 1,603                                          |       | 1,711                                               |       |
| Current portion  of deferred license fees                                                                                                                                                 |       | 2,751                                          |       | 1,148                                               |       |
| Total current  liabilities                                                                                                                                                                |       | 12,460                                         |       | 24,695                                              |       |
| Senior secured credit  facility and accrued interest                                                                                                                                      |       | —                                         |       | 37,659                                              |       |
| Deferred revenue                                                                                                                                                                          |       | 26,873                                         |       | 23,261                                              |       |
| Deferred license fees                                                                                                                                                                     |       | 7,364                                          |       | 9,385                                               |       |
| Other long-term  liabilities                                                                                                                                                              |       | 1,392                                          |       | 678                                                 |       |
|                                                                                                                                                                                      |       | 48,089                                         |       | 95,678                                              |       |
| Redeemable convertible  preferred stock, $0.01 par value, 30,000,000 shares authorized at September  30, 2006:                                                                            |       |                                           |       |                                                |       |
| Series E;  18,000,000 shares authorized and 16,265,094 issued and outstanding at  December 31, 2005                                                                             |       | —                                         |       | 32,530                                              |       |
| Series E-1;  6,419,811 shares authorized, issued and outstanding at December 31, 2005                                                                                           |       | —                                         |       | 9,321                                               |       |
| Series F;  6,000,000 shares authorized and 5,042,090 issued and outstanding at  December 31, 2005                                                                               |       | —                                         |       | 15,126                                              |       |
|                                                                                                                                                                                      |       | —                                         |       | 56,977                                              |       |
| Stockholders’ equity  (deficit):                                                                                                                                                     |       |                                           |       |                                                |       |
| Common stock,  $0.01 par value, 100,000,000 shares authorized and 20,595,546 and 3,826,325  shares issued and outstanding at September 30, 2006 and December 31,  2005, respectively |       | 207                                            |       | 39                                                  |       |
| Additional  paid-in capital                                                                                                                                                               |       | 193,005                                        |       | 61,566                                              |       |
| Treasury stock  at cost; 41,881 shares at September 30, 2006                                                                                                                              |       | (395                                           | )          | —                                              |       |
| Notes receivable  from stockholders                                                                                                                                                       |       | (77                                            | )          | (177                                                | )          |
| Deferred stock  based compensation                                                                                                                                                        |       | —                                         |       | (1,672                                              | )          |
| Accumulated  deficit                                                                                                                                                                      |       | (176,247                                       | )          | (157,433                                            | )          |
| Total stockholders’  equity (deficit)                                                                                                                                                |       | 16,493                                         |       | (97,677                                             | )          |
| Total liabilities, redeemable convertible preferred stock and  stockholders’ equity (deficit)                                                                                        |       | $                                              | 64,582     |                                                | $          | 54,978 |   |

 

See accompanying notes.

2

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**Traffic.com, Inc.**

** Condensed Consolidated Statements ofOperations**

***(In Thousands, Except Per ShareAmounts)***

 
| ** **                                               | ** ** | **Three Months  Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                               | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(unaudited)**                                        | ** ** | **(unaudited)**                                           | ** ** |
| Revenue:                                                 |       |                                                   |       |                                                      |       |   |   |   |   |
| Advertising                                              |       | $                                                      | 11,029     |                                                      | $          | 9,564 |   | $ | 32,885 |   | $ | 29,071 |   |
| Traffic data  services                                   |       | 2,022                                                  |       | 1,126                                                     |       | 5,330 |   | 3,025 |   |
|                                                     |       | 13,051                                                 |       | 10,690                                                    |       | 38,215 |   | 32,096 |   |
| Cost of revenue                                          |       | 10,424                                                 |       | 8,595                                                     |       | 30,067 |   | 24,541 |   |
| Gross margin                                             |       | 2,627                                                  |       | 2,095                                                     |       | 8,148 |   | 7,555 |   |
| Operating expenses:                                      |       |                                                   |       |                                                      |       |   |   |   |   |
| Research and  development                                |       | 1,551                                                  |       | 983                                                       |       | 4,361 |   | 2,587 |   |
| Sales and  marketing                                     |       | 4,761                                                  |       | 3,733                                                     |       | 13,772 |   | 11,045 |   |
| General and  administrative                              |       | 3,013                                                  |       | 1,945                                                     |       | 8,146 |   | 6,137 |   |
| Legal  settlements                                       |       | —                                                 |       | 14,250                                                    |       | — |   | 18,473 |   |
|                                                     |       | 9,325                                                  |       | 20,911                                                    |       | 26,279 |   | 38,242 |   |
| Loss from operations                                     |       | (6,698                                                 | )          | (18,816                                                   | )          | (18,131 | ) | (30,687 | ) |
| Interest income  (expense), net                          |       | 281                                                    |       | (1,416                                                    | )          | (677 | ) | (4,229 | ) |
| Net loss                                                 |       | $                                                      | (6,417     | )                                                         | $          | (20,232 | ) | $ | (18,808 | ) | $ | (34,916 | ) |
| Accretion of redeemable  convertible preferred stock     |       | —                                                 |       | (554                                                      | )          | (108 | ) | (1,643 | ) |
| Net loss attributable  to common stockholders            |       | $                                                      | (6,417     | )                                                         | $          | (20,786 | ) | $ | (18,916 | ) | $ | (36,559 | ) |
| Net loss attributable  to common stockholders per share: |       |                                                   |       |                                                      |       |   |   |   |   |
| Basic and  diluted                                       |       | $                                                      | (0.31      | )                                                         | $          | (6.05 | ) | $ | (1.00 | ) | $ | (10.79 | ) |
| Number of shares used  in per share calculation:         |       |                                                   |       |                                                      |       |   |   |   |   |
| Basic and diluted                                        |       | 20,575                                                 |       | 3,438                                                     |       | 18,937 |   | 3,387 |   |

 

See accompanying notes.

3

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**Traffic.com, Inc.****Condensed Consolidated Statements of CashFlows*****(In thousands)***
| ** **                                                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Operating activities**                                                                   |       |                                                |       |   |   |
| Net loss                                                                                   |       | $                                                   | (18,808    | ) | $ | (34,916 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |       |                                                |       |   |   |
| Depreciation of  property and equipment                                                    |       | 2,650                                               |       | 1,652 |   |
| Amortization of  deferred financing fees and intangible assets                             |       | 1,614                                               |       | 442 |   |
| Stock based  compensation expense                                                          |       | 1,267                                               |       | 58 |   |
| Non-cash legal  expenses                                                                   |       | —                                              |       | 11,348 |   |
| Provision for  bad debts                                                                   |       | 57                                                  |       | 40 |   |
| Changes in  assets and liabilities:                                                        |       |                                                |       |   |   |
| Accounts and  government services receivables                                              |       | (2,393                                              | )          | 468 |   |
| Other assets                                                                               |       | 2,316                                               |       | (347 | ) |
| Accounts payable  and accrued expenses                                                     |       | (3,522                                              | )          | 3,033 |   |
| Accrued legal  settlements                                                                 |       | (7,125                                              | )          | 7,125 |   |
| Deferred revenue                                                                           |       | 3,504                                               |       | 4,869 |   |
| Deferred license  agreement                                                                |       | (418                                                | )          | 1,182 |   |
| Other  liabilities                                                                         |       | 726                                                 |       | — |   |
| Net cash used in  operating activities                                                     |       | (20,132                                             | )          | (5,046 | ) |
| **Investing activities**                                                                   |       |                                                |       |   |   |
| Purchases of property  and equipment                                                       |       | (4,166                                              | )          | (7,021 | ) |
| Change in restricted  cash                                                                 |       | 336                                                 |       | 199 |   |
| Purchases of short-term  investments                                                       |       | (48,060                                             | )          | — |   |
| Sales and maturities of  short-term investments                                            |       | 39,658                                              |       | — |   |
| Net cash used in  investing activities                                                     |       | (12,232                                             | )          | (6,822 | ) |
| **Financing activities**                                                                   |       |                                                |       |   |   |
| Proceeds from the sales  of common stock in an initial public offering                     |       | 77,693                                              |       | — |   |
| Offering issuance costs                                                                    |       | (3,221                                              | )          | — |   |
| Proceeds from the  issuance of redeemable convertible preferred stock                      |       | —                                              |       | 15,126 |   |
| Proceeds from  (repayment of) the senior secured credit facility                           |       | (37,697                                             | )          | 10,000 |   |
| Debt issuance costs                                                                        |       | (19                                                 | )          | (349 | ) |
| Net proceeds from  (payments of) the former revolving credit facility                      |       | (4,128                                              | )          | (810 | ) |
| Proceeds from the  exercise of common stock options and warrants                           |       | 114                                                 |       | 74 |   |
| Proceeds from the  payment of shareholder notes                                            |       | 100                                                 |       | 324 |   |
| Payment of long-term  debt                                                                 |       | —                                              |       | (33 | ) |
| Net cash provided by  financing activities                                                 |       | 32,842                                              |       | 24,332 |   |
| Net decrease in cash  and cash equivalents                                                 |       | 478                                                 |       | 12,464 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 13,143                                              |       | 4,898 |   |
| Cash and cash  equivalents at end of period                                                |       | 13,621                                              |       | 17,362 |   |
|                                                                                       |       |                                                |       |   |   |
| **Supplemental  cash flow disclosures**                                                    |       |                                                |       |   |   |
| Conversion of  redeemable convertible preferred stock                                      |       | 57,086                                              |       | — |   |
| Accretion of  preferred stock                                                              |       | (108                                                | )          | (1,643 | ) |
| Repurchase of stock for  exercise of common stock warrants                                 |       | (395                                                | )          | — |   |
|                                                                                            |            |                                                     |            |  |  |  |  |

 

See accompanying notes.

