UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 0-22239

Autobytel Inc.

(Exact name of registrant as specified in its charter)


Delaware	33-0711569
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer identification number)

18872 MacArthur Boulevard, Suite 200, Irvine, California	92612
(Address of principal executive offices)	(Zip Code)

(949) 225-4500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated ~~filer,”~~filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~July 31,~~November 1, 2010, there were ~~45,389,431~~45,515,671 shares of the Registrant’s Common Stock outstanding.


	~~INDE~~INDEXX
		Page
	PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Unaudited Consolidated Condensed Balance Sheets as of ~~June~~September 30, 2010 and December 31, 2009	3

	Unaudited Consolidated Condensed Statements of Operations and Comprehensive Loss for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2010 and the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2009	4

	Unaudited Consolidated Condensed Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2010 and the ~~Six~~Nine Months Ended ~~June~~September 30, 2009	5

	Notes to Unaudited Consolidated Condensed Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13 18

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	18 23

ITEM ~~4T.~~4.	Controls and Procedures	18 23

	PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	19 24

ITEM 1A.	Risk Factors	19 24

ITEM 6.	Exhibits	21 27

Signatures		2228

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

(Amounts in thousands, except share and per-share data)

	September 30,			December 31,
	2010			2009
Assets
Current assets:
Cash and cash equivalents	$	10,332		$	25,097
Accounts receivable, (net of allowances for bad debts and customer credits of $623 and $1,107 at September 30, 2010 and December 31, 2009, respectively)		9,231			8,573
Prepaid expenses and other current assets		1,222			594
Total current assets		20,785			34,264
Property and equipment, net		1,212			1,003
Long-term strategic investment		1,000			—
Intangible assets, net		4,595			—
Goodwill		11,669			—
Other assets		81			123
Total assets	$	39,342		$	35,390
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,190		$	2,539
Accrued expenses and other current liabilities		4,306			4,028
Deferred revenues		524			603
Total current liabilities		8,020			7,170
Note payable		5,000			—
Other non-current liabilities		375			79
Total liabilities		13,395			7,249
Commitments and contingencies (Note 9)		—			—
Stockholders’ equity:
Preferred stock, $0.001 par value; 11,445,187 shares authorized; none outstanding		—			—
Common stock, $0.001 par value; 200,000,000 shares authorized and 45,390,275 and 45,168,706 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		45			45
Additional paid-in capital		304,903			301,831
Accumulated deficit		(279,001	)		(273,735	)
Total stockholders’ equity		25,947			28,141
Total liabilities and stockholders’ equity	$	39,342		$	35,390

See accompanying notes.

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AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(Amounts in thousands, except per-share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net revenues:
Purchase Requests	$	11,875		$	11,695		$	33,854		$	35,431
Advertising		1,037			1,627			2,959			5,100
Other revenues		19			32			61			138
Total net revenues		12,931			13,354			36,874			40,669
Cost of revenues (excludes depreciation of $144 and $225 for the three months ended September 30, 2010 and 2009, respectively and $731 and $859 for the nine months ended September 30, 2010 and 2009, respectively)		8,174			8,614			23,127			26,523
Gross profit		4,757			4,740			13,747			14,146
Operating expenses:
Sales and marketing		2,959			2,387			8,631			7,568
Technology support		2,080			1,357			5,060			4,044
General and administrative		2,887			2,409			8,677			9,495
Patent litigation settlement		(66	)		(2	)		(2,871	)		(2,848	)
Total operating expenses		7,860			6,151			19,497			18,259

Operating loss		(3,103	)		(1,411	)		(5,750	)		(4,113	)
Interest and other income, net		88			94			578			915
Loss before income tax expense		(3,015	)		(1,317	)		(5,172	)		(3,198	)
Income tax expense (benefit)		46			(132	)		94			(627	)
Loss from continuing operations		(3,061	)		(1,185	)		(5,266	)		(2,571	)
Discontinued operations		—			386			—			1,164
Net loss and comprehensive loss	$	(3,061	)	$	(799	)	$	(5,266	)	$	(1,407	)

Basic and diluted loss per common share:
Loss from continuing operations	$	(0.07	)	$	(0.03	)	$	(0.12	)	$	(0.06	)
Discontinued operations, net		—			0.01			—			0.03
Basic and diluted loss per common share	$	(0.07	)	$	(0.02	)	$	(0.12	)	$	(0.03	)

See accompanying notes.

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AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Amounts in thousands)


	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(5,266	)	$	(1,407	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		866			1,258
Provision for bad debts		102			864
Provision for customer credits		468			729
Gain on sale of AVV business		—			(1,772	)
Share-based compensation		803			792
Changes in assets and liabilities:
Accounts receivable		68			(348	)
Prepaid expenses and other current assets		(616	)		634
Other non-current assets		48			(569	)
Accounts payable		224			(662	)
Accrued expenses and other liabilities		(253	)		(2,780	)
Deferred revenues		(79	)		(1,041	)
Non-current liabilities		(125	)		(73	)
Net cash used in operating activities		(3,760	)		(4,375	)
Cash flows from investing activities:
Purchases of property and equipment		(1,114	)		(131	)
Proceeds from sale of AVV business		—			1,772
Purchase of Autotropolis and Cyber Ventures		(9,000	)		—
Long-term strategic investment		(1,000	)		—
Proceeds from available-for-sale investments		—			580
Net cash (used in) provided by investing activities		(11,114	)		2,221
Cash flows from financing activities:
Proceeds from exercise of stock options and awards issued under the employee stock purchase plan		109			—
Net cash provided by financing activities		109			—
Net decrease in cash and cash equivalents		(14,765	)		(2,154	)
Cash and cash equivalents, beginning of period		25,097			27,393
Cash and cash equivalents, end of period	$	10,332		$	25,239

See accompanying notes.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Organization and Operations

Autobytel Inc. (“Autobytel” or the “Company”) is an automotive marketing services company that helps automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles through its internet lead referral and online advertising programs. Internet lead referrals (“Purchase Requests”) are consumer internet requests for pricing and availability of new or used vehicles or for vehicle financing. Purchase Requests originate from t he Company’s websites or are purchased from third parties (“Network Websites”), and are sold primarily to Dealers and Manufacturers. The Company’s consumer-facing automotive websites, including Autobytel.com®, Autoweb.com®, AutoSite.com®, Car.comsm, CarSmart.com®, CarTV.com®, MyRide.com® and Autotropolis.com® provide consumers with information and tools to aid them with their automotive purchase decisions and the opportunity to submit Purchase Requests. Manufacturers direct consumers to their messages and their respective websites by purchasing advertising on the Company’s websites.

The Company was incorporated in Delaware on May 17, 1996. Its principal corporate offices are located in Irvine, California. The Company’s common stock is listed on The NASDAQ Global Market under the symbol ABTL.

On September 17, 2010, the Company acquired substantially all of the assets of privately-held Autotropolis, Inc., a Florida corporation, and Cyber Ventures, Inc., a Florida corporation (collectively, “Auto/Cyber”). The business acquired from Cyber Ventures, Inc., through proprietary content, generates and sells in-market consumer automotive Purchase Requests. The business acquired from Autotropolis, Inc., through its Autotropolis.com website, provides new car Purchase Requests and related digital products directly to automotive dealers.

The Company has historically experienced negative cash flow and losses and at September 30, 2010 had an accumulated deficit of $279 million. The Company believes that its current cash and cash equivalents are sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, primarily as a result of the recent acquisition of Auto/Cyber, which the Company believes will contribute to reducing negative ca sh flow, and expense reduction initiatives designed to preserve working capital that were commenced in the fourth quarter of 2010.However, the Company continues to face many risks and uncertainties, many of which are beyond its control, including those related to general economic conditions and the automotive industry in general and there can be no assurances given that the Company will be able to meet anticipated cash needs for at least the next 12 months.

2. Basis of Presentation

The unaudited consolidated condensed financial statements of Autobytel presented herein are presented on the same basis as the Company’s 2009 Annual Report on Form 10-K. Autobytel has made its disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, but condensed or omitted certain information and disclosures normally included in notes to consolidated financial statements in accordance with the Securities and Exchange Commission’s rules and regulations. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in Autobytel’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2009.

In the opinion of Autobytel’s management, the accompanying unaudited interim consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present Autobytel’s consolidated condensed financial position as of September 30, 2010 and the consolidated condensed statements of operations for the three and nine months ended September 30, 2010 and 2009 and cash flows for the nine months ended September 30, 2010 and 2009, as applicable. The statements of operations and comprehensive loss and cash flows for the periods ended September 30, 2010 and 2009 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.

