Traffic.com, Inc.
Item 2.   Properties   26
related entities, or ICG, that the conversion of ICG's Series B convertible preferred stock to common stock on a one-for-five basis (from approximately 5 million shares of Series B preferred stock to approximately 1 million shares of common stock), in connection with our Series E preferred stock financing in March 2003, is valid and that ICG is not entitled to any additional ownership stake in the Company or any other payments or damages in connection with the Series E preferred stock financing or related matters. On July 26, 2005, ICG filed preliminary objections to our complaint for declaratory judgment which, under Pennsylvania practice, is equivalent to a motion to dismiss our complaint. On October 28, 2005, we entered into a settlement agreement with ICG with respect to our litigation. Under this agreement, in exchange for mutual releases and an agreement to dismiss the litigation, we issued to ICG 300,562 shares of our common stock, at a fair value of $3.5 million, and agreed to permit ICG to grant to the underwriters in our recently completed initial public offering the right to purchase up to 66,666 shares of our common stock owned by ICG to cover any over-allotments. On February 23, 2006, the underwriters exercised their over-allotment option and ICG sold 27,141 shares to them.  Item 4.    Submission of Matters to a Vote of Security Holders.           No matter was submitted to a vote of security holders during the fourth quarter of 2005.  28             PART II      Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer                 Purchases of Equity Securities.           Our common stock has been quoted on the NASDAQ National Market under the symbol TRFC since our initial public offering on January 25, 2006. Prior to that date, there was no public market for our common stock. For the period from January 25, 2006 through March 22, 2006, the high and low sale prices per share of our common stock as reported on the NASDAQ National Market were $13.30 and $8.78, respectively.          The only equity securities of the registrant sold by us during 2005 that were not registered under the Securities Act were shares of our Series F convertible preferred stock and the options and warrants described in detail below. On September 7, 2005, we sold an aggregate of 5,042,090 shares of our Series F convertible preferred stock to existing stockholders who were accredited investors at a purchase price of $3.00 per share for an aggregate price of approximately $15.1 million. We offered Series F convertible preferred stock to holders of our Series E convertible preferred stock and our founders on a pro rata basis based on their then current ownership percentage of our common stock (on an as-converted basis). Our offering of Series F convertible preferred stock was exempt from registration under the Securities Act pursuant to Section 4(2) thereof on the basis that the transaction did not involve a public offering. Further, consistent with interpretations and no-action letters issued by the Securities and Exchange Commission, the offering of Series F convertible preferred stock was not required to be registered pursuant to the five-part integration test set forth in Rule 502 of Regulation D under the Securities Act. The purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or an available exemption from registration.          In April 2005, we issued a warrant to purchase 116,666 shares of our common stock to National Electric Benefit Fund, our senior secured lender at the time. The warrant has an exercise price of $0.03 and is exercisable at any time prior to its expiration on April 22, 2010.          In April 2005, we issued warrants to purchase a total of 233,331 shares of our common stock to TL Ventures IV Interfund L.P., TL Ventures IV L.P., PA Early Stage Partners III, L.P. and Safeguard Delaware, Inc. The warrants have an exercise price of $0.03 and are exercisable at any time prior to their expiration on April 22, 2010. PA Early Stage Partners III, L.P. exercised its warrant to purchase 17,565 shares of common stock in August 2005.          In August 2005, we issued a warrant to purchase 66,666 shares of our common stock to PA Early Stage Partners III, L.P in exchange for a warrant to purchase of 20,000 shares of our common stock. The new warrant has an exercise price of $0.75 per share and is exercisable at any time prior to March 31, 2008.          In 2005, we issued and sold an aggregate of 81,155 shares of common stock to directors, a former director, officers, and employees through stock option exercises at a weighted average price of $1.00 per share, for aggregate cash consideration of approximately $81,000. This issuance was exempt from registration under the Securities Act pursuant to Rule 701 promulgated under Section 3(b) thereof on the basis that the transaction was pursuant to a compensatory benefit plan.          In 2005, we issued options to purchase 196,253 shares of our common stock with a weighted average exercise price of $4.36 per share to a number of our current and former employees and directors. These transactions were exempt from registration under the Securities Act pursuant to Rule 701 promulgated under Section 3(b) thereof on the basis that the transactions were pursuant to a compensation benefit plan  29               The sales of the above securities were exempt from the registration requirements of the Securities Act, in reliance on Section 4(2) of the Securities Act, Regulation S, Regulation D or Rule 701 promulgated thereunder, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. There were no underwriters involved in connection with the sale of the above securities.          As of March 22, 2006 we had approximately 106 holders of record of our common stock.  Use of Proceeds from Registered Securities           Our registration statement on Form S-1 (Reg. No. 333-127973) in connection with our initial public offering was declared effective by the SEC on January 24, 2006. As of the date of the filing of this report, the offering has terminated and 6,950,000 shares of our common stock were sold pursuant to our registration statement, including 62,334 shares sold by selling stockholders. The underwriters of the offering were WR Hambrecht + Co, LLC and JMP Securities, LLC. Net proceeds from the sale of 6,887,666 shares of common stock sold by us, based on the initial public offering price of $12.00 per share, and after deducting the underwriting discount and offering expenses payable by us, were approximately $74.7 million. No payments for our expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates. We have used $37.7 million and $4.1 million of the net proceeds, respectively to repay all outstanding principal and accrued and unpaid interest under a senior secured credit facility and a revolving credit facility utilized by the Company prior to the public offering. We intend to use the balance of the net proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).          There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).  Dividend Policy           We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business.  Equity Compensation Plans           We have three equity incentive plans: our 2005 Long-Term Incentive Plan (the 2005 Plan) and our 1999 Long-Term Incentive Plan and our 1999 Non-Employee's Stock Plan (the 1999 Plans). Our 2005 Plan was approved by stockholders on January 18, 2006 and became effective on January 24, 2006. As of December 31, 2005, a total of 2,511,372 shares of our common stock had been reserved for issuance under the 1999 plans. In January 2006 an additional 1,750,000 shares of common stock were reserved for issuance under the 2005 Plan. All outstanding options and warrants at December 31, 2005 were granted under our 1999 Plans. All future awards will be made under the 2005 Plan. The following table provides information as of December 31, 2005 with respect to shares of our common stock that may be issued under our existing equity compensation plans:     Plan Category    Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights   Weighted Average Exercise Price of Outstanding Options, Warrants and Rights   Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans   Equity Compensation Plans Approved by Security Holders   2,435,477   $ 2.13   75,895    30      Item 6.    Selected Financial Data.          Year Ended December 31,         2001   2002   2003   2004   2005         (in thousands, except per share amounts)      Consolidated Statement of Operations Data:                                   Revenue                                   Advertising   $ 15,349   $ 24,068   $ 36,045   $ 39,449   $ 38,871     Traffic data services     559     1,083     581     2,993     4,422     License agreement     —     2,055     750     —     —                                15,908     27,206     37,376     42,442     43,293     Cost of revenue     21,880     31,070     30,988     32,090     33,567                          Gross margin (loss)     (5,972 )   (3,864 )   6,388     10,352     9,726     Operating expenses:                                   Research and development     3,161     2,391     2,828     3,647     3,905     Sales and marketing     8,273     9,524     14,086     12,032     16,177     General and administrative     7,663     6,060     6,402     7,229     8,704     Legal settlements     —     —     —     —     18,473(1)                                19,097     17,975     23,316     22,908     47,259                          Loss from operations     (25,069 )   (21,839 )   (16,928 )   (12,556 )   (37,533 )   Interest income (expense), net     862     (5,052 )   (4,151 )   (3,428 )   (5,609 )                        Net loss   $ (24,207 ) $ (26,891 ) $ (21,079 ) $ (15,984 )   (43,142 )                        Redemption and accretion of redeemable convertible preferred stock     (2,990 )   (2,930 )   34,824(2)     (2,128 )   (2,037 )                        Net income (loss) attributable to common stockholders   $ (27,197 ) $ (29,821 ) $ 13,745   $ (18,112 )   (45,179 )                        Net income (loss) attributable to common stockholders per share:                                   Basic   $ (14.41 ) $ (15.79 ) $ 5.15   $ (5.91 )   (13.00 )   Diluted   $ (14.41 ) $ (15.79 ) $ 1.45   $ (5.91 )   (13.00 )   Number of shares used in per share calculation:                                   Basic     1,888     1,889     2,671     3,064     3,474     Diluted     1,888     1,889     9,492     3,064     3,474        (1)Includes a $14.3 million charge in connection with the settlement of litigation, half of which was paid by an investor affiliate and half of which was paid by us. (2)Includes gains recognized on the redemption of Series D preferred stock and gains recognized on the exchange of Series A through D preferred stock as described on Note 10 to the financial statements.  31             As of December 31,         2001   2002   2003   2004   2005         (in thousands)      Consolidated Balance Sheet Data:                                   Cash and cash equivalents, and short-term investments   $ 6,643   $ 15,961   $ 8,999   $ 4,898   $ 13,143     Total assets     24,236     33,625     36,188     33,730     54,978     Long-term deferred revenue and deferred license fees     4,063     10,973     9,159     26,963     32,646     Senior secured credit facility and accrued interest     —     24,722     24,850     23,744     37,659     Other long-term liabilities     155     96     35     —     678     Redeemable convertible preferred stock     61,428     64,358     37,686     39,814     56,977     Total stockholders' deficit     (47,902 )   (77,338 )   (48,217 )   (66,120 )   (97,677 )
Item 6.   Selected Financial Data   31
changed our name to Mobility Technologies, Inc. In March 2005, we changed our name back to Traffic.com, Inc.          In 1999, we began construction of our sensor network, and in 2000, we began to license our traffic data to the U.S. Department of Transportation (U.S. DOT) and certain state and local government agencies. We began selling our traffic information to radio stations in 2000 and to television stations in 2001 in exchange for advertising inventory. In the first quarter of 2004, we expanded our business model and began to provide traffic data services to businesses for their own commercial purposes. In July 2005, we launched our enhanced website which is designed to include advertising and offers wireless services. In July 2005, we also began to offer advertising sponsorships on our second-generation television product, Traffic Pulse NeXgen, and on our wireless service.  Revenue Profile and Business Trends           To date, substantially all of our revenue has been derived from the sale of advertising on radio and television stations, as well as from providing our traffic data to the U.S. DOT and certain state and local government agencies. We believe that our newer revenue opportunities, including Internet and wireless advertising, and commercial traffic data services, will become an increasingly larger percentage of our total revenue. We intend to invest significant resources in our marketing campaign in order to increase brand recognition of Traffic.com.          Advertising.    In 2000, we entered into our first contracts with radio stations to provide traffic information in exchange for advertising inventory, which we then sell through our own direct sales force. In 2001, we signed our first contracts with television stations, under which we also provide traffic information in exchange for advertising inventory. Certain of our radio and television contracts require us to provide production services, such as announcers and producers, and/or make cash payments, in addition to providing traffic information. We also enter into contracts with certain radio stations under which we buy advertising time solely in exchange for cash in order to be able to offer advertisers access to a more comprehensive range of markets. We do not provide traffic information to these stations. Our television and radio contracts are generally for a term of one to three years and may be terminated with no penalty by either party if the other party breaches the agreement or is in bankruptcy. Some of the three-year agreements may be terminated by the customer after 18 months upon 30 days notice to us.          In July 2005, we began to offer Internet advertising on our enhanced website and the websites of our customers and we recently began to offer advertising on our wireless consumer services. Based on industry reports of projected growth in the Internet advertising market from $12.0 billion in 2004 to $22.0 billion in 2008, and based on our strategy to increase awareness of our Traffic.com brand, we believe that Internet and wireless advertising provide us with an attractive opportunity to increase our revenue. The Internet and wireless advertising markets, however, are new and rapidly evolving. We have had no significant revenue from Internet and wireless advertising to date. Our success in attracting Internet advertisers will depend, in large part, on our ability to significantly increase the number of visitors to our website. We intend to invest significant resources in our branding campaign to increase brand recognition of Traffic.com.          We currently expect Internet and wireless advertising to increase to between 15% and 30% of our total revenue within the next three years, as we invest in our branding campaign in the expectation that the number of visitors to our www.traffic.com website and users of our wireless services will grow. We expect our radio and television advertising revenue to increase in dollar amount as we expand the number of metropolitan areas in which we provide traffic information, but to decrease as a percentage of total revenue to between 55% and 65% within the next three years. We are actively seeking to stimulate growth of Internet and wireless advertising by developing co-branding opportunities on our  33       media customers' websites, such as www.weather.com and www.comcast.net, and by increasing the services offered on our own website.          Traffic Data Services.    In the first quarter of 2004, we entered into our first commercial traffic data services agreement with XM Satellite Radio Holdings, Inc., which uses our traffic data for 21 metropolitan areas. The XM Satellite Radio agreement has a term of five years. Subsequently, we entered into a five-year traffic data services agreement with NAVTEQ Corporation, which has been using our traffic data since June 2004 in conjunction with its mapping data as content in a variety of services, including in-vehicle navigation systems. In 2005, we entered into a three-year agreement with The Weather Channel, Inc., which uses our traffic data to provide traffic information on its website, cable networks, local programming and desktop application. We also entered into a two-year agreement with Motorola, Inc., which has been using our traffic data since March 2005 to provide traffic information in its VIAMOTO solution, a suite of location software for cell phones. Most recently, we have entered into a three-year agreement with Comcast Cable Communications Management LLC, pursuant to which we will provide our traffic service incident, event and flow data to Comcast for use on its www.comcast.net website. We currently anticipate that Comcast will begin utilizing our data starting in the second quarter of 2006. In each of these agreements, either party may terminate the agreement with no penalty, if the other party breaches the agreement or is in bankruptcy. We currently expect that our traffic data services revenue, excluding government data services, will increase as a percentage of our total revenue from approximately $1.4 million, or 3.3%, of total revenue in 2004 and $2.6 million, or 6.0%, of total revenue in 2005 to between 8% to 10% of total revenue within the next three years.          Traffic.com Website and Consumer Wireless Services.    In July 2005, we launched our enhanced www.traffic.com website and we began to offer our consumer wireless services, which allow drivers to receive route-specific information on wireless devices. We have commenced a focused campaign to attract users and advertisers to our website and to websites of our media customers that are co-branded with www.traffic.com. These new distribution channels are designed to provide advertising opportunities for our advertising customers. We began offering these services free of charge in January 2006.          Operations and Infrastructure Support for New Revenue Opportunities.    Since 1999, we have made a significant investment in our development and enhancement of TIMS, our proprietary system for collecting, analyzing and distributing traffic data through a variety of delivery channels, as well as our sensor network for collecting traffic data in real time. Based on this investment and the resulting scalability and flexibility of TIMS, which is designed to allow for very high and increasing transaction volumes and to integrate with new technologies with minimal additional development effort, we believe that we should be able to incorporate new revenue opportunities at relatively low additional cost. As we have added new products and services, we have expended approximately $1.5 million in 2004 and 2005 on technology infrastructure and development capital and expect to spend a total of $3.0 million to $4.0 million in 2006. As we expand our geographic coverage we have expended approximately $0.9 million in 2004 and 2005 on facilities expansion, principally new traffic operations centers, and anticipate spending a total of $1.0 million to $2.0 million on new facilities in 2006.  34        Sources of Revenue     Advertising            Radio and Television Advertising.    In exchange for providing traffic information, cash and/or production services (including announcers and producers) to radio and television station customers, we receive the right to sell advertising time adjacent to traffic, news or weather reports as well as the right to sell advertisements on our customers' websites. Additionally, under certain of our contracts with radio stations to which we do not provide traffic information, we buy for cash the right to sell a set amount of advertising time, primarily to expand our advertising sales coverage. We refer to the advertising time that we receive in exchange for these two types of contracts as "owned inventory." As of December 31, 2005, we had contracts to acquire owned inventory from over 392 radio stations (including 107 to which we provided our traffic information services, including both our Traffic Pulse Broadcaster and/or our affiliate web offering) and with 45 television stations. Revenue from owned inventory advertising grew from $26.0 million in 2003 to $30.3 million in 2004 to $33.0 million in 2005.          We supplement our owned inventory by purchasing additional advertising time for cash from time to time from radio stations that are not under contract with us. These purchases, referred to as "cash buys," usually are made to satisfy specific advertisers' needs for additional coverage on particular stations or in smaller markets. Because cash buys are purchased in the spot market on an as-needed basis, the cost of acquiring this advertising is higher than the cost of owned inventory. As a result, margins for the sale of cash buys are generally lower than the margins that can be achieved from the sale of owned inventory.          Revenue from our radio and television advertising is recognized 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 morning commuting hours on a Viacom-owned UPN station in Philadelphia. This program changes the standard morning news format by focusing first on traffic, which constitutes approximately 40% of airtime, then approximately 40% on weather and the balance on news. We produce and broadcast this program from our own studio facility in our principal office. This program, which we expect to introduce in other markets, provides us with significant opportunities for promoting our brand name on air, which we believe could lead to an increase in the number of users of our other services, such as our website and consumer wireless services. In return for this service, we received an upfront fee from Viacom, and receive advertising inventory. In addition, we are entitled to all of the advertising revenues earned from the sale of any naming, sponsorship or other promotional rights related to NeXgen. Viacom has a one-time right to terminate this agreement at a specified time.          We are amortizing the initial license fee received from Viacom ratably over a period of five years, which represents the initial contract term. We intend to recognize any sponsorship and promotional revenues generated from the contract with Viacom over the period that the sponsorship or promotion is aired. As of December 31, 2005, no revenues had yet been generated from sponsorships or promotional rights. In addition, we recognize revenue from the advertising spots we receive from Viacom at the time an advertisement airs.          Internet and Wireless Advertising.    With the introduction of our enhanced website and consumer wireless services in July 2005, we have begun to offer advertising on our own www.traffic.com website and in connection with our wireless services, in addition to offering advertising on the websites of a number of our customers. We have not generated any significant revenue from either Internet or wireless advertising to date. We intend to invest a total of $4 million to $5 million in 2006 in our branding campaign to increase brand recognition of Traffic.com. Revenue from Internet and wireless advertising will be recognized over the period during which the advertisement is displayed or aired. We price Internet and wireless advertisements based upon a cost per thousand impressions delivered. We  35       are not required to display or air any minimum number of Internet or wireless advertisements. In some cases, we agreed with our radio and television customers to whom we provided website traffic data services to share revenue from any subscriptions for our wireless services generated directly from their websites, with the customer receiving approximately 20% of the revenue generated. In accordance with EITF 99-19, the Company would recognize the gross revenue subject to this revenue-sharing arrangement with the applicable customer payment recorded as a direct cost of revenue. As of January 14, 2006, however, we ceased charging subscription fees for our wireless services.          We believe that our multiple media delivery platforms provide advertisers with an attractive cross-media campaign opportunity. Our advertisers can reach their customers at various times of day using advertisements associated with our traffic content aired on radio and television, placed on our website and embedded in our wireless services. We believe that this cross-media opportunity will result in heightened interest in our services from advertisers.    Traffic Data Services            Government Services.    In 1999, in a competitive bidding process under the 1998 Transportation Equity Act for the 21st Century (TEA-21), we were awarded, as principal subcontractor to the U.S. DOT, a subcontract to enable us to deploy an intelligent transportation infrastructure system to collect and distribute traffic flow data. TEA-21 envisioned a program in more than 40 metropolitan areas. Under the terms of this subcontract, of the $2.0 million received by our prime contractor for each designated metropolitan area, we are paid 95% or $1.9 million, to provide to federal and state transportation agencies the traffic flow data from our sensor network in these areas for non-commercial purposes, such as research, infrastructure planning and congestion management. We retain the exclusive right to use this data for commercial purposes. As a condition to our receipt of federal funds for each metropolitan area, we are required to commit, or have a third party provide, an additional $0.5 million in cash or services per metropolitan area deployed.          Under our subcontract, we own and are responsible for constructing, operating and maintaining our sensor networks. We have engaged a third party contractor for the installation of the sensors used in our network. As part of this arrangement, the contractor acquires and assembles the component parts of the sensors, installs the sensors on a site (typically a pole) and calibrates the sensors. More than one sensor can be mounted at one site, in order to cover more than one direction on a roadway or multiple roadways in close proximity. We pay the contractor a specified amount per site, which varies per metropolitan area based on the number of sites to be installed in that area. There are a number of third parties capable of providing site installation services. A number of factors are considered in the planning phase of the network installation process that determines the number of sites required in a metropolitan area. Some metropolitan areas have existing sensors on targeted roadways which we can utilize in our system. In those instances, our installation efforts will focus on supplementing the existing sensors, which can reduce the number of sensors that we need to install. The size of the metropolitan area and the number of congested roads is also a factor. The distance between sensors varies based on availability of roadside locations to install the sensors and the distance between exit or entrance ramps, but the sensors are generally at a set distance.          Our ability to recognize revenue from our federal subcontract is based on when we obtain formal customer acceptance of the system. Revenue is then recognized over the estimated service period of the contract of 15 years. Revenue recognized under our federal subcontract totaled $0.3 million in 2003, $0.4 million in 2004 and $0.9 million in 2005.          In addition, as a subcontractor to the U.S. DOT, we must enter into agreements with state or local government agencies responsible for the metropolitan areas in which we deploy our sensor network, in order to proceed with deployment of the network. Once the relevant state or local agency accepts our proposal and enters into a contract with us, we are required to meet certain milestones, including  36       federal acceptance of our plans, designs and architecture. As of March 15, 2006, we have completed our sensor network and received system acceptance from the relevant transportation agencies in Boston, Chicago, Oklahoma City, Philadelphia, Pittsburgh, Providence, San Diego, St. Louis and Tampa. We are collecting data from sensor networks that we are in the process of constructing in Detroit, Los Angeles, Phoenix, San Francisco, and Washington, DC. We are under contract to deploy our sensor network in Baltimore, Salt Lake City and Seattle. Our agreement with the Utah Department of Transportation includes the integration of cell phone probe data into TIMS in Salt Lake City. As of March 1, 2006, we are recognizing revenue from our sensor network in connection with our subcontract from the U.S. DOT in Boston, Chicago, Philadelphia, Pittsburgh, Providence, San Diego, St. Louis and Tampa.          We are obligated to reinvest in activities and equipment related to our sensor network or share a specified percentage of our revenue that is directly attributable to the commercial sales of flow data generated under the program from the sensors we install and own. This amount is calculated as 5% of revenue generated from commercial sales of such flow data between $250,000 and $1.0 million and 10% of such revenue over $1.0 million. This amount does not include revenue from sales of flow data collected from government-owned sensor systems, which constitutes a significant amount of the flow data for many of the metropolitan areas that we cover, or from information which is gathered independently about incidents and events. To date, the total amount of our reinvestment and revenue sharing has not been material, and amounted to $0.1 million in 2005. The activities funded are determined in consultation with the relevant state or local agency. These funds may be used for a number of purposes, including integrating the existing state and local agency intelligent transportation systems with our sensor network or installing additional sensors.          Commercial Traffic Data Services.    In the first quarter of 2004, we began to enter into agreements with companies to provide our traffic data directly to these customers for their own use in their websites and media and service offerings. Our first such agreement was with XM Satellite Radio and, since that time, we have entered into agreements with NAVTEQ, Motorola, The Weather Channel and Comcast. Revenue from our other traffic data services agreements includes one or more of annual usage and exclusivity fees, fees for 24/7 support services, and in-vehicle traffic data subscription fees. Revenue from these data service agreements was $1.4 million in 2004, the first year in which we recognized such revenue, and $2.6 million in 2005. Revenue recognition from these contracts varies, based upon contract minimums, subscriber growth and special services provided by us.          Under our NAVTEQ agreement, NAVTEQ has paid us $9.9 million as an advance against subscription, license and other fees payable by NAVTEQ. Upon expiration or earlier termination of the agreement, we are 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 million in 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 in the fifth year of the agreement. Upon expiration of the agreement, if it is not renewed, up to $1.9 million of any remaining portion of the advance fee that we are required to repay may, at our option, be repaid in quarterly installments over three years at an interest rate of prime plus 1%.          The NAVTEQ agreement has a term of five years. The agreement may be terminated by either party upon a material breach not cured within thirty days' notice, a performance failure caused by a force majeure event not cured within six months or bankruptcy of the other party. A material breach includes a material breach by us of our service level commitment to NAVTEQ, but only if more than 15% of the covered population is affected by the service failure for more than 180 days or the failure lasts longer than 270 days. Each party may terminate the agreement if the other sells all or substantially all of its business to certain specified entities.  37               Consumer Wireless Subscriptions.    Following the completion of our enhanced website, we began to offer subscription wireless services to consumers in July 2005. On January 14, 2006, we began to offer all of our wireless services free of charge to consumers, as we plan to focus on obtaining advertising-based revenues from these services. Users can sign up for a number of my traffic.com personalized traffic services within the my traffic.com section of the traffic.com website.          We have begun to offer advertising opportunities and sponsorships associated with our free wireless services to our advertising customers, although we have generated only minimal advertising revenue from this source to date.          Revenue from advertising and sponsorships in connection with our wireless services will be recognized over the period during which the advertisement or sponsorship is displayed and will be recognized as advertising revenue in our statement of operations.          License Agreement.    In April 2002, we entered into an intellectual-property based financing transaction, which was structured as a license agreement, that resulted in funding of $11.0 million. Under the license agreement, we transferred various intellectual property rights, including patents, copyrights, trademarks and domain names, to the technology development corporation and were granted an exclusive license to use the intellectual property rights in exchange for a quarterly royalty payment. The royalty payments were equal to a percentage ranging from 1% to 5% of the net revenue from the use of the licensed intellectual property rights, up to $0.3 million per quarter. We classified the license agreement for accounting purposes as a research and development agreement and recognized revenue based on the completion of new Developed Technology (as defined in the statement of work within the license agreement).          We maintained the right to repurchase the intellectual property rights at any time upon payment of $11.0 million less any royalty payments made to the technology development corporation through the repurchase date. In April 2003, we and the technology development corporation agreed to terminate the license agreement. In exchange for a payment of $10.0 million and the issuance of $0.4 million in debt (which represented the then-current value of the license agreement less interim royalty payments), the intellectual property rights reverted to us.    Cost of Revenue            Cost of revenue consists of media inventory expenses, traffic data collection expenses, and other technology costs associated with maintaining TIMS.          Media Inventory.    Media inventory expenses consist of cash paid to purchase advertising inventory under long-term contracts with radio stations. In addition, media inventory expenses include cash payments to radio stations to purchase additional advertising inventory in the spot market on an as-needed basis, which we refer to as "cash buys." As we expand our presence into a larger number of metropolitan areas in the United States, we expect our media inventory expenses to decrease as a percentage of total revenue.          Traffic Data Collection Expenses.    Traffic data collection expenses consist of the costs of personnel, both full-time and part-time, the costs of aircraft and automobiles, the monitoring of police and emergency response vehicles, the depreciation of our traffic flow data sensor network, the use of state and local agency data sources where available (including sensors and cameras), and our own camera network. These expenses also include occupancy and communications costs for our national operations center and local operations centers. Traffic data collection costs are expected to continue to increase as we expand from our presence in 35 metropolitan areas as of March 1, 2006. We plan to utilize existing operations centers where it is efficient and effective to do so.  38               Other Technology Expenses.    Technology expenses primarily consist of personnel and related costs for employees engaged in the development and ongoing maintenance of TIMS, including hardware and internal product development expenses and the cost of consultants engaged to assist with various software development programs. In addition, these expenses include communications costs; capital depreciation of computer hardware; and the depreciation of certain technology costs capitalized in accordance with SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." We expect to continue to incur development costs as we add products and services.          License Agreement.    License agreement expenses consisted of royalty payments and certain development costs related to intellectual property covered by the license agreement.  Operating Expenses           Research and Development    In accordance with Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," research and development costs include those labor costs incurred during the application development stage of internally developed software. In addition, research and development costs also include costs associated with licensing third-party software and other quality assurance costs.          