** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

ý       **QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **
| **For the quarterly  period ended June 30, 2006** |
|---------------------------------------------------|

###### ** **

###### **or**

###### ** **

**o****       ****TRANSITION REPORT PURSUANT TOSECTION 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 itsCharter)

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

 

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

 

**Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.**

** **

**YES****ý          NO****o**

** **

**Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.**

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

** **

**Indicate by checkmarkwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)**

** **

**YES**o      NO ý

** **

**At July 31, 2006 , there were 20,551,458 shares of common stockoutstanding.**

 

 

----

 

**TRAFFIC.COM, INC.**

 

##### INDEX

 
| Part I.    | Financial  Information | Page                                                                                                                                   |
|------------|------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|       |                   |                                                                                                                                   |
|       | Item 1.                | Unaudited Condensed Consolidated Financial Statements                                                                                  |   |
|       |                   |                                                                                                                                   |   |
|       |                   | Condensed Consolidated Balance Sheets at June 30, 2006 (unaudited)  and December 31, 2005                                              | 3 |
|       |                   |                                                                                                                                   |   |
|       |                   | Condensed Consolidated Statements of Operations (unaudited) for the  three and six months ended   June 30, 2006 and June 30, 2005 | 4 |
|       |                   |                                                                                                                                   |   |
|       |                   | Condensed Consolidated Statements of Cash Flows (unaudited) for the  six months ended   June 30, 2006 and June 30, 2005      | 5 |
|       |                   |                                                                                                                                   |   |
|       |                   | Notes to Unaudited Condensed Consolidated Financial Statements                                                                         | 6 |
|       |                   |                                                                                                                                   |   |
|       | Item 2.                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                            | 11 |
|       |                   |                                                                                                                                   |   |
|       | Item 3                 | Quantitative and Qualitative Disclosures  About Market Risk                                                                            | 20 |
|       |                   |                                                                                                                                   |   |
|       | Item 4.                | Controls and Procedures                                                                                                                | 21 |
|       |                   |                                                                                                                                   |   |
|       |                   |                                                                                                                                   |   |
| Part II.   | Other Information      |                                                                                                                                   |
|       |                   |                                                                                                                                   |
|       | Item 1A.               | Risk Factors                                                                                                                           | 21 |
|       |                   |                                                                                                                                   |   |
|       | Item 4.                | Submission of  Matters to a Vote of Security Holders                                                                                   | 22 |
|       |                   |                                                                                                                                   |   |
|       | Item 5.                | Other Information                                                                                                                      | 22 |
|       |                   |                                                                                                                                   |   |
|       | Item 6.                | Exhibits                                                                                                                               | 22 |
|       |                   |                                                                                                                                   |   |
| Signatures |                   | 23                                                                                                                                     |
|       |                   |                                                                                                                                   |
| Exhibits   |                   | 24                                                                                                                                     |

 

**2**

----

** **

**Traffic.com, Inc.**

**CondensedConsolidated Balance Sheets**

***(In Thousands,Except Share Amounts)***

** **
| ** **                                                                                                                                                                                         | ** ** | **As of   June 30,   2006** | ** ** | **As of   December 31,   2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **(unaudited)**                                 | ** ** | ** **                                          | ** ** |
| **Assets**                                                                                                                                                                                         |       |                                            |       |                                                |       |
| Current assets:                                                                                                                                                                                    |       |                                            |       |                                                |       |
| Cash and cash equivalents                                                                                                                                                                          |       | $                                               | 3,684      |                                                | $          | 13,143 |   |
| Short-term investments                                                                                                                                                                             |       | 23,316                                          |       | —                                              |       |
| Accounts receivable, net of allowance of  $750 and $779 at June 30, 2006 and December 31, 2005, respectively                                                                                  |       | 13,993                                          |       | 10,177                                              |       |
| Government services receivables                                                                                                                                                                    |       | 602                                             |       | 2,091                                               |       |
| Deferred offering costs                                                                                                                                                                            |       | —                                          |       | 2,368                                               |       |
| Other current assets                                                                                                                                                                               |       | 1,374                                           |       | 723                                                 |       |
| Total current assets                                                                                                                                                                               |       | 42,969                                          |       | 28,502                                              |       |
| Property and equipment, net                                                                                                                                                                        |       | 25,632                                          |       | 23,816                                              |       |
| Other long-term assets                                                                                                                                                                             |       | 876                                             |       | 2,660                                               |       |
| Total assets                                                                                                                                                                                       |       | $                                               | 69,477     |                                                | $          | 54,978 |   |
| **Liabilities, redeemable convertible  preferred stock, and stockholders’ deficit**                                                                                                           |       |                                            |       |                                                |       |
| Current liabilities:                                                                                                                                                                               |       |                                            |       |                                                |       |
| Accounts payable                                                                                                                                                                                   |       | $                                               | 1,989      |                                                | $          | 3,023 |   |
| Accrued station compensation                                                                                                                                                                       |       | 3,624                                           |       | 3,032                                               |       |
| Accrued legal settlements                                                                                                                                                                          |       | —                                          |       | 7,125                                               |       |
| Other accrued expenses                                                                                                                                                                             |       | 2,609                                           |       | 4,528                                               |       |
| Revolving credit facility                                                                                                                                                                          |       | —                                          |       | 4,128                                               |       |
| Current portion of deferred revenue                                                                                                                                                                |       | 1,667                                           |       | 1,711                                               |       |
| Current portion of deferred license fees                                                                                                                                                           |       | 3,162                                           |       | 1,148                                               |       |
| Total current liabilities                                                                                                                                                                          |       | 13,051                                          |       | 24,695                                              |       |
| Senior secured credit facility and accrued  interest                                                                                                                                               |       | —                                          |       | 37,659                                              |       |
| Deferred revenue                                                                                                                                                                                   |       | 25,257                                          |       | 23,261                                              |       |
| Deferred license fees                                                                                                                                                                              |       | 7,545                                           |       | 9,385                                               |       |
| Other long-term liabilities                                                                                                                                                                        |       | 1,337                                           |       | 678                                                 |       |
|                                                                                                                                                                                               |       | 47,190                                          |       | 95,678                                              |       |
| Redeemable convertible preferred stock,  $0.01 par value, 30,000,000 authorized at June 30, 2006:                                                                                                  |       |                                            |       |                                                |       |
| Series E; 18,000,000 shares authorized  at December 31, 2005; 16,265,094 issued and outstanding at  December 31, 2005; liquidation preference of $65,060 at  December 31, 2005 |       | —                                          |       | 32,530                                              |       |
| Series E-1; 6,419,811 shares  authorized, issued and outstanding at December 31, 2005; liquidation  preference of $12,364 at December 31, 2005                                      |       | —                                          |       | 9,321                                               |       |
| Series F; 6,000,000 shares authorized  and 5,042,090 issued and outstanding at December 31, 2005; liquidation  preference of $20,168 at December 31, 2005                           |       | —                                          |       | 15,126                                              |       |
|                                                                                                                                                                                               |       | —                                          |       | 56,977                                              |       |
| Stockholders’ equity (deficit):                                                                                                                                                               |       |                                            |       |                                                |       |
| Common stock, $0.01 par value, 100,000,000  shares authorized and 20,549,710 and 3,826,325 shares issued and outstanding  at June 30, 2006 and December 31, 2005, respectively                |       | 206                                             |       | 39                                                  |       |
| Additional paid-in capital                                                                                                                                                                         |       | 192,383                                         |       | 61,566                                              |       |
| Treasury stock at cost; 41,881 shares at  June 30, 2006                                                                                                                                            |       | (395                                            | )          | —                                              |       |
| Notes receivable from stockholders                                                                                                                                                                 |       | (77                                             | )          | (177                                                | )          |
| Deferred stock based compensation                                                                                                                                                                  |       | —                                          |       | (1,672                                              | )          |
| Accumulated deficit                                                                                                                                                                                |       | (169,830                                        | )          | (157,433                                            | )          |
| Total stockholders’ equity (deficit)                                                                                                                                                          |       | 22,287                                          |       | (97,677                                             | )          |
| Total liabilities, redeemable convertible  preferred stock and stockholders’ equity (deficit)                                                                                                 |       | $                                               | 69,477     |                                                | $          | 54,978 |   |

 

See accompanying notes.