Certain reclassifications have been made to prior periods’ consolidated condensed financial statements to conform to the current year presentation. These reclassifications include presenting bad debt expense in Sales and Marketing and presenting rental expense in General and Administrative expense.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

3. Acquisition of Autotropolis, Inc. and Cyber Ventures, Inc.

On September 17, 2010 (“Acquisition Date”), the Company acquired substantially all of the assets of Auto/Cyber. The results of Auto/Cyber’s operations have been included in the consolidated financial statements since that date. The business acquired from Cyber Ventures, Inc., through its proprietary content, generates and sells in-market consumer automotive purchase requests. The business acquired from Autotropolis, Inc., through its Autotropolis.com website, provides new car purchase requests and related digital products directly to automotive dealers. The Company expects the transaction to extend its core growth and margin-enhancement strategies and solidify its position as the premier provider of automotive-relate d consumer Purchase Requests in the industry. Prior to the acquisition, Cyber Ventures, Inc. was a Purchase Request provider for the Company.

The Acquisition Date fair value of the consideration transferred totaled $16.8 million which consisted of the following:

	(amounts in thousands)

Cash	$	9,000
Convertible subordinated promissory note		5,900
Warrant to purchase 2,000,000 shares of Company Common Stock		1,260
Contingent consideration		526
Working capital adjustment		91
	$	16,777

As part of the consideration paid for the acquisition, the Company issued a convertible subordinated promissory note for $5,000,000 (“Note”) to the sellers. The fair value of the Note as of the Acquisition Date was $5,900,000. This valuation was estimated using a binomial option pricing method. Key assumptions used in valuing the promissory note include a market yield of 15.0% and stock price volatility of 77.5%. As the convertible note was issued with a substantial premium, the Company recorded the premium as additional paid-in capital. Interest is payable at an annual interest rate of 6% in quarterly installments. The entire outstanding balance of the Note is to be paid in full on September 30, 2015. At any time after September 30, 2013, the h olders of the Note may convert all or any part of, but in 200,000 minimum share increments, the then outstanding and unpaid principal of the Note into fully paid shares of the Company’s Common Stock at a conversion price of $0.93 per share (as adjusted for stock splits, stock dividends, combinations and other similar events). The right to convert the Note into Common Stock of the Company is accelerated in the event of a change in control of the Company. In the event of default, the entire unpaid balance of the Note will become immediately due and payable and will bear interest at the lower of 8% per year and the highest legal rate permissible under applicable law.

The Warrant to purchase 2,000,000 shares of Company Common Stock issued in connection with the acquisition (“Warrant”) has been valued at $0.63 per share for a total value of $1,260,000. The Company used an option pricing model to determine the value of the warrant. Key assumptions used in valuing the warrant are as follows: risk-free rate of 2.3%, stock price volatility of 77.5% and a term of 8.04 years. The Warrant was valued based on long-term volatilities of the Company and comparable public companies as of the Acquisition Date. The exercise price of the Warrant is $0.93 per share (as adjusted for stock splits, stock dividends, combinations and other similar events). The Warrant becomes exercisable on the th ird anniversary of the issuance date and expires on the eighth anniversary of the issuance date. The right to exercise the Warrant is accelerated in the event of a change in control of the Company.

The contingent consideration arrangement requires the Company to pay up to $1,000,000 of additional consideration to the sellers if certain Purchase Request volume, Purchase Request quality and gross margin targets are met. The fair value of the contingent consideration arrangement as of the Acquisition Date was $526,000. The fair value of the contingent consideration was estimated using a Monte Carlo Simulation. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in Accounting Standards Codification 820, Fair Value Measurements and Disclosures. The key assumptions in applying the Monte Carlo Simulation consisted of minimum, maximum, and modal values for the expected quarterly incremental Purchase Request volume, close rate index, and

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

gross margin growth rate as well as a triangular distribution assumption. As of September 30, 2010, there were no significant changes in the range of outcomes for the contingent consideration recognized as a result of the acquisition of Auto/Cyber.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date. Because the transaction was completed near the end of our third quarter, we have not yet finalized the fair values of the assets and liabilities assumed in connection with the acquisition.

	(amounts in thousands)

Accounts receivable	$1,296
Prepaid online advertising	12
Property, plant and equipment	56
Other long-term assets	6
Total tangible assets acquired	1,370

Current liabilities	662
Other liabilities	100
Total liabilities assumed	762

Net identifiable assets acquired	608

Definite-lived intangible assets acquired	4,500

Goodwill	11,669

Net assets acquired	$16,777

The preliminary fair value of the acquired intangible assets was determined using the below valuation approaches. In estimating the preliminary fair value of the acquired intangible assets, the Company utilized the valuation methodology determined to be most appropriate for the individual intangible asset being valued as described below. The acquired intangible assets include the following:

	Valuation Method	Estimated Fair Value	Remaining Useful Lives (1)
		(in thousands)	(years)

Employment/Non-compete Agreements	Discounted Cash Flow (2)	$500	5
Publications	Cost Approach (3)	500	3
Customer Relationships	Excess of Earnings (4)	1,870	3
Trademarks and trade names	Relief from Royalty (5)	830	5
Software	Cost Approach (3)	800	3
Total purchased intangible assets		$4,500

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

(1) Determination of the estimated useful lives of the individual categories of purchased intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite lives are recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.

~~UNAUDITED CONSOLIDATED~~ ~~CONDENSED BALANCE SHEETS~~(2) The employment/non-compete agreements fair value was derived by calculating the difference between the present value of the Company’s forecasted cash flows with the agreements in place and without the agreements in place.

~~(Amounts in thousands, except share~~(3) The cost approach estimates the cost required to repurchase or reproduce the intangible assets. The method takes into account technological and ~~per-share data)~~economic obsolescence of the publications and software licenses.

June 30, December 31,
2010 2009
Assets
Current assets:
Cash and cash equivalents $ 23,877 $ 25,097
Accounts receivable, (net of allowances for bad debts and customer credits of $659 and $1,107 at June 30, 2010 and December 31, 2009, respectively) 7,438 8,573
Prepaid expenses and other current assets 987 594
Total current assets 32,302 34,264
Property and equipment, net 863 1,003
Other assets 149 123
Total assets $ 33,314 $ 35,390
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 2,922 $ 2,539
Accrued expenses and other current liabilities 3,196 4,028
Deferred revenues 540 603
Total current liabilities 6,658 7,170
Non-current liabilities 45 79
Total liabilities 6,703 7,249
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 11,445,187 shares authorized; none outstanding — —
Common stock, $0.001 par value; 200,000,000 shares authorized and 45,382,729 and 45,168,706 shares issued and outstanding at June 30, 2010 and 2009, respectively 45 45
Additional paid-in capital 302,505 301,831
Accumulated deficit (275,939 ) (273,735 )
Total stockholders’ equity 26,611 28,141
Total liabilities and stockholders’ equity $ 33,314 $ 35,390
(4) The excess of earnings method estimates a purchased intangible asset’s value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or relationships.

~~See accompanying notes.~~

~~Table of contents~~

~~AUTOBYTEL INC.~~(5) The relief from royalty method is an earnings approach which assesses the royalty savings an entity realizes since it owns the asset and doesn’t have to pay a third party a license fee for its use.

~~UNAUDITED CONSOLIDATED~~ ~~CONDENSED STATEMENTS OF OPERATIONS~~

~~AND COMPREHENSIVE LOSS~~

~~(Amounts in thousands, except per-share data)~~

Some of the more significant estimates and assumptions inherent in the estimate of the fair value of the identifiable purchased intangible assets include all assumptions associated with forecasting cash flows and profitability. The primary assumptions used for the determination of the preliminary fair value of the purchased intangible assets were generally based upon the present value of anticipated cash flows discounted at a rate of 18%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

The goodwill recognized of $11.7 million is attributable primarily to expected synergies and the assembled workforce of Auto/Cyber. Of this amount, approximately $10.2 million is amortizable for income tax purposes. As of September 30, 2010, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Auto/Cyber.

The Company has incurred $525,000 of acquisition related costs related to Auto/Cyber to date. Of this amount, $442,000 was expensed in the current period.

The operating results of Auto/Cyber have been included in the Company’s consolidated financial statements from the date of the acquisition through September 30, 2010. Total revenue of $0.4 million and net income of $0.1 million was recognized for Auto/Cyber in the quarter.