 

4

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**Traffic.com, Inc.Notes to Condensed Consolidated Financial Statements**

**1.Organization and Summary of Accounting Policies**

Traffic.com, Inc.(the “Company”), formerly known as Mobility Technologies, Inc., isdeploying a nationwide traffic and logistics data collection network and aproprietary Traffic Information Management System (“TIMS”) with the goal ofbecoming the nation’s premier provider of real-time digital and predictivetraffic and logistics information for businesses, consumers, and government agencies.The Company is building a network of wireless sensors (the “digital sensornetwork”) and integrating government agency sensors along major highways. Thedigital sensor network collects vehicle counts, vehicle speeds, classification(car or truck), and roadway density and transmits the data over a wirelessnetwork to TIMS. Initially, the Company’s revenues were generated solelythrough traditional radio and television syndication of the Company’s trafficdata content and the licensing of its traffic data to the federal and certainstate and local governmental entities. The Company has broadened its revenueapproach to include commercial sales and licenses of its traffic data (“TrafficData Services”) and syndication of the Company’s traffic content in the contextof online, mobile and other interactive and non-traditional media.

OnJanuary 25, 2006, the Company completed an initial public offering andbegan trading on the NASDAQ National Market under the symbol “TRFC”. In theinitial public offering, a total of 6,950,000 shares of common stock were sold,including the exercised portion of the underwriter’s over-allotment option. Ofthe 6,950,000 shares of common stock sold in the initial public offering,62,334 shares were sold by selling shareholders and 6,887,666 shares were soldby the Company, generating approximately $74.5 million in proceeds to theCompany, net of offering expenses and underwriters’ discounts. In connectionwith the consummation of the offering, 9,242,312 shares of common stock wereissued upon conversion of the Company’s redeemable convertible preferred stock.Upon consummation of the offering, the Company’s Fifth Amended and RestatedCertificate of Incorporation became effective. The Fifth Amended and RestatedCertificate of Incorporation authorizes 100,000,000 shares of common stock and30,000,000 shares of undesignated preferred stock. No shares of preferred stockwere outstanding at September 30, 2006.

**Principlesof Consolidation**

Theaccompanying condensed consolidated financial statements include the accountsof the Company and its wholly owned subsidiaries. All inter-companytransactions and balances have been eliminated.

**UnauditedInterim Financial Information**

Theaccompanying condensed consolidated balance sheet as of September 30, 2006, thecondensed consolidated statements of operations for the three and nine monthsended September 30, 2006 and 2005 and the condensed consolidated statements ofcash flows for the nine months ended September 30, 2006 and 2005 are unaudited.These unaudited interim condensed consolidated financial statements have beenprepared in accordance with U.S. generally accepted accounting principles. Inour opinion, the unaudited interim condensed consolidated financial statementsinclude all adjustments of a normal recurring nature necessary for the fairpresentation of our financial position at September 30, 2006, and our resultsof operations for the three and nine months ended September 30, 2006 and 2005and our cash flows for the nine months ended September 30, 2006 and 2005. Theresults of operations for the three and nine months ended September 30, 2006are not necessarily indicative of the results to be expected for the yearending December 31, 2006.

Theseunaudited interim condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and related notesincluded in our 2005 Annual Report on Form 10-K, filed on March 24,2006.

**Useof Estimates**

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

On anongoing basis, the Company evaluates its estimates, including those related toaccounts receivable allowance, useful lives of long lived assets, its assetretirement obligation, revenue recognition on the Company’s contract with theUnited States Department of Transportation, the value of common stock for thepurpose of determining stock-based compensation, and income taxes, amongothers. The Company bases its estimates on historical experience and on variousother assumptions that are believed to be reasonable, the results of which formthe basis for making judgments about the carrying value of assets andliabilities.

5

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**Stock-basedCompensation**

OnJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123 (revised 2004), “Share-Based Payment”(SFAS 123(R)). SFAS 123(R) requires all share-based payments toemployees, including grants of stock options, to be recognized in the financialstatements based on their fair value. Under SFAS 123(R), pro formadisclosure is no longer an alternative to financial statement recognition forstock option awards made after the Company’s adoption of SFAS 123(R). See Note 5for further details.

**IncomeTaxes**

Therewas no provision for income taxes for the three or nine months ended September30, 2006 and 2005.

**Reclassifications**

Certainamounts in the condensed consolidated balance sheet as of December 31,2005 have been reclassified to conform to the September 30, 2006 presentation.

**Short-TermInvestments**

Investmentswith original maturities longer than three months, but less than one year, areclassified as short-term investments. At September 30, 2006, these investmentsconsisted of certificates of deposits. Short-term investments are stated attheir fair value.

**2.Net Loss Attributable to Common Stockholders per Common Share**

Basicnet loss attributable to common stockholders per common share excludes dilutionfor potential common stock issuances and is computed by dividing the net lossattributable to common stockholders by the weighted-average number of commonshares outstanding for the period. Diluted net loss attributable to commonstockholders per common share reflects the potential dilution that could occurif securities or other contracts to issue common stock were exercised orconverted into common stock. The following table provides a reconciliation ofthe numerators and denominators used in computing basic and diluted net lossattributable to common stockholders per common share and pro forma lossattributable to common stockholders per common share *(in thousands, except per share amounts)* :
| ** **                                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Basic  net loss per share**                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator:                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                                                                       |       | $                                                    | (6,417     | )                                                   | $          | (20,232 | ) | $ | (18,808 | ) | $ | (34,916 | ) |
| Accretion of redeemable convertible preferred stock                            |       | —                                               |       | (554                                                | )          | (108 | ) | (1,643 | ) |
| Numerator for per share calculation—basic and  diluted                    |       | $                                                    | (6,417     | )                                                   | $          | (20,786 | ) | $ | (18,916 | ) | $ | (36,559 | ) |
| Denominator:                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted-average common shares outstanding                                     |       | 20,575                                               |       | 3,457                                               |       | 18,937 |   | 3,438 |   |
| Less: Weighted-average unvested common stock subject  to repurchase agreements |       | —                                               |       | (19                                                 | )          | — |   | (51 | ) |
| Denominator for per share calculation—basic and  diluted                  |       | 20,575                                               |       | 3,438                                               |       | 18,937 |   | 3,387 |   |
| Net loss attributed to  common stockholders per share—basic and diluted   |       | $                                                    | (0.31      | )                                                   | $          | (6.05 | ) | $ | (1.00 | ) | $ | (10.79 | ) |

 

6

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Thefollowing table shows stock equivalents that were not considered in thecomputation of the diluted net loss attributable to common stockholders percommon share as of September 30, 2006 and 2005 as their effect isanti-dilutive:

|                                                       | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Shares of preferred  stock (on an as converted basis) |       | —                 |       | 9,242,312 |   |
| Stock options                                         |       | 2,486,714              |       | 2,042,782 |   |
| Warrants                                              |       | 1,073,122              |       | 1,669,570 |   |

 

**3.Interest Income (Expense), Net***(in thousands)*:

|                                                                                                          | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income                                                                                          |       | $                                                    | 295        |                                                | $          | 39 |   | $ | 984 |   | $ | 97 |   |
| Amortization of  deferred financing fees                                                                 |       | —                                               |       | (167                                                | )          | (1,531 | ) | (442 | ) |
| Retroactive  adjustments to accrued interest under the Senior Secured Credit facility due  to amendments |       | —                                               |       | —                                              |       | — |   | (688 | ) |
| Accretion of the  asset retirement obligation                                                            |       | (14                                                  | )          | —                                              |       | (41 | ) | — |   |
| Interest expense                                                                                         |       | —                                               |       | (1,288                                              | )          | (89 | ) | (3,196 | ) |
| Interest income  (expense), net                                                                          |       | $                                                    | 281        |                                                | $          | (1,416 | ) | $ | (677 | ) | $ | (4,229 | ) |

 

**4.Debt**

**SeniorSecured Credit Facility**

InJanuary 2006, the Company repaid the $37.7 million of outstandingprincipal and interest outstanding under its senior secured credit facilityusing a portion of the proceeds raised in the initial public offering. As aresult of the repayment of the facility, the Company accelerated the amortizationof $1.5 million of deferred financing fees into interest expense.

**RevolvingCredit Facility**

InFebruary 2006, the Company repaid the outstanding obligation due under itsformer revolving credit facility with a portion of the proceeds from theinitial public offering. In March 2006, the facility terminated upon itsterms.

InAugust 2006, the Company and a bank established a new revolving creditfacility.  The facility provides formaximum borrowings of $12.0 million and terminates in August 2008.  Borrowings bear interest at the bank’s primeloan rate, plus 0.50%, which was 8.75% at September 30, 2006, and the Companyis obligated to pay an unused facility fee equal to 0.25% of unused availablefunds, paid quarterly on an annualized basis, per annum.