Sales and Marketing Expenses.    Sales and marketing expenses primarily consist of personnel and related costs for employees engaged in sales, business development and marketing, including salaries, commissions, and other variable compensation, travel expenses and costs associated with trade shows, advertising and other marketing efforts and bad debt expense. While the operating costs associated with our traditional radio and television relationships have remained relatively flat over the last year, we have incurred additional costs in connection with our business development efforts related to Internet advertising and product development. Since mid-2005, we have significantly increased our expenditure of funds for brand marketing and expect to continue or increase this spending for the foreseeable future. We currently expect to spend approximately $4.0 million to $5.0 million in 2006.          General and Administrative Expenses.    General and administrative expenses consist of personnel and related costs of our management, finance, human resources, technology support and administrative personnel, professional fees and other corporate expenses. As we expand our business and incur additional expenses associated with being a public company, we believe that general and administrative expenses will also increase. While we cannot predict with certainty what the additional costs of being a public company will be, a review of comparable companies would suggest that additional costs could be between $1.5 million and $3.0 million annually.          Legal Settlements.    Legal settlement expenses consist primarily of the settlement against us and our investor affiliate in the Santa Fe litigation. Although we are required, in accordance with the SEC Staff Accounting Bulletin Topic 5T, Accounting for Expense or Liabilities Paid by Principal Stockholder(s), to recognize the full amount of the settlement in our statement of operations, one-half of the settlement, which has been paid by our investor affiliate, is treated as a capital contribution to us. Legal settlement expenses also includes the estimated fair value of common stock and warrants issued to two investors in settlement of claims of $4.2 million.  39       Results of Operations           The following table sets forth the items in our historical statements of operations for the periods indicated as a percentage of total revenue:         Year Ended December 31,         2003   2004   2005     Revenue                 Advertising   96.4   % 92.9   % 89.8   %   Traffic data services   1.6   % 7.1   % 10.2   %   License agreement   2.0   % 0.0   % 0.0   %                      100.0   % 100.0   % 100.0   %   Cost of revenue   82.9   % 75.6   % 77.5   %                  Gross margin   17.1   % 24.4   % 22.5   %   Operating expenses:                 Research and development   7.6   % 8.6   % 9.0   %   Sales and marketing   37.7   % 28.3   % 37.4   %   General and administrative   17.1   % 17.0   % 20.1   %   Legal settlements   —   —   42.7   %                      62.4   % 53.9   % 109.2   %                  Loss from operations   (45.3 )% (29.5 )% (86.7 )%   Interest income (expense), net   (11.1 )% (8.1 )% (13.0 )%                  Net loss   (56.4 )% (37.6 )% (99.7 )%                  Redemption and accretion of redeemable convertible preferred stock   93.2   % (5.0 )% (4.7 )%                  Net income (loss) attributable to common stockholders   36.8   % (42.6 )% (104.4 )%                   Comparison of the Years Ended December 31, 2004 and 2005     Revenue            Revenue increased from $42.4 million in 2004 to $43.3 million in 2005, a 2.1% increase.          Advertising.    Advertising revenue decreased slightly from $39.4 million in 2004 to $38.9 million in 2005; however, owned inventory revenue, which generates higher margins, increased from $30.3 million, or 76.9% of advertising revenue in 2004 to $33.0 million, or 85.0% of advertising revenue in 2005, a 8.9% increase. Our advertising revenue growth was impacted by our decision at the end of 2004 not to renew an agreement with a large network radio customer which had generated approximately $5.6 million in revenues in 2004, based on unacceptable terms proposed by the customer. Owned inventory revenue has steadily increased, both in absolute dollars and as a percentage of total advertising revenue, as the number of our radio and television customers has grown, due in part to the launch of Traffic Pulse NeXgen in the fourth quarter of 2004.          Traffic data services.    Traffic data services revenue grew from $3.0 million in 2004 to $4.4 million in 2005, a 46.7% increase. The increase was due to commencing revenue recognition with respect to four additional cities under the U.S. DOT contract and increases in revenue generated from the XM Satellite Radio and NAVTEQ agreements and a new agreement with The Weather Channel for the use of our data on their cable stations, website and desktop applications.  40          Cost of revenue            Cost of revenue increased from $32.1 million in 2004 to $33.6 million in 2005, a 4.7% increase. Cost of revenue as a percentage of revenue increased from 75.6% in 2004 to 77.5% in 2005.          Media Inventory.    Media inventory expenses decreased from $18.9 million in 2004 to $16.9 million in 2005, a 10.6% decrease. Our media inventory expenses decreased as a percentage of revenue from 44.5% in 2004 to 39.0% in 2005. The decrease in both absolute dollars and as a percentage of revenue was primarily due to our decision at the end of 2004 not to renew the agreement with a large network radio customer described above. Such non-renewal resulted in lower expense of approximately $1.8 million, as well as an increase in owned inventory sales, which reduced the need for lower margin cash buys purchased on the open market.          Traffic data collection.    Traffic data collection expenses increased from $12.4 million in 2004 to $15.8 million in 2005, a 27.4% increase. Our traffic data collection costs as a percentage of revenue increased from 29.1% in 2004 to 36.6% in 2005. The increase both in amount and as a percentage of revenue was primarily due to an increase in compensation and related costs, including on-air talent and production staff, of $2.2 million due to our increased number of radio and television customers and expansion in the number of markets being serviced from 24 in 2004 to 35 in 2005. In addition, depreciation expense increased $0.2 million as a result of commencing depreciation of our sensor network in four additional cities, and maintenance and communication costs relating to the digital sensor network increased $0.5 million primarily as a result of the upgrading of our wireless modems in certain of our markets.          Other technology expenses.    Other technology expenses were $0.9 million in 2004 and 2005. Our other technology expenses as a percentage of revenue was 2.0% in 2004 and 2005.    Operating expenses            Research and development.    Research and development expenses increased from $3.6 million in 2004 to $3.9 million in 2005, an 8.3% increase. Research and development expenses increased as a percentage of revenue from 8.6% in 2004 to 9.0% in 2005. The increase in both amount and as a percentage of revenue was due mainly to an increase in third party software licensing costs and product maintenance costs which were offset by a decrease in compensation and related employee costs as a result of increased capitalization of product development efforts, specifically the enhanced website and consumer based products.          Sales and marketing.    Sales and marketing expenses increased from $12.0 million in 2004 to $16.2 million in 2005, a 35.0% increase. Our sales and marketing expenses as a percentage of revenue increased from 28.3% in 2004 to 37.4% in 2005. The increase, in both amount and as a percentage of revenue, was primarily due to $2.1 million of additional marketing expenses for branding, external product marketing, and public relations and an expanded presence at trade shows. In addition, compensation and related expenses increased $1.2 million due to staff additions, specifically in business development and marketing personnel.          General and administrative.    General and administrative expenses increased from $7.2 million in 2004 to $8.7 million in 2005, a 20.8% increase. Our general and administrative expenses as a percentage of revenue increased from 17.0% in 2004 to 20.1% in 2005. The increase in both amount and as a percentage of revenue was due mainly to a $0.8 million increase in compensation costs due to staff additions and incentive bonus payments in the fourth quarter, and a $0.5 million increase in legal expenses, specifically for the Santa Fe matter which went to trial in 2005.          Legal Settlements.    Legal settlement expenses were $18.5 million in 2005, which was 42.7% of revenue. These costs consisted of the entire settlement against us and our investor affiliate in the Santa  41       Fe litigation of $14.25 million. Although we are required, in accordance with the SEC Staff Accounting Bulletin Topic 5T, Accounting for Expense or Liabilities Paid by Principal Stockholder(s), to recognize the full amount of the settlement in our statement of operations, one-half of the settlement ($7.125 million), which was paid by our investor affiliate, was treated as a capital contribution to us. Legal settlement expenses also include the fair value of common stock and warrants issued to two investors in settlement of claims.          Interest income (expense), net.    Net interest expense increased from $3.4 million in 2004 to $5.6 million in 2005, a 64.7% increase. Net interest expense was impacted in 2004 and 2005 by amendments to our senior secured credit facility in April of each year. The amendments, which included an interest rate reduction in 2004 and a two-year extension in 2005, were retroactive to the inception of the facility in April 2002 and required cumulative adjustments to interest expense through the date of each amendment. This reduced interest expense by $3.8 million in 2004 and increased interest expense by $0.7 million in 2005. Deferred financing fees amortized into interest expense in 2004 were $3.3 million and $0.6 million in 2005. The expense in 2004 included the write-off of previously deferred financing costs as a result of the 2004 amendment to our senior secured credit facility. Lastly, interest expense was $3.9 million 2004 and $4.5 million in 2005.  Comparison of the Years Ended December 31, 2003 and 2004     Revenue            Revenue increased from $37.4 million in 2003 to $42.4 million in 2004, a 13.4% increase.          Advertising.    Advertising revenue increased from $36.0 million in 2003 to $39.4 million in 2004, a 9.4% increase. The increase was due primarily to an increase in owned inventory revenue which grew from $26.0 million, or 72.2% of advertising revenue in 2003, to $30.3 million, or 76.9% of advertising revenue in 2004, a 16.5% increase. The increase in owned inventory revenue was due to an increase in the number of radio and television customers and continued an annual historical trend of owned inventory revenue growth.          Traffic data services.    Traffic data services revenue increased from $0.6 million in 2003 to $3.0 million in 2004, a 400.0% increase. The increase was due to recognizing revenue for two additional cities under the U.S. DOT contract at various times during 2004, as well as revenue from our agreements with XM Satellite Radio and NAVTEQ entered into during 2004.          License agreement.    Revenue recognized from our license agreement decreased from $0.8 million in 2003 to $0.0 in 2004 as a result of the repurchase of the licensed technology in April 2003.    Cost of revenue            Cost of revenue increased from $31.0 million in 2003 to $32.1 million in 2004, a 3.5% increase. Cost of revenue as a percentage of revenue decreased from 82.9% in 2003 to 75.6% in 2004.          Media inventory.    Media inventory expenses decreased from $19.4 million in 2003 to $18.9 million in 2004, a 2.6% decrease. Our media inventory expenses decreased as a percentage of revenue from 51.8% in 2003 to 44.5% in 2004. These decreases were due to the increase in owned inventory revenue, which reduced the need for lower margin cash buys.          Traffic data collection.    Traffic data collection expenses increased from $9.6 million in 2003 to $12.4 million in 2004, a 29.2% increase. Our traffic data collection costs as a percentage of revenue increased from 25.6% in 2003 to 29.1% in 2004. The increase in traffic data collection costs was due to additional costs resulting from growth in the number of our radio and television customers, an increase in markets being serviced from 17 in 2003 to 24 in 2004, and the expansion of coverage hours in 19  42       markets from 16 hours per day to 24 hours per day, seven days a week. The expansion of coverage hours was in support of certain data services agreements.          Other technology expenses.    Other technology expenses decreased from $1.3 million in 2003 to $0.9 million in 2004, a 30.8% decrease. Other technology expenses decreased as a percentage of revenue from 3.5% in 2003 to 2.0% in 2004. The decrease both in amount and as a percentage of revenue was due mainly to a decrease in depreciation expense resulting from certain assets that were fully depreciated during the period.          License Agreement.    Expenses from our license agreement decreased from $0.8 million in 2003 to $0 in 2004 as a result of the repurchase of the licensed technology in April 2003.    Operating expenses            Research and development.    Research and development expenses increased from $2.8 million in 2003 to $3.6 million in 2004, a 28.6% increase. Research and development expenses increased as a percentage of revenue from 7.6% in 2003 to 8.6% in 2004. The increase both in amount and as a percentage of revenue was due mainly to an increase in compensation and related costs of $0.5 million and a $0.2 million increase in the computer equipment purchases relating to product development efforts.          Sales and marketing.    Sales and marketing expenses decreased from $14.1 million in 2003 to $12.0 million in 2004, a 14.9% decrease. Our sales and marketing expenses as a percentage of revenue decreased from 37.7% in 2003 to 28.3% in 2004. This reduction was primarily due to reduced compensation and related costs of $1.6 million from sales staff reductions, resulting from a sales force reorganization. The staff reduction impacted travel and entertainment costs, which decreased by $0.3 million. In addition, bad debt expense was reduced by $0.2 million due primarily to the collection of a large advertising account that was previously reserved for in the allowance for doubtful accounts.          General and administrative.    General and administrative expenses increased from $6.4 million in 2003 to $7.2 million in 2004, a 12.5% increase. Our general and administrative expenses decreased as a percentage of revenue from 17.1% in 2003 to 17.0% in 2004. The increase in absolute dollars was due to a $0.5 million increase in professional fees, specifically for legal costs and consulting.          Interest income (expense), net.    Net interest expense decreased from $4.2 million in 2003 to $3.4 million in 2004, a 19.0% decrease. Net interest expense was impacted in 2003 and 2004 by amendments to our senior secured credit facility in April of each year. The amendments, which included interest rate reductions, were retroactive to the inception of the facility in April 2002 and required cumulative reductions of interest expense through the date of the amendment of $4.4 million in 2003 and $3.8 million in 2004. Deferred financing fees, including the write-off of previously deferred financing costs required as a result of the amendments, amortized into interest expense were $2.2 million in 2003 and $3.3 million in 2004. Interest expense was $6.5 million in 2003 and $3.9 million in 2004.  43      Quarterly Results of Operations           The following table presents our unaudited quarterly results of operations for the eight quarters ended December 31, 2005. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for fair presentation of our financial position and operating results for the quarters presented. This data should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this prospectus. The operating results for any quarter should not be considered indicative of results for any future period.         Quarter Ended         Mar 31, 2004   Jun 30, 2004   Sep 30, 2004   Dec 31, 2004   Mar 31, 2005   Jun 30, 2005   Sep 30, 2005   Dec 31, 2005         (In thousands, except per share amounts) (unaudited)      Revenue                                                     Advertising   $ 8,492   $ 10,681   $ 9,977   $ 10,299   $ 8,330   $ 11,177   $ 9,564   $ 9,800     Traffic data services     592     650     670     1,081     930     969     1,126     1,397                                         9,084     11,331     10,647     11,380     9,260     12,146     10,690     11,197     Cost of revenue     7,432     8,410     8,335     7,913     7,627     8,319     8,595     9,026                                   Gross margin     1,652     2,921     2,312     3,467     1,633     3,827     2,095     2,171     Operating expenses:                                                     Research and development     767     960     1,025     895     807     797     983     1,318     Sales and marketing     3,099     3,105     3,100     2,728     3,783     3,529     3,733     5,132     General and administrative     1,832     1,976     1,583     1,838     1,697     2,495     1,945     2,567     Legal settlements     —     —     —     —     —     4,223     14,250     —                                         5,698     6,041     5,708     5,461     6,287     11,044     20,911     9,017     Loss from operations     (4,046 )   (3,120 )   (3,396 )   (1,994 )   (4,654 )   (7,217 )   (18,816 )   (6,846 )   Interest income (expense), net     (1,678 )   15     (910 )   (855 )   (1,127 )   (1,686 )   (1,416 )   (1,380 )                                 Net loss   $ (5,724 ) $ (3,105 ) $ (4,306 ) $ (2,849 ) $ (5,781 ) $ (8,903 ) $ (20,232 ) $ (8,226 )                                 Redemption and accretion of redeemable convertible preferred stock     (520 )   (536 )   (536 )   (536 )   (536 )   (553 )   (554 )   (394 )                                 Net loss attributable to common stockholders   $ (6,244 ) $ (3,641 ) $ (4,842 ) $ (3,385 ) $ (6,317 ) $ (9,456 ) $ (20,786 ) $ (8,620 )                                 Net loss attributable to common stockholders per share—basic   $ (2.11 ) $ (1.23 ) $ (1.63 ) $ (1.01 ) $ (1.89 ) $ (2.80 ) $ (6.05 ) $ (2.31 )   Net loss attributable to common stockholders per share—diluted   $ (2.11 ) $ (1.23 ) $ (1.63 ) $ (1.01 ) $ (1.89 ) $ (2.80 ) $ (6.05 ) $ (2.31 )    44                 The following table presents our unaudited quarterly results of operations for the eight quarters ended December 31, 2005 as a percentage of revenue.         Quarter Ended         Mar 31, 2004   Jun 30, 2004   Sep 30, 2004   Dec 31, 2004   Mar 31, 2005   Jun 30, 2005   Sep 30, 2005   Dec 31, 2005         (unaudited)      Revenue                                     Advertising   93.5 % 94.3 % 93.7 % 90.5 % 90.0 % 92.0 % 89.5 % 87.5 %   Traffic data services   6.5 % 5.7 % 6.3 % 9.5 % 10.0 % 8.0 % 10.5 % 12.5 %                                     100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %   Cost of revenue   81.8 % 74.2 % 78.3 % 69.5 % 82.4 % 68.5 % 80.4 % 80.6 %                                 Gross margin   18.2 % 25.8 % 21.7 % 30.5 % 17.6 % 31.5 % 19.6 % 19.4 %   Operating expenses:                                     Research and development   8.4 % 8.5 % 9.6 % 7.9 % 8.7 % 6.6 % 9.2 % 11.8 %   Sales and marketing   34.1 % 27.4 % 29.1 % 24.0 % 40.9 % 29.1 % 34.9 % 45.8 %   General and administrative   20.2 % 17.4 % 14.9 % 16.2 % 18.3 % 20.5 % 18.2 % 22.9 %   Legal settlements   —   —   —   —   —   34.8 % 133.3 % —                                       62.7 % 53.3 % 53.6 % 48.1 % 67.9 % 91.0 % 195.6 % 80.5 %                                 Loss from operations   (44.5) % (27.5) % (31.9) % (17.6) % (50.3) % (59.5) % (176.0) % (61.1) %   Interest income (expense), net   (18.5) % 0.1 % (8.5) % (7.5) % (12.2) % (13.9) % (13.2) % (12.3) %                                 Net loss   (63.0) % (27.4) % (40.4) % (25.1) % (62.5) % (73.4) % (189.2) % (73.4) %                                 Redemption and accretion of redeemable convertible preferred stock   (5.7) % (4.7) % (5.0) % (4.7) % (5.8) % (4.6) % (5.2) % (3.5) %                                 Net loss attributable to common stockholders   (68.7) % (32.1) % (45.4) % (29.8) % (68.3) % (78.0) % (194.4) % (76.9) %                                  Seasonality           Due to the seasonal nature of broadcast advertising revenue and the percentage of our total revenue historically represented by these sources, we have typically experienced lower revenue during the first quarter, following the holiday season, and the third quarter, during the summer months.  Liquidity and Capital Resources           Since inception, we have principally financed our operations through private sales of our preferred stock, internally generated funds, a secured credit facility, a revolving line of credit and our license agreement. At December 31, 2005, we had $13.1 million of cash and cash equivalents compared to $4.9 million at December 31, 2004. As of December 31, 2005, we had raised an aggregate of $101.9 million through our preferred stock financings. In January and February 2006 we raised a total of approximately $74.7 million from our initial public offering, net of fees and expenses. We generally invest our cash in highly liquid investments with a maturity of six months or less at the date of purchase. To date, inflation has not had a material effect on our business.          Cash flows used in operating activities were $24.3 million in 2003. Cash flows provided by operating activities were $5.4 million in 2004. Cash flows used in operating activities in 2005 were $10.3 million. Cash flows used in operating activities in 2003 were primarily due to a net loss of $21.1 million and $10.0 million for the repayment of our license agreement funded in 2002, partially offset by adjustments for depreciation and amortization, accounts payable and accrued expenses, and deferred revenue. Cash flows provided by operating activities in 2004 were primarily due to the prepayment of future revenue under the NAVTEQ agreement of $9.0 million, of which $0.3 million was recognized as revenue, an increase in deferred revenue under our subcontract with the U.S. DOT, and  45       adjustments for depreciation and amortization, which was partially offset by a net loss of $16.0 million. Cash flows used in operating activities in 2005 were primarily due to a net loss of $43.1 million, which included non-cash legal settlement costs of $11.3 million, and an increase in accounts receivable and U.S. DOT subcontract receivable, which were partially offset by the receipt of $0.9 million, representing the balance of the advance payment due under the NAVTEQ agreement; adjustments for accounts payable and accrued expenses, accrued legal settlements, and deferred revenue from the U.S. DOT subcontract.          Cash flows provided by investing activities were $6.1 million in 2003. Cash flows used in investing activities were $6.3 million in 2004 and $9.9 million 2005, respectively. Cash flows provided by investing activities in 2003 were primarily due to the net sale of marketable securities of $10.3 million, partially offset by the purchase of fixed assets. Cash flows used in investing activities in 2004 were due to the purchase of fixed assets. Cash flows used in investing activities in 2005 were due to the purchase of fixed assets offset by a decrease in restricted cash. Restricted cash represents cash and cash equivalents restricted for standby letters of credit supporting long-term facility leases and escrow arrangements.          Cash flows provided by financing activities were $21.5 million in 2003. Cash flows used in financing activities were $3.2 million in 2004. Cash flows provided by financing activities were $28.5 million in 2005. Cash flows provided by financing activities in 2003 were primarily due to the sale of Series E convertible preferred stock, which resulted in proceeds of $27.5 million, and borrowing under our revolving line of credit of $4.0 million, partially offset by the repurchase of certain shares of Series D convertible preferred stock for $9.4 million. Cash flows used in financing activities in 2004 were primarily due to the repayment of $3.2 million under the revolving credit facility. Cash flows provided by financing activities in 2005 were primarily due to the closing of the sale of Series F convertible preferred stock which resulted in proceeds of $15.1 million, and additional borrowing under the senior secured credit facility of $9.7 million, after related fees, and $3.3 million in additional borrowings under our revolving credit facility.          Our capital requirements depend on many factors, including our planned geographic expansion into new metropolitan areas. We currently expect to expand our traffic information coverage and service offerings to a total of 50 U.S. metropolitan areas by the end of 2006. We expect to incur capital expenditures of approximately $15.0 million in 2006. The majority of these expenditures relate to the construction of our sensor network in a number of new metropolitan areas, with approximately $10 million to $12 million expected in 2006. These expenditures, however, are expected to be balanced by a comparable amount of receipts under our data services agreement with the U.S. DOT associated with these new metropolitan areas.          Recently, we have focused on new revenue opportunities, including the enhancement of our website and the introduction of our in-vehicle and consumer wireless services, and have devoted increasing resources to developing and marketing these new services. Our ability to generate revenue from these services will have a material impact on our future cash needs. We expect to devote significant capital resources to continued product development, brand marketing, expansion of operational systems and other general corporate activities. Specifically, we expect to spend approximately $4.0 million to $5.0 million in 2006 on our branding initiative. We expect to spend approximately $1.0 million to $2.0 million on facilities, principally traffic operations centers, in 2006. We expect to spend approximately $3.0 million to $4.0 million on technology development and infrastructure during the same period.          Based on our current operations and planned expansion, we expect that our available funds, including the net proceeds from our recently completed initial public offering, and after having repaid all outstanding borrowings under our senior secured credit facility and revolving credit facility out of our public offering proceeds, are sufficient to meet our expected needs for working capital and capital expenditures through at least the end of 2007. Thereafter, if we do not have sufficient cash available to  46       finance our operations, we may be required to obtain additional public or private debt or equity financing. We cannot be certain that additional financing will be available to us on favorable terms, if at all. If we are unable to raise sufficient funds, we may need to reduce our operations, delay our geographic expansion, and reduce our product development and marketing activities.          In July 1999, Santa Fe Technologies, Inc., or SFT, filed a lawsuit against us and others, including certain of our officers and directors and TL Ventures LLC, whose successor, TL Ventures L.P., is affiliated with certain of our investors. In June 2005, a jury returned a verdict against us and our investor affiliate. Judgment was entered on this verdict in August 2005, finding us and the investor affiliate jointly and severally liable to plaintiff for $6.2 million in compensatory damages, assessing punitive damages against us and assessing punitive damages against the investor affiliate. In late September 2005, the district court rejected our motion to set aside the jury verdict. On October 13, 2005, final judgment was entered against us and the investor affiliate. On November 17, 2005, we, SFT and TL Ventures L.P. entered into a memorandum of settlement with respect to our litigation, which was supplemented by a formal settlement agreement and general release dated as of December 16, 2005. Under these agreements, we and TL Ventures L.P. agreed to pay to SFT an aggregate of $14,250,000 in settlement of the litigation, one-half to be paid within 30 days of the date of the settlement agreement and the other half to be paid within 60 days of the date of the settlement agreement. Upon receipt of the full settlement amount, SFT agreed to execute a general release of us and TL Ventures L.P. and all of our respective officers, directors, agents, employees, limited partners, general partners, members and affiliates and to vacate the judgment entered against us and TL Ventures L.P. Also on November 17, 2005, we entered into an agreement with TL Ventures L.P. specifying that each of us will pay one-half of the settlement amount, or $7,125,000. TL Ventures L.P. and we have each made our respective settlement payments to SFT. In accordance with the SEC Staff Accounting Bulletin Topic 5T, Accounting for Expense or Liabilities Paid by Principal Stockholder(s), we recognized the full amount of the settlement in our statement of operations. We recorded a reserve for the portion that we will pay, and the other half of the settlement, which will be paid by our investor affiliate, is treated as a capital contribution to us. The liability related to the settlement of this contingency recorded in our balance sheet at December 31, 2005, is the $7.125 million we paid in January 2006.  Indebtedness           As of December 31, 2004 and 2005, respectively, we had a total of $23.7 million and $37.7 million in principal and accrued interest outstanding on our then-existing senior secured credit facility. Columbia Partners, LLC Investment Management, one of our principal stockholders, acted as agent for this facility. The indebtedness under our senior secured credit facility was used to fund our general working capital needs and was secured by a first priority security interest in all of our property, except for broadcast advertising accounts receivable, for which the lender held a second priority security interest. Our senior secured credit facility had a stated interest rate of 6.316%. Upon repayment of the entire principal amount of the borrowings or upon the maturity date or certain liquidity events, however, we were required to pay the lender an additional amount that would be sufficient to provide the lender with an internal rate of return of 15%. In January 2006 we repaid the outstanding principle and interest outstanding under this facility using a portion of the proceeds raised in the initial public offering. We anticipate entering into a new credit facility, although we have not reached an agreement with any lender.          As of December 31, 2005, we also had a revolving credit facility which was secured by a first priority security interest on our media advertising accounts receivable and a second priority security interest in all of our other property. Under such facility we had the right to borrow up to a maximum of $8.5 million, based on eligible accounts receivable, as defined. As of December 31, 2005 there was $4.1 million outstanding under this facility. All of such outstanding amounts have since been fully  47       repaid and the facility has terminated upon its own terms in March 2006. We anticipate entering into a new credit facility, although we have not reached an agreement with any lender.          At December 31, 2005, we were in compliance with all of our debt covenants.  Contractual Obligations           Contractual obligations at December 31, 2005 are as follows:         Total   2006   2007-2008   2009-2010   After 2011       (in thousands)    Long-term debt obligations(1)   $ 37,659   $ —   $ 37,659   $ —   $ —   Operating lease obligations(2)     8,294     1,916     3,525     2,809     44   Payments to radio and television stations(3)     13,981     8,628     5,297     56     —                          $ 59,934   $ 10,544   $ 46,481   $ 2,865   $ 44                         (1)Under the terms of our then-existing senior secured credit facility, the entire $37.7 million in outstanding principal and interest under the facility was paid in January 2006 upon the closing of our initial public offering. (2)Operating lease obligations represent rent expense for office space under non-cancelable operating lease agreements. The leases generally provide for scheduled rent increases, which are reflected in the table above. (3)Payments to radio and television station customers consist of minimum contractual commitments with radio and television stations in exchange for advertising inventory.  Critical Accounting Policies and Estimates           The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to stock based compensation, bad debts, long-lived assets and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements. Our critical accounting policies have been discussed with the audit committee of our board of directors. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.  Stock-Based Compensation     Accounting for Stock-Based Awards to Employees            We account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and comply with the disclosure provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based Compensation," as modified by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of SFAS No. 123." Currently, we are not required to record stock-based compensation  48      charges if the employee stock option exercise price or restricted stock purchase price equals or exceeds the deemed fair value of our common stock at the grant date.          We typically have granted stock options at exercise prices equal to the value of the underlying stock as determined by our board of directors on the date of option grant. For purposes of financial accounting, we have applied hindsight within each year or quarter to arrive at reassessed values for the shares underlying these options. Prior to the filing of our registration statement, we utilized two measures of value of our common stock in accounting for equity compensation relating to our compensatory equity grants:    •The "board-determined value," which is the per share value of our common stock determined by our board of directors at the time the board made an equity grant, taking into account several factors, including our operating performance, anticipated future operating results, the terms of redeemable convertible preferred stock issued by us, including the liquidation value and other preferences of our preferred stockholders, as well as the valuations of other companies. •The "reassessed value," which is the per share value of our common stock determined by us in hindsight solely for the purpose of financial accounting for employee stock-based compensation. We have used the Current-Value Method outlined in the American Institute of Certified Public Accountants' (AICPA) practice aid entitled "Valuation of Privately-Held Company Equity Securities Issued as Compensation" published in 2004 by AICPA in performing these valuations.           We have recorded deferred stock-based compensation to the extent that the reassessed value of the stock at the date of grant exceeded the exercise price of the option.          For the period from July 2003 through March 2005, our board of directors granted options at an exercise price of $0.75 per share. This determination was based on a number of factors that were detailed in an internal valuation carried out in July 2003. The valuation resulted in a common share value of $0.36, but our board decided at that time to use the higher exercise price of $0.75 in order to take a conservative position with respect to option pricing. In deriving the valuation, we used a multiple of 2.3 times our revenue derived from a review of peer companies. The resulting gross valuation for the invested capital was then netted against the value of our outstanding debt and the overall value of outstanding liquidation preferences of the redeemable, convertible preferred stock to derive a net valuation for common equity, and the resulting valuation was divided by the outstanding common shares. We did not obtain a contemporaneous valuation by an unrelated valuation specialist as our board of directors believed that, because of the early stage of our business, traditional valuation approaches used by independent valuation firms, such as an income approach, would not be relevant and would not be worth the cost.          Unlike our business today, which has higher revenues, several revenue streams, contracts with a number of large customers, and products that support Internet and wireless initiatives, during the period from July 2003 through March 2005, we relied almost completely on our radio and TV advertising business and, towards the end of 2004, had a growing liquidity problem.          