The following unaudited pro forma information presents the consolidated results of the Company and Auto/Cyber for the three and nine months ended September 30, 2010 and 2009, respectively, with adjustments to give effect to pro forma events that are directly attributable to the acquisition and have a continuing impact, but exclude the impact of pro forma events that are directly attributable to the acquisition and are one-time occurrences. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods, the results of operations that actually would have been realized had the entities been a single company during the periods presented or the results of operations that the combined company will experience after the acquisition. The un audited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost savings that may be associated with the acquisition. The unaudited pro forma information also does not include any integration costs, dis-synergies or remaining future transaction costs that the companies may incur as a result of the acquisition and combining the operations of the companies.

The unaudited pro forma consolidated results of operations, assuming the acquisition had occurred on January 1, 2009, are as follows:

Three Months Ended June 30, Six Months Ended June 30,
2010 2009 2010 2009
Net revenues:
Lead fees $ 11,245 $ 11,583 $ 21,979 $ 23,735
Advertising 869 1,786 1,922 3,473
Other revenues 17 75 42 107
Total net revenues 12,131 13,444 23,943 27,315
Cost of revenues (excludes depreciation of $321 and $197 for the three months ended June 30, 2010 and 2009, respectively and $643 and $450 for the six months ended June 30, 2010 and 2009, respectively) 7,889 9,022 14,953 17,908
Gross profit 4,242 4,422 8,990 9,407
Operating expenses:
Sales and marketing 2,904 2,542 5,671 5,245
Technology support 1,583 1,226 2,980 2,687
General and administrative 3,077 3,032 5,791 7,023
Patent litigation settlement (43 ) (179 ) (2,806 ) (2,846 )
Total operating expenses 7,521 6,621 11,636 12,109

Operating loss (3,279 ) (2,199 ) (2,646 ) (2,702 )
Interest and other income 313 675 490 821
Loss before income tax expense (2,966 ) (1,524 ) (2,156 ) (1,881 )
Income tax expense (benefit) 35 (495 ) 48 (495 )
Loss from continuing operations (3,001 ) (1,029 ) (2,204 ) (1,386 )
      Discontinued operations — 778 — 778
Net loss and comprehensive loss $ (3,001 ) $ (251 ) $ (2,204 ) $ (608 )

Basic and diluted loss per common share:
    Loss from continuing operations $ (0.07 ) $ (0.02 ) $ (0.05 ) $ (0.03 )
    Discontinued operations, net — 0.02 — 0.02
Basic and diluted loss per common share $ (0.07 ) $ (0.01 ) $ (0.05 ) $ (0.01 )

~~See accompanying notes.~~

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)


	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
	(amounts in thousands)
Unaudited pro forma consolidated results:
Revenue	$	15,143		$	14,520		$	43,561		$	47,754
Net loss	$	(2,940	)	$	(2,236	)	$	(5,537	)	$	(2,793	)

4. Computation of Basic and Diluted Net Loss Per Share


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Basic and diluted shares:
Weighted average common shares outstanding		45,382,729			44,958,840			45,272,244			44,957,194
Weighted average unvested restricted stock		(226,762	)		(456,679	)		(299,624	)		(456,679	)
Basic and diluted shares		45,155,967			44,502,161			44,972,620			44,500,515

5. Share-Based Compensation


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(in thousands)				(in thousands)

Cost of revenues	$	8	$	7	$	27	$	20
Sales and marketing		74		85		189		257
Technology support		45		25		109		68
General and administrative (a)		104		150		478		447
Total share-based compensation costs	$	231	$	267	$	803	$	792

(a) Approximately $96,000 of accelerated stock compensation is included in the nine months ended September 30, 2010 amount. Approximately $46,000 of accelerated stock compensation expense is included in the nine months ended September 30, 2009 amount. Vesting of these awards accelerated in accordance with the original award agreements.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Dividend yield		—			—			—			—
Volatility		83	%		80	%		83	%		75	%
Risk-free interest rate		2.2	%		2.2	%		2.0	%		1.7	%
Expected life (years)		4.1			4.1			4.1			4.1

Warrants. In connection with the acquisition of Auto/Cyber, the Company issued to the sellers a Warrant to purchase 2,000,000 shares of the Company’s Common Stock at an exercise price of $0.93 per share. The Warrant was fully vested on the date of issuance and becomes exercisable on the third anniversary of the issuance date and expires on the eighth anniversary of the issuance date. The right to exercise the Warrant is accelerated in the event of a change in control of the Company. The Warrant was valued at $0.63 per share on the Acquisition Date using an option pricing model with the following key assumptions: risk-free rate of 2.3%, stock price volatility of 77.5% and a term of 8.04 years.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

6. Selected Balance Sheet Accounts


	September 30,			December 31,
	2010			2009
	(in thousands)
Computer software and hardware	$	10,057		$	9,183
Furniture and equipment		1,505			1,432
Leasehold improvements		1,024			949
Capitalized internal use software		912			912
		13,498			12,476
Less – Accumulated depreciation and amortization		(12,286	)		(11,473	)
Property and equipment, net	$	1,212		$	1,003

The Company periodically reviews long-lived assets to determine if there are any impairment indicators. The Company assesses the impairment of these assets, or the need to accelerate amortization, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our long-lived assets. If such indicators exist, the Company evaluates the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. Should the carrying amount of an asset exceed its estimated future undiscounted cash flows, an impairm ent loss is recorded for the excess of the asset’s carrying amount over its fair value. Fair value is generally determined based on a valuation process that provides an estimate of a fair value of these assets using a discounted cash flow model, which includes assumptions and estimates.

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~~AUTOBYTEL INC.~~

~~UNAUDITED CONSOLIDATED~~ ~~CONDENSED STATEMENTS OF CASH FLOWS~~

~~(Amounts in thousands)~~

Six Months Ended June 30,
2010 2009
Cash flows from operating activities:
Net loss $ (2,204 ) $ (608 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 643 900
Provision for bad debts 82 607
Provision for customer credits 287 567
Gain on sale of AVV business — (1,273 )
Share-based compensation 572 525
Changes in assets and liabilities:
Accounts receivable 766 689
Prepaid expenses and other current assets (393 ) 676
Other non-current assets (40 ) (569 )
Accounts payable 383 217
Accrued expenses and other liabilities (832 ) (3,151 )
Deferred revenues (63 ) (895 )
Non-current liabilities (34 ) (44 )
Net cash used in operating activities (833 ) (2,359 )
Cash flows from investing activities:
Purchases of property and equipment (489 ) (119 )
Proceeds from sale of AVV business — 1,273
Proceeds from available-for-sale investments — 580
Net cash (used in) provided by investing activities (489 ) 1,734
Cash flows from financing activities:
Proceeds from exercise of stock options and awards issued under the employee stock purchase plan 102 —
Net cash provided by financing activities 102 —
Net decrease in cash and cash equivalents (1,220 ) (625 )
Cash and cash equivalents, beginning of period 25,097 27,393
Cash and cash equivalents, end of period $ 23,877 $ 26,768

~~See accompanying notes.~~

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~~AUTOBYTEL INC.~~

~~NOTES~~ ~~TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~1. Organization and Operations of Autobytel~~

~~Autobytel Inc. (“Autobytel” or the “Company”) is an automotive marketing services company that helps automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles through its internet lead referral and online advertising programs. Internet lead referrals (“Leads~~”) are consumer internet requests for pricing and availability of new or used vehicles or for vehicle financing. Leads originate from the Company’s websites o r are purchased from third parties (“~~Network Websites”), and are sold primarily to Dealers and Manufacturers. The Company’s consumer-facing automotive websites, including Autobytel.com~~®~~, Autoweb.com~~®~~, AutoSite.com~~®~~, Car.com~~sm~~, CarSmart.com~~®~~, CarTV.com~~®~~, and MyRide.com~~® provide consumers with information and tools to aid them with their automotive purchase decisions and the opportunity to submit Lead requests. Manufacturers direct consumers to their messages and their respective websites by purchasing advertising on the Company’s websites.

The Company has historically experienced negative cash flow and at June 30, 2010 had an accumulated deficit of $276 million. The Company continues to face many risks and uncertainties related to the general economic conditions and the automotive industry in particular, however, the Company believes current cash and cash equivalents are sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

~~2. Basis of Presentation, Unaudited Interim Financial Statements~~

In the opinion of Autobytel’s management, the accompanying unaudited interim consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present Autobytel’s consolidated condensed financial position as of June 30, 2010 and the consolidated condensed statements of operations for the three and six months ended June 30, 2010 and 2009 and cash flows for the six months ended June 30, 2010 and 2009, as applicable. The statements of operations and comprehensive loss and cash flows for the periods ended June 30, 2010 and 2009 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.