TheCompany’s borrowings are subject to an 80% advance rate against a definedborrowing base.  The facility contains aminimum EBITDA (as defined in the agreement) and liquidity covenants, as wellas other affirmative and negative covenants customary for a facility of thistype.

As ofSeptember 30, 2006, the Company was in compliance with all covenants and therewere no outstanding borrowings under this facility.

**5**.**Stockholders’ Equity (Deficit):**

**ReverseStock Split**

InOctober 2005, the Company’s board of directors approved a one-for-threereverse stock split of common stock to be effected prior to the effective dateof the Company’s initial public offering of common stock. The reverse stocksplit was approved by the Company’s stockholders in January 2006. Inconnection with the reverse stock split, the par value of the Company’s commonstock was adjusted to remain at $0.01. The accompanying condensed consolidatedfinancial statements give retroactive effect as though the one-for-threereverse split of the Company’s common stock occurred for all periods presented.

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**TreasuryStock**

Duringthe nine months ended September 30, 2006, the Company withheld 41,881shares issuable upon the exercise of warrants for the acquisition of 580,654shares of common stock in lieu of payment of the exercise price for suchwarrants. These shares have been recorded at cost as treasury stock.

**StockOptions**

InJanuary 2006, the Company’s 2005 Long-Term Incentive Plan (the 2005 Plan),which was approved by the Board of Directors in October 2005, becameeffective following approval by the Company’s stockholders and the consummationof the Company’s initial public offering. The 2005 Plan provides for the grantof stock options, stock appreciation rights, restricted stock, restricted stockunits and other equity-based awards. No additional awards will be made underthe Company’s 1999 Long-Term Incentive Plan or the 1999 Non-Employee’s StockPlan (the 1999 Plans). Upon effectiveness of the 2005 Plan, in addition to theshares remaining for grants under the 1999 Plans which flowed through to the2005 Plan, an additiona1 1,750,000 shares of common stock became reserved forissuance under the 2005 Plan. In addition, the 2005 Plan contains an “evergreenprovision” which allows for an annual increase in the number of sharesavailable for issuance under the plan on the first day of each of the Company’sfiscal years beginning in fiscal year 2007. The annual increase in the numberof shares shall be equal to the lesser of:  (i) 350,000shares; (ii) 1% of the Company’s outstanding shares of common stockon the first day of the fiscal year; or (iii) an amount determined by theCompany’s Board of Directors. Stock option terms are generally 10 years,with options generally becoming exercisable on a pro rata basis overfour years from the date of the grant.

**Impactof the Adoption of SFAS 123(R)**

SFAS123(R) requires all share-based payments to employees, including grants ofstock options, to be recognized in the financial statements based on their fairvalues. Under SFAS 123(R), pro forma disclosure is no longer an alternative tofinancial statement recognition for stock option awards made after the Company’sadoption of SFAS 123(R). The Company adopted SFAS 123(R) onJanuary 1, 2006.

Priorto August 30, 2005, the date that the Company filed a Form S-1 withthe Securities and Exchange Commission, the Company used the minimum valuemethod to calculate the pro forma disclosure required by SFAS 123. When theCompany adopted SFAS 123(R) on January 1, 2006, the Company continuedto account for the portion of awards outstanding prior to August 30, 2005using the provisions of APB Opinion No. 25, “Accounting for Stock Issuedto Employees” (APB 25) and its related interpretative guidance. The Company didnot make any stock option grants in the period from August 30, 2005 throughDecember 31, 2005. Accordingly, since the Company valued stock optiongrants using the minimum-value method in prior years, pro forma informationwould not be meaningful and is not being provided.

TheCompany adopted SFAS 123(R) using the modified prospective methodbeginning January 1, 2006. For stock-based awards granted afterJanuary 1, 2006, the Company has recognized compensation expense duringthe nine months ended September 30, 2006 based on the estimated grant date fairvalue using the Black-Scholes valuation model. For these awards, the Companyhas recognized compensation expense using a straight-line amortization method.As SFAS 123(R) requires that stock-based compensation expense be based onawards that are ultimately expected to vest, stock-based compensation for thenine-month period ended September 30, 2006 has been reduced for estimatedforfeitures. When estimating forfeitures, the Company considers voluntarytermination behaviors as well as trends of actual option forfeitures. As a resultof adopting Statement 123(R) on January 1, 2006, the Company’s netincome for the nine months ended September 30, 2006 is $0.8 million lowerthan if it had continued to account for share-based compensation underAPB 25, and basic and diluted earnings per share for the nine months endedSeptember 30, 2006 is $0.04 lower.

Inconnection with certain stock options granted during the second quarter of2005, the Company, in accordance with APB 25, recorded deferred stockcompensation aggregating $1.8 million, net of subsequent cancellations,representing the difference between the exercise price of the options and thedeemed fair value of the Company’s common shares on the dates the options weregranted. This deferred stock-based compensation is being amortized on astraight line basis over the vesting periods of the underlying stock options offour years. Through September 30, 2006, the Company has amortizedapproximately $0.4 million of such compensation expense, withapproximately $0.1 million being amortized in the three months endedSeptember 30, 2006. Upon the adoption of SFAS 123(R) in January 2006,the unearned stock-based compensation balance of approximately $1.7 million wasreclassified to additional paid-in capital.

***Valuation Assumptions***

TheCompany calculated the fair value of each option award on the date of grantusing the Black-Scholes option pricing model. The following assumptions wereused for valuing grants made during the nine months ended September 30, 2006:

| Risk-free interest rates     |   | 4.54 - 4.99  | %      |
|------------------------------|--------|--------------|--------|
| Expected lives  (in years)   |   | 5.50 - 6.25  |   |
| Dividend yield               |   | 0            | %      |
| Expected  volatility         |   | 74.6% - 82.0 | %      |
| Weighted-average  volatility |   | 78.4         | %      |

 

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Due toa limited trading history in a public market, the Company’s computation ofstock-price volatility is based on the volatility rates of comparablepublicly-held companies over a period equal to the estimated useful life of theoptions granted by the Company. These rates may or may not reflect the Company’sstock-price volatility after it has been a publicly-held company for ameaningful period of time. If the Company had made different assumptions aboutthe stock-price volatility rates, the related compensation expense and its netincome and net income per share amounts could have been significantlydifferent. The Company’s computation of expected life was determined using the “simplified”method whereby the vesting period plus the original contractual term is dividedby two. The range provided above relates to options being granted with differentvesting periods. The interest rate for periods within the contractual life ofthe award is based on the U.S. Treasury yield curve in effect at the time ofthe grant.

***Stock-based Payment Award Activity***

Thefollowing table summarizes activity under our equity incentive plans for thenine months ended September 30, 2006:
| ** **                                            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2006                  |       | 2,000,478  |       | $                                          | 2.43       |                                                                 |       |                            |       |   |
| Granted                                               |       | 1,093,163  |       | $                                          | 8.48       |                                                                 |       |                            |       |   |
| Exercised                                             |       | (58,588    | )          | $                                          | 1.93       |                                                                 |       |                            |       |   |
| Expired/Forfeited/Cancelled                           |       | (548,339   | )          | $                                          | 11.81      |                                                                 |       |                            |       |   |
| Outstanding at  September 30, 2006                    |       | 2,486,714  |       | $                                          | 3.03       |                                                                 | 7.03       |                            | $          | 5,572,000 |   |
|                                                  |       |       |       |                                       |       |                                                                 |       |                            |       |
| Options vested  and expected to vest                  |       | 2,335,087  |       | $                                          | 2.97       |                                                                 | 6.90       |                            | $          | 5,403,000 |   |
|                                                  |       |       |       |                                       |       |                                                                 |       |                            |       |
| Options vested and  exercisable at September 30, 2006 |       | 1,494,047  |       | $                                          | 2.56       |                                                                 | 5.93       |                            | $          | 4,136,000 |   |

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the quoted price of the Company’s commonstock for the 2,348,497 options that were in-the-money at September 30, 2006.As of September 30, 2006, there was approximately $3.6 million of totalunrecognized compensation expense related to unvested stock options issuedunder the Company’s stock option plans which is expected to be recognized overa remaining weighted average period of 3.30 years. The weighted average fairvalue of a common stock option granted during the nine months ended September30, 2006 was $8.48. The total intrinsic value (market value on date of exerciseless the exercise price) of the options exercised during the nine months endedSeptember 30, 2006 was $0.2 million.

OnJuly 20, 2006, the Compensation Committee of the Board of Directors approvedthe cancellation of options to purchase an aggregate of 499,233 shares ofcommon stock, which were granted on February 16, 2006 at an exercise price of$12.13 per share, and to grant replacement options to purchase common stock atan exercise price of $4.77 per share, which was the fair value of the Company’scommon stock on that date. The options granted provide for the Company’sstandard four-year vesting schedule. The cancellation and subsequentreplacement of the options was undertaken in a proactive effort to retainvaluable employees.

Inaccordance with SFAS 123(R), the cancellation and concurrent grant of the stockoptions has been accounted for as an option modification which will result inincremental compensation expense. The incremental compensation of $0.4 millionplus the remaining unamortized grant-date fair value of the stock optionsgranted in February 2006 is being recognized ratably over the 48-month periodfrom the date of grant.