Between July 2003 and March 2005, we continued to review the valuation of our company using these same metrics. During this time, however, we did not achieve the revenues we had anticipated, and determined that, given its own internal valuation of our company which yielded a $0.36 common share value, the exercise price of new option grants should be no more than the $0.75 per share valuation we had assessed in July of 2003. Towards the end of 2004 and as we entered 2005, it was clear that we had a limited level of liquidity, and prior to the renegotiation of our senior secured credit facility in April 2005, we determined that there was no basis to increase the valuation of our company for common stock valuation purposes. In light of our decreasing liquidity, in order to induce our lender to extend an additional $10.0 million under our senior secured credit facility, certain of our stockholders agreed to enter into a guarantee agreement, under which they each severally agreed to  49       guarantee repayment of the credit line up to an aggregate of $10.0 million under certain circumstances. As a further condition to the extension of the additional $10.0 million in credit, the guarantors entered into an equity commitment letter with us, whereby they agreed to purchase up to an aggregate of $10.0 million of our Series F convertible preferred stock if we failed to comply with certain financial covenants in the senior secured credit facility. The negotiation of these transactions with our lender and the guarantors took several months to complete.          In May and June 2005, our board of directors granted options to purchase a total of 169,956 shares of common stock at an exercise price of $0.75 per share. We did not obtain a contemporaneous valuation of the common stock underlying the options granted in this period, relying on the continued standard practice we had employed from March 2003, but it was agreed in June 2005 to carry out a detailed valuation of the business and of common stock options. As a result, early in the third quarter 2005, we reassessed the value of our common stock as of May 31, 2005 using a discounted cash flow analysis as the income-based methodology to determine the fair value of our invested capital as of that date, defined as the sum of our common stock plus senior securities, less cash and cash equivalents. Based upon our calculations, we derived a weighted average cost of capital of 28%, thereby deriving a market value of invested capital, and subsequently a market value of our common stock. A discount related to the lack of marketability of 22.6% was estimated based on the theoretical cost of utilizing a series of put options to "lock in" the price of our common stock during an estimated holding period. This was completed by applying a Black-Scholes option pricing model. These calculations resulted in a fair value of our common stock of $4.92 per share, as of April 22, 2005, the date on which our renegotiated senior secured credit facility and $10.0 million equity guarantee were completed. This valuation was used through the end of the second quarter of 2005 and into the third quarter.          Also early in the third quarter 2005, we reviewed and reconfirmed that the stock value was $0.36 for the purposes of recording a weighted average reassessed value of underlying stock for those options granted between July 2003 and March 2005.          Subsequent to June of 2005 we continued to achieve key milestones:    •In July 2005, we introduced our new website, which provides a means to derive revenue from Internet and consumer wireless advertising as well as a means to market our brand. We also agreed to proceed with a public offering process and engaged WR Hambrecht + Co as the lead underwriter. In addition, we signed a contract with Comcast Cable to provide our traffic incident, event and flow data to Comcast for use on its website; •In August 2005, legislation became effective that reauthorized our federal contract, ensuring that we have the continuing ability to build out our sensor networks in order to collect traffic data in an aggregate of 27 metropolitan areas. In addition we obtained irrevocable, binding commitments from investors to complete our Series F convertible preferred stock financing for $15.1 million; •In September 2005, we launched our brand marketing campaign in four of the largest cities in the United States, signed contracts with three advertising networks targeted at Internet advertising, hired our first three dedicated sales people for our Internet advertising business, saw strong growth in visitors to our website, and closed our Series F convertible preferred stock financing.           Due to this continued development of our business, we again reassessed the value of our common stock in August 2005, using the same discounted cash flow model that we had used as of May 31, 2005, but updating it to reflect the achievements and growth of our business. In particular, we recalculated the weighted average cost of capital to 25% from 28%, and adjusted the discount rate related to the lack of marketability to 19.6% from 22.6%. These changes resulted in an adjustment in the fair value of our common stock to be the mid-point of the estimated price range for this offering.  50                 In October 2005, based on our reassessment of the value of our common stock, we offered to the employees who were granted options in May and June 2005 the ability to amend the terms of their options to increase the exercise price from $0.75 to $4.92 per share. All of the Company's employees who received options at this time have now chosen to amend their stock options to a higher exercise price in order to avoid adverse income tax consequences under recently-adopted Section 409A of the Internal Revenue Code, which was effective January 1, 2005.          In relation to these amended options, we recorded unearned compensation equal to the difference between the amended $4.92 exercise price per share and $11.50 per share, the estimated fair value of the common stock on the date of the modification. The unearned compensation will be amortized into compensation expense over the options' remaining vesting period.          The table below shows the computation of deferred stock-based compensation amounts arising from unvested stock options granted to employees for each of the three month periods set forth below:         Three Months Ended       March 31, 2005   June 30, 2005   September 30, 2005   December 31, 2005       (unaudited)    Options granted to employees     26,297     169,956     —     —   Weighted average exercise price   $ 0.75   $ 0.75     n/a   $ 4.92   Weighted average reassessed value of underlying stock per option granted   $ 0.36   $ 4.92     n/a   $ 11.50   Weighted average reassessed deferred stock-based compensation per option granted   $ —   $ 4.17     n/a   $ 6.58   Deferred stock-based compensation   $ —   $ 709,000   $ —   $ 1,118,000            We recognize compensation expense as we amortize the deferred stock-based compensation amounts on a straight line basis over the related vesting periods. Reassessed values are inherently uncertain and highly subjective. If we had made different assumptions, our deferred stock-based compensation amount, stock-based compensation expense, net loss and net loss per share amounts could have been significantly different.          The Minimum Value option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The weighted average fair value of options granted during 2003, 2004 and 2005 was $0.42, $0.18 and $3.78 per share, respectively.    Accounting for Stock-Based Awards to Non-Employees            We measure the fair value of options to purchase our common stock granted to non-employees throughout the vesting period as they are earned, at which time we recognize a charge to stock-based compensation. The fair value is determined using the Black-Scholes option-pricing model, which considers the exercise price relative to the reassessed value of the underlying stock, the risk-free interest rate and the dividend yield. As discussed above, the reassessed value of the underlying stock were based on assumptions of matters that are inherently highly uncertain and subjective. As there has been no public market for our stock for all periods presented, our assumptions about stock-price volatility are based on the volatility rates of comparable publicly-held companies. These rates may or may not reflect our stock-price volatility after we have been a publicly-held company for a meaningful period of time. If we had made different assumptions about the reassessed value of our stock or stock-  51      price volatility rates, the related stock-based compensation expense and our net income and net income per share amounts could have been significantly different.    Intrinsic Value of Outstanding Options            The following table shows the intrinsic value of our outstanding vested and unvested options as of December 31, 2005 based upon a $11.50 per share common stock price, which was the estimated fair value as of that date:         Number of Shares Underlying Options   Intrinsic Value (In thousands)   Total Vested Options Outstanding   1,217,493   $ 10,802   Total Unvested Options Outstanding   782,985     7,333   Total Options Outstanding   2,000,478     18,135    Long-Lived Assets           We record our property and equipment at cost. We review the carrying value of our property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We evaluate these assets by examining estimated future cash flows to determine if their current recorded value is impaired. We evaluate these cash flows by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If we determine that an asset's carrying value is impaired, we will record a write-down of the carrying value of the identified asset and charge the impairment as an operating expense in the period in which the determination is made. Although we believe that the carrying values of our long-lived assets are appropriately stated, changes in strategy or market conditions or significant technological developments could significantly impact these judgments and require adjustments to recorded asset balances.          In connection with our U.S. DOT contract and related state contracts related to our sensor networks throughout various cities in the United States, we may be required under certain circumstances to remove the sensor network assets residing on governmental property. In accordance with FASB Statement No. 143, Accounting for Asset Retirement Obligations, we recognize the fair value of a liability for an asset retirement obligation (ARO) for each city in the period in which the related asset is placed in service. We capitalize that cost as part of the carrying amount of the sensor network, which is depreciated on a straight-line basis over the useful life of the corresponding asset of 15 years. The ARO is recorded at fair value, and accretion expense will be recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash outflows discounted at our credit-adjusted risk-free interest rate. Changes in the estimated fair value of the ARO are recorded in the period in which they are identified. At December 31, 2005, we had an asset retirement obligation, including accretion, classified in long-term liabilities of $0.7 million and an increase to existing capitalized assets of $0.6 million.          We capitalize software development and acquisition costs in accordance with Statement of Position, or SOP, No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The costs of internally developed software are expensed unless incurred during the application development stage. Software development costs capitalized during the application development stage are included in property and equipment and depreciated on a straight-line basis over three years, which is the estimated useful life.  52       Income Taxes           We account for income taxes under the liability method, which requires the establishment of a deferred tax asset or liability to reflect the net tax effects of temporary differences between tax carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax expense or benefit is recognized as a result of the change in the deferred asset or liability during the year. As of December 31, 2005, we had a valuation allowance of $49.0 million to reduce our deferred tax assets. The valuation allowance primarily relates to deferred tax assets arising from net operating loss carry-forwards which, if not used, will expire between 2018 and 2024. Should we generate taxable income in the future, we may be able to realize all or part of the operating loss carry-forwards against which we have applied the valuation allowance. In that event, our current income tax expense would be reduced or our income tax benefits would be increased, resulting in an increase in net income or a reduction in net loss. We exercise significant judgment in assessing our ability to utilize any future tax benefit from our deferred tax assets.  Revenue Recognition Pursuant to the U.S. DOT Contract           During installation of our sensor network and upon completion of specified milestones, our prime contractor pays us 95%, or $1.9 million, of $2.0 million paid to it in each metropolitan area in exchange for our providing data to the various federal and state agencies for non-commercial purposes such as research, planning, and congestion management. The majority of all funds under this subcontract are received on or before complete installation of the system and system acceptance. All amounts invoiced by us are initially recorded as deferred revenue. We commence recognition of revenue when we obtain formal system acceptance. Deferred revenue is amortized into revenue over the estimated service period of the contract of 15 years. The estimated service period was determined based on our expectation that we will continue to provide data to the government agencies for 15 years. This estimate was predicated in part on the fact that the local government agencies have been collecting traffic data from their own sensors for a similarly long period of time. Further, the estimate is consistent with the estimated economic useful life of the related assets. However, given the pace of technological change, it is possible that other technology approaches may become as important or useful as sensor networks. Revenue recognized from this subcontract was $0.3 million, $0.4 million, and $0.9 million for 2003, 2004, and 2005, respectively.  Inflation           We do not believe that inflation had a material impact on our earnings from operations.  Off-Balance Sheet Arrangements           At December 31, 2005, 2004 and 2003, we did not have any relationships with unconsolidated entities or financial partnerships which would have been established for the purposes of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  Recent Accounting Pronouncements           In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations ("FIN 47"). FIN 47 clarifies that an entity must record a liability for a "conditional" asset retirement obligation if the fair value of the obligation can be reasonably estimated. The adoption of FIN 47 did not have a material effect on our financial condition or results of operations.          In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3", referred to as SFAS No. 154, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all  53       voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. It does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS No. 154. The Company does not believe the adoption of SFAS No. 154 will materially impact the Company's consolidated financial statements.          In December 2004, the Financial Accounting Standards Board, or FASB, issued statement No. 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)), which is a revision of Statement No. 123, "Accounting for Stock-Based Compensation". SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and amends FASB Statement No. 95, "Statement of Cash Flows".          SFAS 123(R) requires all share-based payments to employees, including grants of stock options, to be recognized in the financial statements based on their fair values. Under SFAS 123(R), pro forma disclosure is no longer an alternative to financial statement recognition for stock option awards made after the Company's adoption of SFAS 123(R). The Company will adopt 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 and Exchange Commission), the Company used the minimum value method to calculate the pro forma disclosure required by SFAS 123. When the Company adopts SFAS 123(R) on January 1, 2006, the Company will continue to account for the portion of awards outstanding prior to August 30, 2005 using the provision of APB Opinion No. 25 and its related interpretative guidance.          For awards issued on or after August 30, 2005, and for awards modified, repurchased or cancelled on or after that date, the Company will use an option pricing model other than the minimum value method to calculate the pro forma disclosures required by SFAS 123. When the Company adopts SFAS 123(R) on January 1, 2006, the Company will begin recognizing the expense associated with these awards in the income statement over the award's vesting period using the modified prospective method. Because the amount, terms and fair values of awards to be issued in the future are uncertain, the impact of the adoption of SFAS 123(R) on the Company's financial statements is not known at this time.  Item 7A. Quantitative and Qualitative Disclosures About Market Risk.         We do not use derivative financial instruments for speculation or trading purposes. Our current policy is to maintain an investment portfolio consisting mainly of U.S. Government obligations or other securities rated AAA or comparably, with a maximum maturity of 12 months and a weighted average maturity for the portfolio of 6 months. Our cash is deposited in and invested through highly rated financial institutions in North America Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase.          As of December 31, 2005, we had exposure to interest rate risk related to our short-term and long-term debt. All of such debt was repaid subsequent to December 31, 2005. And, as of the date hereof, the Company does not have any short or long-term debt outstanding. In general, as of December 31, 2005, the interest rate on our senior secured credit facility was fixed (with a required internal rate of return to the lender on repayment of 15%) and the rate on our revolving credit facility was variable. See Note 6 to the Consolidated Financial Statements included elsewhere in this Annual Report for a discussion of the components of our long-term debt as of December 31, 2005. Changes in the fair value of our fixed rate debt have no impact on our cash flows or consolidated financial statements. We currently do not hedge interest rate exposure.  Item 8. Financial Statements and Supplementary Data.         The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list of the financial statements filed herewith is found at "Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.  54        Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.           None.  Item 9A. Controls and Procedures. Evaluation of disclosure controls and procedures   (a) Evaluation of disclosure controls and procedures.          We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Security Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Security Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer, President, Chief Operating Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.          As of December 31, 2005, Company management, including the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, Management concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this annual report.  (b) Section 404 compliance project.          Beginning with the year ending December 31, 2007, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include management's report on our internal control over financial reporting in our Annual Report on Form 10-K. The internal control report must contain (1) a statement of management's responsibility for establishing and maintaining adequate internal control over our financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management's assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over financial reporting is effective, and (4) a statement that our registered independent public accounting firm has issued an attestation report on management's assessment of our internal control over financial reporting.          In order to achieve compliance with Section 404 within the prescribed period, management has commenced a Section 404 compliance project under which management has engaged outside consultants and adopted a detailed project work plan to assess the adequacy of our internal control over financial reporting, remediate any control deficiencies that may be identified, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Except as described above, during the fourth quarter of fiscal year 2005, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  (c) Inherent limitations of the effectiveness of internal control.          A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.  Item 9B. Other Information.         None.  55             PART III          Item 10.    Directors and Executive Officers of the Registrant.         Set forth below is certain information regarding our directors and executive officers.     Name    Age   Position   Robert N. Verratti   62   Chief Executive Officer and Director   David L. Jannetta   53   President and Director   Christopher M. Rothey   35   Chief Operating Officer   Andrew Maunder   49   Chief Financial Officer   Joseph A. Reed   41   Chief Information Officer   Brian J. Sisko   45   Chief Legal Officer, Senior Vice President and General Counsel   Mark J. DeNino   52   Chairman of the Board   John H. Josephson   44   Director   George MacKenzie   57   Director   Samuel A. Plum   61   Director            Set forth below is certain information regarding certain of our key employees.     Name    Age   Position   Michael Nappi   51   Senior Vice President, Business Development   William Powers   39   Senior Vice President, Sales   Peter Doyle   56   Senior Vice President, Media Affiliation   Brian Smyth   38   Senior Vice President, Software Development   Peter Menninger   44   Senior Vice President, Operations and Systems Architecture    Information Concerning Directors           Our board of directors consists of six members. Our common stock is quoted on The NASDAQ National Market and we are subject to the National Association of Securities Dealers' listing standards. These rules require that two members of our board of directors be independent by 90 days after our listing on The NASDAQ National Market, and that a majority of our board of directors be independent by the first anniversary of our listing on the NASDAQ National Market. As presently constituted, our board makeup complies with the 90 day requirement. We intend to comply with the first anniversary requirement applicable to the full board, as well as to the first anniversary requirement applicable to our board committees as described below. Our board of directors has determined that, two members of our board of directors, Mr. Plum and Mr. MacKenzie, will be considered independent under Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards.  Directors Whose Terms Expire in 2006—Class I Directors           Mark J. DeNino has served as one of our directors since October 1998 and is the chairman of our board. In 1994, Mr. DeNino joined TL Ventures, a national venture capital firm that invests in software, information technology infrastructure and services, communications, semiconductor and biotechnology industries, as a Managing Director. During his tenure, Mr. DeNino has been extensively involved in the creation, incubation, development and consolidation of a number of information technology and communications companies. He is also the co-founder of, and senior advisor to, EnerTech Capital, a venture capital firm specializing in investment opportunities emerging from the reshaping and convergence of the energy, utility and telecommunications industries. Mr. DeNino is on the board of directors of a number of TL portfolio companies. Mr. DeNino has a B.S. degree in Finance and Accounting from Boston College and an M.B.A. from the Harvard Graduate School of Business Administration.  56               David L. Jannetta is one of our co-founders and has served as our President and as one of our directors since inception. Prior to co-founding our company, he was a principal of The Jannetta Company, a consultant group and developer of government and private sector projects. He also served as Secretary of General Services for the Commonwealth of Pennsylvania with responsibilities in construction, central purchasing, real estate and maintenance programs. He currently serves on the board of directors of the Intelligent Transportation Society of America and is a member of the Congressional ITS Caucus Advisory Committee. He holds a B.S. in engineering from the U.S. Air Force Academy, an M.A.P. in Public Administration from Webster College, and an M.S. in Operations Management from the University of Arkansas.  Directors Whose Terms Expire in 2007—Class II Directors           John H. Josephson has served as one of our directors since September 2004. He has been employed since August 1987 by Allen & Company LLC, an investment bank, and its predecessor, presently as Managing Director. He is also a member of the board of directors of Sesac Holdings, Inc., an organization that licenses performance rights to copyrighted musical compositions to establishments such as cable and broadcast television networks and radio stations. He holds an A.B. in Economic History from Cornell University and an M.B.A. from the Harvard Graduate School of Business Administration.          Samuel A. Plum has served as one of our directors since September 2004. Since 1996, he has served as General Partner of SCP Private Equity Partners, a private equity fund manager. From 1989 to 1993, he served as the president and chief executive officer of Charterhouse, Inc. and Charterhouse North American Securities, Inc., the U.S. based investment banking and brokerage firms of Charterhouse PLC, a London based merchant banking firm. From 1973 to 1989, he served in various capacities, including managing director and partner, in, respectively, PaineWebber, Inc. and its predecessor firm, Blyth Eastman Dillon & Co. Inc. He is currently a member of the board of directors of Index Stock Imagery, Inc., a provider of visual imagery to businesses and consumers; Metallurg Holdings Inc., a holding company for Metallurg, Inc.; a leading international producer and seller of high quality metal alloys; Pentech Financial Services, Inc., an equipment financing company; and, Pac-West Telecomm, Inc., a telecommunications company. He holds a B.A. in American History from Harvard University and a M.B.A. from the Harvard Graduate School of Business Administration.  Directors Whose Terms Expire in 2008—Class III Directors           George MacKenzie has served as one of our directors since December 2005. Since January 2006, he has served as interim chief executive officer of American Water, a water resource company and subsidiary of RWE group, a multi utility company based in Germany. He served as interim chief executive officer of C&D Technologies, Inc., a New York Stock Exchange-listed producer and marketer of electrical power storage and conversion products, between March 2005 and July 2005. He also served as executive vice president and chief financial officer of Glatfelter, a New York Stock Exchange-listed producer and global supplier of specialty papers, between September 2001 and June 2002. He served in various capacities at Hercules, Inc., a global manufacturer of chemical specialties, between May 1979 and June 2001, including vice chairman and chief financial officer, the latter position which he held from 1995 to June 2001. He is currently a member of the board of directors of C&D Technologies; Safeguard Scientifics, Inc., a New York Stock Exchange-listed operating company of technology; Central Vermont Public Service Corp., a New York Stock Exchange-listed public utility and energy provider; and American Water. He holds a B.S. in Business-Finance and Economics from the University of Delaware and an M.B.A. from the University of Chicago.          Robert N. Verratti has served as our Chief Executive Officer and a director since October 2003. In 1998, Mr. Verratti joined TL Ventures, a national venture capital firm that invests in software, information technology infrastructure and services, communications, semiconductor and biotechnology industries where he was a Venture Partner from 1998 to July 2000 and Managing Director from  57       July 2000 to October 2003. He has served as Chief Executive Officer of National Media Corporation, at the time, a New York Stock Exchange-listed multi-media marketing company and a TL portfolio company; Total Care Systems, a group care living facilities provider; Great Western Cities, a land development subsidiary of Hunt International Resources; and Globe Ticket, a specialty printing company. He also serves on the boards of OE Waves, Inc., an oscillator technology company and eNom, Inc., a domain name registration company. He holds a B.S. in engineering from the United States Naval Academy and served as a nuclear-trained submarine officer in the U.S. Navy.      Information Concerning Executive Officers and Key Employees              Andrew Maunder has served as our Chief Financial Officer since April 2005. Prior to joining us, in January 2003, he co-founded Kayak Interactive Corporation, a publisher of mobile games and a spinout of Valaran Corporation, a New Jersey-based software company. Mr. Maunder served as Chief Executive Officer of Kayak Interactive Corporation from January 2003 to August 2004, and as Chief Financial Officer from September 2004 until March 2005. He served as Chief Executive Officer of Valaran Corporation from May 2000 to October 2003. From September 1994 to December 1999, Mr. Maunder served as President and Chief Executive Officer of Telesciences Inc., a New Jersey-based telecommunications software company. Mr. Maunder qualified as an accountant with the Chartered Institute of Management Accountants, studying at Thames Valley University, Slough, Bucks, England.          Christopher M. Rothey has served as our Chief Operating Officer since October 2003, previously serving as Product Marketing Director from May 2000 to September 2001, Vice President, Product Marketing from September 2001 to September 2002, and Senior Vice President, Strategy & Development from September 2002 to October 2003. Prior to joining us, Mr. Rothey served as a nuclear-trained submarine officer in the U.S. Navy. While a student at the University of Pennsylvania, Mr. Rothey and Michael D. Burns, another of our founders, designed a wireless traffic sensor system which evolved into the basis for our company. Mr. Rothey holds a B.S.E. in Finance from the Wharton School of the University of Pennsylvania and a B.S. in Electrical Engineering as well as a Masters in Electrical Engineering from the University of Pennsylvania.          Joseph A. Reed has served as our Chief Information Officer since January 2000 and is responsible for all of our information technology initiatives and operations and the deployment of our proprietary sensor network across the United States. He also is responsible for our traffic data gathering operations, which include radio and television studios, producers and talent. He brings us thirteen years of IT and operations experience. Prior to joining us, he was Principal Equivalent, Director of Internet Development at Towers Perrin, a global consulting firm and Senior Vice President, Electronic Brokerage at Reuters responsible for developing retail trading and information systems for large financial institutions. Mr. Reed holds a B.A. in Computer Science from Temple University.          Brian J. Sisko has served as our Chief Legal Officer, Senior Vice President and General Counsel since February 2006. Prior to joining us, Mr. Sisko was Chief Operating Officer of Warp Technology Holdings, Inc. a public holding company for enterprise software businesses, from February 2005. From February 2002 to March 2005, Mr. Sisko ran B/T Business and Technology, which served as an advisor and strategic management consultant to a variety of public and private companies, both small and large. From April 2000 to January 2002, he was Managing Director of Katalyst, LLC, a venture capital and operational advisory firm. Mr. Sisko also previously served as Senior Vice President—Corporate Development and General Counsel of National Media Corporation, at the time a New York Stock Exchange-listed multi-media marketing company. In addition, Mr. Sisko was a partner in the Corporate Finance/Mergers and Acquisitions practice group of the Philadelphia-based law firm, Klehr Harrison, Harvey Branzburg & Ellers. Mr. Sisko has also taught as an adjunct professor in the MBA program of the Fox School of Business at Temple University. He earned his Juris Doctorate from The Law School of the University of Pennsylvania and his B.S. from Bucknell University.  58               Peter Doyle has served as Senior Vice President, Media Affiliation, since March 2004. From February 1999 to February 2003 Mr. Doyle was President of Interep/Independents, an advertising sales and marketing company specializing in radio, the Internet and complementary media. From 1987 to 1998, he served as President of McGavren-Guild, the largest of the independent representative firms within Interep. He holds a B.A. in Political Science from Princeton University.          Peter Menninger has served as our Senior Vice President of Operations and Systems Architecture since January 2005 and is responsible for system design, network communications, broadcast engineering and daily operation of our production services. From March 2000 through January 2005, he was our Vice President of Operations and Systems Architecture. He brings us 17 years of systems operation and design experience. For the seven years prior to joining us, he was Vice President of Operations and System Architecture at Reuters Group Plc where he developed trading systems architectures for large financial institutions. Other previous experience includes the Philadelphia Stock Exchange, Unisys, CA Electronics, and XRT Inc. He holds a B.S. in computer information sciences from the University of Delaware.          Michael Nappi has served as our Senior Vice President of Business Development since September 2004. Prior to joining us, from November 2002 to January 2004, he was the Senior Vice President of Worldwide Sales & Business Development at Webraska, Inc., a worldwide provider of navigation solutions for wireless carriers and service providers. From May 1992 to February 2002, he was Vice President and General Manager of MapQuest.com, a worldwide provider of map and travel information. He holds both a B.S. in Biology and a B.A. in Geology from Kent State University.          William Powers joined us in 1999 and has served as Senior Vice President of Sales since October 2003. Prior to joining us, from 1997 to 1999, he served as an account executive with Westwood One, Inc., a provider of news and entertainment programs to radio stations, in its Shadow Traffic Boston office. He also served as an account executive with American Radio Sports from 1996 to 1997.          Brian Smyth has served as our Senior Vice President of Software Development since January 2005 and is responsible for all software development initiatives. From March 2000 through January 2005, he was our Vice President of Software Development. From April 1998 through March 2000, he was Vice President, Component Development Manager of Bank One, leading a development team for Bank One's credit card middleware systems. From October 1994 through April 1998, Mr. Smyth was Senior Project Lead at Reuters Group Plc where he led development for Internet trading applications for large financial institutions. Other previous experience includes GE Aerospace/Martin Marietta and International Business Machines. He holds a B.S. in computer science from Pennsylvania State University.  Committees of the Board of Directors           Our board of directors has established an audit committee, a compensation committee and a nominations committee as standing committees. Pursuant to our bylaws, our board of directors may from time to time establish other committees to facilitate the management of our business and operations.  