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~~AUTOBYTEL INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)~~

~~3. Computation of Basic and Diluted Net Loss Per Share~~

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock. Diluted net loss per share is computed using the weighted average number of common shares, and if dilutive, potential common shares outstanding, as determined under the treasury stock method, during the period. Potential common shares consist of unvested restricted stock and the common shares issuable upon the exercise of stock options. The following are the share amounts utilized to compute the basic and diluted net loss per share for the three and six months ended June 30, 2010 and 2009:

Three Months Ended June 30, Six Months Ended June 30,
2010 2009 2010 2009
Basic shares:
Weighted average common shares outstanding 45,256,231 45,184,679 45,212,710 45,184,679
Weighted average unvested restricted stock (296,456) (685,000) (330,977) (685,000)
Basic shares 44,959,775 44,499,679 44,881,733 44,499,679

Diluted Shares:
Basic Shares 44,959,775 44,499,679 44,881,733 44,499,679
Weighted average dilutive securities 1,161,684 — 1,143,867 —
Dilutive Shares 46,121,459 44,499,679 46,025,600 44,499,679

For both the three and six months ended June 30, 2010, 3.8 million anti-dilutive potential shares of common stock have been excluded from the calculation of diluted earnings per share, respectively. For the three and six months ended June 30, 2009, 7.9 million and 7.5 million anti-dilutive potential shares of common stock have been excluded from the calculation of diluted earnings per share, respectively.

~~4. Share-Based Compensation~~

~~Share-based compensation expense is included in costs and expenses in the accompanying Consolidated Condensed Statements of Operations and Comprehensive Loss as follows:~~

Three Months Ended June 30, Six Months Ended June 30,
2010 2009 2010 2009
(in thousands) (in thousands)
Cost of revenues $ 9 $ 6 $ 18 $ 12
Sales and marketing 55 108 114 192
Technology support 33 2 65 24
General and administrative (a)
233 141 375 297
Total share-based compensation costs $ 330 $ 257 $ 572 $ 525

(a) Approximately $96,000 of accelerated stock compensation is included in the six months ended June 30, 2010 amount. Approximately $46,000 of accelerated stock compensation expense is included in the six months ended June 30, 2009 amount. Vesting of these awards accelerated in accordance with the original award agreements.

~~Service-Based Options.~~ During the three months ended June 30, 2010, the Company granted 648,710 service-based stock options with weighted average grant date fair values of $0.63. During the six months ended June 30, 2010, the Company granted 871,210 service-based stock options with weighted average grant date fair values of $0.64. During the three months ended June 30, 2009, the Company granted 1,000,000 service-based stock options with weighted average grant date fair values of $0.14. During the six months ended June 30, 2009, the Company granted 1,200,000 service-based stock options, with weighted average grant date fair values of $0.16. The se options generally vest one-third on the first anniversary

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

Intangible Asset	Estimated Useful Life
Trademarks/trade names	5 years
Software and publications	3 years
Customer relationships	3 years
Employment/non-compete agreements	5 years

Amortization expense for the remainder of the year and for the next five years is as follows:

Year	Amortization Expense
	(in thousands)

2010	$	337
2011		1,370
2012		1,356
2013		1,037
2014		286
2015		209
	$	4,595

Goodwill. The Company recognized $11.7 in goodwill related to the acquisition of Auto/Cyber in the quarter ended September 30, 2010. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized and is assessed annually for impairment or whenever events or circumstances indicate that the carrying value of such assets may not be recoverable.

Accrued Expenses and Other Current Liabilities. Accrued expenses and other current liabilities consisted of the following:

	September 30,		December 31,
	2010		2009
	(in thousands)
Compensation and related costs	$	1,822	$	2,629
Professional fees and other accrued expenses		1,773		667
Amounts due to customers		365		468
Other current liabilities		346		264
Total accrued expenses and other current liabilities	$	4,306	$	4,028

Long-term debt. In connection with the acquisition of Auto/Cyber, the Company issued a $5.0 million convertible subordinated promissory note. Interest is payable at an annual interest rate of 6% in quarterly installments. The entire outstanding balance of the promissory note is to be paid in full on September 30, 2015. At any time after September 30, 2013, holders of the Note may convert all or any part of, but in 200,000 minimum share increments, the then outstanding and unpaid principal of the Note into fully paid shares of the Company’s Common Stock at a conversion price of $0.93 per share (as adjusted for stock splits, stock dividends, combinations and othe r similar events). The right to convert the Note into Common Stock of the Company is accelerated in the event of a change in control of the Company.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

In the event of default, the entire unpaid balance of the Note will become immediately due and payable and will bear interest at the lower of 8% per year and the highest legal rate permissible under applicable law.

7. Patent Litigation Settlements

Dealix Patent Litigation Settlement. In 2004, the Company brought a lawsuit for patent infringement against Dealix Corporation (“Dealix”). In December 2006, the Company entered into a settlement agreement with Dealix (“Settlement Agreement”). The Settlement Agreement required Dealix to pay the Company a total of $20.0 million in settlement payments for a mutual release of claims and a license from the Company to Dealix and its parent company, the Cobalt Group, for certain of the Company’s patent and patent applications. On March 13, 2007, the Company received the initial $12.0 million settlement payment with the remainder to be paid out in installments of $2.7 million on the next three anniversary dates of the initial payment.

The Company did not have reasonable assurance that it would receive the remaining payment on its due date and therefore had not recorded any amounts receivable related to the Settlement Agreement as of December 31, 2009. On March 15, 2010, the Company had received the final annual installment payment of $2.7 million. The Company recorded the payment as patent litigation settlement in the period payment was received, as a reduction to operating expenses.

Texas and California Patent Litigation Settlements. The Company entered into a settlement agreement with Insweb Corporation (“Insweb”), Leadpoint, Inc. (“Leadpoint”), and Internet Brands, Inc. (“Internet Brands”) settling and dismissing with prejudice various patent-related and other claims by and against the Company. Under the settlement terms, Autobytel granted to Insweb, Leadpoint and Internet Brands, and Insweb, Leadpoint and Internet Brands each granted to Autobytel, a non-exclusive perpetual license to their respective patents as well as long- term covenants not to sue any of the parties for infringement of current or future patents; and mutual releases of claims. In connection with the settlement, (i) Autobytel and Autodata Solutions, Inc. (“Autodata”), a wholly owned subsidiary of Internet Brands, entered into a Master License and Services Agreement pursuant to which the Company will have the right to publish certain editorial content, images, shopping tools and vehicle data provided by Autodata for a term of five years; and (ii) shares of Internet Brands’ common stock previously issued to one of the Company’s subsidiaries but held by Internet Brands was released to the Company. In addition, InsWeb and Autobytel entered into a Content License Agreement pursuant to which Autobytel will receive specific auto insurance editorial content, data and interactive tools from InsWeb. The content and tools will contain links to one of InsWeb’s insurance websites , and Autobytel and InsWeb will share the revenue associated with consumer activity generated by the links. LeadPoint agreed to pay Autobytel $200,000, $100,000 of which was paid in connection with the signing of the settlement, to be followed by $50,000 installments payable on or before March 31, 2010 and September 30, 2010, respectively. The $50,000 payments were actually received in April and October of 2010, respectively. In connection with the settlement, all claims brought by Insweb, Internet Brands and Leadpoint against Dominion Enterprises (“Dominion”), the purchaser of the Company’s AVV business, and Retention Performance Marketing, Inc. (“RPM”), and OneCommand, Inc. (“OneCommand”), the purchaser of the Company’s RPM business, were also dismissed with prejudice, with Internet Brands, Leadpoint, and Insweb each providing Dominion, OneCommand, and RPM covenants not to sue for infringement of the Insweb patent at issue in the litigation, and Dominion, OneCommand, and RPM each granting to Insweb, Internet Brands, and Leadpoint, and Insweb, Internet Brands and Leadpoint each granting to Dominion, OneCommand, and RPM, mutual releases of claims.

Edmunds Declaratory Relief Action Settlement. On March 13, 2008, Edmunds Holding Company and Edmunds.com (collectively “Edmunds”) filed a lawsuit against the Company in the United States District Court for the District of Delaware relating to the Company’s U.S. Patent Number 6,282,517 for purchase request technology (“517 Patent”). In the lawsuit, Edmunds sought a declaration that its business activities, some of which include generating automotive purchase requests, did not infringe on the ‘517 Patent and that such patent was invalid. On February 20, 2009, this declaratory relief action was di smissed by the court.