Cashreceived from option exercises under all share-based payment arrangements forthe nine months ended September 30, 2006 was $0.1 million.

**Stock Warrants**

TheCompany has fully vested common stock warrants that were issued prior toJanuary 1, 2006. During the nine months ended September 30, 2006, warrantsto purchase 622,535 shares of common stock were exercised at a price of $0.75.The Company did not receive any cash proceeds as the warrant holderssurrendered 41,881 shares as payment of the exercise price. The sharessurrendered have been recorded as Treasury Stock in the balance sheet as ofSeptember 30, 2006. The total intrinsic value (market value on date of exerciseless exercise price) of the warrants exercised during the nine months endedSeptember 30, 2006 was $5.5 million.

InAugust 2006, in connection with the origination of the revolving creditfacility, the Company issued a fully vested, non-forfeitable warrant topurchase 26,087 shares of common stock, at an exercise price of $4.60 per shareto the bank providing the revolving credit facility.  The warrant expires in August 2013.  The value assigned to the warrant was $48,000which has been recorded as deferred financing fees, and is 

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being amortized over thelife of the credit facility.  The fairvalue of the warrant was estimated at the date of issuance using theBlack-Scholes option-pricing model assuming a risk-free interest rate of 4.99%,dividend yield of 0%, volatility of 47.9%, and expected life of the warrant of3.5 years.

**6.Commitments and Contingencies**

InJanuary 2006, the Company paid $7.125 million in connection with thesettlement of a litigation matter, pursuant to a settlement agreement enteredinto with Santa Fe Technologies, Inc. and TL Ventures, LLC inNovember 2006. Upon payment of the settlement amount, the matter wasresolved.

**7.Subsequent Event**

OnNovember 5, 2006, the Company and NAVTEQ Corporation, a Delaware corporation (“NAVTEQ”),NAVTEQ Holdings B.V., a corporation organized under the laws of TheNetherlands, and NAVTEQ Holdings Delaware, Inc., a Delaware corporation (“MergerSubsidiary”), entered into an Agreement and Plan of Merger (the “MergerAgreement”), pursuant to which the Company will be merged with and into MergerSubsidiary (the “Merger”).  Upon consummation of the Merger, the separateexistence of the Company will cease, and Merger Subsidiary will be thesurviving corporation.  It is anticipated that the Merger will beconsummated during the first quarter of 2007.

Pursuantto the Merger Agreement, at the effective time of the Merger, each shareoutstanding of Company common stock will be converted into the right toreceive, at the election of the holder thereof (subject to certain conditions,including those pertaining to pro-ration): (i) $8.00 in cash, without interestor (ii) 0.235 shares of NAVTEQ common stock (collectively, the “MergerConsideration”).  The election of cash or stock will be subject to a limiton total cash consideration of approximately $49 million (minus the cash valueof dissenting shares) and a total stock consideration equal to approximately4.3 million shares of NAVTEQ common stock (less the shares of NAVTEQ commonstock issued to holders of warrants to purchase Company stock that areexchanged for NAVTEQ common stock based on the per share stock consideration).

TheMerger Agreement includes customary representations, warranties and covenantsof the parties.  The covenants of the Company include, subject to certainexceptions, covenants to (i) conduct its business in the ordinary courseconsistent with past practice during the period between the execution of theMerger Agreement and the consummation of the Merger, (ii) have its Board ofDirectors recommend that its stockholders vote for the approval and adoption ofthe Merger Agreement and the Merger, (iii) hold a stockholders’ meeting for thepurpose of voting on the adoption of the Merger Agreement, (iv) not withdrawits Board of Director’s recommendation, approve an alternative businesscombination transaction or proposal, or approve or enter into an agreement foran alternative business combination transaction, (v) not solicit, encourage orfacilitate alternative business combination transaction proposals, and (vi) notengage in discussions or negotiations concerning or disclose nonpublicinformation in connection with alternative business combination transactions orproposals, subject to the Board of Directors’ fiduciary duties under Delawarelaw.

Theconsummation of the Merger is subject to the approval of stockholders of theCompany by a majority of the votes cast at the meeting of the Company’sstockholders and other customary closing conditions, including (i) expirationor termination of the applicable waiting period under the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended, (ii) the absence of any law orregulation that makes illegal the Merger or the transactions contemplatedthereby or prohibits or otherwise prevents the consummation of the Merger orany of the transactions contemplated thereby, (iii) the effectiveness of theregistration statement on Form S-4 to be filed with the Securities and ExchangeCommission (“SEC”), (iv) the number of shares dissenting from approval of theMerger not exceeding ten percent of the aggregate number of shares of Companycapital stock outstanding as of the record date for the Company’s stockholders’meeting, and (iv) the approval of NAVTEQ’s common stock to be issued in theMerger for listing on the New York Stock Exchange.  Each party’sobligation to close is also subject to, among other closing conditions, theaccuracy of representations and warranties of the other party and compliance bythe other party of the covenants required to be complied with on or prior toclosing, the receipt of required regulatory approvals, the delivery to eachparty of customary tax opinions from its counsel that the Merger will qualifyas a tax-free reorganization for federal income purposes, the absence of anevent constituting a material adverse effect on the other party, as describedin the Merger Agreement, and the delivery of certain third party consents bythe other party.  Furthermore, NAVTEQ’s obligation to close is subject to,among other closing conditions, the delivery of written agreements from certainholders of outstanding Company warrants providing for the exercise of suchwarrants in full at or prior to closing, the exchange of such warrants for theper share stock consideration set forth in the Merger Agreement or thereplacement of such warrants by new warrants in a form agreed to by NAVTEQ andsuch holders.

TheMerger Agreement contains certain termination rights of the Company and NAVTEQand further provides that the Company will be required to pay NAVTEQ atermination fee of $6.25 million under certain specified circumstances.

Theforegoing description of the Merger Agreement and the Merger does not purportto be complete and is qualified in its entirety by reference to the Merger Agreementfiled as Exhibit 2.1 to the Company’s Current Report on Form 8-K filedwith the Securities and Exchange Commission on November 6, 2006.

Concurrentlywith the execution and delivery of the Merger Agreement, certain stockholdersof the Company entered into agreements  (the “Voting Agreements”) pursuantto which those stockholders have agreed to vote their Company shares in favorof adoption and approval 

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of the Merger Agreementand approval of the Merger.

**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our unaudited interim condensed consolidatedfinancial statements and the notes to those statements appearing elsewhere inthis document.*

Itshould also be noted, that, as discussed in the notes to the condensedconsolidated financial statements contained herein, we recently executed theMerger Agreement with Navteq and its affiliated entities.  In connectionwith the organizational and operational integration that will occur as a resultof the Merger, it may be that certain of the matters discussed below whichconcern future periods will be affected by the Merger in ways that have not yetbeen identified or decided.

**Overview**

We area leading provider of accurate, real-time traffic information in the UnitedStates, based on the quality of our traffic data and the extent of ourgeographic coverage. We combine traffic incident and event information,collected using traditional methods, with comprehensive flow data collectedthrough our network of roadside sensors to offer detailed traffic information,including specific speeds, travel times and delay times. We have built our TIMSdata management system to process the above information in real time and todeliver customized reports to large numbers of radio, television, online,mobile device, and in-vehicle navigation system users.

***Revenue Profile and Business Trends***

Todate, substantially all of our revenue has been derived from the sale ofadvertising on radio and television stations, as well as from providing ourtraffic data to the U.S. DOT and certain state and local government agencies.We believe that our newer revenue opportunities, including online and mobileadvertising, and commercial traffic data services, will become an increasinglylarger percentage of our total revenue. We are investing, and intend tocontinue to invest, significant resources in our marketing campaign in order toincrease brand recognition of Traffic.com.

***Advertising.*** In 2000,we entered into our first contracts with radio stations to provide trafficinformation in exchange for advertising inventory, which we then sell throughour own direct sales force. In 2001, we signed our first contracts withtelevision stations, under which we also provide traffic information inexchange for advertising inventory. Certain of our radio and televisioncontracts require us to provide production services, such as announcers andproducers, and/or make cash payments, in addition to providing trafficinformation. We also enter into contracts with certain radio stations underwhich we buy advertising time solely in exchange for cash in order to be ableto offer advertisers access to a more comprehensive range of markets. We do notprovide traffic information under these agreements. Our television and radiocontracts are generally for a term of one to three years and may be terminatedwith no penalty by either party if the other party breaches the agreement or isin bankruptcy. Some of the three-year agreements may be terminated by thecustomer after 18 months upon 30 days notice to us.

InJuly 2005, we began to offer online advertising on our enhanced websiteand the websites of our customers and we recently began to offer advertising onour mobile consumer services. Based on industry reports of projected growth inthe online advertising market, from $12.0 billion in 2004 to$22.0 billion in 2008, and based on our strategy to increase awareness ofour Traffic.com brand, we believe that online and mobile advertising provide uswith an attractive opportunity to increase our revenue. The online and mobileadvertising markets, however, are new and rapidly evolving. Revenues fromonline and mobile advertising were $0.7 million for the nine months endedSeptember 30, 2006. Our success in attracting online and mobile advertiserswill depend, in large part, on our ability to significantly increase the numberof visitors to our website and the number of persons who subscribe to ourmobile services. We intend to continue to invest significant resources in ourbranding campaign to increase brand recognition of Traffic.com.