Audit Committee and Audit Committee Financial Experts           Our audit committee currently consists of Mr. DeNino, Mr. MacKenzie (chairperson) and Mr. Plum. Our board of directors has determined that two members of our audit committee, Mr. Plum and Mr. MacKenzie, are "independent directors" as defined in Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards and SEC rules. All of the members of the audit committee must be independent by the first anniversary of our listing on The NASDAQ National Market. Each member of our audit committee is financially literate. In addition, Mr. MacKenzie and Mr. Plum serve as our audit committee "financial experts" within the meaning of Item 401(h) of Regulation S-K of the Securities Act. The board has determined that all of the members of our audit  59       committee have the financial sophistication required under The NASDAQ National Market rules. Our audit committee assists our board of directors in its oversight of the integrity of our financial statements and oversees the qualifications, independence and performance of our independent auditor. The audit committee has the sole direct responsibility for the selection, appointment, evaluation and retention of our independent auditor and for overseeing its work. All audit services and non-audit services to be provided to us by our independent auditor must be approved in advance by our audit committee. Ernst & Young LLP currently serves as our independent auditor. Our board of directors has adopted a written charter for the audit committee which is available on our website, http://investor.traffic.com/governance.cfm under "Corporate Governance—Charter Information."  Nominations Committee           Our board of directors has a nominations committee which consists of three members, Mr. DeNino (chairperson), Mr. Josephson and Mr. Plum. Our board of directors has determined that one member of our nominations committee, Mr. Plum, is independent under The NASDAQ National Market and SEC rules. All of the members of the nominations committee must be independent by the first anniversary of our listing on The NASDAQ National Market. Our nominations committee is responsible for soliciting, evaluating and recommending individuals for membership on our board of directors and overseeing evaluations of the board of directors, its members and committees of the board of directors. Our board of directors has adopted a written charter for the nominations committee which is available on our website, http://investor.traffic.com/governance.cfm under "Corporate Governance—Charter Information."  Compensation Committee Interlocks and Insider Participation           Our compensation committee currently consists of Mr. DeNino, Mr. MacKenzie and Mr. Plum (chairperson). Our board of directors has determined that two members of our compensation committee, Mr. MacKenzie and Mr. Plum, are independent under the National Association of Securities Dealers listing standards and SEC rules. All of the members of the nominations committee must be independent by the first anniversary of our listing on The NASDAQ National Market. Our compensation committee reviews and makes recommendations to our board of directors regarding the compensation and benefits of our executive officers and senior management, administers our stock incentive and employee stock purchase plans and reviews and makes recommendations to our board of directors with respect to incentive compensation and equity plans. Our board of directors has adopted a written charter for the compensation committee which is available on our website, http://investor.traffic.com/governance.cfm under "Corporate Governance—Charter Information."          Our compensation committee currently determines the compensation levels of our executive officers as described above. None of our executive officers has served as a director or member of the compensation committee, or other committee serving an equivalent function, of any entity of which an executive officer is expected to serve as a member of our compensation committee.  Compensation Committee Report   Compensation Governance           The Compensation Committee is responsible to the Board of Directors (the "Board") of Traffic.com, Inc. (the "Company") and to stockholders for approving compensation awarded to the Company's Chief Executive Officer and its other executive officers. The Compensation Committee administers the Company's 2005 Long-Term Incentive Plan, its 1999 Long-Term Incentive Plan and its 1999 Non-Employees' Stock Plan and authorizes all equity awards under these plans. The Compensation Committee operates under a written charter adopted by the Board in August 2005 in contemplation of the Company's initial public offering. Prior to the adoption of this charter, the Board took primary responsibility for developing the Company's compensation policy and executive compensation packages. The full text of the Compensation Committee charter can be viewed on the Company's website at  http://www.investor.traffic.com/governance.cfm. 60         Compensation Philosophy           The compensation arrangements established for the Company's executive officers are designed to attract, motivate and retain executives critical to the Company's long-term success and to the creation of stockholder value. The Company's philosophy is to encourage its key employees to focus on the achievement of annual and long-term performance goals that will enhance the Company's performance and stockholder value. We include a significant equity component in total compensation because we believe that equity-based compensation aligns the long-term interests of employees with those of our stockholders. The Company also strives to keep overall compensation packages competitive in the marketplace.          The Chief Executive Officer reviews annually the performance of the Company's executive officers and makes compensation recommendations to the Compensation Committee and the Board, based on his judgment of each executive officer's individual performance, the Company's performance and the compensation levels of non-executive employees. The Compensation Committee, and in the past the Board, reviews these recommendations independently and approves, with any modifications it considers appropriate, annual salaries and salary increases, equity compensation and the appropriateness of any bonus payments.          As a privately-held company until 2006, the Company's compensation packages for its executive officers have historically consisted primarily of base salary and long-term equity incentives, principally in the form of stock options. In 2004, the compensation package for the Company's Chief Executive Officer and each of the Named Executive Officers, as well as other executive officers of the Company, consisted of the following elements: (1) base salary, (2) long-term incentives, (3) other benefits, and (4) in certain cases, cash bonuses. More specific information about each of these elements follows.  Base Salary           The Compensation Committee seeks to set base salaries at levels that reflect the individual executive's responsibilities and job performance and that are competitive with those paid to senior executives with comparable qualifications, experience and responsibilities at companies in the same or comparable industries. The minimum base salaries of Messrs. Verratti, Jannetta, Reed, Rothey and Maunder were established in their employment agreements. Increases in base salary have been made consistent with overall increases in base salary for the Company's employees generally and to reflect increased responsibility and promotions. The Company competes with a large and diverse number of companies in its industry and comparable industries for executive talent. The Compensation Committee believes that setting base salaries competitively is necessary to attract and retain the executive talent required to lead the Company.  Long-Term Incentives           The Compensation Committee believes that long-term incentives in the form of stock options and restricted stock directly link the amounts earned by executive officers with the amount of appreciation realized by the Company's stockholders. The Compensation Committee considers long-term incentive grants as a means to attract and retain highly qualified executives and key personnel and has always included long-term incentives as a key component of the compensation package, consistent with practices throughout its industry. Long-term incentives are structured to encourage key employees to continue in the employ of the Company and to motivate performance that will meet the long-term expectations of stockholders. In determining the size of any equity award, the Compensation Committee considers the individual's management position, annual base salary, past performance, potential contribution to the Company and his or her then equity interest in the Company. Stock option grants are generally made to executive officers at the time that they join the Company and may also be granted at other times in connection with, for example, promotions or as special performance  61       awards. All stock option grants and restricted stock awards made to executive officers through December 31, 2005 have been made under the 1999 Long-Term Incentive Plan but future grants and awards will be made under the 2005 Long-Term Incentive Plan. The exercise price of each option granted in 2005 to employees, including executive officers, was equal to the fair market value of a share of common stock on the date of grant, as determined by the Board, and each such option expires ten years after the date of the grant. Each of these options vests over a four-year period. The Board has made one restricted stock award in the past, to the Company's Chief Executive Officer.  Other Benefits           Executive officers are eligible to participate in programs that are generally made available to all salaried employees, including medical, dental, life, disability and a 401(k) plan. The Company does not "match" employee contributions to its 401(k) plan.  Cash Bonuses           The Compensation Committee has not historically awarded material cash bonuses to executive officers. In 2005, the Board approved significant bonuses to two executive officers. In August 2005, the Board approved a $160,000 bonus to Robert Verratti, the Company's Chief Executive Officer, to cover any tax liability that Mr. Verratti may incur under Section 83(b) of the Internal Revenue Code with respect to his restricted stock award. In October 2005, the Board approved a bonus to Andrew Maunder, the Company's Chief Financial Officer, to address an expectation with respect to his stock option terms, payment of which is dependent on his continued employment with the Company. This bonus is payable in four equal installments of $82,000, the first of which was paid on December 31, 2005 and the balance of which will be payable on April 26, 2006, October 26, 2006 and April 26, 2007, but only if he remains employed by the Company on those dates.          In February 2006, the Board approved an aggregate of $185,000 in bonuses to certain executive officers of the Company, including a bonus of $60,000 to the Chief Executive Officer, in recognition of their accomplishments in 2005 and the completion of the Company's initial public offering in January 2006.  Chief Executive Officer Compensation           Mr. Verratti's employment as the Company's Chief Executive Officer is governed by an employment agreement entered into on October 1, 2004, under which his annual base salary was set at $300,000 and remained at this level in 2005. In accordance with his employment agreement, Mr. Verratti received a grant under the 1999 Long-Term Incentive Plan of 432,214 shares of common stock at a purchase price of $0.75 per share. One-half of these shares vested immediately on November 1, 2004 and the balance of these shares were scheduled to vest in 12 monthly installments. The remaining installments were accelerated in full by the Board in August 2005. The Board determined to accelerate vesting of these shares principally for tax reasons and paid Mr. Verratti a bonus of $160,000 to cover any tax liability under Section 83(b) of the Internal Revenue Code. In addition, in February 2006, Mr. Verratti was awarded a bonus of $60,000 in recognition of his significant contributions to the Company in 2005, with regard to key management hires, growth in the Company's commercial traffic data services business, implementation of the Company's Internet and wireless strategic plan, and his successful efforts to secure additional debt financing, complete a private placement, and initiate and complete an initial public offering. Mr. Verratti's base salary has been increased to $310,500 for 2006, consistent with the overall increase in base salary for employees.  62       Compliance with Internal Revenue Code Section 162(m)           Section 162(m) of the Internal Revenue Code generally disallows a tax deduction for compensation exceeding $1 million in any taxable year that is paid to a publicly-held corporation's chief executive officer or to any of its four other most highly compensated executive officers. However, qualifying performance-based compensation is not subject to the deduction limit if certain requirements are met. The Compensation Committee will review the potential effect of Section 162(m) periodically and will generally seek to structure the long-term incentive compensation granted to the Company's executive officers in a manner that is intended to avoid disallowance of deductions under Section 162(m). Nevertheless, there can be no assurance that the compensation attributable to awards granted will be treated as qualified performance-based compensation under Section 162(m). In addition, the Compensation Committee reserves the right to use its judgment to authorize compensation payments that may be subject to the limit when the Compensation Committee believes that such payments are appropriate and in the best interests of the Company and its stockholders, after taking into consideration changing business conditions and the performance of its employees.  Members of the Compensation Committee (as of date of adoption): Sam Plum (Chairman) Mark DeNino John H. Josephson Stock Price Performance Graph           Our common stock was not registered pursuant to Section 12 of the Exchange Act in 2005. We plan to furnish a stock performance graph in the proxy statement for our annual meeting in 2007.  Section 16(a) Beneficial Ownership Reporting Compliance           Our common stock became registered pursuant to Section 12 of the Exchange Act in January 2006. As a result of such registration, Section 16(a) of the Exchange Act requires our directors, executive officers and the holders of more than 10% of our common stock to file reports with the SEC. Such reports include initial reports of ownership of our common stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Executive officers, directors and 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file.          Since our directors, executive officers and the holders of more than 10% of our common stock did not become subject to Section 16(a) until January 2006, they were not required to file reports under Section 16(a) for the fiscal year ended December 31, 2005.  Code of Ethics           The Company has adopted a "code of ethics" as defined by applicable rules of the SEC and the NASDAQ Stock Market, which is applicable to all employees. This code is publicly available on the Company's website at http://investor.traffic.com/governance.cfm under the "Corporate Governance—Code of Ethics" captions. If the Company makes any amendments to the code of ethics for its senior officers, financial and reporting persons or directors (other than technical, administrative, or other non-substantive amendments), or grants any waivers, including implicit waivers, from a provision of this code to such persons, the Company will disclose the nature of the amendment or waiver, its effective date and to whom it applies on its website or in a report on Form 8-K filed with the SEC.  63           Item 11.    Director and Executive Compensation.      Director Compensation Arrangement           Our directors historically have not received cash fees as compensation for their services, but non-employee directors have been eligible to receive non-statutory stock options under our 1999 Non-Employees' Stock Plan. On December 16, 2005, our board of directors modified the terms of options granted on November 15, 2004 to each of John H. Josephson and Samuel A. Plum to acquire 16,666 shares of Common Stock at $0.75 a share under the 1999 Non-Employees' Stock Plan. Pursuant to this modification, the 12,500 unvested shares under each of these options became exercisable in full.          In October 2005, our board of directors approved a program under our 2005 Plan pursuant to which, starting on January 24, 2006, each non-employee directors receives an annual retainer of $25,000. In addition, each committee chairperson receives an annual retainer of $3,000 and each committee member (other than the chairperson) receives an annual retainer of $2,000. Upon completion of our public offering, each non-employee director at the time was granted an option to purchase 8,500 shares of our common stock at an exercise price equal to the fair market value at the time of the grant. Effective upon Mr. Vadnais' appointment to the Board on April 1, 2006, he will be issued an option to purchase 8,500 shares of our common stock at an exercise price equal to the fair market value at that date. Half of these options vested or will vest immediately upon grant and the remainder will vest on the first anniversary of grant. In each subsequent year, non-employee directors will be granted an option to purchase 3,500 shares of our common stock at an exercise price equal to the fair market value at the time of the grant. These options will vest annually over a one-year period. We will reimburse all of our directors for reasonable travel, lodging and other expenses related to their service on our board of directors.  Executive Compensation           The following table shows all compensation provided for 2003, 2004 and 2005 to our chief executive officer and our other most highly compensated executive officers, whose aggregate salary, bonus and other compensation exceeded $100,000 during the fiscal year ended December 31, 2005. We refer to them as "named executive officers."  64       SUMMARY COMPENSATION TABLE                          Long-Term Compensation           Annual Compensation           Name and Principal Position(5)    Other Annual Compensation   Restricted Stock Award   Securities Underlying Options   LTIP Payouts ($)   All Other Compensation     Year   Salary   Bonus   Robert N. Verratti(1) Chief Executive Officer   2003 2004 2005   $$$ 65,444 300,000 300,000 (1) $ — — 261,009 (5) — — —   $ — 38,899 — (3) — — 83,333   — — —   — — —   David L. Jannetta President    2003 2004 2005   $$$  185,000 185,000 200,000   $$$  16,200 16,200 2,700    — — —      — — —    390,999 533 —    — — —    — — —   Joseph A. Reed Chief Information Officer    2003 2004 2005   $$$  185,000 185,000 200,000   $  — — 40,000 (5)  — — —      — — —    59,666 — 12,666    — — —    — — —   Christopher M. Rothey Chief Operating Officer    2003 2004 2005   $$$  145,000 181,666 200,000 (2) $  — — 45,000 (5)  — — —      — — —    58,666 66,666 5,183    — — —    — — —   Andrew Maunder(4) Chief Financial Officer    2005   $  137,179 (4) $  122,000 (5)  —      —    58,333    —    —      (1)Mr. Verratti joined us in October 2003. (2)Mr. Rothey's base salary was increased to $185,000 on February 1, 2004, following his promotion to Chief Operating Officer in October 2003. (3)On August 23, 2005, the board of directors approved the immediate accelerated vesting of all unvested shares of Mr. Verratti's restricted stock. (4)Andrew Maunder joined us as our Chief Financial Officer on April 25, 2005. His base salary in 2005 was $200,000. (5)Includes cash bonuses approved by the compensation committee of the board, and paid, in February, 2006 in the following amounts: Mr. Verratti—$60,000, Mr. Reed—$40,000, Mr. Rothey—$45,000, and Mr. Maunder—$40,000  Option Grants in Last Fiscal Year           The following table contains information concerning stock options granted during the fiscal year ended December 31, 2005 to the named executive officers.                         Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2)           Percent of Total Options Granted to Employees in Fiscal Year 2005           Name    No. of Securities Underlying Options Granted(1)   Per Share Exercise Price   Expiration Date     5%   10%                       (in thousands)    Robert N. Verratti   83,333   42.5 % $ 4.92   2015   $ 1,141   $ 1,948   Joseph A. Reed   4,333   2.2 % $ 4.92   2015   $ 56   $ 96   Joseph A. Reed   8333   4.2 % $ .75   2015   $ 142   $ 220   Christopher M. Rothey   5,183   2.6 % $ 4.92   2015   $ 71   $ 121   Andrew Maunder   58,333   29.7 % $ 4.92   2015   $ 799   $ 1,364      (1)The options vest 25% after one year and 6.25% each fiscal quarter thereafter, and will be fully vested four years after the date of grant.  65       (2)The potential realizable value is calculated based on the term of the option at the time of grant. Assumed rates of stock price appreciation of 5% and 10% are prescribed by rules of the Securities and Exchange Commission and do not represent our prediction of our stock price performance. There was no public trading market for our common stock as of December 31, 2005. Accordingly, as permitted by the rules of the Securities and Exchange Commission we have calculated the potential realizable values at 5% and 10% appreciation are calculated by assuming that the initial public offering price of $12.00 appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price.   Aggregated Option Exercises During the Year Ended December 31, 2005 and Year-End Option Values           The following table contains information with respect to options exercised during 2005 and the value of unexercised options held as of December 31, 2005 for the named executive officers.                         Value of Unexercised In-the-Money Options at December 31, 2005(1)               Number of Securities Underlying Unexercised Options at December 31, 2005   Name    Shares Acquired on Exercise   Value Realized     Exercisable   Unexercisable   Exercisable   Unexercisable                       (in thousands)    Robert N. Verratti   —     —   —   83,333   $ —   $ 590   David L. Jannetta   —     —   310,587   165,112   $ 3,173   $ 1,799   Joseph A. Reed   6,666   $ 72   85,564   37,103   $ 841   $ 384   Christopher M. Rothey   —     —   74,040   66,474   $ 702   $ 689   Andrew Maunder   —     —   —   58,333   $ —   $ 413      (1)There was no public trading market for our common stock as of December 31, 2005. Accordingly, as permitted by the rules of the Securities and Exchange Commission, we have calculated the value of unexercised in-the-money options at fiscal year-end using the initial public offering price of $12.00.  Executive Employment Agreements           We have entered into employment agreements with our executive officers, the terms of which are summarized below.  Chief Executive Officer           We entered into an employment agreement with Robert N. Verratti, our Chief Executive Officer, on October 1, 2004, pursuant to which he received an initial base salary of $300,000. Mr. Verratti currently receives a base salary of $310,500. Under the agreement, Mr. Verratti also received a grant of 432,214 shares of common stock at a purchase price of $0.75 per share. Of these shares, 324,160 (or 75%) were fully vested immediately, and the remaining shares vest in 12 monthly installments beginning November 1, 2004. On August 23, 2005, the board of directors approved the immediate accelerated vesting of all remaining unvested shares of his restricted stock. If within four years from October 16, 2003, we (i) merge or consolidate with another company or (ii) issue or sell our securities or the securities of another entity that we spin off, or from which we split, and in which Mr. Verratti receives an equity interest, Mr. Verratti will be entitled to a bonus of 3% of the gross proceeds from such transaction less the value of, or consideration previously received from the sale of, his restricted stock or other equity interest received as a direct result of his ownership of the restricted stock. This bonus is capped at a fixed amount per year and will be forfeited if Mr. Verratti is terminated for cause. If Mr. Verratti is terminated without cause or voluntarily terminates employment with us, he will be  66       entitled to this bonus. On August 23, 2005, the board of directors also approved paying a bonus of $160,000 to Mr. Verratti, to cover any tax liability that Mr. Verratti may incur under Section 83(b) of the Internal Revenue Code with respect to his restricted stock. On February 16, 2006 the compensation committee of the board of directors approved a cash bonus in the amount of $60,000 payable immediately to Mr. Verratti related to his performance on behalf of the Company in 2005.  President           We entered into an employment agreement with David L. Jannetta, our President, as of October 7, 1999, pursuant to which Mr. Jannetta receives an annual base salary as determined by our board of directors. Mr. Jannetta's annual base salary is currently $207,000. If he is terminated without cause, Mr. Jannetta will be entitled to all compensation earned through the date of termination, and payments at the rate of his then base salary for a period of six months after termination. Mr. Jannetta will receive no compensation if he is terminated for cause or because of his voluntary termination. If Mr. Jannetta terminates his employment, he is prohibited from managing, advising or owning more than 1% of stock in a company that derives more than 10% of its business from collecting, managing and distributing real-time and historical traffic and logistics data for a period of two years after termination.  Chief Operating Officer           We entered into an employment letter agreement with Christopher M. Rothey in March 9, 2000 under which he became our Product Marketing Director at a base salary of $90,000. Mr. Rothey was later promoted to serve as our Chief Operating Officer and currently receives an annual base salary of $207,000. As part of the letter agreement, Mr. Rothey received a stock option to purchase 6,666 shares of our common stock at an exercise price of $3.99 per share, vesting in 16 equal quarterly installments over a four-year period. On February 16, 2006 the compensation committee of the board of directors approved a cash bonus in the amount of $45,000 payable immediately to Mr. Rothey related to his performance on behalf of the Company in 2005.  Chief Financial Officer           We entered into an employment letter agreement with Andrew P. Maunder, our Chief Financial Officer, in April 2005, pursuant to which Mr. Maunder receives an initial base salary of $200,000. Mr. Maunder currently receives a base salary of $207,000. As part of his employment agreement, Mr. Maunder received an option to purchase 58,333 shares of our common stock at an exercise price of $0.75 per share, with 25% vesting at the end of the first year, and the remainder vesting in 12 equal quarterly installments over a three-year period from April 2006. If there is a change of control, as defined, of our company on or before October 25, 2005, Mr. Maunder's stock option will vest 50%; however, this option will vest 100% if his employment is terminated, his compensation is reduced, or his duties or title is substantially reduced following such transaction. In October 2005, the Board approved a bonus to Mr. Maunder to address an expectation with respect to his stock option terms, payment of which is dependent on his continued employment with the Company. This bonus is payable in four equal installments of $82,000, the first of which was paid on December 31, 2005 and the balance of which will be payable on April 26, 2006, October 26, 2006 and April 26, 2007, but only if he remains employed by the Company on those dates. On February 16, 2006 the compensation committee of the board of directors approved a cash bonus in the amount of $40,000 payable immediately to Mr. Maunder related to his performance on behalf of the Company in 2005.  Chief Information Officer           We entered into an employment letter agreement with Joseph A. Reed, our Chief Information Officer as of January 24, 2000. Mr. Reed currently receives an annual base salary of $207,000. As part  67       of this agreement, Mr. Reed received an option to purchase 44,001 shares of our common stock at an exercise price of $1.50 per share, vesting in 16 equal quarterly installments over a four-year period. On February 16, 2006 the compensation committee of the board of directors approved a cash bonus in the amount of $40,000 payable immediately to Mr. Reed related to his performance on behalf of the Company in 2005.  Chief Legal Officer           In February, 2006, we entered into an employment letter with Brian J. Sisko, concerning his hire as the Company's Chief Legal Officer, Senior Vice President and General Counsel, pursuant to which Mr. Sisko receives an annual base salary of $200,000. As part of this agreement, Mr. Sisko received an option to purchase 58,333 shares of our common stock at an exercise price of $12.13 per share, the closing price of our common stock on February 16, 2006, with 25% vesting at the end of the first year of his employment, and the remainder vesting in 12 equal quarterly installments over the following three-year period.      Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.              Other than as specifically detailed therein, the following table sets forth information, as of March 22, 2006, with respect to the beneficial ownership of our common stock:    •each person who is known by us to beneficially own more than 5% of our common stock; •each of our directors and executive officers; and •all of our directors and executive officers as a group.          The following table is based on 20,335,882 shares of our common stock outstanding as of March 22, 2006. The amounts and percentages of our common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes the power to vote or to direct the voting of such security, or "investment power," which includes the power to dispose of or to direct the disposition of such security. Beneficial ownership includes shares of common stock issuable upon options and warrants exercisable within 60 days of March 31, 2006. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities as to which such person has an economic interest.         Shares Beneficially Owned     Executive Officers and Directors(1)        Number   Percent     Robert N. Verratti(2)   417,854   2.1 %   David L. Jannetta(3)   1,800,779   8.6 %   Christopher M. Rothey(4)   1,107,463   5.4 %   Andrew Maunder(5)   14,583   *     Joseph A. Reed(6)   106,439   *     Mark J. DeNino(7)   7,735,653   36.7 %   John H. Josephson(8)   20,916   *     George MacKenzie(9)   4,250   *     Samuel A. Plum(10)   20,916   *     Brian J. Sisko   0   *     Directors and executive officers as a group (10 persons)(11)   10,212,762   46.2 %   5% Stockholders(1)             Entities affiliated with TL Ventures(12)   7,614,321   36.2 %   Entities affiliated with Fred Alger Management, Inc.(13)   1,398,000   6.9 %      *Less than 1%.  68       (1)Unless otherwise indicated, the address of each person named in the table below is c/o Traffic.com, Inc., 851 Duportail Road, Wayne, PA 19087. Information on beneficial ownership of 5% or more of our common stock is based on Forms 3 and 4 and a Schedule 13G filed with the SEC, as well as on our own internal records. To our knowledge, there are no additional beneficial owners of 5% or more of our common stock. (2)Includes 397,021 shares of common stock and 20,833 shares of common stock issuable on the exercise of vested options owned by Mr. Verratti. (3)Includes 367,917 shares of common stock held by Mr. Jannetta, 6,664 shares of common stock held by Mr. Jannetta's family, 50,580 shares of common stock held in trust for the Jannetta children and 359,527 shares issuable on the exercise of vested options owned by Mr. Jannetta; 559,743 shares of common stock and 147,132 shares of common stock issuable on the exercise of a warrant held by Convergence Capital, L.P.; and 309,216 shares of common stock held by Convergence Capital II, L.P. According to information provided by Convergence Capital, L.P. and Convergence Capital II, L.P., Mr. Jannetta could be deemed to have shared voting and dispositive power with respect to the shares of our common stock held by Convergence Capital, L.P. and Convergence Capital II, L.P.; however he disclaims beneficial ownership except to the extent of his indirect pecuniary interest therein. (4)Includes 1,666 shares of common stock and 89,706 shares issuable on the exercise of options owned by Mr. Rothey; 559,743 shares of common stock and 147,132 shares of common stock issuable on the exercise of a warrant held by Convergence Capital, L.P.; and 309,216 shares of common stock held by Convergence Capital II, L.P. According to information provided to be granted to by Convergence Capital, L.P. and Convergence Capital II, L.P., Mr. Rothey could be deemed to have shared voting and dispositive power of Convergence Capital, L.P. and Convergence Capital II, L.P.; however he disclaims beneficial ownership except to the extent of his indirect pecuniary interest therein. (5)Includes 14,583 shares of common stock issuable on the exercise of vested options. (6)Includes 11,333 shares of common stock and 95,106 shares issuable on the exercise of vested options. (7)Based on a Form 3 filed with the SEC on January 25, 2006 and a Form 4 filed with the SEC on February 1, 2006 (the "DeNino Forms"), by Mr. DeNino, TL Ventures III L.P., TL Ventures III Offshore L.P., TL Ventures III Interfund L.P., TL Ventures IV L.P. and TL Ventures IV Interfund L.P, as well as on our own internal records. According to the DeNino Forms, Mr. DeNino is the owner of record of 117,082 shares of common stock and 4,250 shares of common stock issuable on the exercise of options; TL Ventures III L.P. is the owner of record of 1,266,480 shares of common stock and 210,528 shares of common stock issuable on the exercise of warrants; TL Ventures III Offshore L.P. is the owner of record of 265,102 shares of common stock and 44,067 shares of common stock issuable on the exercise of warrants; TL Ventures III Interfund L.P. is the owner of record of 41,353 shares of common stock and 6,873 shares of common stock issuable on the exercise of warrants; TL Ventures IV L.P. is the owner of record of 5,202,762 shares of common stock and 428,354 shares of common stock issuable on the exercise of warrants; and TL Ventures IV Interfund L.P. is the owner of record of 137,484 shares of common stock and 11,318 shares of common stock issuable on the exercise of warrants. According to the DeNino Forms, Mr. DeNino may be deemed with the other members or stockholders of the ultimate respective general partners of the funds to have shared voting and dispositive power over the shares of stock held by TL Ventures; however, he disclaims beneficial ownership of all shares except to the extent of his indirect pecuniary interest therein.  69         (8)Includes 20,916 shares of common stock issuable on the exercise of vested options. (9)Includes 4,250 shares of common stock issuable on the exercise of vested options. (10)Includes 20,916 shares of common stock issuable on the exercise of vested options. (11)See notes 1 through 11 above. (12)Based on a Form 3 filed with the SEC on January 25, 2006 and a Form 4 filed with the SEC on February 1, 2006 (the "TL Forms"), by TL Ventures III L.P., TL Ventures III Offshore L.P., TL Ventures III Interfund L.P., TL Ventures IV L.P. and TL Ventures IV Interfund L.P., as well as on our own internal records According to the TL Forms, TL Ventures III L.P. is the owner of record of 1,266,480 shares of common stock and 210,528 shares of common stock issuable on the exercise of warrants; TL Ventures III Offshore L.P. is the owner of record of 265,102 shares of common stock and 44,067 shares of common stock issuable on the exercise of warrants; TL Ventures III Interfund L.P. is the owner of record of 41,353 shares of common stock and 6,873 shares of common stock issuable on the exercise of warrants; TL Ventures IV L.P. is the owner of record of 5,202,762 shares of common stock and 428,354 shares of common stock issuable on the exercise of warrants; and TL Ventures IV Interfund L.P. is the owner of record of 137,484 shares of common stock and 11,318 shares of common stock issuable on the exercise of warrants.   According to the TL Forms, TL Ventures III Interfund L.P. and TL Ventures III L.P., TL Ventures III Manager LLC is a General Partner of TL Ventures III General Partner L.P., the General Partner of TL Ventures III Interfund L.P., and TL Ventures Management III L.P., the General Partner of TL Ventures III L.P. TL Ventures III Manager LLC's members are Robert E. Keith, Jr., Gary J. Anderson, Mark J. DeNino and Christopher Moller and may be deemed to have shared voting and dispositive power over the shares held by those funds.  According to the TL Forms, TL Ventures III Offshore L.P., TL Ventures III Offshore Ltd. is a General Partner of TL Ventures III Offshore Partners L.P., the General Partner of TL Ventures III Offshore L.P.. TL Ventures III Offshore Ltd.'s stockholders are Robert E. Keith, Jr., Gary J. Anderson, Mark J. DeNino and Christopher Moller and may be deemed to have shared voting and dispositive power over the shares held by that fund.  TL Ventures III Manager LLC, TL Ventures III Offshore Ltd. and Mark J. DeNino disclaim beneficial ownership of all shares except to the extent of any indirect pecuniary interest therein.  According to the TL Forms, TL Ventures IV Interfund L.P. and TL Ventures IV L.P., TL Ventures IV LLC is a General Partner of TL Ventures IV Interfund L.P., and TL Ventures Management IV L.P., the General Partner of TL Ventures IV L.P. TL Ventures IV LLC's members are Robert E. Keith, Jr., Gary J. Anderson, Mark J. DeNino and Christopher Moller and may be deemed to have shared voting and dispositive power over the shares held by those funds.  