 

3

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** **

**Traffic.com, Inc.**

**CondensedConsolidated Statements of Operations**

*(In Thousands, Except Per Share Amounts)*

 
| ** **                                               | ** ** | **Three Months  Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                          | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(unaudited)**                                   | ** ** | **(unaudited)**                                     | ** ** |
| Revenue:                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Advertising                                              |       | $                                                 | 12,529     |                                                | $          | 11,177 |   | $ | 21,856 |   | $ | 19,507 |   |
| Traffic data services                                    |       | 1,851                                             |       | 969                                                 |       | 3,308 |   | 1,899 |   |
|                                                     |       | 14,380                                            |       | 12,146                                              |       | 25,164 |   | 21,406 |   |
| Cost of revenue                                          |       | 10,145                                            |       | 8,319                                               |       | 19,643 |   | 15,946 |   |
| Gross margin                                             |       | 4,235                                             |       | 3,827                                               |       | 5,521 |   | 5,460 |   |
| Operating expenses:                                      |       |                                              |       |                                                |       |   |   |   |   |
| Research and development                                 |       | 1,542                                             |       | 797                                                 |       | 2,810 |   | 1,604 |   |
| Sales and marketing                                      |       | 4,755                                             |       | 3,529                                               |       | 9,011 |   | 7,312 |   |
| General and administrative                               |       | 2,976                                             |       | 2,495                                               |       | 5,133 |   | 4,192 |   |
| Legal settlements                                        |       | —                                            |       | 4,223                                               |       | — |   | 4,223 |   |
|                                                     |       | 9,273                                             |       | 11,044                                              |       | 16,954 |   | 17,331 |   |
| Loss from operations                                     |       | (5,038                                            | )          | (7,217                                              | )          | (11,433 | ) | (11,871 | ) |
| Interest income (expense), net                           |       | 341                                               |       | (1,686                                              | )          | (958 | ) | (2,813 | ) |
| Net loss                                                 |       | $                                                 | (4,697     | )                                                   | $          | (8,903 | ) | $ | (12,391 | ) | $ | (14,684 | ) |
| Accretion of redeemable convertible  preferred stock     |       | —                                            |       | (553                                                | )          | (108 | ) | (1,089 | ) |
| Net loss attributable to common  stockholders            |       | $                                                 | (4,697     | )                                                   | $          | (9,456 | ) | $ | (12,499 | ) | $ | (15,773 | ) |
| Net loss attributable to common  stockholders per share: |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                                    |       | $                                                 | (0.23      | )                                                   | $          | (2.80 | ) | $ | (0.69 | ) | $ | (4.69 | ) |
| Diluted                                                  |       | $                                                 | (0.23      | )                                                   | $          | (2.80 | ) | $ | (0.69 | ) | $ | (4.69 | ) |
| Number of shares used in per share  calculation:         |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                                    |       | 20,412                                            |       | 3,377                                               |       | 18,066 |   | 3,361 |   |
| Diluted                                                  |       | 20,412                                            |       | 3,377                                               |       | 18,066 |   | 3,361 |   |

 

See accompanying notes.

 

4

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**Traffic.com, Inc.**

**CondensedConsolidated Statements of Cash Flows**

***(In thousands)***

 
| ** **                                                                                 | ** ** | **Six Months Ended   June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Operating activities**                                                                   |       |                                                |       |   |   |
| Net loss                                                                                   |       | $                                                   | (12,391    | ) | $ | (14,684 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |       |                                                |       |   |   |
| Depreciation of property and equipment                                                     |       | 1,671                                               |       | 1,002 |   |
| Amortization of deferred financing fees and  intangible assets                             |       | 1,531                                               |       | 268 |   |
| Stock based compensation expense                                                           |       | 792                                                 |       | 14 |   |
| Provision for bad debts                                                                    |       | 33                                                  |       | 40 |   |
| Changes in assets and liabilities:                                                         |       |                                                |       |   |   |
| Accounts and government services  receivables                                              |       | (2,360                                              | )          | (2,397 | ) |
| Other assets                                                                               |       | 2,543                                               |       | 1,060 |   |
| Accounts payable and accrued expenses                                                      |       | (3,406                                              | )          | 5,927 |   |
| Accrued legal settlements                                                                  |       | (7,125                                              | )          | — |   |
| Deferred revenue                                                                           |       | 1,952                                               |       | 3,534 |   |
| Deferred license agreement                                                                 |       | 174                                                 |       | 1,438 |   |
| Other liabilities                                                                          |       | 671                                                 |       | — |   |
| Net cash used in operating activities                                                      |       | (15,915                                             | )          | (3,798 | ) |
| **Investing activities**                                                                   |       |                                                |       |   |   |
| Purchases of property and equipment                                                        |       | (3,325                                              | )          | (5,323 | ) |
| Change in restricted cash                                                                  |       | 336                                                 |       | 199 |   |
| Purchases of short-term investments                                                        |       | (48,060                                             | )          | — |   |
| Sales and maturities of short-term  investments                                            |       | 24,744                                              |       | — |   |
| Net cash used in investing activities                                                      |       | (26,305                                             | )          | (5,124 | ) |
| **Financing activities**                                                                   |       |                                                |       |   |   |
| Proceeds from the sales of common stock in  an initial public offering                     |       | 77,693                                              |       | — |   |
| Offering issuance costs                                                                    |       | (3,218                                              | )          | — |   |
| Proceeds from (repayment of) the senior  secured credit facility                           |       | (37,697                                             | )          | 10,000 |   |
| Debt issuance costs                                                                        |       | —                                              |       | (349 | ) |
| Net proceeds from (payments of) the  revolving credit facility                             |       | (4,128                                              | )          | (810 | ) |
| Proceeds from the exercise of common stock  options and warrants                           |       | 11                                                  |       | 9 |   |
| Proceeds from the payment of shareholder  notes                                            |       | 100                                                 |       | — |   |
| Payment of long-term debt                                                                  |       | —                                              |       | (33 | ) |
| Net cash provided by financing activities                                                  |       | 32,761                                              |       | 8,817 |   |
| Net decrease in cash and cash equivalents                                                  |       | (9,459                                              | )          | (105 | ) |
| Cash and cash equivalents at beginning of  period                                          |       | 13,143                                              |       | 4,898 |   |
| Cash and cash equivalents at end of period                                                 |       | 3,684                                               |       | 4,793 |   |
|                                                                                       |       |                                                |       |   |   |
| **Supplemental cash flow disclosures**                                                     |       |                                                |       |   |   |
| Conversion of redeemable convertible  preferred stock                                      |       | 57,086                                              |       | — |   |
| Accretion of preferred stock                                                               |       | (108                                                | )          | (1,089 | ) |
| Repurchase of stock for exercise of common  stock warrants                                 |       | (395                                                | )          | — |   |
|                                                                                            |            |                                                     |            |  |  |  |  |

 

See accompanying notes.

 

**5**

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** **

**Traffic.com, Inc.Notes to CondensedConsolidated Financial Statements**

** **

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

 

Traffic.com, Inc. (the “Company”), formerlyknown as Mobility Technologies, Inc., is deploying a nationwide trafficand logistics data collection network and a proprietary Traffic InformationManagement System (“TIMS”) with the goal of becoming the nation’s premierprovider of real-time digital and predictive traffic and logistics informationfor businesses, consumers, and government agencies. The Company is building anetwork of wireless sensors (the “digital sensor network”) and integratinggovernment agency sensors along major highways. The digital sensor networkcollects vehicle counts, vehicle speeds, classification (car or truck), androadway density and transmits the data over a wireless network to TIMS.Initially, the Company’s revenues were generated solely through traditionalradio and television syndication of the Company’s traffic data content and thelicensing of its traffic data to the federal and certain state and localgovernmental entities. The Company has broadened its revenue approach toinclude commercial sales and licenses of its traffic data (“Traffic DataServices”) and syndication of the Company’s traffic content in the context of online,mobile and other interactive and non-traditional media.

 

On January 25, 2006, the Company completed aninitial public offering and began trading on the NASDAQ National Market underthe symbol “TRFC”. In the initial public offering, a total of 6,950,000 sharesof common stock were sold, including the exercised portion of the underwriter’sover-allotment option. Of the 6,950,000 shares of common stock sold in theinitial public offering, 62,334 shares were sold by selling shareholders and6,887,666 shares were sold by the Company, generating approximately$74.5 million in proceeds to the Company, net of offering expenses andunderwriters’ discounts. In connection with the consummation of the offering,9,242,312 shares of common stock were issued upon conversion of the Company’sredeemable convertible preferred stock. Upon consummation of the offering, theCompany’s Fifth Amended and Restated Certificate of Incorporation becameeffective. The Fifth Amended and Restated Certificate of Incorporationauthorizes 100,000,000 shares of common stock and 30,000,000 shares ofundesignated preferred stock. No shares of preferred stock were outstanding atJune 30, 2006.

 

**Principles of Consolidation**

 

The accompanying condensed consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries. All inter-company transactions and balances have been eliminated.

 

**Unaudited Interim Financial Information**

 

The accompanying condensedconsolidated balance sheet as of June 30, 2006, the condensed consolidatedstatements of operations for the three and six months ended June 30,2006 andthe condensed consolidated statements of cash flows for the six months endedJune 30, 2006 and 2005 are unaudited. These unaudited interim condensedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles. In our opinion, the unaudited interimcondensed consolidated financial statements include all adjustments of a normalrecurring nature necessary for the fair presentation of our financial positionat June 30, 2006, and our results of operations for the three and sixmonths ended June 30, 2006 and our cash flows for the six months ended June 30, 2006 and 2005. Theresults of operations for the three and six months ended June 30, 2006 are notnecessarily indicative of the results to be expected for the year endingDecember 31, 2006.

 

These unaudited interimcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and related notes included in our 2005Annual Report on Form 10-K, filed on March 24, 2006.

 

**Use of Estimates**

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

On an ongoing basis, the Company evaluates itsestimates, including those related to accounts receivable allowance, usefullives of long lived assets, its asset retirement obligation, revenuerecognition on the Company’s contract with the United States Department ofTransportation, the value of common stock for the purpose of determining stock-basedcompensation, and income taxes, among others. The Company bases its estimateson historical experience and on various other assumptions that are believed tobe reasonable, the results of which form the basis for making judgments aboutthe carrying value of assets and liabilities.

