RESTON, Va. ( TheStreet) -- TerreStar ( TSTR) was trading sharply higher on a surge in volume after the company announced a deal with AT&T ( T) to bring to market a fully integrated satellite cellular smartphone.

TerreStar announced Wednesday that it will combine AT&T's wireless connectivity with the ability to use a satellite network as back up throughout the U.S. Users will be able to use TerreStar's Genus phone to access voice and data services in the U.S., Puerto Rico, and the U.S. Virgin Islands and offshore coastal waters using AT&T's 3G network or its own satellite network.

News of the deal had TerreStar shares rallying sharply higher on big volume. TerreStar was lately rising 45 cents, or 21.1%, to $2.58. Earlier, the stock touched an intraday high of $2.95. More than 6.8 million shares changed hands in the first hour of trading Wednesday, compared to the stock's 50-day average daily volume of 1.2 million, according to the Nasdaq's Web site.

TerreStar has a 103.2 million-share float with a small short interest float of only 0.8% as of Sept. 10, according to Yahoo! Finance. More than 23% of the company's shares are held by insiders.

Investor posts on Internet message boards were split on whether to sell the news on Wednesday. While some argued TerreStar should hit $5 a share, others were nervous the news would fade over the next few days, along with the company's share price.

Some savvy investors also noted that the market has known about the TerreStar/AT&T agreement for some time, and that Wednesday's press release only added that the satellite was fully operational.

Despite the surge in shares Wednesday, investors continue to be concerned about TerreStar's financial situation. In the company's most recent earnings report, filed in August, TerreStar said it saw a net decrease in cash and cash equivalents totaling nearly $126 million in the first six months of 2009, compared to a net increase of $132 million in the first six months of 2008.

"Based on the current plans, we estimate that the outstanding cash and cash equivalents as of June 30, 2009 will not be sufficient to cover the projected funding needs for all of 2010," TerreStar said in its regulatory filing.

-- Written by Robert Holmes in New York.