TL Ventures IV LLC and Mark J. DeNino disclaim beneficial ownership of all shares except to the extent of any indirect pecuniary interest therein.    (13)Based on a Schedule 13G filed with the SEC on February 10, 2006 by Fred Alger Management, Inc. and Fred M. Alger III ("Alger Form"). According to the Alger Form, Fred Alger Management and Fred M. Alger III own 1,398,000 shares of common stock over which they have sole voting and dispositive power.  70      Item 13.    Certain Relationships and Related Transactions.           In 2005, we engaged in the following transactions with our directors and officers and holders of more than 5% of our voting securities and affiliates of our directors, officers and 5% stockholders:  Indebtedness of Management           On October 1, 2004, as part of an executive loan program then in effect to enable officers to purchase our shares, we made a loan of $324,161 to our chief executive officer, Robert N. Verratti, to purchase 432,214 shares of our common stock. This loan accrued interest at a rate of 4% per annum. Under that program, we also made several loans to our president, David L. Jannetta. On December 31, 2000, we made a loan to Mr. Jannetta of $31,250 to exercise options to purchase 41,666 shares of our common stock; on January 1, 2001, we made a loan of $16,625 to Mr. Jannetta to exercise options to purchase 4,166 shares of our common stock; and on April 16, 2001, we made a loan of $93,484 to Mr. Jannetta to assist with a federal income tax obligation incurred in connection with the exercise of options. All of these loans have five-year terms. These loans accrued interest at the mid-term borrowing rate prescribed by the Internal Revenue Service, compounded annually. The aggregate outstanding amount (principal and interest) of each of Mr. Jannetta's loans is $37,715, $20,061 and $111,003, respectively, as of September 30, 2005, and a total of $170,586 (principal and interest) as of December 31, 2005. Mr. Verratti's loan was repaid in full, together with accrued interest thereon, on August 29, 2005. Our executive loan program was terminated as of August 31, 2005 such that no future loans will be issued.  Transactions with 5% or Greater Stockholders           On or before August 30 2005, we obtained irrevocable, binding commitments from existing stockholders to purchase 5,042,090 shares of our Series F convertible stock at $3.00 per share for an aggregate price of $15.1 million, which we refer to as the Series F financing. The Series F financing closed in September 2005. Purchasers of our Series F convertible preferred stock included Mark DeNino, David L. Jannetta and various TL Ventures entities.          On October 28, 2005, we entered into a settlement agreement with Internet Capital Group, Inc., ICG Holdings, Inc. and related entities, or ICG, and various TL Ventures entities, with respect to pending litigation. Under this agreement, in exchange for mutual releases and agreement to dismiss the litigation, we issued to ICG 300,562 shares of our common stock and agreed to permit ICG to grant to the underwriters in our recently completed initial public offering the right to purchase up to 66,666 shares of our common stock owned by ICG, by February 24, 2006, to cover any over-allotments. Given that TL Ventures, through its affiliates entities, constitutes our largest investor and was the lead investor in the Series E convertible preferred stock financing, various TL Ventures entities were made parties to the settlement agreement solely for purposes of obtaining mutual releases with ICG.          On November 17, 2005, we, Santa Fe Technologies, Inc. and TL Ventures L.P. entered into a settlement agreement with respect to our litigation. Under this agreement, we and TL Ventures L.P. agreed to pay to SFT an aggregate of $14.25 million in settlement of the litigation, one-half to be paid within 30 days of the date of the settlement agreement and the other half to be paid within 60 days of the date of the settlement agreement. Upon receipt of the full settlement amount, SFT agreed to execute a general release of us and TL Ventures L.P., and our respective officers, directors, agents, employees and affiliates, and to dismiss the litigation. Also on November 17, 2005, we entered into an agreement with TL Ventures L.P. specifying that each of us will pay one-half of the settlement amount, or $7.125 million each. TL Ventures L.P. made the first settlement payment to SFT in December, 2005 and we made the second payment in January, 2006.  71       Investor Rights Agreement           We have entered into a Fourth Amended and Restated Investors Rights Agreement with the purchasers of our outstanding preferred stock and certain individuals, including Mr. DeNino and Mr. Jannetta. Certain of our directors, including entities with which they are affiliated, executive officers and holders of our capital stock are parties to this agreement. Stockholders who are a party to this agreement are provided certain rights to demand registration of shares of common stock and to participate in a registration of our common stock that we may decide to do, from time to time. These registration rights survived our initial public offering and will terminate as to any holder at the earlier of such time as all of such holders' securities can be sold immediately may be sold immediately under Rule 144 without regard to any volume limitations thereunder and the five-year anniversary of our initial public offering.  Transactions with Executive Officers           On August 23, 2005, the board of directors approved paying a bonus of $160,000 to Robert N. Verratti, our Chief Executive Officer, to cover any tax liability that Mr. Verratti may incur under Section 83(b) of the Internal Revenue Code with respect to his restricted stock.          On October 17, 2005, the board of directors approved paying a bonus to Andrew Maunder, our Chief Financial Officer, based on his tenure with us consisting of a payment of $82,000 on December 31, 2005 and each of the following three dates if he is still employed by us on those dates: (i) April 25, 2006; (ii) October 25, 2006; and (iii) April 25, 2007.          On February 16, 2006, the Compensation Committee of the board of directors approved paying bonuses in the following amounts to certain of the Company's executive officers for their performance on behalf of the Company in 2005: Mr. Verratti—$60,000, Mr. Rothey—$45,000, Mr. Maunder—$40,000, and Mr. Reed—$40,000          On March 22, 2006, the board of directors approved a retainer agreement between the Company and Allen & Company, LLC. (Allen). This retainer agreement updates and replaces an agreement previously in place between the Company and Allen covering similar services. Pursuant to the new agreement, Allen will act as exclusive financial advisor to the Company. This retainer agreement provides that Allen shall act on behalf of the Company if and when situations may arise where the Company has the opportunity to become involved in discussions regarding potential acquisitions of other companies, potential mergers or acquisitions and/or potential sales of or by the Company. For their services under this retainer arrangement, Allen would receive fees equal to 2% of 1) the value of the consideration received by the Company and/or its shareholders in any such transaction(s) and/or 2) the value of the consideration paid by the Company in any such transaction(s) where Allen's services are utilized. No fees are payable under this retainer unless a transaction or transactions occur, and then only if and when consideration is actually received or paid. Such retainer agreement also provides for reimbursement of expenses related to the services to be provided; and standard indemnification of Allen by the Company in the event of certain claims made against Allen in connection with their services. The retainer agreement is for an initial term of twelve months, subject to extension pursuant to mutual agreement by the parties. John Josephson, a member of the board of directors, is a managing director of Allen.  72
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   55
Item 9B.   Other Information   55
Information Concerning Executive Officers and Key Employees
PART IV
Item 13.   Certain Relationships and Related Transactions   71
Type of Fee    2004   2005   Audit Fees(1)   $ 75,000   $ 1,550,000   Audit-Related Fees     3,000     0   Tax Fees(2)     30,000     35,000   All Other Fees     —     0             Total Fees for Services Provided   $ 108,000   $ 1,585,000      (1)Audit fees represent fees for professional services rendered for the audit of our financial statements, review of interim financial statements and services normally provided by the independent auditor in connection with regulatory filings, including our Form S-1 filing for our initial public offering. (2)Tax fees are for tax compliance.   Pre-approval Policies and Procedures           Our Audit Committee Charter provides that the Audit Committee shall pre-approve all services to be provided to the Company by E&Y.  73             PART IV          Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.      (a)    The following documents are being filed as part of this report:     (1)The following financial statements of the Company and the Report of Independent Registered Public Accounting Firm are included in Part II, Item 8 of this Annual Report on Form 10-K:     Report of Ernst & Young LLP, Independent Registered Public Accounting Firm  Consolidated Balance Sheets as of December 31, 2005 and 2004  Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003  Consolidated Statements of Changes in Stockholders' Equity / (Deficit) for the years ended December 31, 2005, 2004 and 2003  Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003  Notes to Consolidated Financial Statements    (c)    Exhibits.    The following Exhibits are incorporated herein by reference or are filed with this Annual Report on Form 10-K as indicated below.      Exhibit Number    Description   3.2   Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on January 20, 2006.    3.4    Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on January 20, 2006.    4.1    Specimen Certificate evidencing shares of common stock. Incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    4.2    Warrant to purchase 116,666 shares of common stock, $0.01 par value per share, dated April 22, 2005, issued by the Registrant to National Electric Benefit Fund. Incorporated herein by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.3    Warrant to purchase 193,099 shares of common stock, $0.01 par value per share, dated April 22, 2005, issued by the Registrant to TL Ventures IV L.P. Incorporated herein by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.4    Warrant to purchase 33,333 shares of Series E Preferred stock, $0.01 par value per share, dated December 7, 2003, issued by the Registrant to Comerica Bank. Incorporated herein by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.            74          4.5    Warrant to purchase 525 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III Interfund L.P. Incorporated herein by reference to Exhibit 4.5 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.6    Warrant to purchase 6,348 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III Interfund L.P. Incorporated herein by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.7    Warrant to purchase 3,370 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III Offshore L.P. Incorporated herein by reference to Exhibit 4.7 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.8    Warrant to purchase 40,697 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III Offshore L.P. Incorporated herein by reference to Exhibit 4.8 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.9    Warrant to purchase 194,425 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III L.P. Incorporated herein by reference to Exhibit 4.9 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.10    Warrant to purchase 16,103 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III L.P. Incorporated herein by reference to Exhibit 4.10 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.11    Warrant to purchase 235,255 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures IV L.P. Incorporated herein by reference to Exhibit 4.11 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.12    Warrant to purchase 147,132 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to Convergence Capital, L.P. Incorporated herein by reference to Exhibit 4.12 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.13    Warrant to purchase 6,216 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures IV Interfund L.P. Incorporated herein by reference to Exhibit 4.13 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.14    Warrant to purchase 7,333 shares of common stock, $0.01 par value per share, dated July 31, 2003, issued by the Registrant to T. Williams Consulting, Inc. Incorporated herein by reference to Exhibit 4.14 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.15    Warrant to purchase 78,737 shares of common stock, $0.01 par value per share, dated May 30, 2003, issued by the Registrant to ICG Holdings, Inc. Incorporated herein by reference to Exhibit 4.18 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.             75          4.16    Warrant to purchase 25,000 shares of Series E Preferred stock, $0.01 par value per share, dated July 8, 2003, issued by the Registrant to Comerica Bank. Incorporated herein by reference to Exhibit 4.19 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.17    Warrant to purchase 31,000 shares of common stock, $0.01 par value per share, dated July 31, 2003, issued by the Registrant to Peachtree Creek Business Group, Inc. Incorporated herein by reference to Exhibit 4.20 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.18    Warrant to purchase 66,666 shares of common stock, $0.01 par value per share, dated August 24, 2005, issued by the Registrant to PA Early Stage Partners, L.P. Incorporated herein by reference to Exhibit 4.21.1 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    4.19    Warrant to purchase 17,565 shares of common stock, $0.01 par value per share, dated April 22, 2005, issued by the Registrant to Safeguard Delaware, Inc. Incorporated herein by reference to Exhibit 4.23 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.20    Warrant to purchase 10,000 shares of common stock, $0.01 par value per share, dated January 26, 2001, issued by the Registrant to PNC Bank, National Association. Incorporated herein by reference to Exhibit 4.24 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.21    Warrant to purchase 41,666 shares of common stock, $0.01 par value per share, dated April 17, 2002, issued by the Registrant to Potomac Technology Development, LLC. Incorporated herein by reference to Exhibit 4.25 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.22    Warrant to purchase 5,102 shares of common stock, $0.01 par value per share, dated April 22, 2005, issued by the Registrant to TL Ventures IV Interfund L.P. Incorporated herein by reference to Exhibit 4.26 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.23    Contingent Warrant to purchase 33,333 shares of common stock, $0.01 par value per share, dated March 16, 2001, issued by the Registrant to Hearst Communications, Inc. Incorporated herein by reference to Exhibit 4.27 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.24    Fourth Amended and Restated Investor Rights Agreement dated August 30, 2005, as amended, among the Registrant and the parties listed therein. Incorporated herein by reference to Exhibit 4.28 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    4.25    Amendment to the Fourth Amended and Restated Investor Rights Agreement, among the Registrant and the parties listed therein. Incorporated herein by reference to Exhibit 4.28.1 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on January 5, 2005.    10.1**    Amended and Restated 1999 Long-Term Incentive Plan, dated as of May 11, 2000. Incorporated herein by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.            76          10.2**    Amended and Restated 1999 Non-Employees' Stock Plan, dated as of May 11, 2000. Incorporated herein by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.3**    2005 Long-Term Incentive Plan. Incorporated herein by reference to Exhibit 10.2.1 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on January 24, 2006.    10.4    Lease Agreement dated June 14, 2000 between FV Office Partners II, L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.5    First Amendment to Lease Agreement dated April 30, 2001 between FV Office Partners II, L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.6    Second Amendment to Lease Agreement dated November 15, 2004 between FV Office Partners II, L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.7    Third Amendment to Lease Agreement dated May 26, 2005 between FV Office Partners II, L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.8    Subcontractor agreement dated June 1, 1999 between SIGNAL Corporation and the Registrant. Incorporated herein by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.9    Modification to Subcontract dated June 20, 2002, between Signal Solutions, Inc. and the Registrant. Incorporated herein by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    10.10    Modification to Subcontract dated August 5, 2005, between Signal Solutions, Inc. and the Registrant. Incorporated herein by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    10.11**    Employment Agreement dated October 1, 2004, between Robert Verratti and the Registrant. Incorporated herein by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.12**    Employment Agreement dated October 7, 1999 between David L. Jannetta and the Registrant. Incorporated herein by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.13**    Employment Letter Agreement dated March 9, 2000 between Christopher M. Rothey and the Registrant. Incorporated herein by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.14**    Employment Letter Agreement dated April 20, 2005 between Andrew Maunder and the Registrant. Incorporated herein by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005    10.15**    Employment Letter Agreement dated December 1, 1999 between Joseph A. Reed and the Registrant. Incorporated herein by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.16**    Employment Letter Agreement dated February 16, 2006 between Brian Sisko and the Registrant. Incorporated herein by reference to Exhibit 10.1 of Registrant's Current Report of Form 8-K, filed on February 23, 2006.             77          10.17**    Employment Letter Agreement dated June 14, 2002 between Robert Pollan and the Registrant. Incorporated herein by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.18**    Employment Letter Agreement between Douglas Alexander and the Registrant. Incorporated herein by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    10.19    Guaranty Agreement dated April 22, 2005 between TL Ventures, PA Early Stage III, L.P., Safeguard Delaware Inc., Columbia Partners, LLC Investment Management and the National Electrical Benefit Fund. Incorporated herein by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.20    Equity Commitment Letter dated April 22, 2005 between TL Ventures, PA Early Stage III, L.P., Safeguard Delaware Inc., National Electrical Benefit Fund and the Registrant. Incorporated herein by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.21*    Data Acquisition Agreement between NAVTEQ Corporation and the Registrant. Incorporated herein by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    10.22    Formal Settlement Agreement and General Release, dated as of December 16, 2005, among Santa Fe Technologies, Inc., TL Ventures L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on January 20, 2006.    10.23    Retainer Agreement, dated March 22, 2006, by and between the Company and Allen & Company, LLC.    23.1    Consent of Ernst & Young LLP    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.      *Confidential treatment granted as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission **Indicates management contract or compensatory plan or arrangement.  78        SIGNATURES           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Traffic.com, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wayne, State of Pennsylvania, on this 24th day of March 2006.         Traffic.com, Inc.         By:    /s/  ROBERT N. VERRATTI       Robert N. Verratti Chief Executive Officer            Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.     Signature   Title              /s/  ROBERT N. VERRATTI       Robert N. Verratti    Chief Executive Officer and Director (Principal Executive Officer)    /s/  ANDREW MAUNDER       Andrew Maunder    Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)    /s/  DAVID L. JANNETTA       David L. Jannetta    President and Director    /s/  MARK DENINO       Mark DeNino    Chairman of the Board    /s/  JOHN H. JOSEPHSON       John H. Josephson    Director    /s/  GEORGE MACKENZIE       George MacKenzie    Director    /s/  SAMUEL A. PLUM       Samuel A. Plum    Director    79         Traffic.com, Inc.       Consolidated Financial Statements          Years ended December 31, 2003, 2004, and 2005          Contents         Report of Independent Registered Public Accounting Firm   F-2    Audited Consolidated Financial Statements         Consolidated Balance Sheets    F-3   Consolidated Statements of Operations   F-4   Consolidated Statements of Stockholders' Deficit   F-5   Consolidated Statements of Cash Flows   F-6   Notes to Consolidated Financial Statements   F-7    F-1        Report of Independent Registered Public Accounting Firm   The Board of Directors and Stockholders Traffic.com, Inc.  We have audited the accompanying consolidated balance sheets of Traffic.com, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Traffic.com, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.  /s/ Ernst & Young LLP  Philadelphia, PA March 10, 2006  F-2        Traffic.com, Inc.    Consolidated Balance Sheets   (In Thousands, Except Share Amounts)          2004   2005     Assets                 Current assets:                   Cash and cash equivalents   $ 4,898   $ 13,143       Accounts receivable, net of allowance of $950 and $779 at December 31, 2004 and 2005, respectively     9,859     10,177       Government services receivables     1,501     2,091       Deferred offering costs     —     2,368       Other current assets     1,323     723                 Total current assets     17,581     28,502      Property and equipment, net      14,885      23,816     Intangible assets, net     —     130     Deferred financing fees     98     1,531     Restricted cash, net     1,002     780     Other long-term assets     164     219                 Total assets   $ 33,730   $ 54,978                 Liabilities, redeemable convertible preferred stock, and stockholders' deficit                   Current liabilities:                   Accounts payable   $ 2,496   $ 3,023       Accrued station compensation     3,321     3,032       Accrued legal settlements     —     7,125       Other accrued expenses     1,665     4,528       Revolving credit facility     810     4,128       Current portion of deferred revenue     604     1,711       Current portion of deferred license fees     400     1,148       Current maturities of long-term debt     33     —                 Total current liabilities     9,329     24,695      Senior secured credit facility and accrued interest      23,744      37,659     Deferred revenue     17,793     23,261     Deferred license fees     9,170     9,385     Asset retirement obligation     —     678                       60,036     95,678     Redeemable convertible preferred stock, $0.01 par value:                   Series E; 18,000,000 shares authorized and 16,265,094 issued and outstanding at December 31, 2004 and 2005; liquidation preference of $65,060 at December 31, 2004 and 2005     32,530     32,530       Series E-1; 6,419,811 shares authorized issued and outstanding at December 31, 2004, and 2005; liquidation preference of $11,448, and $12,364 at December 31, 2004 and 2005, respectively     7,284     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                       39,814     56,977     Stockholders' deficit:                   Common stock, $0.01 par value, 69,580,189 shares authorized and 3,427,043, and 3,826,325 shares issued and outstanding at December 31, 2004 and 2005, respectively;     35     39       Additional paid-in capital     48,641     61,566       Notes receivable from stockholders     (505 )   (177 )     Deferred stock based compensation     —     (1,672 )     Accumulated deficit     (114,291 )   (157,433 )               Total stockholders' deficit     (66,120 )   (97,677 )               Total liabilities, redeemable convertible preferred stock and stockholders' deficit   $ 33,730   $ 54,978                  See accompanying notes.  F-3        Traffic.com, Inc.    Consolidated Statements of Operations   (In Thousands, Except Per Share Amounts)          Year ended December 31         2003   2004   2005     Revenue:                         Advertising   $ 36,045   $ 39,449   $ 38,871       Traffic data services     581     2,993     4,422       License agreement     750     —     —                          37,376     42,442     43,293      Cost of revenue      30,988      32,090      33,567                    Gross margin     6,388     10,352     9,726     Operating expenses:                         Research and development     2,828     3,647     3,905       Sales and marketing     14,086     12,032     16,177       General and administrative     6,402     7,229     8,704       Legal settlements     —     —     18,473                          23,316     22,908     47,259                    Loss from operations     (16,928 )   (12,556 )   (37,533 )   Interest income (expense), net     (4,151 )   (3,428 )   (5,609 )                  Net loss   $ (21,079 ) $ (15,984 ) $ (43,142 )                  Redemption and accretion of redeemable convertible preferred stock     34,824     (2,128 )   (2,037 )                  Net income (loss) attributable to common stockholders   $ 13,745   $ (18,112 ) $ (45,179 )                  Net income (loss) attributable to common stockholders per share:                         Basic   $ 5.15   $ (5.91 ) $ (13.00 )     Diluted   $ 1.45   $ (5.91 ) $ (13.00 )    Number of shares used in per share calculation:                            Basic     2,671     3,064     3,474       Diluted     9,492     3,064     3,474      See accompanying notes.  F-4        Traffic.com, Inc.    Consolidated Statements of Stockholders' Deficit    (In Thousands, Except Share Amounts)          Common Stock       Notes Receivable from Stockholders                     Additional Paid-in Capital   Deferred Stock-Based Compensation   Accumulated Deficit             Shares   Par Value   Total     Balance at January 1, 2003   1,873,032   $ 19   $ —   $ (129 ) $ —   $ (77,228 ) $ (77,338 )     Exercise of common stock options   40,701     —     88     (52 )   —     —     36       Conversion of preferred stock   1,051,810     11     14,935     —     —     —     14,946       Redemption of Series D preferred stock   —     —     25,444     —     —     —     25,444       Exchange of Series A through D preferred stock for common stock   —     —     11,680     —     —     —     11,680       Stock based compensation related to stock options granted to non-employees   —     —     319     —     —     —     319       Issuance of common stock warrants   —     —     75     —     —     —     75       Preferred stock accretion   —     —     (2,300 )   —     —     —     (2,300 )     Net loss   —     —     —     —     —     (21,079 )   (21,079 )                              Balance at December 31, 2003   2,965,543     30     50,241     (181 )   —     (98,307 )   (48,217 )     Exercise of common stock options   461,500     5     528     (324 )   —     —     209       Preferred stock accretion   —     —     (2,128 )   —     —     —     (2,128 )     Net loss   —     —     —     —     —     (15,984 )   (15,984 )                              Balance at December 31, 2004   3,427,043     35     48,641     (505 )   —     (114,291 )   (66,120 )     Exercise of common stock options   32,489     —     44     —     —     —     44       Exercise of common stock warrants   66,231     1     36                 —     37       Issuance of common stock in settlement of litigation   300,562     3     3,453     —     —     —     3,456       Issuance of common stock warrants   —     —     2,477     —     —     —     2,477       Repayment of stockholder notes   —     —     —     328     —     —     328       Investor share of legal settlement treated as capital contribution   —     —     7,125     —     —     —     7,125       Deferred stock-based compensation related to employee stock options   —     —     1,827     —     (1,827 )   —     —       Amortization of deferred stock-based compensation   —     —     —     —     155     —     155       Preferred stock accretion   —     —     (2,037 )   —     —     —     (2,037 )     Net loss   —     —     —     —     —     (43,142 )   (43,142 )                              Balance at December 31, 2005   3,826,325   $ 39   $ 61,566   $ (177 ) $ (1,672 ) $ (157,433 ) $ (97,677 )                               See accompanying notes.  F-5        Traffic.com, Inc.    Consolidated Statements of Cash Flows    (In thousands)          Year ended December 31         2003   2004   2005     Operating activities                       Net loss   $ (21,079 ) $ (15,984 ) $ (43,142 )   Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                         Depreciation of property and equipment     2,232     1,579     2,352       Amortization of deferred financing fees and intangible assets     2,233     3,330     619       Stock based compensation expense     319     —     155       Non-cash legal expenses     —     —     11,348       Provision for bad debts     250     78     61       Changes in assets and liabilities:                           Accounts and government services receivables     (5,686 )   489     (969 )       Other assets     (126 )   (700 )   (1,816 )       Accounts payable and accrued expenses     2,483     (1,920 )   6,450         Accrued legal settlements     —     —     7,125         Deferred revenue     5,071     8,921     6,575         Deferred license agreement     (10,000 )   9,570     963                    Net cash (used in) provided by operating activities     (24,303 )   5,363     (10,279 )   Investing activities                          Purchases of property and equipment     (3,740 )   (6,221 )   (10,169 )   Change in restricted cash     (456 )   (41 )   222     Purchases of marketable securities     (7,512 )   —     —     Sales and maturities of marketable securities     17,837     —     —                    Net cash provided by (used in) investing activities     6,129     (6,262 )   (9,947 )   Financing activities                          Payments made to repurchase Series D preferred stock     (9,359 )   —     —     Proceeds from the sale of Series E preferred stock     27,487     —     —     Proceeds from the sale of Series F preferred stock     —     —     15,126     Borrowings under the senior secured credit facility     —     —     10,000     Debt issuance costs     (570 )   (157 )   (349 )   Net proceeds from (payments of) the revolving credit facility     4,000     (3,190 )   3,318     Proceeds from the exercise of common stock options and warrants     36     209     81     Proceeds from the payment of shareholder notes     —     —     328     Payment on long-term debt     (57 )   (64 )   (33 )                  Net cash provided by (used in) financing activities     21,537     (3,202 )   28,471                    Net increase (decrease) in cash and cash equivalents     3,363     (4,101 )   8,245     Cash and cash equivalents at beginning of period     5,636     8,999     4,898                    Cash and cash equivalents at end of period   $ 8,999   $ 4,898   $ 13,143                    Supplemental cash flow disclosures                          Redemption and accretion of preferred stock   $ 34,824   $ (2,128 ) $ (2,037 )   Cash paid for interest     913     1,308     1,263     Non-cash debt issuance costs     3,662     —     1,712      See accompanying notes.  F-6        Traffic.com, Inc.    Notes to Consolidated Financial Statements   1.    Organization           Traffic.com, Inc. (the "Company"), formerly known as Mobility Technologies, Inc., is deploying a nationwide traffic and logistics data collection network and a proprietary Traffic Information Management System ("TIMS") with the goal of becoming the nation's premier provider of real-time digital predictive traffic and logistics information for businesses, consumers, and government agencies. The Company's plans call for building a network of wireless sensors (the "digital sensor network") and integrating government agency sensors along major highways in over 40 of the largest metropolitan areas in the United States. The digital sensor network collects vehicle counts, vehicle speeds, classification (car or truck), and roadway density and transmits the data every 60 seconds over a wireless network to TIMS. As of March 15, 2006, the Company has completed its digital sensor network and received system acceptance from the relevant transportation agencies in Boston, Chicago, Oklahoma City, Philadelphia, Pittsburgh, Providence, San Diego, St. Louis and Tampa. The Company is collecting data from sensor networks that it is in the process of constructing in Detroit, Los Angeles, Phoenix, San Francisco, and Washington, DC. The Company is under contract to deploy its sensor network in Baltimore and Seattle. In addition, the Company is under contract to integrate probe data in Salt Lake City into TIMS. The Company's data collection network also includes state agency data and traditional traffic event and incident information with operations in 35 cities, utilizing scanners, cameras, vehicles, and aircraft. The Company's revenue opportunities include traditional broadcast (radio, TV) and new media (cable, Internet, mobile wireless, and satellite radio), logistics and fleet management, mobile workforce professionals, telematics (in-vehicle units), and government agencies.          On January 25, 2006 the Company completed an initial public offering and began trading on the NASDAQ National Market under the symbol "TRFC".  Contract with United States Department of Transportation           In 1999, the Company, as principal subcontractor, was awarded a subcontract with the U.S. Department of Transportation ("U.S. DOT") under the provisions of the 1998 Transportation Equity Act for the 21st Century ("TEA 21") as authorized by the United States Congress. TEA 21 authorizes federal funds to enable the Company to deploy an intelligent transportation infrastructure system (the digital sensor network) to collect, integrate, and distribute real-time traffic data. TEA 21 also allows the creation of a data repository of new and existing real-time traveler and related information for dissemination to the traveling public through a variety of delivery mechanisms, including support for a 511-based telephone service, provision of free basic traveler information to the public for personal use, and commercial traveler information services. TEA 21 allocated $2 million of federal funds per metropolitan area and requires a $0.5 million non-federal match. The first task order awarded to the Company allocated $4 million to begin the deployment of such systems in two metropolitan areas—Pittsburgh and Philadelphia.          Under the terms of the subcontract, the Company, during installation of its digital sensor network and upon completion of specified milestones, is paid approximately $1.9 million, or 95% of the $2.0 million received by the prime contractor, per metropolitan area for providing data to the various federal and state agencies for noncommercial purposes such as research, planning, and congestion management. The Company retains the ability to market the data for commercial purposes and has committed to share up to 10% of certain revenues with state and local departments of transportation for reinvesting and enhancing the system. The revenue share amount is calculated quarterly, and the required amount is placed in a separate cash account annually and recorded as restricted cash in the accompanying balance sheets. The impact of the revenue share has historically been immaterial, and  F-7       amounted to $0.1 million in 2005. The Company owns and is responsible for deploying, operating, and maintaining the digital sensor network without future government funding beyond the initial payments above.          Following the successful completion of the Pittsburgh and Philadelphia systems, the Company was awarded a second task order that authorizes an additional $50 million to continue the deployment in twenty-five more metropolitan areas. Recent federal legislation (SAFETEA-LU) reauthorizes the program and makes additional cities eligible for the program. On March 3, 2006, U.S. DOT selected 10 metropolitan areas that are able to enter into contracts for use of the remaining funds: Atlanta, Charlotte, Denver, Indianapolis, Las Vegas, Minneapolis, New York/Northern New Jersey, Portland, Sacramento, and San Jose.          