 

6

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**Stock-based Compensation**

 

**On January 1, 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS 123(R)). SFAS 123(R) requires all share-based paymentsto employees, including grants of stock options, to be recognized in thefinancial statements based on their fair value. Under SFAS 123(R), proforma disclosure is no longer an alternative to financial statement recognitionfor stock option awards made after the Company’s adoption of SFAS 123(R).See Note 5 for further details.**

** **

**Income Taxes**

 

**There was no provision for income taxes for the three orsix months ended June 30, 2006 and 2005.**

** **

**Reclassifications**

 

Certain amounts in the condensed consolidatedbalance sheet as of December 31, 2005 have been reclassified to conform tothe June 30, 2006 presentation.

 

**Short-Term Investments**

 

Investments with original maturities longer thanthree months, but less than one year, are classified as short-term investments.At June 30, 2006, these investments consisted of certificates of deposits.Short-term investments are stated at their fair value.

 

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

 

Basic net loss attributable to common stockholdersper common share excludes dilution for potential common stock issuances and iscomputed by dividing the net loss attributable to common stockholders by theweighted-average number of common shares outstanding for the period. Dilutednet loss attributable to common stockholders per common share reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock. The following tableprovides a reconciliation of the numerators and denominators used in computingbasic and diluted net loss attributable to common stockholders per common shareand pro forma loss attributable to common stockholders per common share *(in thousands, except per share amounts)*:

 
| ** **                                                                     | ** ** | **Three Months   Ended   March 31,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                                 | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Basic net loss per share**                                                   |       |                                                     |       |                                                |       |   |   |   |   |
| Numerator:                                                                     |       |                                                     |       |                                                |       |   |   |   |   |
| Net loss                                                                       |       | $                                                        | (4,697     | )                                                   | $          | (8,903 | ) | $ | (12,391 | ) | $ | (14,684 | ) |
| Accretion of redeemable convertible  preferred stock                           |       | —                                                   |       | (553                                                | )          | (108 | ) | (1,089 | ) |
| Numerator for per share calculation—basic  and diluted                    |       | $                                                        | (4,697     | )                                                   | $          | (9,456 | ) | $ | (12,499 | ) | $ | (15,773 | ) |
| Denominator:                                                                   |       |                                                     |       |                                                |       |   |   |   |   |
| Weighted-average common shares outstanding                                     |       | 20,412                                                   |       | 3,431                                               |       | 18,066 |   | 3,429 |   |
| Less: Weighted-average unvested common  stock subject to repurchase agreements |       | —                                                   |       | (54                                                 | )          | — |   | (68 | ) |
| Denominator for per share calculation—basic  and diluted                  |       | 20,412                                                   |       | 3,377                                               |       | 18,066 |   | 3,361 |   |
| Net loss attributed to common stockholders  per share—basic and diluted   |       | $                                                        | (0.23      | )                                                   | $          | (2.80 | ) | $ | (0.69 | ) | $ | (4.69 | ) |

 

7

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The following table shows stock equivalents thatwere not considered in the computation of the diluted net loss attributable tocommon stockholders per common share as of June 30, 2006 and 2005 as theireffect is anti-dilutive:

 
| ** **                                            | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|
| ** **                                            | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Shares of preferred stock (on an as  converted basis) |       | —            |       | 7,561,623 |   |
| Stock options                                         |       | 2,525,646         |       | 2,062,770 |   |
| Warrants                                              |       | 1,047,035         |       | 1,689,139 |   |

 

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

 
| ** **                                                                                              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                        | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income                                                                                         |       | $                                               | 354        |                                     | $          | 36 |   | $ | 689 |   | $ | 58 |   |
| Amortization of deferred financing fees                                                                 |       | —                                          |       | (255                                     | )          | (1,531 | ) | (275 | ) |
| Retroactive adjustments to accrued interest  under the Senior Secured Credit facility due to amendments |       | —                                          |       | (688                                     | )          | — |   | (688 | ) |
| Accretion of the asset retirement  obligation                                                           |       | (13                                             | )          | —                                   |       | (27 | ) | — |   |
| Interest expense                                                                                        |       | —                                          |       | (779                                     | )          | (89 | ) | (1,908 | ) |
| Interest income (expense), net                                                                          |       | $                                               | 341        |                                     | $          | (1,686 | ) | $ | (958 | ) | $ | (2,813 | ) |

 

**4. Debt**

 

**Senior Secured Credit Facility**

 

In January 2006, the Company repaid the $37.7million of outstanding principal and interest outstanding under its senior securedcredit facility using a portion of the proceeds raised in the initial publicoffering. As a result of the repayment of the facility, the Company acceleratedthe amortization of $1.5 million of deferred financing fees into interestexpense.

 

**Revolving Credit Facility**

 

In February 2006, the Company repaid theoutstanding obligation due under its revolving credit facility with a portionof the proceeds from the initial public offering. In March 2006, thefacility expired upon its terms.

 

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

 

**Reverse Stock Split**

 

In October 2005, the Company’s board ofdirectors approved a one-for-three reverse stock split of common stock to beeffected prior to the effective date of the Company’s initial public offeringof common stock. The reverse stock split was approved by the Company’sstockholders in January 2006. In connection with the reverse stock split,the par value of the Company’s common stock was adjusted to remain at $0.01.The accompanying condensed consolidated financial statements give retroactiveeffect as though the one-for-three reverse split of the Company’s common stockoccurred for all periods presented.

 

**Treasury Stock**

 

During the six months ended June 30, 2006, theCompany withheld 41,881 shares issuable upon the exercise of warrants forthe acquisition of 580,654 shares of common stock in lieu of payment of theexercise price. These shares have been recorded at cost as treasury stock.

 

8

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** **

**Stock Options**

 

In January 2006, the Company’s 2005 Long-TermIncentive Plan (the 2005 Plan), which was approved by the Board of Directors inOctober 2005, became effective following approval by the Company’sstockholders and the consummation of the Company’s initial public offering. The2005 Plan provides for the grant of stock options, stock appreciation rights,restricted stock, restricted stock units and other equity-based awards. Noadditional awards will be made under the Company’s 1999 Long-Term IncentivePlan or the 1999 Non-Employee’s Stock Plan (the 1999 Plans). Upon effectivenessof the 2005 Plan, in addition to the shares remaining for grants under the 1999Plans which flowed through to the 2005 Plan, an additiona1 1,750,000 shares ofcommon stock became reserved for issuance under the 2005 Plan. In addition, the2005 Plan contains an “evergreen provision” which allows for an annual increasein the number of shares available for issuance under the plan on the first dayof each of the Company’s fiscal years beginning in fiscal year 2007. The annualincrease in the number of shares shall be equal to the lesser of:  (i) 350,000 shares;  (ii) 1% of the Company’s outstandingshares of common stock on the first day of the fiscal year; or (iii) anamount determined by the Company’s Board of Directors. Stock option terms aregenerally 10 years, with options generally becoming exercisable on a prorata basis over four years from the date of the grant.

 

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

 

SFAS 123(R) requiresall share-based payments to employees, including grants of stock options, to berecognized in the financial statements based on their fair values. Under SFAS123(R), pro forma disclosure is no longer an alternative to financial statementrecognition for stock option awards made after the Company’s adoption of SFAS123(R). The Company adopted SFAS 123(R) on January 1, 2006.

 

Prior to August 30,2005, the date that the Company filed a Form S-1 with the Securities andExchange Commission, the Company used the minimum value method to calculate thepro forma disclosure required by SFAS 123. When the Company adopted SFAS123(R) on January 1, 2006, the Company continued to account for theportion of awards outstanding prior to August 30, 2005 using theprovisions of APB Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB 25) and its related interpretative guidance. The Company didnot make any stock option grants in the period from August 30, 2005through December 31, 2005. Accordingly, since the Company valued stockoption grants using the minimum-value method in prior years, pro formainformation would not be meaningful and is not being provided.

 

We adopted SFAS 123(R) using the modifiedprospective method beginning January 1, 2006. For stock-based awardsgranted after January 1, 2006, we have recognized compensation expenseduring the six months ended June 30, 2006 based on the estimated grant datefair value using the Black-Scholes valuation model. For these awards, we haverecognized compensation expense using a straight-line amortization method. AsSFAS 123(R) requires that stock-based compensation expense be based onawards that are ultimately expected to vest, stock-based compensation for thesix-month period ended June 30, 2006 has been reduced for estimatedforfeitures. When estimating forfeitures, we consider voluntary terminationbehaviors as well as trends of actual option forfeitures. As a result ofadopting Statement 123 (R) on January 1, 2006, the Company’s netincome for the six months ended June 30, 2006 is $0.5 million lower thanif it had continued to account for share-based compensation under APB 25.Basic and diluted earnings per share for the six months ended June 30, 2006 is$0.03 lower than if the Company had continued to account for share-basedcompensation under APB 25.

 

In connection with certain stock options grantedduring the second quarter of 2005, the Company, in accordance with APB 25,recorded deferred stock compensation aggregating $1.8 million, net ofsubsequent cancellations, representing the difference between the exerciseprice of the options and the deemed fair value of the Company’s common shareson the dates the options were granted. This deferred stock-based compensationis being amortized on a straight line basis over the vesting periods of the underlyingstock options of four years. Through June 30, 2006, the Company hasamortized approximately $0.3 million of such compensation expense, withapproximately $0.1 million being amortized in the three months ended June30, 2006. Upon the adoption of SFAS 123(R) in January 2006, theunearned stock-based compensation balance of approximately $1.7 million wasreclassified to additional paid-in capital.