Wecurrently expect online and mobile advertising to increase to between 15% and30% of our total revenue within the next two years, as we invest in ourbranding campaign in the expectation that the number of visitors to ourwww.traffic.com website, the websites of our partners, and users of our mobileservices will grow. We expect our radio and television advertising revenue toincrease in dollar amount as we expand the number of metropolitan areas inwhich we provide traffic information, but to decrease as a percentage of totalrevenue to between 50% and 60% within the next two years. We are activelyseeking to stimulate growth of online and mobile advertising by developingco-branding opportunities on our media customers’ websites, such as www.aol.comand www.comcast.net and by increasing the services offered on our own website.We refer to these partner websites as TrafficOnes and at the end of the thirdquarter of 2006 we had 125 live TrafficOnes installed. As of that date, we alsohad agreements in place to install TrafficOnes for another 31 partners.

***Traffic Data Services.***Since the first quarter of 2004, we have entered into agreements to providetraffic data to the following customers:

·                  XM Satellite RadioHoldings, Inc. currently uses our traffic data for 21 metropolitan areasunder a five year agreement entered into January 2004.

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·                  NAVTEQ Corporation has been using ourtraffic data under a five-year agreement since June 2004 in conjunctionwith its mapping data as content in a variety of services, including in-vehiclenavigation systems.

·                  The Weather Channel, Inc. hasbeen using our traffic data under a three-year agreement sinceJanuary 2005 to provide traffic information on its website, cablenetworks, local programming and desktop application.

·                  Motorola, Inc. has been usingour traffic data under a two-year agreement since March 2005 to providetraffic information in its VIAMOTO solution, a suite of location software forcell phones.

·                  Comcast Cable CommunicationsManagement LLC has been using our traffic data since June 2005 under a three-yearagreement for use on its www.comcast.net website.

·                  Microsoft Corporation has been usingour traffic data under an agreement entered into in February 2006.

·                  Garmin International is scheduled tobegin using our traffic data in the fourth quarter of 2006 for its Mobile 20wireless GPS navigation system and its online mobile service under a three-yearagreement entered into in June 2006.

·                  AOL has been using our traffic datafor its AOL.com website under a two-year agreement entered into in July 2006.

In each of theseagreements, either party may terminate the agreement with no penalty, if theother party breaches the agreement or is in bankruptcy. We currently expectthat our traffic data services revenue, excluding government data services,will increase to between 10% to 15% of total revenue within the next two years.

***Traffic.com Website and Consumer MobileServices.*** In July 2005, we launched our enhancedwww.traffic.com website and we began to offer our consumer mobile services,which allow drivers to receive route-specific information on mobile devices. Weare engaged in a focused campaign to attract users and advertisers to ourwebsite and to websites of our media customers that are co-branded withwww.traffic.com. These new distribution channels are designed to provideadvertising opportunities for our advertising customers. We began offering allof our consumer services free of charge in January 2006.

***Operations and Infrastructure Support forNew Revenue Opportunities.*** Since 1999, we have made asignificant investment in our development and enhancement of TIMS. TIMS is ourproprietary system for collecting traffic data through our sensor network;analyzing such data; and distributing the analyzed data through a variety ofdelivery channels, in real time. As a result of this investment, TIMS is veryscalable and flexible. It is designed to allow for very high and increasingtransaction volumes and to integrate with new technologies with minimaladditional development effort. We believe that we should be able to incorporatenew revenue opportunities at relatively low additional cost.

***Sources of Revenue***

***Advertising***

***Radio and Television Advertising****.* In exchange for providing trafficinformation, cash and/or production services (including announcers and producers)to radio and television station customers, we receive the right to selladvertising time adjacent to traffic, news or weather reports as well as theright to sell advertisements on these stations’ websites. Additionally, undercertain of our contracts with radio stations to which we do not provide trafficinformation, we buy for cash the right to sell a set amount of advertisingtime, primarily to expand our advertising sales coverage. We refer to theadvertising time that we receive in exchange for these two types of contractsas “owned inventory.” As of October 15, 2006, we had contracts to acquireowned inventory from 512 radio stations (including 129 to which we provided ourtraffic information services, including both our Traffic Pulse Broadcasterand/or our affiliate web offering) and with 58 television stations.

Wesupplement our owned inventory by purchasing additional advertising time forcash from time to time from radio stations that are not under contract with us.These purchases, referred to as “cash buys,” are usually made to satisfyspecific advertisers’ needs for additional coverage on particular stations orin smaller markets. Because cash buys are purchased in the spot market on anas-needed basis, the cost of acquiring this advertising is higher than the costof owned inventory. As a result, margins for the sale of cash buys aregenerally lower than the margins that can be achieved from the sale of ownedinventory.

Revenuefrom our radio and television advertising is recognized in the month that anadvertisement is aired.

***Online and Mobile Advertising****.* We introduced our enhanced website andconsumer mobile services in July 2005, and are offering advertising on ourown www.traffic.com website and in connection with our mobile services, inaddition to offering advertising on the websites of a number of our customers.Revenues from online and mobile advertising were $0.7 million for the ninemonths ended September 30, 2006.

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Revenue from online andmobile advertising will be recognized over the period during which theadvertisement is displayed or aired. We price online and mobile advertisementsbased upon a cost per thousand impressions delivered.

Webelieve that our multiple media delivery platforms provide advertisers with anattractive cross-media campaign opportunity. Our advertisers can reach theircustomers at various times of day using advertisements associated with ourtraffic content aired on radio and television, placed on our website andembedded in our mobile services. We believe that this cross-media opportunitywill result in heightened interest in our services from advertisers.

***Traffic Data Services***

***Government Services****.* In 1999, we were awarded, as principalsubcontractor to the U.S. DOT, a subcontract to enable us to deploy anintelligent transportation infrastructure system to collect and distributetraffic flow data. Under the terms of this subcontract, of the$2.0 million received by our prime contractor for each designatedmetropolitan area, we are paid 95% or $1.9 million, to provide to federaland state transportation agencies the traffic flow data from our sensor networkin these areas for non-commercial purposes. We retain the exclusive right touse this data for commercial purposes.

Underour subcontract, we own and are responsible for constructing, operating andmaintaining our sensor networks. We engage third party contractors for theinstallation of the sensors used in our network. We generally pay a specifiedamount per site installed, which varies per metropolitan area based on variousfactors, including the number of sites to be installed in that area. There area number of third parties capable of providing the required services.

Ourability to recognize revenue from our federal subcontract is based on when weobtain formal customer acceptance of the system. Revenue is then recognized overthe estimated service period of the contract of 15 years.

Inaddition, as a subcontractor to the U.S. DOT, we must enter into agreementswith state or local government agencies responsible for the metropolitan areasin which we deploy our sensor network, in order to proceed with deployment ofthe network. Once the relevant state or local agency accepts our proposal andenters into a contract with us, we are required to meet certain milestones,including federal acceptance of our plans, designs and architecture. As ofSeptember 30, 2006, we were recognizing revenue from our sensor network inconnection with our subcontract from the U.S. DOT regarding Boston, Chicago,Oklahoma City, Philadelphia, Pittsburgh, Providence, San Diego, San Francisco,St. Louis and Tampa.

***Commercial Traffic Data Services****.* In the first quarter of 2004, we beganto enter into agreements with companies to provide our traffic data directly tothese customers for their own use in their websites and media and serviceofferings. Our first such agreement was with XM Satellite Radio and, since thattime, we have entered into agreements with NAVTEQ, Motorola, The WeatherChannel, Comcast, and Microsoft. Revenue from our other traffic data servicesagreements includes one or more of annual usage and exclusivity fees, fees for24/7 support services, and in-vehicle traffic data subscription fees. Revenuerecognition from these contracts varies, based upon contract minimums,subscriber growth and special services provided by us.

Underour NAVTEQ agreement, NAVTEQ has paid us $9.9 million as an advanceagainst subscription, license and other fees payable by NAVTEQ. Upon expirationor earlier termination of the agreement, we are required to repay NAVTEQ anamount equal to (i) any portion of the $9.9 million advance paymentthat has not yet been earned, less (ii) aggregate specified annual minimumlicense fees of $0.4 million in each of the first, second and third yearsof the agreement, $0.8 million in the fourth year of the agreement and$1.0 million in the fifth year of the agreement. Upon expiration of theagreement, if it is not renewed, up to $1.9 million of any remainingportion of the advance fee that we are required to repay may, at our option, berepaid in quarterly installments over three years at an interest rate of primeplus 1%.

TheNAVTEQ agreement, entered into in June 2004, has a term of five years. Theagreement may be terminated by either party upon a material breach not curedwithin thirty days’ notice, a performance failure caused by a force majeureevent not cured within six months or bankruptcy of the other party. A materialbreach includes a material breach by us of our service level commitment toNAVTEQ, but only if more than 15% of the covered population is affected by theservice failure for more than 180 days or the failure lasts longer than270 days. Each party may terminate the agreement if the other sells all orsubstantially all of its business to certain specified entities.