The 1st Federal Task Order which covered the Pittsburgh and Philadelphia locations did not provide a contractual term. Under the 2nd Federal Task Order (which covers 25 additional cities), the contractual obligation to provide the Government with traffic flow data under the Federal Task Order will end ten years from the date of system acceptance in each metropolitan area, or January 1, 2012, whichever is the earlier of these two dates. It is noted in the Federal Task Order, however, that the Company is expected to continue to provide services to public agencies and commercial clients on an ongoing basis. Further, the Company is required to provide the services to the public agencies as long as it provides such services to its commercial markets.          The 2nd Federal Task Order allows the Federal government to terminate its agreement with the Company for cause at any time within the first ten years after system acceptance in the deployment of each metropolitan area or January 1, 2012, whichever is the earlier of these two dates. If such were to occur, the Company would be obligated to pay liquidated damages of $960,000 in year one, reducing by 10% each year through year 10; however, in no case would the Company be liable for any liquidated damages after January 1, 2012.          Under the terms of the Federal Task Order, the Company is required to enter into separate agreements with each metropolitan area for which it is providing traffic data services. The terms and contract life for each of the local agreements is unique to the contract itself, ranging from a period of five years to a period no longer than the January 1, 2012 contract termination date under the Federal Task Order, in addition to renewal and extension periods. Also, stipulated in these local government contracts are the provisions related to the sensor network in the event the contract is either terminated with cause or not renewed upon completion of the original contract term. If the Company ceases to operate, maintain or manage the traffic sensor network in any of its metropolitan areas prior to termination of the agreement, the Company must dispose of it equipment in the following manner:    •For equipment purchased by the Company with private funds, the local government agency will have right of first refusal to purchase the equipment at fair value. •For equipment purchased with public funds, the local government agency can obtain the equipment at no cost. It should be noted that the Federal Task Order specifically states that no federal funds can be used for the purchase of equipment. •In the event the local government agency does not exercise its rights to purchase or obtain the equipment, the Company must dispose of the equipment at its own cost.   F-8          2.    Summary of Significant Accounting Policies   Principles of Consolidation           The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.  Use of Estimates           The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.          On an ongoing basis, the Company evaluates its estimates, including those related to accounts receivable allowance, useful lives of long lived assets, its asset retirement obligation, revenue recognition on the U.S. DOT contract, the value of common stock for the purpose of determining stock-based compensation, and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities.          The Company has granted stock options at exercise prices equal to the value of the underlying stock as determined by its board of directors on the date of option grant. For purposes of financial accounting for stock-based compensation, management has applied hindsight within each year to arrive at reassessed values for the shares underlying the options. These reassessed values were determined based on a number of factors, including input from advisors, the Company's historical and forecasted operating results and cash flows, and comparisons to publicly-held companies. The reassessed values were used to determine the amount of stock-based compensation recognized related to stock option grants to employees and non-employees and the amount of expense related to stock warrants issued to third parties.  Revenue Recognition   Advertising           Since inception, the majority of the Company's revenues have been derived from the sale of advertising on radio and television stations. The Company receives airtime inventory from radio and television stations in exchange for traffic information and services. No revenue is recognized on the exchange of traffic data services for advertising time as neither the fair value of the advertising time received nor the traffic data services provided can be determined within reasonable limits. The Company purchases additional airtime inventory for cash. The Company employs a sales force to sell advertisements on the acquired airtime. Revenue is recognized when the advertisements are aired.          Revenue from Internet and wireless advertising is recognized over the period during which the advertisement is displayed or aired.  Traffic Data Services           The Company has entered into contracts with certain customers whereby the Company provides traffic data in exchange for cash. Some arrangements have included fees paid to the Company for  F-9       exclusive access to the Company's data for specified purposes. The Company recognizes revenue from these sources during the period in which the services are performed. In addition, certain agreements have provided the Company with payments in advance of future revenues. In those instances, the Company records the receipt of cash as deferred license fees on the balance sheet. The Company's traffic data services agreements may include multiple components to the agreement including advertising, traffic data licensing, and exclusivity fees. The Company recognizes the revenue associated with each component of the multiple element arrangement based on the relative fair values of each component. If fair value of each component cannot be determined, the appropriate recognition of revenue is then determined for those combined deliverables as a single unit of accounting.          The Company receives cash payments based on the achievement of certain milestones, as defined in the USDOT subcontract, in deploying its digital sensor networks. The majority of all funds are received on or before complete installation of the system and system acceptance. The invoicing of achieved milestones is recorded as deferred revenue. Revenue recognition commences upon formal customer acceptance of the system and is recognized pro rata over the estimated service period of the individual networks of 15 years. Revenue recognized was $0.3 million, $0.4 million, and $0.9 million for 2003, 2004, and 2005, respectively.  Cost of Revenue           Cost of revenue consists of media inventory expenses, traffic data collection expenses, and other technology costs associated with maintaining the Company's TIMS network. Media inventory expenses consist of cash paid to purchase advertising inventory under long-term contracts with radio stations. In addition, media inventory expenses include cash payments to radio stations to purchase additional advertising inventory in the spot market on an as-needed basis, referred to as "cash buys." Traffic data collection expenses consist of the costs of personnel, both full-time and part-time, the costs of aircraft, automobiles, the monitoring of police and emergency response vehicles, the depreciation of the Company's traffic flow data sensor network, the use of state and local agency data sources where available (including sensors and cameras), and the Company's own camera network. These expenses also include occupancy and communications costs for the Company's national operations center and its local operations centers. Included in other technology expenses are internal product development expenses, the cost of consultants engaged to assist with various software development programs, and the depreciation of certain technology costs capitalized in accordance with SOP 98-1,  Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. In addition, these other technology costs include communications costs and capital depreciation of computer hardware.  License Agreement           See Note 7 for accounting treatment of the Company's former License Agreement.  F-10        Certain Risks and Concentrations           The Company's revenues are principally derived from advertising, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in customer buying behavior could adversely affect the Company's operating results.          Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, restricted cash and accounts receivable. At December 31, 2004, and 2005, the Company had $5.6 million and $13.6 million, respectively, on deposit with a financial institution and its related investment funds. The amounts held by that institution are insured up to the full net value of the investments. Accounts receivable are typically unsecured and are derived from revenues earned from customers located in the U.S.  Cash and Cash Equivalents           Cash and cash equivalents represent cash and highly liquid short-term investments with original maturities of three months or less.  Restricted Cash           Restricted cash represents cash and cash equivalents restricted for standby letters of credit supporting long-term facility leases and escrow agreements.  Accounts Receivable           Accounts receivables are recorded at the invoice amount and are not interest bearing. The Company performs credit evaluations of its new customers and generally requires no collateral. The Company provides for losses from uncollectible accounts based on analyzing historical data and current trends and such losses have historically not exceeded management's expectations. Past due or delinquency status is based on contractual terms. Past due amounts are written off against the allowance for doubtful accounts when collection is deemed unlikely and all collection efforts have ceased.  Property and Equipment           The Company's property and equipment consist principally of the sensor network pole assets, technology assets such as computer hardware and software, and leasehold improvements and equipment. Included in the sensor network pole assets are the steel poles used to mount the equipment and the radar and solar panels and the related installation costs. Electronic items such as modem, battery and wiring assembly are included in computer hardware and software.          Property and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets. The Company reviews the carrying value of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of any asset to future undiscounted cash flows expected to be  F-11       generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the future discounted cash flows compared to the carrying amount of the asset.          The Company capitalizes software development and acquisition costs in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The costs of internally developed software are expensed unless incurred during the application development stage. Software development costs capitalized during the application development stage are included in property and equipment and depreciated on a straight-line basis over three years, which is the estimated useful life. Capitalized software costs were $0.2 million at December 31, 2004 and $1.2 million at December 31, 2005, net of accumulated depreciation of $0.9 million at December 31, 2004 and $1.2 million at December 31, 2005.  Deferred Financing Fees           Financing costs, including legal fees, the fair value of equity instruments, and lender fees associated with the issuance of debt have been capitalized as deferred financing costs in the accompanying balance sheets and are being amortized to interest expense over the terms of the related debt.          Total amortization of deferred financing fees on the senior secured credit facility was $2.2 million, $3.2 million, and $0.6 million in 2003, 2004, and 2005, respectively. Total amortization of deferred financing fees on the revolving credit facility was $0.1 million in 2004.  Deferred Offering Costs           Deferred offering costs consist of costs related to the Company's initial public offering. The deferred offering costs will be offset against the proceeds from the initial public offering.  Asset Retirement Obligation           In connection with the Company's U.S. DOT contract and related state contracts related to its sensor networks throughout various cities in the United States, the Company may be required under certain circumstances to remove the sensor network assets residing on governmental property. In accordance with FASB Statement No. 143,  Accounting for Asset Retirement Obligations, the Company recognizes the fair value of a liability for an asset retirement obligation ("ARO") for each city in the period in which the related asset is placed in service. The Company capitalizes that cost as part of the carrying amount of the sensor network, which is depreciated on a straight-line basis over the useful life of the corresponding asset of 15 years. The ARO is recorded at fair value, and accretion expense will be recognized over time and charged to interest expense as the discounted liability is accreted to its expected settlement value.          The fair value of the ARO is measured using expected future cash outflows discounted at the Company's credit-adjusted risk-free interest rate. At December 31, 2005, the Company has an asset retirement obligation, including accretion, classified in long-term liabilities of $0.7 million and an increase to existing capitalized assets of $0.6 million.  F-12       Redeemable Convertible Preferred Stock           The Series E and Series F Redeemable Convertible Preferred Stock is recorded at its redemption value which is the purchase price. The Series E-1 Redeemable Convertible Preferred Stock is recorded at the fair value at the time of the time of issuance and is being accreted to its redemption value by the first redemption date in September 2010.  Advertising Expenses           Advertising expenses, which consist predominantly of radio and television commercials and online campaigns such as search engine marketing, as well as industry trade shows, and public relations, are expensed as incurred. These expenses were $0.4 million, $0.1 million, and $2.2 million for the years ended December 31, 2003, 2004, and 2005, respectively.  Leases           Landlord allowances and incentives, if any, are recorded as deferred rent. These amounts are amortized as a reduction of rent expense over the initial term of the lease, commencing with the date of possession. Certain leases provide for predetermined escalations in future minimum annual rentals. The prorated portion of future minimum rent escalations are recorded as deferred rent and are included in other accrued expenses in the accompanying consolidated balance sheets.  Income Taxes           The Company accounts for income taxes in accordance with the liability method, which requires the establishment of a deferred tax asset or liability to reflect the net tax effects of temporary differences between tax carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax expense or benefit is recognized as a result of the change in the deferred asset or liability during the year. If necessary, the Company will establish a valuation allowance to reduce any deferred tax asset to an amount which will, more likely than not, be realized.  Comprehensive Net Income (Loss)           There were no differences between net loss and comprehensive net loss for the years ended December 31, 2003, 2004, and 2005.  Reverse Stock Split           In October 2005, the Company's board of directors approved a one-for-three reverse stock split of common stock to be effected prior to the effective date of the Company's Registration Statement for its initial public offering of common stock. The reverse stock split was approved by the stockholders 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 consolidated financial statements give retroactive effect as though the one-for-three reverse split of the Company's common stock occurred for all periods presented.  F-13        Basic and Diluted Net Loss Attributable to Common Stockholders per Common Share           Basic net loss attributable to common stockholders per common share excludes dilution for potential common stock issuances and is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net loss attributable to common stockholders per common share and pro forma loss attributable to common stockholders per common share  (in thousands, except per share amounts):         Year ended December 31         2003   2004   2005     Basic net loss per share                       Numerator:                         Net loss   $ (21,079 ) $ (15,984 ) $ (43,142 )     Redemption and accretion of redeemable convertible preferred stock     34,824     (2,128 )   (2,037 )                    Numerator for per share calculation—basic and diluted   $ 13,745   $ (18,112 ) $ (45,179 )                  Denominator:                         Weighted-average common shares outstanding     2,671     3,081     3,512       Less: Weighted-average unvested common stock subject to repurchase agreements     —     (17 )   (38 )                    Denominator for per share calculation—basic     2,671     3,064     3,474                    Net income (loss) attributed to common stockholders per share—basic   $ 5.15   $ (5.91 ) $ (13.00 )                  Dilutive effect of:                         Conversion of preferred stock and accrued dividends payable into common stock     6,805     —     —       Warrants to purchase common stock     16     —     —                      Denominator for per share calculation—diluted     9,492     3,064     3,474                    Net income (loss) attributed to common stockholders per share—diluted   $ 1.45   $ (5.91 ) $ (13.00 )                   F-14              The following table shows stock equivalents that were not considered in the computation of the diluted net loss attributable to common stockholders per common share for the years ended December 31, 2003, 2004, and 2005 as their effect is anti-dilutive:         December 31       2003   2004   2005   Shares of preferred stock (on an as converted basis)   —   7,561,623   9,242,312   Stock options   2,028,339   1,886,597   2,000,478   Warrants   1,279,139   1,339,138   1,669,570    Fair Value of Financial Instruments           The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short maturities. The carrying amounts of the Company's debt approximate fair value of these obligations based upon management's best estimate of interest rates that would be available for similar debt obligations at December 31, 2003, 2004, and 2005. The fair value of the Company's redeemable convertible preferred stock is not practicable to determine as no quoted market price exists for the redeemable convertible preferred stock nor have there been any recent transactions in the Company's issued redeemable convertible preferred stock.  Stock-Based Compensation   Accounting for Stock-Based Awards to Employees           The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and complies with the disclosure provisions of SFAS, No. 123, Accounting for Stock-Based Compensation, as modified by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of SFAS No. 123. Currently, the Company is not required to record stock-based compensation charges if the employee stock option exercise price or restricted stock purchase price equals or exceeds the deemed fair value of its common stock at the grant date.          The Company typically has granted stock options at exercise prices equal to the value of the underlying stock as determined by its board of directors on the date of option grant. For purposes of financial accounting, the Company has applied hindsight within each year or quarter to arrive at reassessed values for the shares underlying these options. Prior to the filing of its registration statement, the Company utilized two measures of value of its common stock in accounting for equity compensation relating to its compensatory equity grants:    •The "board-determined value," which is the per share value of the Company's common stock determined by its board of directors at the time the board made an equity grant, taking into account several factors, including the Company's operating performance, anticipated future operating results, the terms of redeemable convertible preferred stock issued by it, including the   F-15        liquidation value and other preferences of it preferred stockholders, as well as the valuations of other companies.    •The "reassessed value," which is the per share value of the Company's common stock determined by it in hindsight solely for the purpose of financial accounting for employee stock-based compensation. The Company has used the Current-Value Method outlined in the American Institute of Certified Public Accountants' ("AICPA") practice aid entitled "Valuation of Privately-Held Company Equity Securities Issued as Compensation" published in 2004 by AICPA in performing these valuations.           The Company has recorded deferred stock-based compensation to the extent that the reassessed value of the stock at the date of grant exceeded the exercise price of the option.          For the period from July 2003 through March 2005, the Company's board of directors granted options at an exercise price of $0.75 per share. This determination was based on a number of factors that were detailed in an internal valuation carried out in July 2003. The valuation resulted in a common share value of $0.36, but the Company's board decided at that time to use the higher exercise price of $0.75 in order to take a conservative position with respect to option pricing. In deriving the valuation, the Company used a multiple of 2.3 times our revenue derived from a review of peer companies. The resulting gross valuation for the invested capital was then netted against the value of our outstanding debt and the overall value of outstanding liquidation preferences of the redeemable convertible preferred stock to derive a net valuation for common equity, and the resulting valuation was divided by the outstanding common shares. The Company did not obtain a contemporaneous valuation by an unrelated valuation specialist as its board of directors believed that, because of the early stage of its business, traditional valuation approaches used by independent valuation firms, such as an income approach, would not be relevant and would not be worth the cost.          Unlike the Company's business today, which has higher revenues, several revenue streams, contracts with a number of large customers, and products that support Internet and wireless initiatives, during the period from July 2003 through March 2005, the Company relied almost completely on its radio and TV advertising business and, towards the end of 2004, had a growing liquidity problem.          Between July 2003 and March 2005, the Company continued to review the valuation of its business using these same metrics. During this time, however, the Company did not achieve the revenues it had anticipated, and determined that, given its own internal valuation of its business arriving at a $0.36 common share value, the exercise price of new option grants should be no more than the $0.75 per share valuation it had assessed in July 2003. Towards the end of 2004 and as the Company entered 2005, it was clear that it had a limited level of liquidity, and prior to the renegotiation of its senior secured credit facility in April 2005, the Company determined that there was no basis to increase the valuation of the Company for common stock valuation purposes. In light of its decreasing liquidity, in order to induce the Company's lender to extend an additional $10.0 million under its senior secured credit facility, certain of the Company's stockholders agreed to enter into a guarantee agreement, under which they each severally agreed to guarantee repayment of the credit line up to an aggregate of $10.0 million under certain circumstances. As a further condition to the extension of the additional $10.0 million in credit, the guarantors entered into an equity commitment letter with the Company, whereby they agreed to purchase up to an aggregate of $10.0 million of its Series F convertible preferred stock if the Company failed to comply with certain financial covenants in the senior secured  F-16       credit facility. The negotiation of these transactions with its lender and the guarantors took several months to complete.          In May and June 2005, the Company's board of directors granted options to purchase a total of 169,956 shares of common stock at an exercise price of $0.75 per share. The Company did not obtain a contemporaneous valuation of the common stock underlying the options granted in this period, relying on the continued standard practice it had employed from March 2003, but it was agreed in June 2005 to carry out a detailed valuation of the business and of common stock options. As a result, early in the third quarter 2005, the Company reassessed the value of its common stock as of May 31, 2005 using a discounted cash flow analysis as the income-based methodology to determine the fair value of its invested capital as of that date, defined as the sum of our common stock plus senior securities, less cash and cash equivalents. Based upon its calculations, the Company derived a weighted-average cost of capital of 28%, thereby deriving a market value of invested capital, and subsequently a market value of our common stock. A discount related to the lack of marketability of 22.6% was estimated based on the theoretical cost of utilizing a series of put options to "lock in" the price of its common stock during an estimated holding period. This was completed by applying a Black-Scholes option pricing model. These calculations resulted in a fair value of the Company's common stock of $4.92 per share, as of April 22, 2005, the date on which its renegotiated senior secured credit facility and $10.0 million equity guarantee were completed. This valuation was used through the end of the second quarter of 2005 and into the third quarter.          Also early in the third quarter 2005, the Company reviewed and reconfirmed that the stock value was $0.36 for the purposes of recording a weighted-average reassessed value of underlying stock for those options granted between July 2003 and March 2005.          Subsequent to June 2005, the Company continued to achieve key milestones:    •In July 2005, the Company introduced its new website, which provides a means to derive revenue from Internet and consumer wireless advertising as well as a means to market its brand. The Company also agreed to proceed with a public offering process and engaged WR Hambrecht as the lead underwriter. In addition, the Company signed a contract with Comcast Cable to provide its traffic incident, event and flow data to Comcast for use on its website; •In August 2005, legislation became effective that reauthorized the Company's federal contract, ensuring that the Company has the continuing ability to build out its sensor networks in order to collect traffic data in an aggregate of 27 metropolitan areas. In addition the Company obtained irrevocable, binding commitments from investors to complete its Series F convertible preferred stock financing for $15.1 million; •In September 2005, the Company launched its brand marketing campaign in four of the largest cities in the United States, signed contracts with three advertising networks targeted at Internet advertising, hired its first three dedicated sales people for its Internet advertising business, saw strong growth in visitors to our website, and closed its Series F convertible preferred stock financing.           Due to this continued development of its business, the Company again reassessed the value of its common stock in August 2005, using the same discounted cash flow model that it had used as of May 31, 2005, but updating it to reflect the achievements and growth of its business. In particular, the Company recalculated the weighted-average cost of capital to 25% from 28%, and adjusted the  F-17       discount rate related to the lack of marketability to 19.6% from 22.6%. These changes resulted in an adjustment in the fair value of the Company's common stock to be approximately the mid-point of the estimated price range for the initial public offering contemplated by the Company.          In October 2005, based on the Company's reassessment of the value of its common stock, the Company offered to the employees who were granted options in May and June 2005 the ability to amend the terms of their options to increase the exercise price from $0.75 to $4.92 per share. All of these employees have now chosen to amend their stock options to a higher exercise price in order to avoid adverse income tax consequences under recently-adopted Section 409A of the Internal Revenue Code, which was effective January 1, 2005.          In relation to these amended options, the Company recorded $1.1 million of unearned compensation in the fourth quarter of 2005 equal to the difference between the amended $4.92 exercise price per share and $11.50 per share, which was the estimated fair value of the common stock on the date of the modification. The unearned compensation is being amortized into compensation expense over the options' remaining vesting period.          The table below shows the computation of deferred stock-based compensation amounts arising from unvested stock options granted to employees for each of the three month periods set forth below:         Three months ended       Mar 31, 2005   Jun 30, 2005   Sep 30, 2005   Dec 31, 2005   Options granted to employees     26,297     169,956     —   $ —   Weighted-average exercise price   $ 0.75   $ 0.75     n/a   $ 4.92   Weighted-average reassessed value of underlying stock per option granted   $ 0.36   $ 4.92     n/a   $ 11.50   Weighted-average reassessed deferred stock-based compensation per option granted   $ —   $ 4.17     n/a   $ 6.58   Deferred stock-based compensation   $ —   $ 709,000   $ —   $ 1,118,000            The Company recognizes compensation expense as it amortizes the deferred stock-based compensation amounts on a straight line basis over the related vesting periods. Reassessed values are inherently uncertain and highly subjective. If the Company had made different assumptions, its deferred stock-based compensation amount, stock-based compensation expense, net loss and net loss per share amounts could have been significantly different.          The Minimum Value option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The weighted-average fair value of options granted during 2003, 2004, and 2005 was $0.42, $0.18, and $3.78 per share, respectively.  F-18       Accounting for Stock-Based Awards to Non-Employees           The Company measures the fair value of options to purchase its common stock granted to non-employees throughout the vesting period as they are earned, at which time it recognizes a charge to stock-based compensation. The fair value is determined using the Black-Scholes option-pricing model, which considers the exercise price relative to the reassessed value of the underlying stock, the risk-free interest rate and the dividend yield. As discussed above, the reassessed value of the underlying stock were based on assumptions of matters that are inherently highly uncertain and subjective. As there has been no public market for the Company's stock for all periods presented, our assumptions about stock-price volatility are based on the volatility rates of comparable publicly-held companies. These rates may or may not reflect the Company's stock-price volatility after it has been a publicly-held company for a meaningful period of time. If the Company had made different assumptions about the reassessed value of its stock or stock-price volatility rates, the related stock-based compensation expense and its net income and net income per share amounts could have been significantly different.  Intrinsic Value of Outstanding Options           The following table shows the intrinsic value of the Company's outstanding vested and unvested options as of December 31, 2005 based upon an $11.50 per share common stock price, which was the fair value as of that date:         Number of Shares Underlying Options   Intrinsic Value           (In Thousands)    Total vested options outstanding   1,217,493   $ 10,802   Total unvested options outstanding   782,985     7,333   Total options outstanding   2,000,478     18,135            The following table illustrates the effect on net loss attributable to common stockholders if the Company had applied the fair value recognition provisions of SFAS No. 123  (in thousands, except per share amounts) :         Year ended December 31         2003   2004   2005     Net income (loss) attributable to common stockholders:                         As reported   $ 13,745   $ (18,112 ) $ (45,179 )     SFAS No. 123 pro forma   $ 13,448   $ (18,327 ) $ (45,388 )     Basic—as reported   $ 5.15   $ (5.91 ) $ (13.00 )     Diluted—as reported   $ 1.45   $ (5.91 ) $ (13.00 )     Basic—pro forma   $ 5.03   $ (5.98 ) $ (13.07 )     Diluted—pro forma   $ 1.42   $ (5.98 ) $ (13.07 )    F-19        Segment Information           The Company currently operates in one business segment; the accumulation and dissemination of traffic data across multiple delivery applications and services, including radio, television, the Internet, wireless devices and in-vehicle navigation systems. The Company is not organized by market and is managed and operated as one business. A single management team that reports to the chief executive officer comprehensively manages the entire business. The Company does not operate any material separate lines of business or separate business entities with respect to its products or product development. Accordingly, the Company does not accumulate discrete financial information with respect to separate product lines and does not have separately reportable segments as defined by SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information.  Recent Accounting Pronouncements           In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations ("FIN 47"). FIN 47 clarifies that an entity must record a liability for a "conditional" asset retirement obligation if the fair value of the obligation can be reasonably estimated. The adoption of FIN 47 did not have a material effect on the Company's financial condition or results of operations.          In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3", referred to as SFAS No. 154, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. It does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS No. 154. The Company does not believe the adoption of SFAS No. 154 will materially impact the Company's consolidated financial statements.          In December 2004, the Financial Accounting Standards Board ("FASB") issued statement No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which is a revision of Statement No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,  Statement of Cash Flows.          SFAS 123(R) requires all share-based payments to employees, including grants of stock options, to be recognized in the financial statements based on their fair values. Under SFAS 123(R), pro forma disclosure is no longer an alternative to financial statement recognition for stock option awards made after the Company's adoption of SFAS 123(R). The Company will adopt 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 and Exchange Commission), the Company used the minimum value method to calculate the pro forma disclosure required by SFAS No. 123. When the Company adopts SFAS 123(R) on January 1, 2006, the Company will continue to account for the portion of awards outstanding prior to August 30, 2005 using the provision of APB Opinion No. 25 and its related interpretative guidance.  F-20               For awards issued on or after August 30, 2005, and for awards modified, repurchased or canceled on or after that date, the Company will use an option pricing model other than the minimum value method to calculate the pro forma disclosures required by SFAS No. 123. When the Company adopts SFAS 123(R) on January 1, 2006, the Company will begin recognizing the expense associated with these awards in the income statement over the award's vesting period using the modified prospective method. Because the amount, terms and fair values of awards to be issued in the future are uncertain, the impact of the adoption of SFAS 123(R) on the Company's financial statements is not known at this time; however, the Company expects to incur in excess of $1.2 million in stock based compensation expense during 2006.  3.    Interest Income (Expense), Net          Year ended December 31         2003   2004   2005         (In Thousands)      Interest income   $ 173   $ 75   $ 247     Amortization of deferred financing fees     (2,222 )   (3,330 )   (619 )   Retroactive adjustments to accrued interest under the Senior Secured Credit facility due to amendments     4,379     3,753     (688 )   Accretion of the asset retirement obligation                 (48 )   Interest expense     (6,481 )   (3,926 )   (4,501 )                  Interest income (expense), net   $ (4,151 ) $ (3,428 ) $ (5,609 )                   4.    