 

9

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***Valuation Assumptions***

 

The Company calculated the fair value of each optionaward on the date of grant using the Black-Scholes option pricing model. Thefollowing assumptions were used for valuing grants made during the six monthsended June 30, 2006:

 
| Risk-free interest rates    |   | 4.54 - 4.85  | %      |
|-----------------------------|--------|--------------|--------|
| Expected lives (in years)   |   | 5.50 - 6.25  |   |
| Dividend yield              |   | 0            | %      |
| Expected volatility         |   | 79.0% - 82.0 | %      |
| Weighted-average volatility |   | 81.6         | %      |

 

Due to a limited trading history in a public market,the Company’s computation of stock-price volatility is based on the volatility ratesof comparable publicly-held companies over a period equal to the estimateduseful life of the options granted by the Company. These rates may or may notreflect the Company’s stock-price volatility after it has been a publicly-heldcompany for a meaningful period of time. If the Company had made differentassumptions about the stock-price volatility rates, the related compensationexpense and its net income and net income per share amounts could have beensignificantly different. The Company’s computation of expected life wasdetermined using the “simplified” method whereby the vesting period plus theoriginal contractual term is divided by two. The range provided above relatesto options being granted with different vesting periods. The interest rate forperiods within the contractual life of the award is based on the U.S. Treasuryyield curve in effect at the time of the grant.

 

***Stock-based Payment AwardActivity***

 

The following table summarizes activity under ourequity incentive plans for the three months ended June 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                                          |       | 578,930    |       | $                                                      | 11.78      |                                                                                               |       |                                        |       |   |
| Exercised                                        |       | (12,752    | )          | $                                                      | 0.87       |                                                                                               |       |                                        |       |   |
| Expired                                          |       | (16,666    | )          | $                                                      | 8.80       |                                                                                               |       |                                        |       |   |
| Forfeited                                        |       | (24,344    | )          | $                                                      | 9.10       |                                                                                               |       |                                        |       |   |
| Outstanding at June 30, 2006                     |       | 2,525,646  |       | $                                                      | 4.48       |                                                                                               | 7.15       |                                        | $          | 10,027,000 |   |
|                                             |       |       |       |                                                   |       |                                                                                               |       |                                        |       |
| Options vested and expected to vest              |       | 2,390,101  |       | $                                                      | 4.24       |                                                                                               | 7.05       |                                        | $          | 6,397,000 |   |
|                                             |       |       |       |                                                   |       |                                                                                               |       |                                        |       |
| Options vested and exercisable at June 30,  2006 |       | 1,457,448  |       | $                                                      | 2.61       |                                                                                               | 6.11       |                                        | $          | 5,269,000 |   |

 

The aggregate intrinsic value is calculated as thedifference between the exercise price of the underlying awards and the quotedprice of the Company's common stock for the 1,909,298 options that werein-the-money at June 30, 2006. As of June 30, 2006, there was approximately $3.6million of total unrecognized compensation expense related to unvested stockoptions issued under the Company’s stock option plans which is expected to berecognized over a remaining weighted average period of 3.43 years. The weightedaverage fair value of a common stock option granted during the six months endedJune 30, 2006 was $11.70. The total intrinsic value (market value on date ofexercise less the exercise price) of the options exercised during the sixmonths ended June 30, 2006 was $0.1 million.

 

Cash received from option exercises under allshare-based payment arrangements for the six months ended June 30, 2006 wasapproximately $11,000.

 

**Stock Warrants**

** **

The Company has fully vested common stock warrantsthat were issued prior to January 1, 2006. During the six months endedJune 30, 2006, warrants to purchase 622,535 shares of common stock wereexercised at a price of $0.75. The Company did not receive any cash proceeds asthe warrant holders surrendered 41,881 shares as payment of the 

 

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exerciseprice. The shares surrendered have been recorded as Treasury Stock in thebalance sheet as of June 30, 2006. The total intrinsic value (market value ondate of exercise less exercise price) of the warrants exercised during the sixmonths ended June 30, 2006 was $5.5 million.

 

**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**

** **

On July 20, 2006, the Compensation Committee of theBoard of Directors approved the cancellation of options to purchase anaggregate of 499,233 shares of common stock, which were granted on February 16,2006 at an exercise price of $12.13 per share, and to grant replacement optionsto purchase the same amount of options to purchase common stock at an exerciseprice of $4.77 per share, which was the fair value of the Company's commonstock on that date. The options granted follow the Company's standard four-yearvesting schedule. The cancellation and subsequent replacement of the optionswas undertaken in a proactive effort to retain valuable employees.

 

In accordance with SFAS 123(R), the cancellation andconcurrent grant of the stock options will be accounted for as an optionmodification which will result in incremental compensation expense. Theincremental compensation of $0.4 million plus the remaining unamortizedgrant-date fair value of the stock options granted in February 2006 will berecognized ratably over the 48-month period from the date of grant.

 

**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

*The following discussion of our financial condition andresults of operations should be read in conjunction with our unaudited interimcondensed consolidated financial statements and the notes to those statementsappearing elsewhere in this document.*

 

**Overview**

 

Weare a 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, mobiledevice, and in-vehicle navigation system users.

 

***Revenue Profile and Business Trends***

 

To date, substantially all of our revenue has beenderived from the sale of advertising on radio and television stations, as wellas from providing our traffic data to the U.S. DOT and certain state and localgovernment agencies. We believe that our newer revenue opportunities, includingonline and mobile advertising, and commercial traffic data services, willbecome an increasingly larger percentage of our total revenue. We areinvesting, and intend to continue to invest, significant resources in ourmarketing campaign in order to increase brand recognition of Traffic.com.

 

***Advertising.***In 2000, we entered into our first contractswith radio stations to provide traffic information in exchange for advertisinginventory, which we then sell through our own direct sales force. In 2001, wesigned our first contracts with television stations, under which we alsoprovide traffic information in exchange for advertising inventory. Certain ofour radio and television contracts require us to provide production services,such as announcers and producers, and/or make cash payments, in addition toproviding traffic information. We also enter into contracts with certain radiostations under which we buy advertising time solely in exchange for cash inorder to be able to offer advertisers access to a more comprehensive range ofmarkets. We do not provide traffic information under these agreements. Ourtelevision and radio contracts are generally for a term of one to three yearsand may be terminated with no penalty by either party if the other partybreaches the agreement or is in bankruptcy. Some of the three-year agreementsmay be terminated by the customer after 18 months upon 30 days noticeto us.

 

In July 2005, we began to offer online advertisingon our enhanced website and the websites of our customers and we recently beganto offer advertising on our mobile consumer services. Based on industry reportsof projected growth in the online advertising market, from $12.0 billionin 2004 to $22.0 billion in 2008, and based on our strategy to increaseawareness of our Traffic.com brand, we believe that online and mobile advertisingprovide us with an attractive opportunity to increase our revenue. The onlineand mobile advertising markets, however, are new and rapidly evolving. Revenuesfrom online and mobile advertising were $0.3 million for the six months endedJune 30, 2006. Our success in attracting online and mobile advertisers willdepend, in large part, on our ability to significantly increase the number ofvisitors to our website and the number of persons who subscribe to our mobile services.We intend to continue to invest significant resources in our branding campaignto increase brand recognition of Traffic.com.

 

We currently expect online and mobile advertising toincrease to between 15% and 30% of our total revenue within the next threeyears, as we invest in our branding campaign in the expectation that the numberof visitors to our www.traffic.com website, the websites of our partners, andusers of our mobile services will grow. We expect our radio and televisionadvertising revenue to increase in dollar amount as we expand the number ofmetropolitan areas in 

 

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whichwe provide traffic information, but to decrease as a percentage of totalrevenue to between 55% and 65% within the next three years. We are actively seekingto stimulate growth of online and mobile advertising by developing co-brandingopportunities on our media customers’ websites, such as www.weather.com andwww.comcast.net and by increasing the services offered on our own website. Werefer to these partner websites as TrafficOnes and at the end of the secondquarter of 2006 we had 66 live TrafficOnes installed. As of that date, we alsohad agreements in place to install TrafficOnes for another 47 partners.

 

***Traffic DataServices.***Since the first quarterof 2004, we have entered into agreements to provide traffic data to thefollowing customers:

 

•                  XMSatellite Radio Holdings, Inc. currently uses our traffic data for 21metropolitan areas under a five year agreement entered into January 2004.

 

•                  NAVTEQCorporation has been using our traffic data under a five-year agreement sinceJune 2004 in conjunction with its mapping data as content in a variety ofservices, including in-vehicle navigation systems.

 

•                  TheWeather Channel, Inc. has been using our traffic data under a three-yearagreement since January 2005 to provide traffic information on itswebsite, cable networks, local programming and desktop application.

 

•                  Motorola, Inc.has been using our traffic data under a two-year agreement sinceMarch 2005 to provide traffic information in its VIAMOTO solution, a suiteof location software for cell phones.

 

•                  ComcastCable Communications Management LLC has been using our traffic data since June2005 under a three-year agreement for use on its www.comcast.net website.