***Consumer Mobile Services****.* Following the completion of our enhancedwebsite, we began to offer subscription mobile services to consumers inJuly 2005. On January 14, 2006, we began to offer all of our mobileservices free of charge to consumers, as we plan to focus on obtainingadvertising-based revenues from these services. Users can sign up for a numberof *my traffic.com* personalizedtraffic services within the *my traffic.com*section of the traffic.com website.

We have begun to offer advertising opportunities andsponsorships associated with our free mobile services to our advertisingcustomers, although we have generated only minimal advertising revenue fromthis source to date.

Revenue from advertising and sponsorships inconnection with our mobile services is recognized over the period during whichthe advertisement or sponsorship is displayed and is included in advertisingrevenue in our statement of operations.

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***Cost of Revenue***

Costof revenue consists of media inventory expenses, traffic data collectionexpenses, and other technology expenses associated with maintaining TIMS.

***Media Inventory.  ***Mediainventory expenses consist of cash paid to purchase advertising inventory underlong-term contracts with radio stations. In addition, media inventory expensesinclude cash payments to radio stations to purchase additional advertisinginventory in the spot market on an as-needed basis, which we refer to as “cashbuys.”

***Traffic Data Collection Expenses.  ***Trafficdata collection expenses consist of the costs of personnel, both full-time andpart-time, the costs of aircraft and automobiles, the monitoring of police andemergency response vehicles, the depreciation of our traffic flow data sensornetwork, the use of state and local agency data sources where available(including sensors and cameras), and our own camera network. These expensesalso include occupancy and communications costs for our national operationscenter and local operations centers. Traffic data collection costs are expectedto stabilize as our planned expansion to 50 metropolitan areas was completedduring the second quarter of 2006. We will continue to expand into additionalmetropolitan areas if we determine it is financially or operationally prudent;however, we have no current plans to do so.

***Other Technology Expenses.  ***Technologyexpenses primarily consist of personnel and related costs for employees engagedin the development and ongoing maintenance of TIMS, including hardware and internalproduct development expenses and the cost of consultants engaged to assist withvarious software development programs. In addition, these expenses includecommunications costs; capital depreciation of computer hardware; and thedepreciation of certain technology costs capitalized in accordance withStatement of Position (SOF) 98-1, “*Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use.*”We expect to continue to incur development costs as we add products andservices.

***Operating Expenses***

***Research and Development.  ***Inaccordance with SOP 98-1 “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use,” research and development costs includethose labor costs incurred during the application development stage ofinternally developed software. In addition, research and development costs alsoinclude costs associated with licensing third-party software and other qualityassurance costs.

***Sales and Marketing Expense.  ***Salesand marketing expenses primarily consist of personnel and related costs foremployees engaged in sales, business development and marketing, includingsalaries, commissions, and other variable compensation, travel expenses andcosts associated with trade shows, advertising and other marketing efforts andbad debt expense. While the operating costs associated with our traditionalradio and television relationships have remained relatively flat over the lastyear, we have incurred additional costs in connection with our businessdevelopment efforts related to online advertising and product development.Since mid-2005, we have significantly increased our expenditure of funds forbrand marketing and expect to continue at this of spending for the foreseeablefuture.

***General and Administrative Expenses.  ***Generaland administrative expenses consist of personnel and related costs of ourmanagement, finance, human resources, technology support and administrativepersonnel, professional fees and other corporate expenses, and stock-basedcompensation*.* As we expand ourbusiness and incur additional expenses associated with being a public company,we believe that general and administrative expenses will also increase.

**Results of Operations**

***Comparison of the Three Months Ended September 30, 2005 and2006***

***Revenue***

Revenueincreased from $10.7 million for the three months ended September 30, 2005to $13.1 million for the three months ended September 30, 2006, a 22.1%increase.

***Advertising.  ***Advertisingrevenue increased from $9.6 million for the three months ended September 30,2005 to $11.0 million for the three months ended September 30, 2006, a15.3% increase. Owned inventory revenue increased from $8.2 million, or85.5% of advertising revenue, for the three months ended September 30, 2005, to$9.1 million, or 82.6% of advertising revenue, for the three months endedSeptember 30, 2006, an 11.3% increase. Owned inventory revenue has steadilyincreased in absolute dollars as the number of our radio and televisioncustomers has grown, due in part to the launch of Traffic Pulse NeXgen in thefourth quarter of 2004, and our continued affiliation efforts. We recognized$0.4 million in online and mobile advertising revenues during the three monthsended September 30, 2006.

***Traffic data service.  ***Trafficdata services revenue grew from $1.1 million for the three months endedSeptember 30, 2005 to $2.0 million for the three months ended September30, 2006, a 79.6% increase. The increase was due to commencing revenuerecognition with

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respect to fouradditional cities under the U.S. DOT contract and increases in revenuegenerated from the XM Satellite Radio, The Weather Channel, and Motorolaagreements, as well as the recently executed Microsoft contract, and the recentexpansion in the number of markets being serviced under the NAVTEQ agreement.

***Cost of revenue***

Costof revenue increased from $8.6 million for the three months endedSeptember 30, 2005 to $10.4 million for the three months ended September30, 2006, a 21.3% increase. Cost of revenue as a percentage of revenuedecreased from 80.4% for the three months ended September 30, 2005 to 79.9% forthe three months ended September 30, 2006.

***Media Inventory.  ***Mediainventory expenses increased from $4.2 million for the three months endedSeptember 30, 2005 to $4.8 million for the three months ended September30, 2006, a 13.8% increase. Our media inventory expenses decreased as apercentage of revenue from 39.6% for the three months ended September 30, 2005to 36.9% for the three months ended September 30, 2006. The increase inabsolute dollars was primarily due to a $0.2 million increase in expenses forstations under long-term agreements, and a $0.2 million increase in cash buyexpense as a result of increased cash buy revenue. Media inventory costsdecreased as a percentage of revenue due to revenue growth provided byadditional television and radio station contracts.

***Traffic data collection.  ***Trafficdata collection expenses increased from $4.0 million for the three monthsended September 30, 2005 to $5.1 million for the three months endedSeptember 30, 2006, a 29.3% increase. Our traffic data collection costs as apercentage of revenue increased from 37.1% for the three months ended September30, 2005 to 39.3% for the three months ended September 30, 2006. The increaseboth in absolute dollars and as a percentage of revenue was primarily due to anincrease in compensation and related costs, including on-air talent andproduction staff, of $0.7 million. This increase directly corresponds toour increased number of radio and television customers as well as the expansionin the number of markets being serviced from 29 at September 30, 2005 to 50 atSeptember 30, 2006. In addition, depreciation expense increased$0.1 million, as a result of commencing depreciation of our sensor networkin four additional cities, and maintenance and communication costs relating tothe digital sensor network increased $0.1 million, primarily as a resultof additional sensors being installed under new city contracts.

***Other technology expenses.  ***Othertechnology expenses increased from $0.4 million for the three months endedSeptember 30, 2005 to $0.5 million for the three months ended September 30,2006, a 19.7% increase. Our other technology expenses decreased as a percentageof revenue from 3.6% for the three months ended September 30, 2005 to 3.5% forthe three months ended September 30, 2006. The increase in absolute dollars wasdue to an increase in depreciation from internally developed software andcapital asset purchases supporting the delivery of data to additional digitalcities and traffic data service and consumer customers.

***Operating expenses***

***Research and development.  ***Researchand development expenses increased from $1.0 million for the three monthsended September 30, 2005 to $1.6 million for the three months endedSeptember 30, 2006, a 57.8% increase. Research and development expensesincreased as a percentage of revenue from 9.2% for the three months endedSeptember 30, 2005 to 11.9% for the three months ended September 30, 2006. Theincrease in both amount and as a percentage of revenue was due primarily to a$0.4 million increase in compensation and related employee expenses related toincreased product development activities.

***Sales and marketing.  ***Salesand marketing expenses increased from $3.7 million for the three monthsended September 30, 2005 to $4.8 million for the three months endedSeptember 30, 2006, a 27.5% increase. Our sales and marketing expenses as apercentage of revenue increased from 34.9% for the three months ended September30, 2005 to 36.5% for the three months ended September 30, 2006. The increasein absolute dollars and as a percentage of revenue was due to a$0.6 million of additional marketing expenses for branding, externalproduct marketing, and public relations, and $0.4 million of additionalcompensation and related employee benefit costs as a result of increasedcommissions due to higher sales levels and staff additions.

***General and administrative.  ***Generaland administrative expenses increased from $1.9 million for the threemonths ended September 30, 2005 to $3.0 million for the three months endedSeptember 30, 2006, a 54.9% increase. Our general and administrative expensesas a percentage of revenue increased from 18.2% for the three months endedSeptember 30, 2005 to 23.1% for the three months ended September 30, 2006. Theincrease in both amount and as a percentage of revenue was due primarily tostock based compensation charges of $0.5 million resulting from the newlyadopted requirements of FAS 123(R) and increases in certain expenses suchas director and officer insurance and audit fees due to our initial publicoffering.

***Interest income (expense), net.***   Netinterest changed from $1.4 million of expense for the three months endedSeptember 30, 2005 to $0.3 million of income for the three months endedSeptember 30, 2006. The change was principally due to the fact that we repaidour senior secured credit facility and revolving credit facility in full inJanuary 2006 as well as an increase in investable cash provided by our initialpublic offering in January 2006.