In March 2009, the Company entered into a settlement agreement resolving the issues presented in Edmunds’ declaratory judgment action. Under this settlement, Autobytel granted to Edmunds a limited license to the ‘517 Patent and other existing Autobytel purchase request-related patents in exchange for the right to publish on Autobytel’s family of websites a select assortment of Edmunds.com’s multi-media automotive content, including photos, editorial reviews, and articles. The settlement agreement also provided for mutual releases of claims. This settlement did not have a material impact on the Company’s financial statements.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

8. Discontinued Operations

On January 23, 2008, the Company completed the sale of certain assets and liabilities of its AVV, Inc. data extraction and customer relationship management software business to Dominion Enterprises (“Dominion”) for approximately $22.75 million in cash, plus a working capital payment of approximately $1.0 million. The Company recorded a gain on sale of approximately $4.2 million in connection with the transaction in the three months ended March 31, 2008. The parties also agreed to a $1.9 million escrow in connection with the transaction. During the nine months ended September 30, 2009, the Company received approximately $1.3 million of the escrow proceeds, classifying this amount as a gain on sale, discontinued operations.

For the three and nine months ended September 30, 2009, the results of operations of AVV are reported as discontinued operations, net of income taxes, as follows:


	Three Months Ended September 30,			Nine Months Ended September 30,
	2009			2009
	(in thousands)

Total net revenues:	$	—		$	—
Cost of revenues		—			—

Gross profit
Operating expenses:
Sales and marketing		—			—
Technology support		—			—
General and administrative		—			—

Total operating costs		—			—

Gain on sale		642			1,915
Benefit from income taxes		(256	)		(751	)

Discontinued operations, net	$	386		$	1,164

9. Commitments and Contingencies

Employment Agreements

The Company has employment agreements and retention agreements with certain key employees. A number of these agreements require severance payments, continuation of certain insurance benefits and acceleration of vesting of stock options and restricted stock units in the event of a termination of employment by the Company without cause by the employee or for good reason. In addition, these employees were also granted stock options and awarded restricted stock, the agreements for which provide for acceleration of vesting upon a change in control of the Company.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

Litigation

In August 2001, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York against Autobytel, certain of the Company’s current and former directors and officers (“Autobytel Individual Defendants”) and underwriters involved in the Company’s initial public offering. A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. This action purports to allege violations of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). Plaintiffs allege that the underwriter defendants agree d to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at predetermined prices. Plaintiffs allege that the prospectus for the Company’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. The parties in the approximately 300 coordinated cases, including the parties in the Autobytel case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Autobytel. On October 6, 2009, the Court granted final approval of the settlement. Objectors to the se ttlement filed six notices of appeal to the United States Court of Appeals for the Second Circuit and one petition seeking permission to appeal. Two objectors to the settlement filed briefs in support of their appeals. Appellees are required to file answering briefs on December 17, 2010. The remaining objectors withdrew their appeals with prejudice. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of this matter. If the settlement does not survive appeal, and Autobytel is found liable, it is possible that damages could be greater than Autobytel’s insurance coverage, and the impact on Autobytel’s financial statements could be material.

Between April and September 2001, eight separate purported class actions virtually identical to the one filed against Autobytel were filed against Autoweb.com, Inc. (“Autoweb”), certain of Autoweb’s former directors and officers (“Autoweb Individual Defendants”) and underwriters involved in Autoweb’s initial public offering. A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. It purports to allege violations of the Securities Act and the Exchange Act. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autoweb’s initial public offering to certain invest ors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at predetermined prices. Plaintiffs also allege that the prospectus for Autoweb’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. The parties in the approximately 300 coordinated cases, including Autoweb’s case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Autoweb. On October 6, 2009, the Court granted final approval of the settlement. Objectors to the settlement filed six notices of appeal to the United States Court of Appeals for the Second Circuit and one petition seeking permission to appeal. Two objectors to the settlement filed briefs in support of their appeals. Appellees are required to file answering briefs on December 17, 2010. The remaining objectors withdrew their appeals with prejudice. Due to inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of this matter. If the settlement does not survive that appeal, and Autoweb is found liable, it is possible that damages could be greater than Autoweb’s insurance coverage and the impact on Autobytel’s financial statements could be material.

From time to time, the Company may be involved in other litigation matters arising from the normal course of its business activities. The actions filed against the Company and other litigation, even if not meritorious, could result in substantial costs and diversion of resources and management attention, and an adverse outcome in litigation could materially adversely affect its business, results of operations, financial condition, and cash flows.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

10. Related Party Transaction

The Compensation Committee approved a payment of $70,000 to Maverick Associates LLC, a Delaware limited liability company, for consulting services rendered to the Company by Jeffrey H. Coats during 2008 in connection with the Company’s evaluation of strategic alternatives and development and implementation of cost reduction initiatives by the Company. Mr. Coats is the sole member of Maverick Associates. The $70,000 was recorded as an expense in the nine month period ended September 30, 2009. There were no payments to Maverick Associates LLC in the nine months ended September 30, 2010.

11. Subsequent Events

In connection with the recent acquisition of Cyber/Auto, the Company undertook a review of its operations. This review resulted in the implementation of various cost efficiency initiatives in the fourth quarter of 2010, including the initiation of a reduction of approximately 14% of its workforce. The affected employees were mostly in the areas of information technology, sales and other general and administrative related areas. The reduction was effected in order to reduce the Company’s overall cost structure and generate operational efficiencies across product lines. The Company estimates the charges associated with the reduction in workforce will be approximately $1.0 million which will be expensed in the fourth quarter 2010. The charges consist mainly of severance costs and other benefits.

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Item 2. Management’s Discussion and Analysis of ~~the grant date~~Financial Condition and ~~ratably over twenty-four months thereafter. The vesting~~Results of ~~these awards is contingent upon the employee rendering service to the Company during the vesting period.~~Operations

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, indus try trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2 and under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2009. Investors are urged not to place undue reliance on forward-looking statements. Fo rward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.

You should read the following discussion of our results of operations and financial condition in conjunction with our consolidated condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and the notes thereto in Autobytel’s Annual Report on Form 10-K for the year ended December 31, 2009.

Our corporate website is located at www.autobytel.com. Information on our website is not incorporated by reference in this Quarterly Report. At or through the Investor Relations section of our website we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as practicable after that material is electronically filed with or furnished to the SEC. Our Code of Conduct and Ethics for Employees, Officers and Directors is available at the Corporate Governance link of the Investor Relations section of our website.

Basis of Presentation

The unaudited consolidated condensed financial statements presented herein are presented on the same basis as the Company’s 2009 Annual Report on Form 10-K. We have made the disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, but condensed or omitted certain information and disclosures normally included in notes to consolidated financial statements in accordance with the SEC’s rules and regulations. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2009.

On September 17, 2010, the Company acquired substantially all of the assets of privately-held Autotropolis, Inc., a Florida corporation, and Cyber Ventures, Inc., a Florida corporation (collectively, “Auto/Cyber”). The business acquired from Cyber Ventures, Inc., through proprietary content, generates and sells in-market consumer automotive purchase requests. The business acquired from Autotropolis, Inc., through its Autotropolis.com website, provides new car purchase requests and related digital products directly to automotive dealers.

Certain reclassifications have been made to prior periods’ consolidated financial statements to conform to the current year presentation. These reclassifications include presenting bad debt expense in Sales and Marketing and presenting rental expense in General and Administrative expense.

Overview

We are an automotive marketing services company that helps automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles through our internet lead referral and online advertising programs. Internet lead referrals (“Purchase Requests”) are consumer internet requests for pricing and availability of new or used vehicles or for vehicle financing. Purchase Requests originate from our websites or are purchased from third parties (“Network Websites”) and are sold primarily to Dealers and Man ufacturers. Our consumer-facing automotive websites, including Autobytel.com®, Autoweb.com®, AutoSite.com®, Car.comsm, CarSmart.com®, CarTV.com®,

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MyRide.com® and Autotropolis.com® provide consumers with information and tools to aid them with their automotive purchase decisions and the opportunity to submit Purchase Requests. Manufacturers direct consumers to their messages and their respective websites by purchasing advertising on our websites. Our websites are the source of an increasing percentage of our Purchase Requests and provide a significant portion of the page views for the advertising component of our business.