 

•                  MicrosoftCorporation will use our traffic data across multiple products, includinglocal.live.com under an agreement entered into in February 2006.

 

•                  GarminInternational will use our traffic data for its Mobile 20 wireless GPSnavigation system and its online mobile service under a three-year agreemententered into in June 2006.

 

•                  AOLwill use our traffic data for its AOL.com and AOLCityGuide.com sites under a two-yearagreement entered into in July 2006.

 

In each of these agreements, either party mayterminate the agreement with no penalty, if the other party breaches theagreement or is in bankruptcy. We currently expect that our traffic dataservices revenue, excluding government data services, will increase to between 15%to 20% of total revenue within the next three years.

 

***Traffic.comWebsite and Consumer Mobile Services.***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 in the process of a focused campaign to attract users and advertisers toour website and to websites of our media customers that are co-branded withwww.traffic.com. These new distribution channels are designed to provide advertisingopportunities for our advertising customers. We began offering all of ourconsumer services free of charge in January 2006.

 

***Operations andInfrastructure Support for New Revenue Opportunities.***Since 1999, we have made a significantinvestment in our development and enhancement of TIMS. TIMS is our proprietarysystem for collecting traffic data through our sensor network; analyzing suchdata; and distributing the analyzed data through a variety of deliverychannels, in real time. Based on this investment, TIMS is very scalable andflexible. It is designed to allow for very high and increasing transactionvolumes and to integrate with new technologies with minimal additionaldevelopment effort. We believe that we should be able to incorporate new revenueopportunities at relatively low additional cost.

 

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***Sources of Revenue***

 

***Advertising***

 

***Radio andTelevision Advertising****.*Inexchange for providing traffic information, cash and/or production services (includingannouncers and producers) to radio and television station customers, we receivethe right to sell advertising time adjacent to traffic, news or weather reportsas well as the right to sell advertisements on these stations’ websites.Additionally, under certain of our contracts with radio stations to which we donot provide traffic information, we buy for cash the right to sell a set amountof advertising time, primarily to expand our advertising sales coverage. Werefer to the advertising time that we receive in exchange for these two typesof contracts as “owned inventory.” As of July 15, 2006, we had contractsto acquire owned inventory from over 485 radio stations (including 126 to whichwe provided our traffic information services, including both our Traffic PulseBroadcaster and/or our affiliate web offering) and with 54 television stations.

 

We supplement our owned inventory by purchasingadditional advertising time for cash from time to time from radio stations thatare not under contract with us. These purchases, referred to as “cash buys,”usually are made to satisfy specific advertisers’ needs for additional coverageon particular stations or in smaller markets. Because cash buys are purchasedin the spot market on an as-needed basis, the cost of acquiring thisadvertising is higher than the cost of owned inventory. As a result, marginsfor the sale of cash buys are generally lower than the margins that can beachieved from the sale of owned inventory.

 

Revenue from our radio and television advertising isrecognized in the month that an advertisement is aired.

 

In May 2005, we launched our first traffic-focused,four-hour television news program, which is broadcast during the morningcommuting hours on a Viacom-owned UPN station in the Philadelphia, PA area.This program changes the standard morning news format by focusing first ontraffic, which constitutes approximately 40% of airtime, then approximately 40%on weather, and the balance on news. We produce and broadcast this program fromour own studio facility in our principal office. This type of program, which weexpect to introduce in other markets, provides us with significantopportunities for promoting our brand name on air, which we believe could leadto an increase in the number of users of our other services, such as ourwebsite and consumer mobile services. In return for this service, we receivedan upfront fee from Viacom, and receive advertising inventory. In addition, weare entitled to all of the advertising revenues earned from the sale of anynaming, sponsorship or other promotional rights related to NeXgen. Viacom has aone-time right to terminate this agreement at a specified time.

 

We are amortizing the initial license fee receivedfrom Viacom ratably over a period of five years, which represents the initialcontract term. We intend to recognize any sponsorship and promotional revenuesgenerated from the contract with Viacom over the period that the sponsorship orpromotion is aired. As of June 30, 2006, no revenues had yet been generatedfrom sponsorships or promotional rights. In addition, we recognize revenue fromthe advertising spots we receive from Viacom at the time an advertisement airs.

 

***Internet Onlineand WirelessMobile Advertising****.*Weintroduced our enhanced website and consumer mobile services in July 2005,and are offering advertising on our own www.traffic.com website and inconnection with our mobile services, in addition to offering advertising on thewebsites of a number of our customers. Revenues from online and mobileadvertising were $0.3 million for the six months ended June 30, 2006. We intendto invest a total of $4 million to $5 million in 2006 on marketingand branding to increase brand recognition of Traffic.com. Revenue from onlineand mobile 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. We are not required todisplay or air any minimum number of online or mobile advertisements.

 

We believe that our multiple media deliveryplatforms provide advertisers with an attractive cross-media campaignopportunity. Our advertisers can reach their customers at various times of dayusing advertisements associated with our traffic content aired on radio andtelevision, placed on our website and embedded in our mobile services. Webelieve that this cross-media opportunity will result in heightened interest inour services from advertisers. An example of this type of opportunity is theagreement we recently entered into, pursuant to which we provide targeted,cross-platform advertising solutions for Lexus dealerships in 11 majormetropolitan markets across the U.S.

 

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***Traffic DataServices***

 

***GovernmentServices****.*In1999, we were awarded, as principal subcontractor to the U.S. DOT, asubcontract to enable us to deploy an intelligent transportation infrastructuresystem to collect and distribute traffic flow data. Under the terms of thissubcontract, of the $2.0 million received by our prime contractor for eachdesignated metropolitan area, we are paid 95% or $1.9 million, to provideto federal and state transportation agencies the traffic flow data from oursensor network in these areas for non-commercial purposes. We retain theexclusive right to use this data for commercial purposes.

 

Under our subcontract, we own and are responsiblefor constructing, operating and maintaining our sensor networks. We haveengaged a third party contractor for the installation of the sensors used inour network. We pay the contractor a specified amount per site, which variesper metropolitan area based on the number of sites to be installed in thatarea. There are a number of third parties capable of providing siteinstallation services.

 

Our ability to recognize revenue from our federalsubcontract is based on when we obtain formal customer acceptance of thesystem. Revenue is then recognized over the estimated service period of thecontract of 15 years.

 

In addition, as a subcontractor to the U.S. DOT, wemust enter into agreements with state or local government agencies responsiblefor the metropolitan areas in which we deploy our sensor network, in order toproceed with deployment of the network. Once the relevant state or local agencyaccepts our proposal and enters into a contract with us, we are required tomeet certain milestones, including federal acceptance of our plans, designs andarchitecture. As of June 30, 2006, we were recognizing revenue from our sensornetwork in connection with our subcontract from the U.S. DOT regarding Boston,Chicago, Oklahoma City, Philadelphia, Pittsburgh, Providence, San Diego, SanFrancisco, St. Louis and Tampa.

 

***CommercialTraffic Data Services****.*Inthe first quarter of 2004, we began to enter into agreements with companies toprovide our traffic data directly to these customers for their own use in theirwebsites and media and service offerings. Our first such agreement was with XMSatellite Radio and, since that time, we have entered into agreements withNAVTEQ, Motorola, The Weather Channel, Comcast, Microsoft, Garmin and AOL.Revenue from our other traffic data services agreements includes one or more ofannual usage and exclusivity fees, fees for 24/7 support services, andin-vehicle traffic data subscription fees. Revenue recognition from thesecontracts varies, based upon contract minimums, subscriber growth and specialservices provided by us.

 

Under our NAVTEQ agreement, NAVTEQ has paid us$9.9 million as an advance against subscription, license and other feespayable by NAVTEQ. Upon expiration or earlier termination of the agreement, weare required to repay NAVTEQ an amount equal to (i) any portion of the$9.9 million advance payment that has not yet been earned, less(ii) aggregate specified annual minimum license fees of $0.4 millionin each of the first, second and third years of the agreement,$0.8 million in the fourth year of the agreement and $1.0 million inthe fifth year of the agreement. Upon expiration of the agreement, if it is notrenewed, up to $1.9 million of any remaining portion of the advance feethat we are required to repay may, at our option, be repaid in quarterlyinstallments over three years at an interest rate of prime plus 1%.

 

The NAVTEQ agreement, entered into in June 2004, hasa term of five years. The agreement may be terminated by either party upon amaterial breach not cured within thirty days’ notice, a performance failurecaused by a force majeure event not cured within six months or bankruptcy ofthe other party. A material breach includes a material breach by us of ourservice level commitment to NAVTEQ, but only if more than 15% of the coveredpopulation is affected by the service failure for more than 180 days orthe failure lasts longer than 270 days. Each party may terminate theagreement if the other sells all or substantially all of its business tocertain specified entities.

 

***Consumer Wireless Subscriptions****.*Following the completionof our enhanced website, we began to offer subscription wireless services toconsumers in July 2005. On January 14, 2006, we began to offer all ofour wireless services free of charge to consumers, as we plan to focus onobtaining advertising-based revenues from these services. Users can signup for a number of *my traffic.com*personalized traffic services within the *mytraffic.com* section of the traffic.com website.

We havebegun to offer advertising opportunities and sponsorships associated with ourfree wireless services to our advertising customers, although we have generatedonly minimal advertising revenue from this source to date.