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***Comparison of the Nine Months Ended September 30, 2005 and2006***

***Revenue***

Revenueincreased from $32.1 million for the nine months ended September 30, 2005to $38.2 million for the nine months ended September 30, 2006, a 19.1%increase.

***Advertising.  ***Advertisingrevenue increased from $29.1 million for the nine months ended September30, 2005 to $32.9 million for the nine months ended September 30, 2006, a13.1% increase. Owned inventory revenue increased from $24.8 million, or85.4% of advertising revenue, for the nine months ended September 30, 2005, to$27.7 million, or 84.3% of advertising revenue, for the nine months endedSeptember 30, 2006, an 11.6% increase. Owned inventory revenue has steadilyincreased in absolute dollars as the number of our radio and televisioncustomers has grown, due in part to the launch of Traffic Pulse NeXgen in thefourth quarter of 2004, and our continued affiliation efforts. We recognized$0.7 million in online and mobile advertising revenues during the nine months endedSeptember 30, 2006.

***Traffic data services.  ***Trafficdata services revenue grew from $3.0 million for the nine months endedSeptember 30, 2005 to $5.3 million for the nine months ended September 30,2006, a 76.2% increase. The increase was due to commencing revenue recognitionwith respect to four additional cities under the U.S. DOT contract andincreases in revenue generated from the XM Satellite Radio, The WeatherChannel, Viacom and Motorola agreements, as well as the recently executedMicrosoft contract, and the recent expansion in the number of markets beingserviced under the NAVTEQ agreement.

***Cost of revenue***

Costof revenue increased from $24.5 million for the nine months endedSeptember 30, 2005 to $30.1 million for the nine months ended September30, 2006, a 22.5% increase. Cost of revenue as a percentage of revenueincreased from 76.5% for the nine months ended September 30, 2005 to 78.7% forthe nine months ended September 30, 2006.

***Media Inventory.  ***Mediainventory expenses increased from $12.4 million for the nine months endedSeptember 30, 2005 to $14.1 million for the nine months ended September30, 2006, a 13.7% increase. Our media inventory expenses decreased as apercentage of revenue from 38.8% for the nine months ended September 30, 2005to 37.0% for the nine months ended September 30, 2006. The increase in absolutedollars was primarily due to a $1.1 million increase in expenses for stationsunder long-term agreements, and an increase of $0.3 million in cash buy costsresulting from increased cash buy revenue. Media inventory costs decreased as apercentage of revenue due to revenue growth provided by additional televisionand radio station contracts.

***Traffic data collection.  ***Trafficdata collection expenses increased from $11.2 million for the nine monthsended September 30, 2005 to $14.7 million for the nine months endedSeptember 30, 2006, a 31.4% increase. Our traffic data collection costs as apercentage of revenue increased from 34.9% for the nine months ended September30, 2005 to 38.5% for the nine months ended September 30, 2006. Theincrease both in absolute dollars and as a percentage of revenue was primarilydue to an increase in compensation and related costs, including on-air talentand production staff, of $2.1 million. This increase directly correspondsto our increased number of radio and television customers as well as theexpansion in the number of markets being serviced from 29 at September 30, 2005to 50 at September 30, 2006. In addition, depreciation expense increased$0.4 million, as a result of commencing depreciation of our sensor networkin four additional cities, and maintenance and communication costs relating tothe digital sensor network increased $0.5 million, primarily as a resultof additional sensors being installed under new city contracts.

***Other technology expenses.  ***Othertechnology expenses increased from $0.9 million for the nine months endedSeptember 30, 2005 to $1.2 million for the nine months ended September 30,2006, a 34.3% increase. Our other technology expenses increased as a percentageof revenue from 2.8% for the nine months ended September 30, 2005 to 3.1% forthe nine months ended September 30, 2006. The increase in both the amount andas a percentage of revenue was primarily due to an increase in depreciationfrom internally developed software and capital asset purchases supporting thedelivery of data to additional digital cities and traffic data service andconsumer customers.

***Operating expenses***

***Research and development.  ***Researchand development expenses increased from $2.6 million for the nine monthsended September 30, 2005 to $4.4 million for the nine months endedSeptember 30, 2006, a 68.6% increase. Research and development expensesincreased as a percentage of revenue from 8.1% for the nine months endedSeptember 30, 2005 to 11.4% for the nine months ended September 30, 2006. Theincrease in both amount and as a percentage of revenue was due primarily to a$1.2 million increase in compensation and related employee expenses related toincreased product development activities.

***Sales and marketing.  ***Salesand marketing expenses increased from $11.0 million for the nine monthsended September 30, 2005 to $13.8 million for the nine months endedSeptember 30, 2006, a 24.7% increase. Our sales and marketing expenses as apercentage of revenue increased from 34.4% for the nine months ended September30, 2005 to 36.0% for the nine months ended September 30, 2006. The increase inabsolute dollars and as a percentage of revenue was due to $1.7 million ofadditional marketing expenses for branding, external product marketing, andpublic relations, and $0.9 million of additional compensation and relatedemployee benefit costs as a result of increased commissions due to higher saleslevels and staff additions.

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***General and administrative.  ***Generaland administrative expenses increased from $6.1 million for the ninemonths ended September 30, 2005 to $8.1 million for the nine months endedSeptember 30, 2006, a 32.7% increase. Our general and administrative expensesas a percentage of revenue increased from 19.1% for the nine months endedSeptember 30, 2005 to 21.3% for the nine months ended September 30, 2006. Theincrease in both amount and as a percentage of revenue was due primarily tostock based compensation charges of $1.3 million resulting from the newlyadopted requirements of FAS 123(R) and increases in certain expenses suchas director and officers insurance and audit fees due to our initial publicoffering.

***Interest income (expense), net.  ***Netinterest expense decreased from $4.2 million for the nine months endedSeptember 30, 2005 to $0.7 million for the nine months ended September 30,2006. The decrease is due to the fact that we repaid our senior secured creditfacility and revolving credit facility in full in January 2006 as well as anincrease in investable cash provided by the initial public offering in January2006.

**Seasonality**

Due tothe seasonal nature of broadcast advertising revenue and the percentage of ourtotal revenue historically represented by these sources, we have typicallyexperienced lower revenue during the first quarter, following the holidayseason, and the third quarter, during the summer months.

**Liquidity and Capital Resources**

Sinceinception, we have principally financed our operations through private sales ofour preferred stock, internally generated funds, a secured credit facility, arevolving line of credit, and, most recently, an initial public offering ofcommon stock . At September 30, 2006, we had $22.0 million of cash andcash equivalents and short-term investments compared to $13.1 million atDecember 31, 2005. We have raised an aggregate of $101.9 millionthrough our preferred stock financings. In January and February 2006,we raised a total of approximately $74.5 million from our initial publicoffering, net of fees and expenses. We generally invest our cash in highlyliquid investments with a maturity of six months or less at the date ofpurchase. To date, inflation has not had a material effect on our business.

Cashflows used in operating activities were $5.0 million for the nine monthsended September 30, 2005 and $20.1 million for the nine months ended September30, 2006. Cash flows used in operating activities for the nine months endedSeptember 30, 2005 were primarily due to a net loss of $34.9 million whichwas offset by adjustments for depreciation and amortization, and non-cash legalexpenses, and changes in accounts payable and accrued expenses, accrued legalsettlements, and deferred revenue. Cash flows used in operating activities forthe nine months ended September 30, 2006 were primarily due to a net loss of$18.8 million which was offset by adjustments for depreciation andamortization, and stock based compensation expense, and the payment of $7.1million in connection with the settlement of litigation, and changes inaccounts and government services receivables, and accounts payable and accruedexpenses.

Cashflows used in investing activities were $6.8 million for the nine monthsended September 30, 2005 and $12.2 million for the nine months ended September30, 2006. Cash flows used in investing activities for the nine months endedSeptember 30, 2005 were due primarily to the purchase of fixed assets. Cashflows used in investing activities for the nine months ended September 30, 2006were primarily due to the net purchase of short term investments following thecompletion of our initial public offering and the purchase of fixed assets.

Cashflows provided by financing activities were $24.3 million for the ninemonths ended September 30, 2005 and $32.8 million for the nine months endedSeptember 30, 2006. Cash flows provided by financing activities for the ninemonths ended September 30, 2005 were primarily due to $15.1 million in proceedsfrom the sale of Series F convertible preferred stock, and $9.7 million in netproceeds under the senior secured credit facility. Cash flows provided byfinancing activities for the nine months ended September 30, 2006 wereprimarily due to $74.5 million in proceeds, after deducting underwriters’ feesand expenses, from our initial public offering, the repayment of$37.7 million due under our senior secured credit facility, and therepayment of $4.1 million under our revolving credit facility.

Recently,we have focused on new revenue opportunities, including the enhancement of ourwebsite and the introduction of our in-vehicle and consumer mobile services,and have devoted increasing resources to developing and marketing these newservices. Our ability to generate revenue from these services will have amaterial impact on our future cash needs. We expect to devote significantcapital resources to continued product development, brand marketing, expansionof operational systems and other general corporate activities.