For the three and nine months ended September 30, 2010 our results of operations were affected and may continue to be affected in the future, by market and economic factors, including, but not limited to, the following:

~~The Company’s President~~

General economic conditions, specifically including the adverse effect of high unemployment in the number of vehicle purchasers and ~~Chief Executive Officer was granted~~ the ~~1,000,000 service based options during~~lack of available consumer credit to finance vehicle purchases. These adverse economic conditions have affected the ~~three months ended June 30, 2009 (“CEO Awards”). The CEO Awards vest on~~automotive industry, which is currently enduring what is considered to be the ~~first anniversary~~most challenging environment of the ~~grant date~~past several decades:

·	North American vehicle sales remain highly volatile and ~~have an exercise price~~are expected to remain at relatively low levels in 2010 and 2011, and

·	Dealer consolidations, closings, and bankruptcies continue.

·	The market for Purchase Requests, including:

The effects of ~~$0.35, which was higher than~~competition and Purchase Request sourcing (i.e., Purchase Requests from our websites versus Purchase Requests acquired from third parties) on our supply and acquisition costs of quality Purchase Requests and the ~~closing price of the Company’s common stock~~resulting effects on ~~the grant date. The shares that are issuable upon exercise of the CEO Awards are subject to restrictions on resale that lapse over time (as to one-third on the first anniversary of the grant date~~sales, pricing and ~~thereafter will lapse as to the remaining two-thirds of the shares in equal one-twelfth (1/12) installments of the original~~margins for our services and products, and

A declining number of ~~shares subject to~~automotive Dealers in the options each quarter until all resale restrictions have la psed). The vesting of these options and lapse of the resale restrictions will accelerate upon involuntary termination of employment by the Company without cause or for voluntary termination by the CEO for good reason.United States.

~~Market Condition Options.~~ ~~During the six months ended June 30, 2009 the Company granted 1,068,250 stock options to substantially all employees with a fair~~

The market value per option granted of $0.35, using a Black-Scholes option pricing model. One-third of these options cliff vest on the first anniversary following the grant date and the remaining two-thirds vest ratably over twenty-four months thereafter. In addition, the remaining two-thirds of the awards must meet additional conditions in order to be exercised. One-third of the remaining options must also satisfy the condition that the closing price of Autobytel’s common stock over any 30 consecutive trading days is at least two times the option exercise price to be exer cised (“~~Market Condition A~~”). The final one-third of the remaining options must also satisfy the condition that the closing price of Autobytel’s common stock over any 30 consecutive trading days is at least three times the option exercise price to be exercised (“~~Market Condition B”). Certain of these options will accelerate vesting upon a change in control. Market Condition A was achieved during 2009 and Market Condition B was achieved in July 2010.~~for advertising services, including:

~~During the three~~

·	Continued volatility in spending by Manufacturers and ~~six months ended June 30, 2010, 226,108 stock options were exercised, with an aggregate weighted average exercise price~~others in marketing allocations,

·	The amount of ~~$0.45. There were no options exercised during the three~~visits (traffic) to our websites,

·	The cost of acquiring traffic to our websites, and ~~six months ended June 30, 2009.~~

The ~~grant date fair value of stock options granted during these periods was estimated using the Black-Scholes option-pricing model using the following weighted average assumptions:~~

Three Months Ended June 30, Six Months Ended June 30,
2010 2009 2010 2009
Dividend yield — — — —
Volatility 83% 75% 83% 73%
Risk-free interest rate 1.7% 1.6% 1.8% 1.6%
Expected life (years) 4.1 4.1 4.1 4.1
rates attainable from our advertisers.

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Results of Operations

Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009


	2010			% of total net revenues			2009			% of total net revenues			$ Change			% Change
	(Dollar amounts in thousands)
Net revenues:
Purchase requests	$	11,875			92	%	$	11,695			88	%	$	180			2	%
Advertising		1,037			8			1,627			12			(590	)		(36	)
Other		19			—			32			—			(13	)		(41	)
Total net revenues		12,931			100			13,354			100			(423	)		(3	)
Cost of revenues (excludes depreciation of $144 and $225 for the three months ended September 30, 2010 and 2009, respectively)		8,174			63			8,614			65			(440	)		(5	)
Gross profit		4,757			37			4,740			35			17			—
Operating expenses:
Sales and marketing		2,959			23			2,387			18			572			24
Technology support		2,080			16			1,357			11			723			53
General and administrative		2,887			23			2,409			18			478			20
Patent litigation settlement		(66	)		(1	)		(2	)		(1	)		(64	)		3,200
Total operating expenses		7,860			61			6,151			46			1,709			28
Operating loss		(3,103	)		(24	)		(1,411	)		(11	)		(1,692	)		120
Interest and other income		88			1			94			1			(6	)		(6	)
Loss before income tax expense		(3,015	)		(23	)		(1,317	)		(10	)		(1,698	)		129
Income tax expense (benefit)		46			1			(132	)		(1	)		178			(135	)
Loss from continuing operations		(3,061	)		(24	)		(1,185	)		(9	)		(1,876	)		158
Discontinued operations		—			—			386			3			(386	)		(100	)
Net loss	$	(3,061	)		(24	)%	$	(799	)		(6	)%	$	(2,262	)		283	%

Purchase Requests. Purchase Requests increased $0.2 million or 2% in the third quarter of 2010 compared to the third quarter of 2009 primarily due to the acquisition of Auto/Cyber offset by a shift in mix from new and used retail Purchase Requests to Manufacturer Purchase Requests, which has a lower average sales price per purchase request. The use of incentives to drive incremental Dealer sign-ups also had a negative impact during the third quarter of 2010. The volume of new and used retail Purchase Requests delivered decreased 15%, which was partially offset by an increase in the volume of Purchase Requests delivered to Manufacturers and finance Purchase Requests delivered of 20% and 34%, respectively, as the automotive consumer credit enviro nment showed signs of recovery in the third quarter of 2010.

Advertising. Advertising revenues decreased $0.6 million or 36% in the third quarter of 2010 compared to the third quarter of 2009 due primarily to unsold advertising, as we have not witnessed incremental ad budget activity, and a 46% decline in page views, which was due to the elimination of a large traffic supplier in the fourth quarter of 2009.

Cost of Revenues. Cost of revenues consists of Purchase Request and traffic acquisition costs, and other cost of revenues. Purchase Request and traffic acquisition costs consist of payments made to our Purchase Request suppliers, including internet portals and online automotive information providers. Other cost of revenues consists of search engine marketing and fees paid to third parties for data and content included on our properties, connectivity costs, technology license fees, development and maintenance costs related to our websites, server equipment depreciation and technology amortization and compensation related expense. Search engine marketing (“SEM”), sometimes referred to as paid search marketing, i s the practice of bidding on keywords on search engines to drive traffic to a website. Our SEM also provides a source of Purchase Requests generated from our websites.

The $0.4 million or 5% decrease in the cost of revenues in the third quarter of 2010 compared to the third quarter of 2009 was due primarily to a decrease of $1.2 million in Purchase Request acquisition costs directly related to the change in mix of Purchase Requests delivered and a $0.3 million decrease in other traffic acquisition costs. This was offset by an increase in SEM costs of $1.2 million.

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Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, personnel costs, and other costs associated with dealer sales, website advertising, dealer support, and bad debt expense. Sales and marketing expense in the third quarter of 2010 increased by $0.6 million or 24% compared to the third quarter of 2009 due principally to higher advertising and strategic new hire personnel costs.

Technology Support. Technology support expense includes personnel costs related to enhancing the features, content and functionality of our websites and our internet-based communications platform, costs associated with our telecommunications and computer infrastructure, and costs related to data and technology development. Technology support expenses in the third quarter of 2010 increased by $0.7 million or 53% compared to the third quarter of 2009 due to increased strategic initiatives and new hire personnel costs.

General and Administrative. General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense in the third quarter of 2010 increased by $0.5 million or 20% compared to the third quarter of 2009 due to increased legal and professional fees related to the acquisition of Auto/Cyber.

Interest and other income. Interest and other income was $0.1 million in both the third quarter of 2010 and 2009 and consisted primarily of patent licensing fees received in the quarter.

Income taxes. Income tax expense was $46,000 in the third quarter of 2010. For the third quarter of 2009, the Company recorded an income tax benefit of $132,000. The current quarter tax expense was primarily related to state taxes in Texas and Michigan. The prior year tax benefit was due to realization of losses from continuing operations as the operating losses offset gains and taxes attributable to discontinued operations.

Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009


	2010			% of total net revenues			2009			% of total net revenues			$ Change			% Change
	(Dollar amounts in thousands)
Net revenues:
Purchase requests	$	33,854			92	%	$	35,431			87	%	$	(1,577	)		(4	)%
Advertising		2,959			8			5,100			13			(2,141	)		(42	)
Other		61			—			138			—			(77	)		(56	)
Total net revenues		36,874			100			40,669			100			(3,795	)		(9	)
Cost of revenues (excludes depreciation of $731 and $859 for the nine months ended June 30, 2010 and 2009, respectively,)		23,127			63			26,523			65			(3,396	)		(13	)
Gross profit		13,747			37			14,146			35			(399	)		(3	)
Operating expenses:
Sales and marketing		8,631			23			7,568			19			1,063			14
Technology support		5,060			14			4,044			10			1,016			25
General and administrative		8,677			24			9,495			23			(818	)		(9	)
Patent litigation settlement		(2,871	)		(8	)		(2,848	)		(7	)		(23	)		1
Total operating expenses		19,497			53			18,259			45			1,238			7
Operating loss		(5,750	)		(16	)		(4,113	)		(10	)		(1,637	)		40
Interest and other income		578			2			915			2			(337	)		(37	)
Loss before income tax expense		(5,172	)		(14	)		(3,198	)		(8	)		(1,974	)		62
Income tax expense (benefit)		94			—			(627	)		(2	)		721			(115	)
Loss from continuing operations		(5,266	)		(14	)		(2,571	)		(6	)		(2,695	)		105
Discontinued operations		—			—			1,164			3			(1,164	)		(100	)
Net loss	$	(5,266	)		(14	)%	$	(1,407	)		(3	)%	$	(3,859	)		274	%

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Purchase Requests. Purchase Requests decreased $1.6 million or 4% in the first nine months of 2010 compared to the first nine months of 2009 and was primarily due to a shift in mix from new and used retail Purchase Requests to Manufacturer Purchase Requests, which has a lower average sales price per purchase request offset by the acquisition of Auto/Cyber. The use of incentives to drive incremental Dealer sign-ups also had a negative impact during the first nine months of 2010. The volume of new and used retail Purchase Requests delivered decreased 20%, which was partially offset by an increase in the volume of Purchase Requests delivered to Manufacturers and finance Purchase Requests delivered of 14% and 28%, respectively, as the automotive consumer cred it environment showed signs of recovery in the first nine months of 2010.

Advertising. The $2.1 million or 42% decrease in advertising revenues for the first nine months of 2010 compared to the first nine months of 2009 was due primarily to the elimination of a large traffic supplier in the fourth quarter of 2009 and a decrease in page views.

Cost of Revenues. The $3.4 million or 13% decrease in the cost of revenues in the first nine months of 2010 compared to the first nine months of 2009 was primarily due to a decrease of $5.9 million in Purchase Request acquisition costs directly related to reduced volume and the change in mix of Purchase Requests delivered and a $1.1 million decrease in traffic acquisition costs. This was offset by an increase in SEM costs of $3.5 million.

Sales and Marketing. Sales and marketing expense in the first nine months of 2010 increased by $1.1 million or 14% compared to the first nine months of 2009 principally due to increased advertising and personnel costs.

Technology Support. Technology support expense in the first nine months of 2010 increased by $1.0 million or 25% compared to the first nine months of 2009 due to increased personnel costs and costs related to strategic initiatives.

General and Administrative. General and administrative expense in the first nine months of 2010 decreased $0.8 million or 9% compared to the first nine months of 2009 due to a decrease in severance costs of $0.2 million, primarily as a result of headcount reductions in 2009, and a decrease in bonuses of approximately $0.5 million and bad debt expense of $0.4 million. The decrease in general and administrative expense for the nine months ended September 30, 2010 is offset by an increase in increased legal and professional fees related to the acquisition of Auto/Cyber.

Dealix Patent Litigation Settlement. In 2004, the Company brought a lawsuit for patent infringement against Dealix Corporation (“Dealix”). In December 2006, the Company entered into a settlement agreement with Dealix (“Settlement Agreement”). The Settlement Agreement provided for Dealix to pay the Company a total of $20.0 million in settlement payments for a mutual release of claims and a license from the Company to Dealix and its parent company, the Cobalt Group, of certain of the Company’s patent and patent applications. On March 13, 2007, the Company received the initial $12.0 million settlement payment with the remain der to be paid out in installments of $2.7 million on the next three anniversary dates of the initial payment. As of September 30, 2010 the Company had received the final annual installment payment of $2.7 million. The Company recorded the payment as patent litigation settlement in the period payment was received, as a reduction to operating expenses.

Interest and other income. Interest and other income was $0.6 million in the first nine months of 2010 and consisted primarily of patent and international licensing fees recognized through September 30, 2010. Interest and other income was $0.9 million in the first nine months of 2009 and primarily represented a gain on the sale of available-for-sale securities and international licensing fees recognized through September 30, 2009.

Income taxes. Income tax expense through September 30, 2010 was $94,000. Through September 30, 2009, the Company recorded an income tax benefit of $627,000. The current year tax expense was primarily related to state taxes in Texas and Michigan. The prior year benefit was due to realization of losses from continuing operations as the operating losses offset gains and taxes attributable to discontinued operations.

Employees

As of November 1, 2010, we had 143 employees. We also use independent contractors as required. None of our employees are represented by labor unions. We have not experienced any work stoppages and consider our employee relations to be generally good.

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Liquidity and Capital Resources

The table below sets forth a summary of our cash flows for the nine months ended September 30, 2010 and 2009:

	Nine Months Ended September 30,
	2010			2009
	(in thousands)
Net cash used in operating activities	$	(3,760	)	$	(4,375	)
Net cash (used in) provided by investing activities		(11,114	)		2,221
Net cash provided by financing activities		109			—

Our principal sources of liquidity are our cash and cash equivalents balances. We entered into the Settlement Agreement with Dealix, which among other things, provided for settlement payments. As of September 30, 2010 we received the final annual installment payment of $2.7 million from Dealix. Our cash and cash equivalents totaled $10.3 million as of September 30, 2010 compared to cash and cash equivalents of $25.1 million as of December 31, 2009.

The Company has historically experienced negative cash flow. The Company believes that its current cash and cash equivalents are sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, primarily as a result of the recent acquisition of Auto/Cyber, which the Company believes will contribute to reducing negative cash flow, and expense reduction initiatives designed to preserve working capital that were commenced in the fourth quarter of 2010.However, the Company continues to face many risks and uncertainties, many of which are beyond its control, including those related to general economic conditions and the automotive industry in general and there can be no assurances given that the Company will be able to meet anticipated cash needs for at least the next 12 months.

Net Cash Used in Operating Activities. Net cash used in operating activities in the nine months ended September 30, 2010 of $3.8 million resulted primarily from net losses of $5.3 million, as adjusted for non-cash charges to earnings, partially offset by a decrease in prepaid expenses and other current assets and cash used to reduce accrued liabilities of $0.3 million primarily related to the payment of annual bonus amounts accrued in 2009 and paid in the first nine months of 2010. Net cash used in operating activities in the nine months ended September 30, 2009 was $4.4 million and resulted primarily from a net loss of $1.4 million and an increase in cash used to reduce accrued expenses and other liabilities of $2.8 million primarily related to severance costs that were accrued as of December 31, 2008 and paid in the first nine months of 2009.

Net Cash (Used in)Provided by Investing Activities. Net cash used in investing activities was $11.1 million in the nine months ended September 30, 2010 and is related primarily to the purchase of Auto/Cyber in September 2010. The Company also used $1.0 million to make a long-term strategic investment. Net cash provided by investing activities was $2.2 million in the nine months ended September 30, 2009. The Company received approximately $1.8 million of the $1.9 million AVV asset sale proceeds held in escrow. In addition, we sold all of our available-for-sale investments for cash proceeds of $0.6 million in the nine months ended September 30, 2009.

Net Cash Provided by Financing Activities. Our primary source of cash from financing activities is from the exercise of stock options. 233,654 options were exercised in the nine months ended September 30, 2010 resulting in $0.1 million of cash inflow. There were no financing activities for the nine months ended September 30, 2009. Our future cash flows from employee stock options will depend on the future timing, stock price and amount of stock option exercises, if any.

Off-Balance Sheet Arrangements

At September 30, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(D)(ii) of Regulation S-K.

~~5. Selected Balance Sheet Accounts~~

Item 3.