Revenuefrom advertising and sponsorships in connection with our wireless services isrecognized over the period during which the advertisement or sponsorship isdisplayed and is included in advertising revenue in our statement ofoperations.

 

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***Cost of Revenue***

 

Cost of revenue consists of media inventoryexpenses, traffic data collection expenses, and other technology expenses associatedwith maintaining TIMS.

 

***Media Inventory****.*Media inventory expenses consist of cash paidto purchase advertising inventory under long-term contracts with radiostations. In addition, media inventory expenses include cash payments to radiostations to purchase additional advertising inventory in the spot market on anas-needed basis, which we refer to as “cash buys.” As we expand our presenceinto a larger number of metropolitan areas in the United States, we expect ourmedia inventory expenses to decrease as a percentage of total revenue.

 

***Traffic DataCollection 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.

 

***OtherTechnology Expenses****.*Technologyexpenses primarily consist of personnel and related costs for employees engagedin the development and ongoing maintenance of TIMS, including hardware andinternal product development expenses and the cost of consultants engaged toassist with various software development programs. In addition, these expensesinclude communications costs; capital depreciation of computer hardware; andthe depreciation of certain technology costs capitalized in accordance with SOP98-1, “*Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use.*” We expect tocontinue to incur development costs as we add products and services.

 

***Operating Expenses***

 

***Research andDevelopment***  In accordance with Statement of Position(SOP) 98-1 “Accounting for the Costs of Computer Software Developed or Obtainedfor Internal Use,” research and development costs include those labor costsincurred during the application development stage of internally developedsoftware. In addition, research and development costs also include costsassociated with licensing third-party software and other quality assurancecosts.

 

***Sales andMarketing Expenses****.*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 or increase this spending for theforeseeable future. We currently expect to spend approximately$4.0 million to $5.0 million on marketing and branding in 2006.

 

***General andAdministrative 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. Whilewe cannot predict with certainty what the additional costs of being a publiccompany will be, a review of comparable companies would suggest that additionalcosts could be between $1.5 million and $3.0 million annually.

 

**Results of Operations**

 

***Comparison of the Three Months EndedJune 30, 2005 and 2006***

 

***Revenue***

 

Revenue increased from $12.1 million for thethree months ended June 30, 2005 to $14.4 million for the three monthsended June 30, 2006, an 18.4% increase.

 

***Advertising****.*Advertising revenue increased from$11.2 million for the three months ended June 30, 2005 to$12.5 million for the three months ended June 30, 2006, a 12.1% increase.Owned inventory revenue, which generates 

 

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highermargins, increased from $9.5 million, or 85.3% of advertising revenue, forthe three months ended June 30, 2005, to $10.6 million, or 84.4% ofadvertising revenue, for the three months ended June 30, 2006, an 11.0%increase. Owned inventory revenue has steadily increased in absolute dollars asthe number of our radio and television customers has grown, due in part to thelaunch of Traffic Pulse NeXgen in the fourth quarter of 2004, and our continuedaffiliation efforts. We recognized $0.2 million in online and mobileadvertising revenues during the three months ended June 30, 2006.

 

***Traffic dataservices****.*Trafficdata services revenue grew from $1.0 million for the three months endedJune 30, 2005 to $1.9 million for the three months ended June 30, 2006, a91.0% increase. The increase was due to commencing revenue recognition withrespect to four additional cities under the U.S. DOT contract and increases inrevenue generated from the XM Satellite Radio, The Weather Channel, Viacom,Motorola agreements, as well as the recently executed Microsoft contract, andthe recent expansion in the number of markets being serviced under the NAVTEQagreement.

 

***Cost of revenue***

 

Cost of revenue increased from $8.3 million forthe three months ended June 30, 2005 to $10.1 million for the three monthsended June 30, 2006, a 21.9% increase. Cost of revenue as a percentage ofrevenue increased from 68.5% for the three months ended June 30, 2005 to 70.5%for the three months ended June 30, 2006.

 

***Media Inventory****.*Media inventory expenses increased from$4.3 million for the three months ended June 30, 2005 to $4.8 millionfor the three months ended June 30, 2006, a 12.1% increase. Our media inventoryexpenses decreased as a percentage of revenue from 35.4% for the three monthsended June 30, 2005 to 33.5% for the three months ended June 30, 2006. Theincrease in absolute dollars was primarily due to a $0.3 million increase inexpenses for stations under long-term agreements, and a $0.2 million increasein cash buy expense as a result of increased cash buy revenue. Media inventorycosts decreased as a percentage of revenue due to revenue growth provided byadditional television and radio station contracts.

 

***Traffic datacollection****.*Trafficdata collection expenses increased from $3.8 million for the three monthsended June 30, 2005 to $4.9 million for the three months ended June 30,2006, a 29.4% increase. Our traffic data collection costs as a percentage ofrevenue increased from 31.4% for the three months ended June 30, 2005 to 34.3%for the three months ended June 30, 2006. The increase both in absolute dollarsand as a percentage of revenue was primarily due to an increase in compensationand related costs, including on-air talent and production staff, of$0.7 million. This increase directly corresponds to our increased numberof radio and television customers and expansion in the number of markets beingserviced from 24 at June 30, 2005 to 50 at June 30, 2006. In addition,depreciation expense increased $0.2 million, as a result of commencingdepreciation of our sensor network in four additional cities, and maintenanceand communication costs relating to the digital sensor network increased$0.1 million, primarily as a result of additional sensors being installedunder new city contracts.

 

***Othertechnology expenses****.*Othertechnology expenses increased from $0.2 million for the three months endedJune 30, 2005 to $0.4 million for the three months ended June 30, 2006, an 86.4%increase. Our other technology expenses increased as a percentage of revenuefrom 1.8% for the three months ended June 30, 2005 to 2.8% for the three monthsended June 30, 2006. The increase in both the amount and as a percentage ofrevenue was due to a $0.2 million increase in depreciation from internallydeveloped software and capital asset purchases supporting the delivery of datato additional digital cities and traffic data service and consumer customers.

 

***Operating expenses***

 

***Research anddevelopment****.*Researchand development expenses increased from $0.8 million for the three monthsended June 30, 2005 to $1.5 million for the three months ended June 30,2006, a 93.5% increase. Research and development expenses increased as apercentage of revenue from 6.6% for the three months ended June 30, 2005 to10.7% for the three months ended June 30, 2006. The increase in both amount andas a percentage of revenue was due primarily to a $0.4 million increase incompensation and related employee expenses related to increased productdevelopment activities.

 

***Sales andmarketing****.*Salesand marketing expenses increased from $3.5 million for the three monthsended June 30, 2005 to $4.8 million for the three months ended June 30,2006, a 34.7% increase. Our sales and marketing expenses as a percentage ofrevenue increased from 29.1% for the three months ended June 30, 2005 to 33.1%for the three months ended June 30, 2006. The increase in absolute dollars andas a percentage of revenue was due to a $0.6 million of additionalmarketing expenses for branding, external product marketing, and publicrelations, and $0.5 million of additional 

 

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compensationand related employee benefit costs as a result of increased commissions due tohigher sales levels and staff additions.

 

***General andadministrative****.*Generaland administrative expenses increased from $2.5 million for the threemonths ended June 30, 2005 to $3.0 million for the three months ended June30, 2006, a 19.3% increase. Our general and administrative expenses as apercentage of revenue increased from 20.5% for the three months ended June 30,2005 to 20.7% for the three months ended June 30, 2006. The increase in bothamount and as a percentage of revenue was due primarily to stock basedcompensation charges of $0.5 million resulting from the newly adoptedrequirements of FAS 123(R) and increases in certain expenses such asdirector and officer insurance and audit fees due to our recently completed initialpublic offering.

 

***Interest income(expense), net****.*Netinterest changed from $1.7 million of expense for the three months endedJune 30, 2005 to $0.3 million of income for the three months ended June30, 2006. The increase in interest income is due to the senior secured creditfacility and revolving credit facility being repaid in January 2006 and anincrease in investable cash provided by our initial public offering in January2006.

 

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*** ***

***Comparison of the Six Months EndedJune 30, 2005 and 2006***

 

***Revenue***

 

Revenue increased from $21.4 million for thesix months ended June 30, 2005 to $25.2 million for the six months endedJune 30, 2006, a 17.6% increase.

 

***Advertising****.*Advertising revenue increased from$19.5 million for the six months ended June 30, 2005 to $21.9 millionfor the six months ended June 30, 2006, a 12.0% increase. Owned inventoryrevenue, which generates higher margins, increased from $16.7 million, or85.4% of advertising revenue, for the six months ended June 30, 2005, to$18.6 million, or 85.2% of advertising revenue, for the six months endedJune 30, 2006, an 11.7% 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$0.3 million in online and mobile advertising revenues during the six monthsended June 30, 2006.

 

***Traffic dataservices****.*Trafficdata services revenue grew from $1.9 million for the six months ended June30, 2005 to $3.3 million for the six months ended June 30, 2006, a 74.2%increase. The increase was due to commencing revenue recognition with respectto four additional cities under the U.S. DOT contract and increases in revenuegenerated from the XM Satellite Radio, The Weather Channel, Viacom 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***

 

Cost of revenue increased from $15.9 millionfor the six months ended June 30, 2005 to $19.6 million for the six monthsended June 30, 2006, a 23.2% increase. Cost of revenue as a percentage ofrevenue increased from 74.5% for the six months ended June 30, 2005 to 78.1%for the six months ended June 30, 2006.