Property and Equipment           Property and equipment consist of the following (in thousands):         December 31           2004   2005   Useful Life   Digital sensor network   $ 8,869   $ 13,792   15 years   Computer hardware and software     6,422     8,981   3 years   Leasehold improvements     1,125     1,524   Lease term   Equipment and office furniture     2,332     3,406   3 years   Vehicles     380     397   3 years   Construction in progress     5,511     7,822                           24,639     35,922        Accumulated depreciation      9,754      12,106                      Property and equipment, net   $ 14,885   $ 23,816                      F-21                Depreciation expense related to the above assets was $2.2 million, $1.6 million, and $2.4 million for 2003, 2004, and 2005, respectively          Depreciation expense related to the digital sensor network was $0.7 million for 2003 and 2004, and $1.0 million in 2005.  5.    Equity Commitment           In April 2005, as part of additional financing terms of the senior secured lenders, certain Series E investors in the Company signed an Investor Guaranty Agreement to provide up to $10.0 million of equity financing in the Company's future issuance of Series F preferred stock. The terms of the equity commitment were fulfilled upon the funding of the Series F financing round in September 2005.  6.    Debt   Senior Secured Credit Facility           In March 2002, the Company received funding on a $20.0 million credit facility which resulted in proceeds, after related fees, of $18.8 million. The facility is collateralized by all of the assets of the Company; however, the facility does allow for the accounts receivable of the Company to be used as collateral in connection with cash management arrangements.          In April 2003, the Company amended the credit facility. Approximately $1.4 million of the principal and accrued interest under the credit facility was converted into shares of Series E preferred stock.          As a result of the April 2003 amendment, $1.2 million of unamortized costs deferred at the inception of the facility were amortized in 2003. The April 2003 amendment reduced the credit facility's internal rate of return to rates escalating each quarter from 22.13% at June 30, 2003 to 26.78% at March 31, 2006. This interest rate reduction was retroactive to the inception of the facility in April 2002 and resulted in a cumulative adjustment to interest expense of $4.4 million. The Company is required to make quarterly interest payments of $0.3 million.          In connection with the April 2003 amendment to the senior secured credit facility, the Company issued a warrant to purchase 1,840,094 shares of Series E preferred stock to the lender at an exercise price of $0.01 per share. The value assigned to these warrants using a fair value pricing model was $3.7 million which was recorded as deferred financing fees, and was being amortized over the life of the credit facility. The warrant was exercised in December 2003.          In April 2004, the Company further amended certain terms of its credit facility. The amendment removed the escalating borrowing rates provisions of the agreement in favor of a defined borrowing rate of 15%, lowered its minimum cash balance requirement from $3.6 million to $3.0 million, and established a three-month trailing net loss covenant. This interest rate reduction was retroactive to the inception of the facility in April 2002 and resulted in a cumulative adjustment to interest expense of $3.8 million. In addition, the Intelligent Transportation System, or digital sensor network, contract covenant was amended, and now requires the Company to have contracts to build out its Intelligent Transportation Systems network in 17 cities in March 2006, and 19 cities in March 2007.          In April 2005, the Company again amended its senior secured credit facility and received additional funding which resulted in proceeds, after related fees, of $9.7 million. The amendment reduced the minimum cash balance covenant to $2.5 million, reset the trailing three-month net loss covenants, and extended the maturity of the facility to March 2008.  F-22               There are no principal payments due under the senior secured credit facility until maturity in March 2008. If held to maturity, the repayment of principal and unpaid accrued interest would be $47.9 million.          As of December 31, 2005, the Company was in compliance with all debt covenants.          In January 2006, the Company repaid the principal and all accrued interest under this facility with a portion of the proceeds from the initial public offering.  Revolving Credit Facility           In December 2003, the Company established a revolving credit facility with a financial institution. The facility had an initial commitment of $6.5 million, which could be expanded to $8.0 million upon the Company reporting a positive net income for six consecutive months. Borrowings bear interest at the bank's prime rate plus 1.5% (6.75% and 7.75% at December 31, 2004 and June 30, 2005, respectively). The facility had a 1-year term.          The Company's borrowings are subject to a 60% advance rate against a defined borrowing base. The facility contains a 3-month trailing net loss covenant and a minimum cash balance requirement of $3.6 million.          In July 2004, the Company amended its revolving credit facility. The commitment was increased to $7.5 million and the borrowing base advance rate was increased to 70%. The commitment was later increased to $8.5 million based on the achievement of an operating milestone. The July 2004 amendment allows for the commitment to be further increased to $10.0 million upon the achievement of two consecutive months of positive EBITDA (as defined).          In April 2005, following a series of extensions, the Company renewed its revolving credit facility through March 7, 2006. The minimum cash balance covenant was decreased from $3.6 million to $2.5 million and the trailing three-month net loss covenant was reset. In addition, as part of the amendment to the senior secured credit facility, the available commitment was reduced to $6.0 million pending the funding of the first tranche of the equity commitment guarantee of $5.0 million at which time the commitment will increase to $7.0 million. After the Company receives funding of the second tranche of the equity commitment guarantee of $5.0 million, the revolving credit facility will increase to $8.5 million. The equity commitment was fulfilled in September 2005 upon the closing of the Series F financing.          In August 2005 the Company amended the revolving credit facility to increase the advance rate of eligible accounts receivable to 80%.          At December 31, 2004 and December 31, 2005, the Company had collateral to support $3.9 million and $7.6 million in borrowings under the revolving credit facility, respectively.          As of December 31, 2005, the Company was in compliance with all debt covenants.          In February 2006, the Company repaid the outstanding amount this facility. In March 2006, the revolving credit facility terminated upon its terms.  7.    License Agreement           The Company had a License Agreement (the "Agreement") with a technology development corporation, which was a wholly-owned subsidiary of our senior secured lender that resulted in proceeds of $11.0 million. Under the Agreement, the Company transferred all existing and new Developed Technology  F-23       and Intellectual Property ("IP") rights; however, the Company maintained the ability to repurchase said rights at any time, for $11.0 million less any royalty payments made through the date of purchase. The Company was granted an exclusive license to use the IP rights in exchange for a quarterly royalty payment. Such payments, which would not exceed $0.3 million in a given quarter, would equal a percentage (which ranges from 1% to 5% during the Agreement) of the net revenue that resulted from the use of the IP. The Company accounted for the Agreement as a research and development agreement and recognized revenue based on the completion of new Developed Technology as defined in the statement of work within the Agreement.          In April 2003, the Company and the technology development corporation agreed to terminate the Agreement. In exchange for a payment of $10.0 million and the issuance of $0.4 million in debt (which represented the value of the Agreement less interim royalty payments), the rights to the Company's Developed Technology and Intellectual Property reverted to the Company's control and sole use.  8.    Data Acquisition Agreement           In April 2004, the Company entered into a multi-year Data Acquisition Agreement with a digital navigation company. Under the terms of the Data Acquisition Agreement, the Company granted a non-exclusive data license for its traffic incident and flow data to the licensor. In exchange, the Company received a license fee payment of approximately $9.0 million during 2004 and an additional $0.9 million during the nine month period ended September 30, 2005. The license fee payment was recorded as deferred license fees and is being earned in current and future periods through either a minimum annual fee or a per subscriber fee for certain navigation applications that include the Company's traffic data, whichever is greater. The Company recognized $0.3 million and $0.4 million in data license revenue in 2004 and 2005, respectively, associated with the Data Acquisition Agreement. Upon expiration (if the agreement is not renewed), up to $1.9 million of any remaining license fee payment that has not been earned through minimum annual fees and subscriber fees may, at our option, be repaid quarterly over three years at an interest rate of prime plus 1%.  9.    Income Taxes           For the years ended December 31, 2003, 2004, and 2005 there were no provisions for income taxes.  F-24               Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income taxes are as follows:         2004   2005     Deferred tax assets:                   Net operating loss carryforwards   $ 34,125   $ 42,761       Accrued compensation and benefits     133     201       Deferred revenue     6,439     12,232       Allowance for doubtful accounts     333     272       Other liabilities     112     132                 Total deferred tax assets     41,142     55,598     Deferred tax liabilities:                   Depreciation and amortization     4,179     6,639                 Net deferred tax asset     36,963     48,959     Valuation allowance     (36,963 )   (48,959 )               Net deferred asset   $ —   $ —                          A reconciliation of the statutory United States statutory income tax rate to the effective income tax rate follows:         2004   2005     Tax at statutory rate   (35.0 )% (35.0 )%   Change in valuation allowance   35.0 % 35.0 %   Effective tax rate   0.0 % 0.0 %            As of December 31, 2005, the Company has net operating losses of approximately $122.2 million for tax purposes which will be available to offset future taxable income. If not used, these carryforwards will expire between 2018 and 2025. The Company's state net operating loss carryforwards will also be subject to expiration over varying years. To the extent that net operating loss carryforwards, when realized, relate to non-qualified stock option deductions, the resulting benefits will be credited to stockholders' equity.          In the event that the Federal net operating loss is subject to Section 382 of the Internal Revenue Code the use of the net operating loss carryforward could be limited in any one year.  10.    Redeemable Convertible Preferred Stock           As of December 31, 2005, the Company had authorized 30,419,811 shares of preferred stock at $0.01 par value. The Board of Directors has the authority to issue shares and to fix voting privileges, dividend rates, conversion privileges, and any other rights of the preferred stock. The currently authorized shares of preferred stock are further designated as 18,000,000 shares of Series E redeemable convertible preferred stock ("Series E preferred stock"); 6,419,811 shares of Series E-1 redeemable convertible preferred stock ("Series E-1 preferred stock"); and 6,000,000 shares of Series F redeemable convertible preferred stock ("Series F preferred stock").          Each share of preferred stock is convertible into one third of a share of common stock at the option of the holder and converts automatically upon a qualified initial public offering of common stock—as defined per the terms and conditions of the preferred stock purchase agreements. The conversion ratio is  F-25       subject to change based on certain dilution events. The holders of the Series E, Series E-1, and Series F preferred stock, voting as a separate class, are entitled to elect three of the seven directors.          In March 2003, the Company entered into an agreement with a group of investors to sell 14,425,000 shares of Series E preferred stock. The sale resulted in proceeds to the Company of $28.9 million, which included converted debt of $1.4 million. As an inducement to participate in the Series E financing, the Company made available 6,419,811 shares of Series E-1 preferred stock to its existing holders of preferred stock. These shares were distributed to existing investors that participated in the Series E round (based on the percentage of their investment in the Series E round) in exchange for shares of Series A, B, C and D Preferred Stock. Based on a fair value for the Series E-1 convertible preferred stock of $0.56 per share, the difference between the carrying value of the Series A through D convertible preferred stock ($15.3 million) that has been derecognized and the fair value of the Series E-1 convertible preferred stock ($3.6 million) that has been recognized, of $11.7 million, has been recognized as an addition to net income to arrive at net income attributable to common stockholders in the accompanying statement of operations for the year ended December 31, 2003. The Company is recording an accretion adjustment in each accounting period subsequent to initial recognition of the Series E-1 preferred stock to reflect the return to the preferred stockholders.          As a result of the March 2003 Series E financing, 873,671 shares of Series A preferred stock were exchanged for 291,223 shares of common stock and 600,000 shares of Series A preferred stock warrants were exchanged for 40,000 common stock warrants. The 4,824,563 outstanding shares of Series B preferred stock were exchanged for 321,637 shares of common stock and 1,315,789 outstanding shares of Series C preferred stock were exchanged for 438,596 shares of common stock. The Company repurchased 2,595,585 shares of Series D preferred stock, which had a carrying value of $34.8 million including cumulative dividends of $5.6 million, for $9.4 million. The $25.4 million difference between the carrying value and repurchase amount was recognized as income in net income attributable to common stockholders in the accompanying statement of operations for the year ended December 31, 2003. In addition, 5,324 shares of Series D preferred stock were exchanged for 354 shares of common stock. Preferred stockholders of each series that did not participate in the Series E financing round were subject to conversion of their preferred stock to common stock at a conversion ratio ranging from 1 for 1 to 1 for 5.          In December 2003, warrants for 1,840,094 shares of Series E preferred stock were exercised by the Company's Senior Secured lender. Upon exercise of the warrants, the carrying value of $3.7 million was reclassified to the redemption value of the Series E preferred stock.          In September 2005, the Company issued and sold 5,042,090 shares of Series F preferred stock at a price of $3.00 per share for proceeds of $15.1 million.          The Series E preferred stockholders receive noncumulative dividends at an annual rate of 8%, if declared. Each holder of the Series E preferred stock is entitled to one vote for each share of common stock into which such share of Series E preferred stock is convertible. The Series E preferred stock is redeemable by the holder in one-third increments on the fifth, sixth, and seventh anniversary of the first issuance of Series F preferred stock at an amount equal to the original purchase price ($2.00 per share) plus any accrued but unpaid dividends. In the event of liquidation, after payment of the Series F liquidation preference, the Series E preferred stock is entitled to receive the greater of $4.00 per share or the proceeds they would receive on an as converted basis into common stock.          The outstanding shares of preferred stock were converted into 9,242,312 shares of common stock in accordance with their terms.  F-26        11.    Stockholders' Deficit           The Series E-1 preferred stock receives noncumulative dividends at an annual rate of 8%, if declared. Each holder of the Series E-1 preferred stock is entitled to one vote for each share of common stock into which such share of Series E-1 preferred stock is convertible. The Series E-1 preferred stock is redeemable by the holder in one-third increments on the fifth, sixth, and seventh anniversary of the first issuance of Series F preferred stock at an amount equal to the original purchase price plus any accrued but unpaid dividends. In the event of liquidation, after payment of the Series F and Series E liquidation preference, the Series E-1 preferred stock is entitled to receive the greater of $1.56 per share plus an annual 8% dividend, or the proceeds they would receive on an as converted basis into common stock.          The Series F preferred stockholders receive noncumulative dividends at an annual rate of 8%, if declared. Each holder of the Series F preferred stock is entitled to one vote for each share of common stock into which such share of Series F preferred stock is convertible. The Series F preferred stock is redeemable by the holder in one-third increments on the fifth, sixth, and seventh anniversary of the first issuance of the Series F preferred stock at an amount equal to the original purchase price ($3.00 per share) plus any accrued but unpaid dividends. In the event of liquidation, the Series F preferred stockholders are entitled to receive the greater of $4.00 per share or the proceeds they would receive on an as converted basis into common stock.          No dividends have been declared on any of the series of preferred stock. The preferred stock is redeemable in installments of $21.8 million in September 2010, $22.3 million in 2011, and $22.8 million in 2012.          At the closing of the Company's initial public offering in January 2006, each share of preferred stock was converted into one third of a share of common stock. The outstanding shares of preferred stock were converted into 9,242,312 shares of common stock in accordance with their terms.  Common Stock           Holders of common stock, voting together with the holders of the Series E, Series E-1, and Series F preferred stock, are entitled to elect three of the seven directors of the Company.  Stock Options           Prior to January 2006, the Company had two stock option plans: the 1999 Long-term Incentive Plan ("Incentive Plan") and the 1999 Nonemployees' Stock Plan ("Nonemployee Plan"). The Incentive Plan provides for the issuance of options, stock appreciation rights, restricted stock, deferred stock, and other stock-based awards to officers and key employees of the Company. The Nonemployee Plan provides for the issuance of options, shares or deferred shares in lieu of fees, and restricted stock to nonemployee directors, advisors, and consultants. The Company originally reserved a total of 3,384,433 shares of common stock to be issued under the Incentive Plan and the Nonemployee Plan.          In October 2005, the Company's board of directors approved the 2005 Long-Term Incentive Plan (the 2005 Plan), which was approved by the stockholders and became effective in January 2006. This plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and other equity-based awards. No additional awards will be made under the Company's 1999 Long-Term Incentive Plan or the 1999 Non-Employee's Stock Plan (the 1999 plans) following the effective date of the 2005 Plan. Upon effectiveness, 1,750,000 shares of common stock became reserved  F-27       for issuance under the 2005 Plan, as well as the shares remaining available for grants under the 1999 plans, which was 75,895 shares at December 31, 2005. In addition, the plan contains an "evergreen provision" which allows for an annual increase in the number of shares available for issuance under the plan on the first day of each of the Company's fiscal years beginning in fiscal year 2007. The annual increase in the number of shares shall be equal to the lesser of: (i) 350,000 shares; (ii) 1% of the Company's outstanding shares of common stock on the first day of the fiscal year; or (iii) an amount determined by the Company's board of directors.          The exercise price (as established by the Board) of stock options granted equals or exceeds the fair market value of the Company's common stock on the date of the grant. All stock options expire ten years from the grant date. Employee options granted to date vest over a four-year period, unless otherwise authorized by the Board. Options granted under both plans are exercisable as determined by the Board. The following table summarizes stock option activity for 2003, 2004, and 2005:         Number of Shares   Weighted- Average Exercise Price   Outstanding at January 1, 2003   1,243,592   $ 4.17     Granted   1,488,931     1.65     Exercised   (40,701 )   2.16     Forfeited   (663,483 )   2.52             Outstanding at December 31, 2003   2,028,339     2.91     Granted   742,186     0.75     Exercised   (461,500 )   1.14     Forfeited   (422,428 )   4.17             Outstanding at December 31, 2004   1,886,597     2.19     Granted   196,253     4.36     Exercised   (32,489 )   1.36     Forfeited   (49,883 )   1.77             Outstanding at December 31, 2005   2,000,478   $ 2.43                      The following table summarizes stock options vested and exercisable:         Number of Shares   Weighted- Average Exercise Price   Exercisable at December 31, 2003   957,660   $ 4.05   Exercisable at December 31, 2004   900,729   $ 2.97   Exercisable at December 31, 2005   1,217,493   $ 2.63    F-28              The following table summarizes information about stock options outstanding at December 31, 2005:     Exercise Price   Options Outstanding   Weighted-Average Remaining Contractual Life   Options Exercisable   $0.75   1,099,082   7.34   585,613   $1.50   146,038   4.43   146,038   $3.99   171,599   4.38   171,599   $4.50   314,390   7.14   215,164   $4.92   169,956   9.41   —   $7.98   3,333   4.55   3,333   $9.00   96,080   4.62   95,746                Total   2,000,478   6.88   1,217,493                         For certain grants issued during the year ended December 31, 2005, the Company has determined that the fair value of the underlying common stock on the date of the grant was in excess of the exercise price of the options. As a result, the Company recorded deferred compensation on these stock options of approximately $1.8 million as an increase in additional paid-in capital and is amortizing it as a charge to operations over the vesting periods of four years. The Company recognized $0.1 million in stock compensation expense related to options issued to nonemployees for the year ended December 31, 2003. There were no such option grants to non-employees in 2004 or 2005.  Shares Reserved for Future Issuance           At December 31, 2005, the Company has reserved the following shares of common stock for issuance:     Common stock options outstanding   2,000,478   Common stock options available to grant   75,895   Common stock warrants   1,627,904   Series E redeemable convertible preferred stock and preferred stock warrants   5,463,357   Series E-1 redeemable convertible preferred stock   2,139,932   Series F redeemable convertible preferred stock   1,680,689              12,988,255           Notes Receivable           Certain members of management have been allowed to participate in an executive loan program. Included in Notes receivable from stockholders are purchase money indebtedness notes issued in connection with the exercise of options granted under the Incentive Plan. Generally, the notes are with recourse and bear interest at a variable rate, which ranged from 3.62% to 6.25% at December 31, 2004 and 4.08% to 8.25% at December 31, 2005. During 2004, the Company issued a restricted stock purchase agreement for 432,214 shares of common stock to an executive of the Company in exchange for a non-recourse note in the amount of $0.3 million bearing interest at 4%. This note and accrued interest thereon was repaid in August 2005. All of the notes are collateralized by the underlying shares and the Company has repurchase rights for any exercised but unvested shares. Such notes receivable were $0.5 million and $0.2 million at December 31, 2004, and 2005, respectively.  F-29       12.    Warrants to Purchase Common and Preferred Stock          Warrants Outstanding at December 31 2004   Weighted- Average Exercise Price   Warrants Outstanding at December 31 2005   Weighted- Average Exercise Price   Warrant type:                         Common stock   1,297,472   $ 1.73   1,627,904   $ 1.38     Series E convertible preferred stock   125,000     2.00   125,000   $ 2.00    Common Stock           Common stock warrants outstanding (fully vested) at December 31, 2005 were comprised of:     Issue Date   Amount   Exercise Price   Expiration Date   January 2001   10,000   $ 24.00   January 2008   March 2001   13,333   $ 33.81   March 2011   April 2002   41,666   $ 15.75   April 2009   March 2003   650,071   $ 0.75   March 2008   May 2003   78,737   $ 0.75   May 2008   July 2003   396,666   $ 0.75   July 2008   July 2003   38,333   $ 0.03   July 2008   April 2005   332,432   $ 0.03   April 2010   August 2005   66,666   $ 0.75   March 2008                        1,627,904                               Warrants issued in 2005 were as follows:         As inducement for the April 2005 Investor Guaranty Agreement guarantee, the Company issued warrants to the investors to purchase 233,331 shares of common stock at a price of $0.03 per share. Also in connection with the April 2005 amendment to the senior secured credit facility, the Company issued a warrant to purchase 116,666 shares of common stock at a price of $0.03 per share. The warrants are fully vested and expire in April 2010. The value assigned to the April 2005 warrants was $1.7 million which has been recorded as deferred financing fees, and is being amortized over the life of the credit facility. The fair value of the warrants was estimated at the date of the issuance using the Black-Scholes option-pricing model assuming a risk-free interest rate of 3.9%, dividend yield of 0%, volatility of 65%, and expected life of the warrants of 5 years. In August 2005, 17,565 of these warrants were exercised.          In August 2005 the Company issued 66,666 fully-vested, nonforfeitable common stock warrants at an exercise price of $0.75 per share to settle a dispute with an investor concerning the conversion of its Series A preferred stock warrant and canceled its previously issued warrant to purchase 20,000 shares of common stock. The warrants expire in March 2008. The value assigned to the warrant was $0.8 million which was recognized as a legal settlement expense in the second quarter of 2005 when the contingency was settled in principle. The fair value of the warrants was estimated at the date of the issuance using the Black-Scholes option-pricing model assuming a risk-free interest rate of 3.9%, dividend yield of 0%, volatility of 65%, and expected life of the warrants of 3 years.  Preferred Stock           In connection with the December 2003 amendment to the revolving credit facility, the Company issued a warrant to purchase 100,000 shares of Series E preferred stock at a price of $2.00 per share in  F-30       connection with the revolving credit facility. The warrants expire in December 2008. The fair value of these warrants was not material.          In connection with the July 2004 amendment to the revolving credit facility, the Company issued a warrant to purchase 25,000 shares of Series E preferred stock at a price of $2.00 per share in connection with the amendment. The warrants expire in July 2009. The fair value of these warrants was not material.  13.    Commitments and Contingencies   Leases           The Company leases office space for its corporate headquarters as well as offices for its sales and operations activities in multiple markets across the United States. The leases terminate at various dates through April 2011 and generally provide for scheduled rent increases. Rental expense for all operating leases approximated $1.8 million, $1.9 million, and $2.0 million in 2003, 2004, and 2005, respectively.          Our principal executive offices are located in Wayne, Pennsylvania, where we lease approximately 34,600 square feet under a lease that expires in October 31, 2010. These offices are used for sales and marketing, back office processing, business development, storage of our equipment and technology, radio and television production and general corporate and finance activities.          The Company leases office space under noncancelable operating lease agreements. The leases generally provide for scheduled rent increases. Future minimum lease payments under noncancelable operating leases as of December 31, 2005, are as follows:     2006   $ 1,916   2007     1,762   2008     1,763   2009     1,576   2010     1,233   Thereafter     44              $ 8,294           Media Inventory           The Company contracts with various television and radio stations for the barter of advertising inventory for services, which may include cash payments. The contracts expire at various dates through January 2009. Expenses under these arrangements were $11.1 million, $11.2 million, and $12.0 million for 2003, 2004, and 2005, respectively.          Future minimum payments for media inventory under agreements with radio and television affiliates for the purchase of advertising inventory with noncancelable terms as of December 31, 2005 are as follows:     2006   $ 8,628   2007     4,099   2008     1,198   2009     56   2010 and thereafter     —              $ 13,981           F-31        Legal Proceedings   Santa Fe Technologies v. Argus Networks, Inc.           On July 28, 1999, Santa Fe Technologies, Inc. ("SFT"), a traffic-sensor installation company, filed a complaint in a New Mexico state court against the Company and others, including certain of the Company's officers, directors and TL Ventures LLC, whose successor, TL Ventures L.P., is affiliated with certain of our investors. The complaint sought compensatory and punitive damages. The complaint related to a proposed merger between SFT and the Company which had been proposed in contemplation of its participation as a subcontractor in a team proposal in response to a federal contract solicitation. In its complaint, SFT alleged that the Company and the other defendants conspired to and did misappropriate or misuse SFT's "corporate opportunity," confidential information and work product, and committed conversion of SFT's intellectual property and contributions in order to win the award of the federal contract.          During the pre-trial phase of the case and the course of the trial, except for three causes of action against the Company and two causes of action against the investor affiliate, all of the causes of action against all of the defendants were dismissed. The remaining claims consisted of a claim against the Company for breach of a claimed fiduciary duty not to use information or "work product" shared in confidence, a related civil conspiracy claim against the Company and the investor affiliate and a claim against the Company and the investor affiliate for unjust enrichment. The district court submitted the fiduciary duty claim (and the related conspiracy claim) to the jury for determination and decided the unjust enrichment claim itself. In June 2005, the fiduciary duty and conspiracy claims were tried before a jury. In late June 2005, the jury returned a verdict against the Company on the breach of fiduciary duty claim and the related conspiracy claim and against the investor affiliate on the conspiracy claim finding, that the Company and the investor affiliate are jointly and severally liable to plaintiff for $6.2 million in compensatory damages, assessing $5.0 million in punitive damages against the Company and assessing punitive damages against the investor affiliate. The district court subsequently rejected the plaintiff's unjust enrichment claim. On August 19, 2005, the district court entered judgment against the Company on the breach of fiduciary duty and conspiracy claims and against the investor affiliate on the conspiracy claim. In late September 2005, the district court rejected the Company's motion to set aside the verdict. On October 13, 2005, final judgment was entered against the Company and the investor affiliate. On November 17, 2005, the Company, Santa Fe Technologies, Inc. and TL Ventures L.P. entered into a settlement agreement with respect to the litigation. Under this agreement, the Company and TL Ventures L.P. agreed to pay to SFT an aggregate of $14.25 million in settlement of the litigation, one-half to be paid within 30 days of the date of the settlement agreement and the other half to be paid within 60 days of the date of the settlement agreement. Upon receipt of the full settlement amount, SFT has agreed to execute a general release of the Company and TL Ventures L.P. and all of our respective officers, directors, agents, employees, limited partners, general partners, members and affiliates and to dismiss the litigation. Also on November 17, 2005, the Company entered into an agreement with TL Ventures L.P. specifying that each party will pay one-half of the settlement amount, or $7.125 million. TL Ventures L.P. made the first settlement payment to SFT in December 2005 and the Company made the second settlement payment to SFT in January 2006. In accordance with the SEC Staff Accounting Bulletin Topic 5T, Accounting for Expense or Liabilities Paid by Principal Stockholder(s), the Company has recognized the full value of the settlement of $14.25 million in its statement of operations in legal settlements expense in the quarter ended September 30, 2005 and has treated the amounts paid by the principal stockholder ($7.125 million) as a capital contribution. Accordingly, the liability related to the settlement of this contingency recorded in the Company's balance sheet at December 31, 2005 is the $7.125 million paid in January 2006.  F-32       Traffic.com, Inc. v. Internet Capital Group, Inc. et al.           On June 29, 2005, the Company filed a complaint in the Chester County Pennsylvania Court of Common Pleas seeking a declaratory judgment against Internet Capital Group, Inc., ICG Holdings, Inc. and related entities, or ICG, that the conversion of ICG's Series B convertible preferred stock to common stock on a one-for-five basis (from approximately 5 million shares of Series B preferred stock to approximately 1 million shares of common stock), in connection with the Company's Series E preferred stock financing in March 2003, is valid and that ICG is not entitled to any additional ownership stake in the Company or any other payments or damages in connection with the Series E preferred stock financing or related matters. On July 26, 2005, ICG filed preliminary objections to the Company's complaint for declaratory judgment which, under Pennsylvania practice, is equivalent to a motion to dismiss our complaint. On October 28, 2005, the Company and ICG entered into a settlement with respect to the litigation. Under this agreement, in exchange for mutual releases and an agreement to dismiss the litigation, the Company issued to ICG 300,562 shares of common stock and agreed to allow ICG to grant to the underwriters in this offering the right to a specified number shares of the Company's common stock owned by ICG, within 30 days after the date of this prospectus, to cover any over-allotments. As a result of this settlement, the Company recognized an expense in the second quarter of 2005 of $3.5 million in legal settlements expenses.  Pennsylvania Early Stage Partners, L.P.           On April 22, 1999, the Company issued to Pennsylvania Early Stage Partners, L.P. ("PAES") a warrant to purchase 300,000 shares of the Company's Series A preferred stock at an exercise price of $1.00 per share. Since May 2004, PAES asserted that it remained entitled to purchase 100,000 shares of common stock, notwithstanding the one-for-five recapitalization of the Company in connection with the Series E and E-1 preferred stock financing on March 31, 2003. Following over a year of disagreement and negotiations, on August 24, 2005, the Company and PAES entered into a settlement agreement pursuant to which PAES' original warrant was terminated and exchanged for a warrant to purchase 66,666 shares of common stock at an exercise price of $0.75 per share, the price at which similar warrants were issued at the time of the recapitalization, and both parties signed mutual releases. As a result of this settlement, the Company recognized an expense in the second quarter of 2005 of $0.8 million in legal settlements expenses.  