Basedon our current operations and planned expansion, we expect that our availablefunds are sufficient to meet our expected needs for working capital and capitalexpenditures through the end of 2007. Thereafter, if we do not have sufficientcash available to finance our operations, we may be required to obtainadditional public or private debt or equity financing. We cannot be certainthat additional financing will be available to us on favorable terms, if atall. If we are unable to raise sufficient funds, we may need to reduce ouroperations, delay our geographic expansion, and reduce our product developmentand marketing activities.

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**Indebtedness**

InJanuary 2006, we repaid the outstanding principal and interest outstandingunder our senior secured credit facility using a portion of the proceeds raisedin our initial public offering.

Ourformer revolving credit facility expired upon its own terms in March 2006.

InAugust 2006, the Company and a bank established a new revolving creditfacility.  The facility provides formaximum borrowings of $12.0 million and terminates in August 2008.  Borrowings bear interest at the bank’s primeloan rate, plus 0.50%, which was 8.75% at September 30, 2006, and the Companyis obligated to pay an unused facility fee equal to 0.25% of unused availablefunds, paid quarterly on an annualized basis, per annum.

Ourborrowings are subject to an 80% advance rate against a defined borrowingbase.  The facility contains a minimumEBITDA (as defined in the agreement) and liquidity covenants, as well as otheraffirmative and negative covenants customary for a facility of this type.

As ofSeptember 30, 2006, we were in compliance with all covenants and there were nooutstanding borrowings under this facility.

**Inflation**

We donot believe that inflation had a material impact on our earnings fromoperations.

**Off-Balance Sheet Arrangements**

AtDecember 31, 2005 and September 30, 2006, we did not have anyrelationships with unconsolidated entities or financial partnerships which wereestablished for the purposes of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes.

**Recent Accounting Pronouncements**

For adiscussion of SFAS 123(R) please refer to Note 1 in the Notes to ourUnaudited Condensed Consolidated Financial Statements included elsewhereherein.

 In June 2006, the Financial AccountingStandards Board (FASB) issued FASB Interpretation No. 48 “Accountingfor Uncertainty in Income Taxes” (FIN 48), an interpretation of FASB StatementNo. 109 “Accounting for Income Taxes”. The interpretation clarifies theaccounting for uncertainty in income taxes recognized in financial statementsand prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This statement becomes effective for thecompany beginning in the first quarter of 2007. The adoption of FIN 48 is notexpected to have a material effect on our financial statements.

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**Item 3.   Quantitative andQualitative Disclosures About Market Risk**

We donot use derivative financial instruments for speculation or trading purposes.Our current policy is to maintain an investment portfolio consisting mainly ofU.S. Government obligations or other securities rated AAA or comparably, with amaximum maturity of 12 months and a weighted average maturity for theportfolio of six months. Our cash is deposited in and invested throughhighly rated financial institutions in North America. Our marketable securitiesare subject to interest rate risk and will fall in value if market interestrates increase.

As ofSeptember 30, 2006, we had no exposure to interest rate risk as we had nooutstanding short or long-term borrowings.

** Item 4.   Controls and Procedures**

***Evaluation of disclosure controls and procedures***

Wemaintain disclosure controls and procedures (as defined inRule 13a-15(e) promulgated under the Securities Exchange Act of 1934,as amended (the “Exchange Act”)) that are designed to ensure that informationthat would be required to be disclosed in Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in theSecurities Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including theChief Executive Officer, President, Chief Operating Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

As ofSeptember 30, 2006, our management, including the Chief Executive Officer,Chief Operating Officer and Chief Financial Officer, evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures. Based on such evaluation, management concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis report.

Section 404compliance project.

Beginningwith the year ending December 31, 2007, Section 404 of theSarbanes-Oxley Act of 2002 will require us to include management’s report onour internal control over financial reporting in our Annual Report onForm 10-K. The internal control report must contain (1) a statementof management’s responsibility for establishing and maintaining adequateinternal control over our financial reporting, (2) a statement identifyingthe framework used by management to conduct the required evaluation of theeffectiveness of our internal control over financial reporting,(3) management’s assessment of the effectiveness of our internal controlover financial reporting as of the end of our most recent fiscal year,including a statement as to whether or not our internal control over financialreporting is effective, and (4) a statement that our registeredindependent public accounting firm has issued an attestation report onmanagement’s assessment of our internal control over financial reporting.

Inorder to achieve compliance with Section 404 within the prescribed period,management has commenced a Section 404 compliance project under whichmanagement engaged outside consultants and adopted a detailed project work planto assess the adequacy of our internal control over financial reporting,remediate any control deficiencies that may be identified, validate throughtesting that controls are functioning as documented and implement a continuousreporting and improvement process for internal control over financialreporting. Management is currently early in the documentation phase of itsprocesses prior to the testing phase of the project. Except as described above,during the quarter ended September 30, 2006, there have been no changes in ourinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

Inherent limitations ofthe effectiveness of internal control.

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the internal controlsystem are met. Because of the inherent limitations of any internal controlsystem, no evaluation of controls can provide absolute assurance that allcontrol issues, if any, within a company have been detected.

** Part II   OtherInformation**

**Item 1.   Legal Proceedings**

On August 22, 2006,we formally notified Road Runner Planning & Consulting Inc. (“RRPC”) that they were in breach of ouragreement with them concerning their role as construction manager fordeployment of our electronic highway traffic sensing equipment (the“Agreement”). The breaches we cited included failure to adhere tocontractually allotted time frames; failure to obtain necessary permits andlicenses; providing defective parts and materials; refusing to provide validlien wavers; and threatening to cease performance. On August 23, 2006, wecommenced an arbitration proceeding against them, seeking damages, basedprincipally on such breaches. Based upon their failure to cure the breaches, onSeptember 12, 2006 we terminated the Agreement. In lieu of filingcounterclaims in connection with the arbitration we filed, they filed aseparate arbitration matter claiming, among other things, that we breached theAgreement by terminating the Agreement, and seeking damages. Both arbitrationmatters were filed with American Arbitration Association in Pittsburgh,Pennsylvania and have now been consolidated into one action. The arbitrationproceeding is in its early stages. At this time it is impossible to predict theoutcome of such arbitration. We believe that the claims and defenses assertedby RRPC are without merit and that the terms of the Agreement support ourclaims against RRPC.  The Company will pursue all viable claims anddefenses against RRPC.

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**Item 1A.    Risk Factors**

*ThePrivate Securities Litigation Reform Act of 1995 (the Act) provides a safeharbor for “forward-looking statements” made by or on our behalf of ourcompany. This Quarterly Report on Form 10-Q, including the Item labeled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”,contains forward-looking statements that you should read in conjunction withthe financial statements and notes to financial statements that we haveincluded elsewhere in this report. These statements are based on our currentexpectations, assumptions, estimates and projections about our business and ourindustry, and involve known and unknown risks, uncertainties, and other factorsthat may cause our or our industry’s results, levels of activity, performanceor achievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. We generally identifythese statements by words or phases such as “believe,” “anticipate,” “expect,” “intend,”“plan,” “will,” “may,” “should,” “estimate,” “predict,” “potential,” “continue,”or the negative of such terms or other similar expressions. Our actual resultsand the timing of events may differ significantly from the results discussed inthe forward-looking statements, and you should not place undue reliance onthese statements. Factors that might cause such a difference include thosediscussed under the heading “Risk Factors,” in our Annual Report on Form 10-K,filed on March 24, 2006, as well as those discussed elsewhere therein and inthis Quarterly Report on Form 10-Q. We disclaim any intent or obligationto update any forward-looking statements as a result of developments occurringafter the period covered by this report or otherwise*

**Item 6.   Exhibits**
| Exhibit  No. | ** ** | **Description**                                                                                                        | ** ** | ** ** |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **   | ** ** | ** **                                                                                                             |
| 31.1         |       | Certification by the  Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934.   |
|         |       |                                                                                                                   |
| 31.2         |       | Certification by the  Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934.   |
|         |       |                                                                                                                   |
| 32.1         |       | Certification pursuant to 18 USC. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                        |   | Traffic.com, Inc.                            |   |
|------------------------|--------|----------------------------------------------|--------|
|                   |   | (Registrant)                                 |   |
|                   |   |                                         |   |
| Date: November 7, 2006 | By:    | /s/ Robert N. Verratti                       |   |
| ** **             |   | Robert N. Verratti                           |   |
| ** **             |   | Chief Executive Officer                      |   |
|                   |   | (Principal Executive Officer)                |   |
|                   |   |                                         |   |
|                   |   |                                         |   |
| Date: November 7, 2006 | By:    | /s/ Andrew Maunder                           |   |
|                   |   | Andrew Maunder                               |   |
|                   |   | Chief Financial Officer                      |   |
|                   |   | (Principal Financial and Accounting Officer) |
|                   |   |                                         |   |

 

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**EXHIBITINDEX**
| Exhibit  No. | ** ** | ** **                                                                                                             | ** ** | **Description** | ** ** | ** ** |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|
|         |       |                                                                                                                   |
| 31.1         |       | Certification by the  Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934.   |
|         |       |                                                                                                                   |
| 31.2         |       | Certification by the  Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934.   |
|         |       |                                                                                                                   |
| 32.1         |       | Certification pursuant to 18 USC. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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