 

***Media Inventory****.*Media inventory expenses increased from$8.2 million for the six months ended June 30, 2005 to $9.3 millionfor the six months ended June 30, 2006, a 13.6% increase. Our media inventoryexpenses decreased as a percentage of revenue from 38.3% for the six monthsended June 30, 2005 to 37.0% for the six months ended June 30, 2006. The increasein absolute dollars was primarily due to a $0.9 million increase in expensesfor stations under long-term agreements. Media inventory costs decreased as apercentage of revenue due to revenue growth provided by additional televisionand radio station contracts.

 

***Traffic datacollection****.*Trafficdata collection expenses increased from $7.4 million for the six monthsended June 30, 2005 to $9.6 million for the six months ended June 30,2006, a 29.8% increase. Our traffic data collection costs as a percentage ofrevenue increased from 34.4% for the six months ended June 30, 2005 to 38.0%for the six months ended June 30, 2006. The increase both in absolute dollarsand as a percentage of revenue was primarily due to an increase in compensationand related costs, including on-air talent and production staff, of$1.4 million. This increase directly corresponds to our increased numberof radio and television customers and expansion in the number of markets beingserviced from 24 at June 30, 2005 to 50 at June 30, 2006. In addition,depreciation expense increased $0.3 million, as a result of commencingdepreciation of our sensor network in four additional cities, and maintenanceand communication costs relating to the digital sensor network increased $0.3 million,primarily as a result of additional sensors being installed under new citycontracts.

 

***Othertechnology expenses****.*Othertechnology expenses increased from $0.4 million for the six months endedJune 30, 2005 to $0.7 million for the six months ended June 30, 2006, a 104.9%increase. Our other technology expenses increased as a percentage of revenuefrom 1.7% for the six months ended June 30, 2005 to 3.0% for the six monthsended June 30, 2006. The increase in both the amount and as a percentage ofrevenue was due to a $0.4 million increase in depreciation from internallydeveloped software and capital asset purchases supporting the delivery of datato additional digital cities and traffic data service and consumer customers.

 

***Operating expenses***

 

***Research anddevelopment****.*Researchand development expenses increased from $1.6 million for the six monthsended June 30, 2005 to $2.8 million for the six months ended June 30,2006, a 75.2% increase. Research and development expenses increased as apercentage of revenue from 7.5% for the six months ended June 30, 2005 to 11.2%for the six 

 

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monthsended June 30, 2006. The increase in both amount and as a percentage of revenuewas due primarily to a $0.8 million increase in compensation and relatedemployee expenses related to increased product development activities.

 

***Sales andmarketing****.*Salesand marketing expenses increased from $7.3 million for the six monthsended June 30, 2005 to $9.0 million for the six months ended June 30,2006, a 23.2% increase. Our sales and marketing expenses as a percentage ofrevenue increased from 34.2% for the six months ended June 30, 2005 to 35.8%for the six months ended June 30, 2006. The increase in absolute dollars and asa percentage of revenue was due to a $1.0 million of additional marketingexpenses for branding, external product marketing, and public relations, and$0.5 million of additional compensation and related employee benefit costs as aresult of increased commissions due to higher sales levels and staff additions.

 

***General andadministrative****.*Generaland administrative expenses increased from $4.2 million for the six monthsended June 30, 2005 to $5.1 million for the six months ended June 30,2006, a 22.4% increase. Our general and administrative expenses as a percentageof revenue increased from 19.6% for the six months ended June 30, 2005 to 20.4%for the six months ended June 30, 2006. The increase in both amount and as apercentage of revenue was due primarily to stock based compensation charges of$0.8 million resulting from the newly adopted requirements of FAS123(R) and increases in certain expenses such as director and officersinsurance and audit fees due to our recently completed public offering.

 

***Interest income(expense), net****.*Net interestexpense decreased from $2.8 million for the six months ended June 30, 2005to $1.0 million for the six months ended June 30, 2006. The decrease isdue to the senior secured credit facility and revolving credit facility beingrepaid in January 2006 in addition to an increase in investable cash providedby the initial public offering in January 2006.

 

**Seasonality**

 

Due to the seasonal nature of broadcast advertisingrevenue and the percentage of our total revenue historically represented bythese sources, we have typically experienced lower revenue during the firstquarter, following the holiday season, and the third quarter, during the summermonths.

 

**Liquidity and Capital Resources**

 

Since inception, we have principally financed ouroperations through private sales of our preferred stock, internally generatedfunds, a secured credit facility, a revolving line of credit, and, mostrecently, an initial public offering of common stock . At June 30, 2006, we had$27.0 million of cash and cash equivalents and short-term investmentscompared to $13.1 million at December 31, 2005. We have raised anaggregate of $101.9 million through our preferred stock financings. InJanuary and February 2006, we raised a total of approximately $74.5 millionfrom our initial public offering, net of fees and expenses. We generally investour cash in highly liquid investments with a maturity of six months or less atthe date of purchase. To date, inflation has not had a material effect on ourbusiness.

 

Cash flows used in operating activities were$3.8 million for the six months ended June 30, 2005 and $15.9 million forthe six months ended June 30, 2006. Cash flows used in operating activities forthe six months ended June 30, 2005 were primarily due to a net loss of$14.7 million which was offset by adjustments for depreciation andamortization, and changes in accounts and government services receivable, otherassets, and deferred revenue. Cash flows used in operating activities for thesix months ended June 30, 2006 were primarily due to a net loss of $12.4million, adjustments for depreciation and amortization, and stock basedcompensation expense; the payment of $7.1 million in connection with thesettlement of litigation; and changes in accounts payable and accrued expensesand deferred revenue.

 

Cash flows used in investing activities were$5.1 million for the six months ended June 30, 2005 and $26.3 million forthe six months ended June 30, 2006. Cash flows used in investing activities forthe six months ended June 30, 2005 were due primarily to the purchase of fixedassets. Cash flows used in investing activities for the six months ended June30, 2006 were primarily due to the purchase of short term investments followingthe completion of our initial public offering and the purchase of fixed assets.

 

Cash flows provided by financing activities were$8.8 million for the six months ended June 30, 2005 and $32.8 million forthe six months ended June 30, 2006. Cash flows provided by financing activitiesfor the six months ended June 30, 2005 were primarily due to $9.7 million innet proceeds under the senior secured credit facility. Cash flows provided byfinancing activities for the six months ended June 30, 2006 were primarily dueto $74.5 million in proceeds, after deducting 

 

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underwriters’fees and 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 revenueopportunities, including the enhancement of our website and the introduction ofour in-vehicle and consumer mobile services, and have devoted increasingresources to developing and marketing these new services. Our ability togenerate revenue from these services will have a material impact on our futurecash needs. We expect to devote significant capital resources to continuedproduct development, brand marketing, expansion of operational systems andother general corporate activities. Specifically, we expect to spendapproximately $4.0 million to $5.0 million in 2006 on our brandinginitiative. We expect to spend approximately $1.0 million to$2.0 million on facilities, principally traffic operations centers, in2006. We expect to spend approximately $3.0 million to $4.0 millionon technology development and infrastructure during the same period. We expectto incur capital expenditures of $7.0 million to $9.0 million in2006, with $3.0 million to $5.0 million relating to the constructionof our sensor network in a number of new metropolitan areas. Theseexpenditures, however, are expected to be balanced by a comparable amount ofreceipts under our data services agreeement with the U.S. DOT associated withthese new metropolitan areas.

 

Based on our current operations and plannedexpansion, we expect that our available funds are sufficient to meet ourexpected needs for working capital and capital expenditures through the end of2007. Thereafter, if we do not have sufficient cash available to finance ouroperations, we may be required to obtain additional public or private debt orequity financing. We cannot be certain that additional financing will beavailable to us on favorable terms, if at all. If we are unable to raisesufficient funds, we may need to reduce our operations, delay our geographicexpansion, and reduce our product development and marketing activities.

 

**Indebtedness**

 

In January 2006, we repaid the outstandingprincipal and interest outstanding under our senior secured credit facilityusing a portion of the proceeds raised in our initial public offering. 

 

Our revolving credit facility terminated upon itsown terms in March 2006. We are in discussions to enter into a new creditfacility, although we have not reached a final agreement with any lender.

 

**Inflation**

 

We do not believe that inflation had a materialimpact on our earnings from operations.

 

**Off-Balance Sheet Arrangements**

 

At December 31, 2005 and June 30, 2006, we didnot have any relationships with unconsolidated entities or financialpartnerships which were established for the purposes of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes.

 

**Recent Accounting Pronouncements**

 

For a discussion of SFAS 123(R) please refer toNote 1 in the Notes to our Unaudited Condensed Consolidated Financial Statementsincluded elsewhere herein.

 

**Item 3.**                          Quantitativeand Qualitative Disclosures About Market Risk

** **

We do not use derivative financial instruments for speculation or tradingpurposes. Our current policy is to maintain an investment portfolio consistingmainly of U.S. Government obligations or other securities rated AAA orcomparably, with a maximum maturity of 12 months and a weighted averagematurity for the portfolio of six months. Our cash is deposited in andinvested through highly rated financial institutions in North America. Ourmarketable securities are subject to interest rate risk and will fall in valueif market interest rates increase.