Other Legal Proceedings           The Company is also subject to various other lawsuits and claims with respect to matters arising out of the normal course of business. While the impact on future financial results for these other lawsuits and claims is not subject to reasonable estimation because considerable uncertainty exists, management believes, after consulting with counsel, that the ultimate liabilities resulting from such other lawsuits and claims will not materially affect the results of operations or financial position of the Company.  14.    Related Party Transactions           The Company has entered into an employment agreement with its chief executive officer that provides for a bonus of 3% of the total gross proceeds of any transaction should such transaction result in the transfer of greater than 50% of the outstanding voting power of the Company.          Additionally, the Company has employment agreements with two former executives that provide, in the aggregate, a combined bonus of 3.7% of the net proceeds of any transaction should such transaction result in the transfer of greater than 50% of the outstanding voting power of the Company. These agreements expire in June 2006 and January 2007.  F-33                In addition to the notes to executives described in Note 11, included in other current assets are notes receivable from certain members of management for loans made in connection with the alternative minimum tax burden incurred by the individuals as a result of the exercise of the options described in Note 11. Such notes receivable, together with accrued interest, were $0.3 million, at December 31, 2004, and 2005.  15.    Allowance for Doubtful Accounts           The following table presents the activity in the allowance for doubtful accounts for the years ended December 31, 2003, 2004, and 2005:         Balance at Beginning of Period   Charged to Expense   Charged to Other Accounts   Write-offs   Balance at End of Period       (In Thousands)    Year ended December 31, 2003                                 Allowance for doubtful accounts   $ 806   $ 250   $ —   $ 67   $ 989   Year ended December 31, 2004                                      Allowance for doubtful accounts     989     78     —     117     950   Year ended December 31, 2005                                      Allowance for doubtful accounts     950     61     —     232     779    16.    Quarterly Results of Operations (unaudited)          Quarter ended         Mar 31, 2004   Jun 30, 2004   Sep 30, 2004   Dec 31, 2004   Mar 31, 2005   Jun 30, 2005   Sep 30, 2005   Dec 31, 2005         (In Thousands, Except Per Share Amounts)          (Unaudited)      Revenue                                                     Advertising   $ 8,492   $ 10,681   $ 9,977   $ 10,299   $ 8,330   $ 11,177   $ 9,564   $ 9,800     Traffic data services     592     650     670     1,081     930     969     1,126     1,397                                         9,084     11,331     10,647     11,380     9,260     12,146     10,690     11,197     Cost of revenue     7,432     8,410     8,335     7,913     7,627     8,319     8,595     9,026                                   Gross margin     1,652     2,921     2,312     3,467     1,633     3,827     2,095     2,171     Operating expenses                                                             Research and development     767     960     1,025     895     807     797     983     1,318     Sales and marketing     3,099     3,105     3,100     2,728     3,783     3,529     3,733     5,132     General and administrative     1,832     1,976     1,583     1,838     1,697     2,495     1,945     2,567     Legal settlements     —     —     —     —     —     4,223     14,250     —                                         5,698     6,041     5,708     5,461     6,287     11,044     20,911     9,017                                   Loss from operations     (4,046 )   (3,120 )   (3,396 )   (1,994 )   (4,654 )   (7,217 )   (18,816 )   (6,846 )   Interest income (expense), net     (1,678 )   15     (910 )   (855 )   (1,127 )   (1,686 )   (1,416 )   (1,380 )                                 Net loss     (5,724 )   (3,105 )   (4,306 )   (2,849 )   (5,781 )   (8,903 )   (20,232 )   (8,226 )   Redemption and accretion of redeemable convertible preferred stock     (520 )   (536 )   (536 )   (536 )   (536 )   (553 )   (554 )   (394 )                                 Net loss attributable to common stockholders   $ (6,244 ) $ (3,641 ) $ (4,842 ) $ (3,385 ) $ (6,317 ) $ (9,456 ) $ (20,786 ) $ (8,620 )                                 Net loss attributable to common stockholders per share—basic   $ (2.11 ) $ (1.23 ) $ (1.63 ) $ (1.01 ) $ (1.89 ) $ (2.80 ) $ (6.05 ) $ (2.31 )   Net loss attributable to common stockholders per share—diluted   $ (2.11 ) $ (1.23 ) $ (1.63 ) $ (1.01 ) $ (1.89 ) $ (2.80 ) $ (6.05 ) $ (2.31 )    F-34      17.    Subsequent Events   Initial Public Offering           In January 2006 the Company offered 6,550,000 shares of common stock during its Initial Public Offering which resulted in proceeds, after the underwriters' discount and offering costs, of approximately $70.9 million. On January 25, 2006, the Company began trading on the NASDAQ national market under the symbol "TRFC".          In February 2006, the underwriters' elected to exercise a portion of their over allotment option and offered an additional 400,000 shares. Of the additional shares, 337,666 were offered by the Company and 62,334 by selling stockholders. The Company realized proceeds of $3.8 million, net of the underwriters' discount.          Upon the closing of the initial public offering, the outstanding shares of redeemable convertible preferred stock, with a carrying value of $57.0 million, were converted into 9,242,312 shares of common stock, in accordance with their terms.  Senior Secured Credit Facility           In January 2006 the Company retired its senior secured credit facility by paying $37.7 million of outstanding principal and accrued interest using a portion of the proceeds from the initial public offering.  Revolving Credit Facility           In February 2006, the Company repaid the outstanding obligation due under the revolving credit facility with a portion of the proceeds from the initial public offering. In March 2006, the facility expired upon its terms.  F-35     EXHIBIT INDEX      Exhibit Number    Description    3.2    Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on January 20, 2006.    3.4    Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on January 20, 2006.    4.1    Specimen Certificate evidencing shares of common stock. Incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    4.2    Warrant to purchase 116,666 shares of common stock, $0.01 par value per share, dated April 22, 2005, issued by the Registrant to National Electric Benefit Fund. Incorporated herein by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.3    Warrant to purchase 193,099 shares of common stock, $0.01 par value per share, dated April 22, 2005, issued by the Registrant to TL Ventures IV L.P. Incorporated herein by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.4    Warrant to purchase 100,000 shares of Series E Preferred stock, $0.01 par value per share, dated December 7, 2003, issued by the Registrant to Comerica Bank. Incorporated herein by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.5    Warrant to purchase 525 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III Interfund L.P. Incorporated herein by reference to Exhibit 4.5 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.6    Warrant to purchase 6,348 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III Interfund L.P. Incorporated herein by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.7    Warrant to purchase 3,370 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III Offshore L.P. Incorporated herein by reference to Exhibit 4.7 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.8    Warrant to purchase 40,697 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III Offshore L.P. Incorporated herein by reference to Exhibit 4.8 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.9    Warrant to purchase 194,425 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III L.P. Incorporated herein by reference to Exhibit 4.9 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.                   4.10    Warrant to purchase 16,103 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures III L.P. Incorporated herein by reference to Exhibit 4.10 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.11    Warrant to purchase 235,255 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures IV L.P. Incorporated herein by reference to Exhibit 4.11 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.12    Warrant to purchase 147,132 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to Convergence Capital, L.P. Incorporated herein by reference to Exhibit 4.12 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.13    Warrant to purchase 6,216 shares of common stock, $0.01 par value per share, dated March 31, 2003, issued by the Registrant to TL Ventures IV Interfund L.P. Incorporated herein by reference to Exhibit 4.13 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.14    Warrant to purchase 7,333 shares of common stock, $0.01 par value per share, dated July 31, 2003, issued by the Registrant to T. Williams Consulting, Inc. Incorporated herein by reference to Exhibit 4.14 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.15    Warrant to purchase 78,737 shares of common stock, $0.01 par value per share, dated May 30, 2003, issued by the Registrant to ICG Holdings, Inc. Incorporated herein by reference to Exhibit 4.18 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.16    Warrant to purchase 25,000 shares of Series E Preferred stock, $0.01 par value per share, dated July 8, 2003, issued by the Registrant to Comerica Bank. Incorporated herein by reference to Exhibit 4.19 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.17    Warrant to purchase 31,000 shares of common stock, $0.01 par value per share, dated July 31, 2003, issued by the Registrant to Peachtree Creek Business Group, Inc. Incorporated herein by reference to Exhibit 4.20 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.18    Warrant to purchase 66,666 shares of common stock, $0.01 par value per share, dated August 24, 2005, issued by the Registrant to PA Early Stage Partners, L.P. Incorporated herein by reference to Exhibit 4.21.1 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    4.19    Warrant to purchase 17,565 shares of common stock, $0.01 par value per share, dated April 22, 2005, issued by the Registrant to Safeguard Delaware, Inc. Incorporated herein by reference to Exhibit 4.23 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.20    Warrant to purchase 10,000 shares of common stock, $0.01 par value per share, dated January 26, 2001, issued by the Registrant to PNC Bank, National Association. Incorporated herein by reference to Exhibit 4.24 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.                   4.21    Warrant to purchase 41,666 shares of common stock, $0.01 par value per share, dated April 17, 2002, issued by the Registrant to Potomac Technology Development, LLC. Incorporated herein by reference to Exhibit 4.25 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.22    Warrant to purchase 5,102 shares of common stock, $0.01 par value per share, dated April 22, 2005, issued by the Registrant to TL Ventures IV Interfund L.P. Incorporated herein by reference to Exhibit 4.26 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.23    Contingent Warrant to purchase 33,333 shares of common stock, $0.01 par value per share, dated March 16, 2001, issued by the Registrant to Hearst Communications, Inc. Incorporated herein by reference to Exhibit 4.27 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    4.24    Fourth Amended and Restated Investor Rights Agreement dated August 30, 2005, as amended, among the Registrant and the parties listed therein. Incorporated herein by reference to Exhibit 4.28 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    4.25    Fourth Amended and Restated Investor Rights Agreement, among the Registrant and the parties listed therein. Incorporated herein by reference to Exhibit 4.28.1 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on January 5, 2005.    10.1**    Amended and Restated 1999 Long-Term Incentive Plan, dated as of May 11, 2000. Incorporated herein by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.2**    Amended and Restated 1999 Non-Employees' Stock Plan, dated as of May 11, 2000. Incorporated herein by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.3**    2005 Long-Term Incentive Plan. Incorporated herein by reference to Exhibit 10.2.1 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on January 24, 2006.    10.4    Lease Agreement dated June 14, 2000 between FV Office Partners II, L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.5    First Amendment to Lease Agreement dated April 30, 2001 between FV Office Partners II, L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.6    Second Amendment to Lease Agreement dated November 15, 2004 between FV Office Partners II, L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.7    Third Amendment to Lease Agreement dated May 26, 2005 between FV Office Partners II, L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.8    Subcontractor agreement dated June 1, 1999 between SIGNAL Corporation and the Registrant. Incorporated herein by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.9    Modification to Subcontract dated June 20, 2002, between Signal Solutions, Inc. and the Registrant. Incorporated herein by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.                   10.10    Modification to Subcontract dated August 5, 2005, between Signal Solutions, Inc. and the Registrant. Incorporated herein by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    10.11**    Employment Agreement dated October 1, 2004, between Robert Verratti and the Registrant. Incorporated herein by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.12**    Employment Agreement dated October 7, 1999 between David L. Jannetta and the Registrant. Incorporated herein by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.13**    Employment Letter Agreement dated March 9, 2000 between Christopher M. Rothey and the Registrant. Incorporated herein by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.14**    Employment Letter Agreement dated April 20, 2005 between Andrew Maunder and the Registrant. Incorporated herein by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005    10.15**    Employment Letter Agreement dated December 1, 1999 between Joseph A. Reed and the Registrant. Incorporated herein by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.16**    Employment Letter Agreement dated February 16, 2006 between Brian Sisko and the Registrant. Incorporated herein by reference to Exhibit 10.1 of Registrant's Current Report of Form 8-K, filed on February 23, 2006.    10.17**    Employment Letter Agreement dated June 14, 2002 between Robert Pollan and the Registrant. Incorporated herein by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.18**    Employment Letter Agreement between Douglas Alexander and the Registrant. Incorporated herein by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    10.19    Guaranty Agreement dated April 22, 2005 between TL Ventures, PA Early Stage III, L.P., Safeguard Delaware Inc., Columbia Partners, LLC Investment Management and the National Electrical Benefit Fund. Incorporated herein by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.20    Equity Commitment Letter dated April 22, 2005 between TL Ventures, PA Early Stage III, L.P., Safeguard Delaware Inc., National Electrical Benefit Fund and the Registrant. Incorporated herein by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1, No. 333-127973, filed on August 31, 2005.    10.21*    Data Acquisition Agreement between NAVTEQ Corporation and the Registrant. Incorporated herein by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on November 4, 2005.    10.22    Formal Settlement Agreement and General Release, dated as of December 16, 2005, among Santa Fe Technologies, Inc., TL Ventures L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form S-1/A, No. 333-127973, filed on January 20, 2006.    10.23    Retainer Agreement, dated March 22, 2006, by and between the Company and Allen & Company, LLC.    23.1    Consent of Ernst & Young LLP                   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.      *Confidential treatment granted as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission. **Indicates management contract or compensatory plan or arrangement.       QuickLinks DOCUMENTS INCORPORATED BY REFERENCE  PART I  RISK FACTORS Risks Related to Our Business Risks Related to Our Common Stock  PART II Overview  PART III
Consolidated Financial Statements Years ended December 31, 2003, 2004, and 2005 Contents        EX-10.23 2 a2168369zex-10_23.htm EXHIBIT 10.23       Exhibit 10.23   March 22, 2006                              Traffic.com, Inc. 851 Duportail Road Suite 220 Wayne, PA 19087     Attn:   Robert N. Verratti Chief Executive Officer    Gentlemen;          We are pleased to confirm our mutual understanding concerning the retention by Traffic.com, Inc. ("Traffic" or the "Company") of Allen & Company LLC ("Allen") to act as the Company's exclusive financial advisor on the terms set forth herein. This letter will replace the prior engagement letter existing between the Company and Allen.          1.     Establishment of Retainer Relationship; Scope of Engagement. In anticipation of situations which may arise from time to time, the Company has determined that it would be in its best interest to update, revise and replace the previously existing engagement letter between the Company and Allen. The Company has requested, and Allen hereby agrees, to be retained by the Company as follows: For the Term hereof, Allen will serve as the Company's exclusive financial advisor in connection with any of the following possible transactions which may arise: (i) any possible acquisition by the Company of the stock or assets of another company or enterprise; (ii) any possible merger, consolidation or other business combination transaction pursuant to which the Company is to acquire another entity (items (i) and (ii) of this paragraph shall hereinafter be referred to as a "Purchase Transaction"), (iii) any possible merger, consolidation or other business combination transaction pursuant to which the Company is to be acquired by, or combined with, another entity; (iv) any possible sale or disposition of all or substantially all of the stock or assets of the Company, or (v) any possible recapitalization, restructuring, joint venture or other transaction or series of transactions which has the effect of transferring a substantial interest in or control of the Company or its assets to another entity (items (iii), (iv) and (v) of this paragraph shall hereinafter be referred to as a "Sale Transaction" and, together with any Purchase Transaction (except as indicated in the last sentence of this paragraph) shall constitute a "Transaction"). In the event requested by the Company, Allen will assist in structuring and negotiating, and will otherwise assist in taking necessary steps toward consummating, any proposed Transaction(s) that the Company may elect to consider during the term of Allen's engagement hereunder. The term "Transaction" shall not include any Purchase Transaction which, because of the size or simplicity of the transaction, the Company does not feel it necessary to utilize the services of a financial advisor.          2.     Advisory Fees and Expenses. (a) In consideration for the services described in paragraph 1 above, upon consummation of a Transaction, the Company shall pay to Allen a cash success fee (the "Success Fee") equal to, as the case may be a) 2% of the Consideration received by the Company or its shareholders in connection with such Sale Transaction, or b) 2% of the Consideration paid by the Company in connection with such Purchase Transaction. As used in the above paragraph, "Consideration" shall mean the sum of (i) any cash, and the fair market value of any securities or other property, paid or payable at the time of the consummation of the relevant Transaction or committed to be so paid in the future, (ii) the aggregate dollar amount of all indebtedness (excluding any capital leases) assumed, recapitalized or restructured at the time of the consummation of the relevant Transaction, (iii) the amount of cash or the fair market value of any property invested at the closing of the relevant Transaction or irrevocably committed to be invested in the future, (iv) in the case of any Sale Transaction resulting in value being delivered to the Company's shareholders, the amount of any extraordinary distributions made by the Company in connection with or anticipation of the contemplated Transaction, (v) to the extent that any Transaction is structured so as to provide for a transfer a majority, but not all, of the Company's stock or assets to a third party and the retention by        the Company or its shareholders of other stock or assets related to the Company or its subsidiaries, the retained stock or assets not being transferred (including but not limited to stock, partnership interests, cash and cash equivalents, real property, investments and receivables) and (vi) any contingent amounts referred to in (i), (ii), (iii),(iv) or (v) above at the time the same are paid, assumed or invested. Such Consideration shall be valued as of the closing of the Transaction, provided that to the extent the right to receive any Consideration is contingent upon future events, the value of such contingent Consideration and the calculation of the fee related thereto shall be determined and payable to Allen only if and when any such Consideration is paid.          (b)   No fee payable to any other financial advisor, by the Company or any other person or entity in connection with the subject matter of this engagement, shall reduce or otherwise affect any fee payable hereunder, except to the extent such other fee has the effect of reducing the Consideration paid in any such Transaction.          (c)   In addition to any fees described above, whether or not any Transaction is consummated, the Company shall reimburse Allen, upon request from time to time, for all reasonable out-of-pocket expenses incurred pursuant to our engagement hereunder, including, reasonable fees and disbursements of our counsel as well as the online data room provider and other consultants and advisors retained by us with your prior written consent.          (d)   Upon termination of this agreement, Allen shall be entitled to collect all such fees (if any) and expenses accrued through the date of termination.          3.     Term and Termination. (a) The initial term of this engagement shall be for a period of 12 months from the date hereof and may be extended as the parties shall mutually agree, subject to the establishment of arrangements for additional compensation and other appropriate terms for such extension. Either the Company or Allen may terminate this engagement at any time for any reason, subject to providing the other party with 30 days' notice of such termination.          (b)   Notwithstanding termination of this engagement or completion of any assignment hereunder, Allen shall be entitled to the payment of a fee for any Transaction as established pursuant to paragraph 2 hereof if such Transaction is consummated, or if any agreement or arrangement respecting such Transaction is made, prior to the expiration of the term or the earlier termination of this engagement.. Allen shall also be entitled to the payment of such fee if, after the date of expiration or termination, but prior to the one year anniversary of such date, the Company consummates or reaches an agreement or arrangement with respect to a Transaction with any entity identified by or introduced to the Company through Allen or with which Allen had contact on behalf of the Company during the term hereof.          (c)   Any termination of this Agreement by the Company for Allen's gross malfeasance; or (ii) any termination of this Agreement by Allen, other than based on the material breach of this Agreement by the Company or other than for good reason as determined by Allen in consultation with the Company, shall terminate any right to receive any fees hereunder.          (d)   Any termination of this engagement pursuant to this paragraph 3 shall otherwise be without liability or continuing obligation for either party except, for fees or other compensation earned or expenses incurred by Allen up to the date of termination, or fees which may be earned after such date as provided above. Furthermore, the provisions of paragraph 6 hereof relating to indemnification and contribution shall remain operative and in full force and effect, notwithstanding the termination of this engagement or the completion of any or all assignments hereunder.          4.     Public Announcements. Prior to any press release or other public disclosure relating to Allen's services hereunder, the Company and Allen shall confer and reach an agreement upon the contents of any such disclosure. Notwithstanding the foregoing, except as required by any applicable law, rule or  2       regulation, no party shall make any public announcement regarding this engagement or our relationship with the Company hereunder without the prior consent of the other party.          5.     Confidentiality; Responsibility for Disclosure. (a) The Company shall provide Allen all information material to its business and operations as well as any other relevant information which Allen reasonably requests in connection with the performance of its services hereunder. To the extent consistent with legal requirements, all information provided to Allen by the Company, unless publicly available or otherwise available to Allen without restriction or breach of any confidentiality obligation, will be held by Allen in confidence and, without the Company's prior approval, will not be disclosed to anyone, other than Allen's employees and advisors who have a need to know such information in connection with this engagement, or used for any purpose other than the transactions contemplated hereunder. Allen shall take all reasonable steps to ensure that its employees and advisors abide by the confidentiality obligations described above. In the event that Allen is requested in any proceeding to disclose any such confidential information, Allen will give the Company prompt notice of such request so that the Company may seek an appropriate protective order. The Company agrees, however, that if Allen is nevertheless compelled to disclose any such information, Allen may disclose the information without liability hereunder, provided that, upon the Company's request, Allen uses its best efforts to obtain assurances that confidential treatment will be accorded to the information so disclosed.          (b)   The Company represents and warrants to Allen that all such information, and all information released to the public or filed by the Company with any relevant government agency or regulatory body, will be accurate and complete at the time it is furnished or filed, and the Company agrees to keep Allen advised of all material developments affecting the Company through the later of the term of our engagement or completion of any Transaction in which Allen is involved on behalf of the Company. The Company recognizes that, in rendering its services hereunder, Allen will be using information provided by the Company, as well as information available from other sources deemed appropriate by Allen. The Company further acknowledges that Allen does not assume responsibility for and may rely, without independent verification, on the accuracy or completeness of any such information.          6.     Indemnification and Contribution. The Company agrees that in the event Allen or any of Allen's officers, employees, agents, affiliates or controlling persons, if any (each of the foregoing, including Allen, an "Indemnified Person"), become involved in any capacity (whether or not as a party) in any action, claim, proceeding or investigation (including any securityholder action or claim or any action brought by or in the right of the Company) related to or arising out of our engagement, including any related services already performed and any modifications or future additions to such engagement, the Company will promptly upon demand, advance to such Indemnified Person, or reimburse each such Indemnified Person for, its legal and other expenses (including the cost of any investigation and preparation) as and when they are to be incurred, or are incurred, in connection therewith.          In addition, the Company will indemnify and hold harmless each Indemnified Person from and against, and no Indemnified Person shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company or its securityholders or creditors for, any losses, claims, damages, liabilities or expenses (including, without limitation, attorney's fees and expenses) related to or arising out of our engagement, any services provided thereunder or any transactions or proposed transactions related thereto, including any related services already performed and any modifications or future additions to such engagement, whether or not any pending or threatened action, claim, proceeding or investigation giving rise to such losses, claims, damages, liabilities or expenses is initiated or brought by or on behalf of the Company and whether or not in connection with any action, claim, proceeding or investigation in which the Company or any Indemnified Person is a party, except to the extent that any such loss, claim, damage, liability or expense is found by a court of competent jurisdiction in a  3       judgment that has become final in that it is no longer subject to appeal or review to have resulted directly and primarily from such Indemnified Person's bad faith or gross negligence.          If for any reason the foregoing indemnification is held unenforceable, then the Company shall contribute to the loss, claim, damage, liability or expense for which such indemnification is held unenforceable in such proportion as is appropriate to reflect the relative benefits received, or sought to be received, by the Company and its securityholders on the one hand and the party entitled to contribution on the other hand in the matters contemplated by this engagement, as well as the relative fault of the Company and such party with respect to such loss, claim, damage, liability or expense and any other relevant equitable considerations. The Company agrees that, to the extent permitted by applicable law, in no event shall the Indemnified Persons be responsible for or be required to contribute amounts which in the aggregate exceed the fees, if any, actually paid to Allen for such financial advisory services.          The Company's reimbursement, indemnity and contribution obligations under this letter shall be in addition to any liability which the Company may otherwise have and shall not be limited by any rights Allen or any other Indemnified Person may otherwise have. The Company agrees that, without Allen's prior written consent, which will not be unreasonably withheld, the Company will not settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action, proceeding or investigation in respect of which indemnification or contribution could be sought hereunder (whether or not Allen or any other Indemnified Person is an actual or potential party to such claim, action, proceeding or investigation), unless such settlement, compromise or consent includes an unconditional release of each Indemnified Person from all liability arising out of such claim, action, proceeding or investigation.          The provisions of this paragraph 6 shall remain in effect indefinitely, notwithstanding the completion of this assignment, the expiration of the term hereof or any other termination of this engagement.          7.     Miscellaneous. No waiver, amendment or other modification of this Agreement shall be effective unless in writing and signed by each party to be bound hereby. This agreement, and any claim related directly or indirectly to this agreement, shall be governed by, and construed in accordance with, the laws of the State of New York without reference to the conflict of laws provisions thereof. The parties hereby irrevocably and unconditionally submit (to the extent permitted by law) to the nonexclusive jurisdiction of the courts of the State of New York located in the City and County of New York and the United States District Court for the Southern District of New York for any legal action or proceeding arising out of this agreement or Allen's engagement hereunder, and each of the parties hereby irrevocably consents to service of process in any such action or proceeding by certified or registered mail at the address for such party set forth above. Allen and the Company (on the Company's own behalf and, to the extent permitted by applicable law, on behalf of its stockholders and creditors) waive all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) related to or arising out of our engagement. The obligations of this agreement shall be binding upon and shall inure to the benefit of the parties hereto, the Indemnified Persons hereunder and any of their successors, assigns, heirs and personal representatives. This Agreement replaces any and all prior agreements between the parties, and any such agreements shall be deemed terminated in their entirety as of the date hereof, with no further obligations of either party remaining under any such agreements subsequent to the date hereof.  4              Please confirm that the foregoing is in accordance with your understanding of the terms of our engagement by signing and returning to us the enclosed duplicate of this letter, which shall thereupon constitute a binding agreement between us.           Very truly yours,         ALLEN & COMPANY LLC         By:    /s/  JOHN H. JOSEPHSON       Name: John H. Josephson Title: Managing Director        Accepted and agreed to as of the date first above written:         TRAFFIC.COM, INC.         By:    /s/  ROBERT N. VERRATTI       Name: Robert N. Verratti Title: Chief Executive Officer          5             EX-23.1 3 a2168369zex-23_1.htm EXHIBIT 23.1       QuickLinks  -- Click here to rapidly navigate through this document  Exhibit 23.1       Consent of Independent Registered Public Accounting Firm              We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-131311) pertaining to the 1999 Long-Term Incentive Plan, the 1999 Non-Employees' Stock Plan, and the 2005 Long-Term Incentive Plan of Traffic.com, Inc. of our report dated March 10, 2006 with respect to the consolidated financial statements of Traffic.com, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2005.             /s/ Ernst & Young LLP             Philadelphia, PA March 23, 2006       QuickLinks Consent of Independent Registered Public Accounting Firm        EX-31.1 4 a2168369zex-31_1.htm EXHIBIT 31.1       Exhibit 31.1   CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934   I, Robert N. Verratti, certify that:   1.I have reviewed this report on Form 10-K of Traffic.com, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:   a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):   a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.   Date: March 24, 2006     /s/  ROBERT N. VERRATTI       Robert N. Verratti Chief Executive Officer                    EX-31.2 5 a2168369zex-31_2.htm EXHIBIT 31.2       Exhibit 31.2   CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934   I, Andrew Maunder, certify that:   1.I have reviewed this report on Form 10-K of Traffic.com, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:   a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):   a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.   Date: March 24, 2006     /s/  ANDREW MAUNDER       Andrew Maunder Chief Financial Officer                    EX-32.1 6 a2168369zex-32_1.htm EXHIBIT 32.1       Exhibit 32.1   CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 TRAFFIC.COM, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002           Each of the undersigned officers of Traffic.com, Inc. (the "Company") hereby certifies to his knowledge that the Company's Annual Report on Form 10-K for the period ended December 31, 2005 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.     /s/  ROBERT N. VERRATTI       Robert N. Verratti Chief Executive Officer (Principal Executive Officer) March 24, 2006        /s/  ANDREW MAUNDER       Andrew Maunder Chief Financial Officer (Principal Accounting and Financial Officer) March 24, 2006                 *  A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Traffic.com, Inc and will be retained by Traffic.com, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This written statement accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission, and will not be incorporated by reference into any filing of Traffic.com, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language contained in such filing.              -----END PRIVACY-ENHANCED MESSAGE-----