 

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As of June 30, 2006, we had no exposure to interest rate risk as our outstandingshort and long-term debt instruments were repaid during the first quarter.

 

**Item 4.**                          Controlsand Procedures

** **

***Evaluation of disclosure controls andprocedures***

 

We maintain disclosure controls andprocedures (as defined in Rule 13a-15(e) promulgated under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) that aredesigned to ensure that information that would be required to be disclosed inExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the Securities Exchange Commission’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including the Chief Executive Officer, President, Chief OperatingOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

As of June 30, 2006, our management, includingthe Chief Executive Officer, Chief Operating Officer and Chief FinancialOfficer, evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures. Based on such evaluation, managementconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this report.

 

Section 404compliance project.

 

Beginning with the year endingDecember 31, 2007, Section 404 of the Sarbanes-Oxley Act of 2002 willrequire us to include management’s report on our internal control overfinancial reporting in our Annual Report on Form 10-K. The internalcontrol report must contain (1) a statement of management’s responsibilityfor establishing and maintaining adequate internal control over our financial reporting,(2) a statement identifying the framework used by management to conductthe required evaluation of the effectiveness of our internal control overfinancial reporting, (3) management’s assessment of the effectiveness ofour internal control over financial reporting as of the end of our most recentfiscal year, including a statement as to whether or not our internal controlover financial reporting is effective, and (4) a statement that ourregistered independent public accounting firm has issued an attestation reporton management’s assessment of our internal control over financial reporting.

 

In order to achieve compliance withSection 404 within the prescribed period, management has commenced aSection 404 compliance project under which management engaged outsideconsultants and adopted a detailed project work plan to assess the adequacy ofour internal control over financial reporting, remediate any controldeficiencies that may be identified, validate through testing that controls arefunctioning as documented and implement a continuous reporting and improvementprocess for internal control over financial reporting. Management is currentlyearly in the documentation phase of its processes prior to the testing phase ofthe project. Except as described above, during the quarter ended June 30, 2006, there havebeen no changes in our internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

Inherentlimitations of the effectiveness of internal control.

 

A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the internalcontrol system are met. Because of the inherent limitations of any internalcontrol system, no evaluation of controls can provide absolute assurance thatall control issues, if any, within a company have been detected.

 

**Part II.       Other Information**

** **

**Item1A.    Risk Factors**

 

*The Private Securities Litigation Reform Act of 1995 (theAct) provides a safe harbor for “forward-looking statements” made by or on ourbehalf of our company. This Quarterly Report on Form 10-Q, including theItem labeled “Management’s Discussion and Analysis of Financial Condition andResults of Operations”, contains forward-looking statements that you shouldread in conjunction with the financial statements and notes to financialstatements that we have included elsewhere in this report. These statements arebased on our current expectations, assumptions, estimates and projections aboutour business and our industry, and involve known and unknown risks,uncertainties, and other factors that may cause our or our industry’s results,levels of activity, performance or achievements to be materially different fromany future results, levels of activity, performance or achievements expressedor implied in, or*

 

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* contemplated by, theforward-looking statements. We generally identify these statements by words orphases such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,”“should,” “estimate,” “predict,” “potential,” “continue,” or the negative ofsuch terms or other similar expressions. Our actual results and the timing ofevents may differ significantly from the results discussed in theforward-looking statements, and you should not place undue reliance on thesestatements. Factors that might cause such a difference include those discussedunder the heading “Risk Factors,” in our Annual Report on Form 10-K, filed onMarch 24, 2006, as well as those discussed elsewhere therein and in thisQuarterly Report on Form 10-Q. We disclaim any intent or obligation toupdate any forward-looking statements as a result of developments occurringafter the period covered by this report or otherwise*

 

**Item 4. Submission of Matters toa Vote of Security Holders**

 

The annual meeting of the stockholders was held onJune 27, 2006. The stockholders approved the election of the following directorsfor a three year term:

 
| ** **      | ** ** | **Votes for** | ** ** | **Votes withheld** | ** ** | **Total votes** | ** ** |
|-----------------|------------|--------------------|------------|-------------------------|------------|----------------------|------------|
| Mark J. DeNino  |       | 14,529,858         |       | 2,722,785               |       | 17,252,643           |       |
| Samuel A. Plum  |       | 16,637,909         |       | 614,734                 |       | 17,252,643           |       |
| Tom A. Vaidnais |       | 16,639,776         |       | 612,867                 |       | 17,252,643           |       |

 

Our stockholders also ratified the appointment of Ernst & Young LLPas our independent auditors for the year ending December 31, 2006 with 17,242,970affirmative votes, 8,770 negative votes and 903 abstentions.

 

**Item 5. Other Information**

 

On August  7, 2006, we entered into amendments tothe employment agreements with the following members of senior management:  David L. Jannetta, President; Christopher M.Rothey, Chief Operating Officer; Andrew P. Maunder, Chief Financial Officer;Joseph A. Reed, Chief Information Officer; Brian J. Sisko, Chief Legal Officer,Senior Vice President and General Counsel; Michael Nappi, Senior Vice Presidentof Business Development; and William Powers, Senior Vice President of MediaSales. Each amendment provides that, in the event of a “change in control” ofthe Company, 1) he will have the right to receive a lump sum payment equal tosix months’ base salary if he is terminated without cause or if he resigns forgood reason (an adverse change in compensation, a change and/or diminution induties, a forced relocation, etc.); and 2) any unvested options held by suchperson will become vested and he will have 90 days from the date of terminationor resignation to exercise any options he holds.

 

For purposes of the amendments, “change in control”will mean (x) a merger, consolidation or issuance or sale of the Company’ssecurities, in which securities possessing more than fifty percent (50%) of thetotal combined voting power of the Company’s (or any successor’s) outstandingsecurities are transferred to a person or persons different from the personsholding such securities immediately prior to such transaction, or (y) the sale,transfer or other disposition of a majority of the Company’s non-liquid assetsto an unaffiliated third party.

 

The amendments to the employment agreements for all ofthe members of senior management other than Mr. Powers were approved by theCompensation Committee of the Company’s Board of Directors, subject todocumentation, on May 24, 2006, and the terms of such amendments were disclosedin our Proxy Statement filed with the Securities and Exchange Commission on May24, 2006. The amendment to Mr. Powers’ employment agreement was approved by ourBoard of Directors, subject to documentation, on June 27, 2006.

 

Copies of the amendments for Messrs. Jannetta, Rothey,Maunder, Reed and Sisko are filed herewith as Exhibits 10.12.1, 10.13.1, 10.14.1,10.15.1, 10.16.1, respectively, and are incorporated by reference.

 

**Item 6.Exhibits**

 
| **Exhibit** | ** ** | ** **                                                                                                              |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------|
| **No.**     | ** ** | **Description**                                                                                                         |   |
| 10.12.1     |       | Employment Agreement  dated August 7, 2006, between David L. Jannetta and the Registrant.                          |
|        |       |                                                                                                                    |
| 10.13.1     |       | Employment Agreement  dated August 7, 2006, between Christopher M. Rothey and the Registrant.                      |
|        |       |                                                                                                                    |
| 10.14.1     |       | Employment Agreement  dated August 7, 2006, between Andrew P. Maunder and the Registrant.                          |
|        |       |                                                                                                                    |
| 10.15.1     |       | Employment Agreement  dated August 7, 2006, between Joseph A. Reed and the Registrant.                             |
|        |       |                                                                                                                    |
| 10.16.1     |       | Employment Agreement  dated August 7, 2006, between Brian J.Sisko and the Registrant.                              |
|        |       |                                                                                                                    |
| 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 the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                       |   | Traffic.com, Inc.                             |   |
|----------------------------|--------|-----------------------------------------------|--------|
|                       |   | (Registrant)                                  |
|                       |   |                                          |
| Date: August 9,  2006 | By:    | /s/ Robert N. Verratti                        |   |
|                       |   | Robert N. Verratti                            |
|                       |   | Chief Executive Officer                       |
|                       |   | (Principal Executive Officer)                 |
|                       |   |                                          |
|                       |   |                                          |
| Date: August 9,  2006 | By:    | /s/ Andrew Maunder                            |   |
|                       |   | Andrew Maunder                                |
|                       |   | Chief Financial Officer                       |
|                       |   | (Principal Financial  and Accounting Officer) |
|                            |        |                                               |        |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                              |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------|
| **No.**     | ** ** | **Description**                                                                                                         |   |
|        |       |                                                                                                                    |
| 10.12.1     |       | Employment Agreement  dated August 7, 2006, between David L. Jannetta and the Registrant.                          |
|        |       |                                                                                                                    |
| 10.13.1     |       | Employment Agreement  dated August 7, 2006, between Christopher M. Rothey and the Registrant.                      |
|        |       |                                                                                                                    |
| 10.14.1     |       | Employment Agreement  dated August 7, 2006, between Andrew P. Maunder and the Registrant.                          |
|        |       |                                                                                                                    |
| 10.15.1     |       | Employment Agreement  dated August 7, 2006, between Joseph A. Reed and the Registrant.                             |
|        |       |                                                                                                                    |
| 10.16.1     |       | Employment Agreement  dated August 7, 2006, between Brian J. Sisko and the Registrant.                             |
|        |       |                                                                                                                    |
| 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. |

** **

**24**

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