~~Property~~Quantitative and ~~Equipment~~Qualitative Disclosures about Market Risk~~. Property and equipment consists of the following:~~

June 30, December 31,
2010 2009
(in thousands)
Computer software and hardware $ 9,634 $ 9,183
Furniture and equipment 1,431 1,432
Leasehold improvements 949 949
Capitalized internal use software 912 912
12,926 12,476
Less – Accumulated depreciation and amortization (12,063 ) (11,473 )
Property and equipment, net $ 863 $ 1,003

~~NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)~~

~~Concentration of Credit Risk~~ Controls and ~~Risks Due to Significant Customers~~. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are primarily maintained with three financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. These deposits may be redeemed upon demand. Accounts receivable are primarily derived from fees billed to automotive dealers and automotive manufacturers. The Company generally requires no collateral to support its accounts receivables and maintains an allowance for bad debts for potential credit losses.

June 30, December 31,
2010 2009
(in thousands)
Compensation and related costs $ 1,782 $ 2,629
Professional fees and other accrued expenses 895 667
Amounts due to customers 380 468
Other current liabilities 139 264
Total accrued expenses and other current liabilities $ 3,196 $ 4,028

~~6. Patent Litigation Settlements~~

~~Dealix Patent Litigation Settlement~~. ~~In 2004, the Company brought a lawsuit for patent infringement against Dealix Corporation (“Dealix”). In December 2006, the Company entered into a settlement agreement with Dealix (“Settlement Agreement~~”). The Settlement Agreement required Dealix to pay the Company a total o f $20.0 million in settlement payments for a mutual release of claims and a license from the Company to Dealix and its parent company, the Cobalt Group, of certain of the Company’s patent and patent applications. On March 13, 2007, the Company received the initial $12.0 million settlement payment with the remainder to be paid out in installments of $2.7 million on the next three anniversary dates of the initial payment.

~~NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)~~

The Company did not have reasonable assurance that it would receive the remaining payment on its due date and therefore had not recorded any amounts receivable related to the Settlement Agreement as of December 31, 2009. As of June 30, 2010, the Company had received the final annual installment payment of $2.7 million. The Company recorded the payment as patent litigation settlement in the period payment was received, as a reduction to operating expenses.

~~7. Discontinued Operations~~

~~NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)~~

Three Months Ended June 30,

Six Months Ended June 30,

2009 2009
(in thousands)

Total net revenues: $ — $ —
Cost of revenues — —

Gross profit
Operating expenses:
     Sales and marketing — —
     Technology support — —
     General and administrative — —
          Total operating costs — —
     Gain on sale 1,273 1,273
     Benefit from income taxes (495 ) (495 )
Discontinued operations, net $ 778 $ 778

~~8. Commitments and Contingencies~~

~~Employment Agreements~~

In August 2001, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York against Autobytel and certain of the Company’s current and former directors and officers (“~~Autobytel Individual Defendants~~”) and underwriters involved in the Company’s initial public offering. A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. This action purports to allege violations of the Securities Act of 1933 (“~~Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act~~ ”). Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at predetermined prices. Plaintiffs allege that the prospectus for the Company’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. The parties in the approximately 300 coordinated cases, including the parties in the Autobytel case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Autobytel. On October 6, 2009, the Court granted final approval of the settlement. A group of three objectors filed a petition to the Second Circuit seeking permission to appeal the District Court’s final approval order on the basis that the settlement class is broader than the class previously rejected by the Second Circuit in its December 2006 order reversing the District Court’s order certifying classes in six of the coordinated cases. The six cases, which do not include Autobytel’s case, are intended to serve as test cases. Plaintiffs filed an opposition to the petition. Objectors, including the objectors that filed the petition seeking permission to appeal, filed six notices of appeal of the Court’s order finally approving the settlement. Subject to court approval, the objectors to the settlement will file their briefs in the Second Circuit no later than October 6, 2010, and answering briefs will be due no later than February 3, 2011. Due to th e inherent uncertainties of

~~NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)~~

9~~. Related Party Transaction~~Procedures

~~Item 2.~~ ~~Management’s~~ ~~Discussion and Analysis of Financial Condition and Results of Operations~~

~~Basis of Presentation~~

General economic conditions, specifically including the adverse effect of high unemployment on the number of vehicle purchasers and the lack of available consumer credit to finance vehicle purchases. These adverse economic conditions have affected the automotive industry, which is currently enduring what is considered to be the most challenging environment of the past several decades:

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·	~~Dealer consolidations, closings, and bankruptcies continue.~~

our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

·	~~A declining Dealer base.~~

·	~~The market for advertising services, including:~~

·	~~Continued volatility in spending by Manufacturers and others in marketing allocations,~~

·	~~The amount of visits (traffic) to our websites,~~

·	~~The cost of acquiring traffic to our websites, and~~

·	~~The rates attainable from our advertisers.~~

~~Results of Operations~~

~~Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009~~

2010 % of total net revenues 2009 % of total net revenues $ Change % Change
(Dollar amounts in thousands)
Net revenues:
Lead fees $ 11,245 93 % $ 11,583 86 % $ (338 ) (3 )%
Advertising 869 7 1,786 13 (917 ) (51 )
Other 17 — 75 1 (58 ) (77 )
Total net revenues 12,131 100 13,444 100 (1,313 ) (10 )
Cost of revenues (excludes depreciation of $321 and $197 for the three months ended June 30, 2010 and 2009, respectively) 7,889 65 9,022 67 (1,133 ) (13 )
Gross profit 4,242 35 4,422 33 (180 ) (4 )
Operating expenses:
Sales and marketing 2,904 24 2,542 19 362 14
Technology support 1,583 13 1,226 9 357 29
General and administrative 3,077 25 3,032 23 45 1
Patent litigation settlement (43 ) — (179 ) (1 ) 136 (76 )
Total operating expenses 7,521 62 6,621 50 900 14
Operating loss (3,279 ) (27 ) (2,199 ) (17 ) (1,080 ) 49
       Interest and other income 313 3 675 5 (362 ) (54 )
Loss before income tax expense (2,966 ) (24 ) (1,524 ) (12 ) (1,442 ) 95
       Income tax expense (benefit) 35 — (495 ) (4 ) 530 (107 )
Loss from continuing operations (3,001 ) (24 ) (1,029 ) (8 ) (1,972 ) 192
       Discontinued operations — — 778 6 (778 ) (100 )
Net loss $ (3,001 ) (24 )% $ (251 ) (2 )% $ (2,750 ) 1,096 %

~~Lead Fees.~~ Lead fees decreased $0.3 million or 3% in second quarter 2010 compared to second quarter 2009 primarily due to a shift in mix from new and used retail Leads to Manufacturer Leads, which has a lower average sales price per lead. The use of incentives to drive incremental Dealer sign-ups also had a negative impact during the second quarter 2010. The volume of new and used retail Leads delivered decreased 19%, which was partially offset by an increase in the volume of Leads delivered to Manufacturers and finance Leads delivered of 14% and 34%, respectively, as the automotive consumer credit environment showed signs of recovery in the second quarter 2010.

~~Advertising.~~ Advertising revenues decreased $0.9 million or 51% in second quarter 2010 compared to second quarter 2009 due primarily to unsold advertising, as ad budgets for our Manufacturer customers have remained conservative and a 23% decline in page views, which was due to the elimination of a large traffic partner in the fourth quarter of 2009.

~~Cost of Revenues.~~ Cost of revenues consists of Lead and traffic acquisition costs, and other cost of revenues. Lead and traffic acquisition costs consist of payments made to our Lead suppliers, including internet portals and online automotive information providers. Other cost of revenues consists of search engine marketing and fees paid to third parties for data and content included on our properties, connectivity costs, technology license fees, development and maintenance costs related to our websites, server equipment depreciation and technology amortization and compensation related expense. Search engine marketing (“SEM”), sometimes referred to as paid search marketing, is the practice of bidding on keywords on search engines to drive traffic to a website. ;Our SEM also provides a source of Leads generated from our websites.

~~Sales and Marketing.~~ Sales and marketing expense includes costs for developing our brand equity, internal personnel costs, and other costs associated with dealer sales, website advertising, dealer support, and bad debt expense. Sales and marketing expense in second quarter 2010 increased by $0.4 million or 14% compared to second quarter 2009 due principally to higher advertising and strategic new hire personnel costs.

~~Technology Support.~~ Technology support expense includes personnel costs related to enhancing the features, content and functionality of our websites and our Internet-based communications platform, costs associated with our telecommunications and computer infrastructure, and costs related to data and technology development. Technology support expenses in second quarter 2010 increased by $0.4 million or 29% compared to second quarter 2009 due to increased strategic new hire personnel costs.

~~General and Administrative.~~ General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense in second quarter 2010 was consistent with second quarter 2009.

~~Interest and other income.~~ Interest and other income was $0.3 million in second quarter 2010 and consisted primarily of patent licensing fees received in the quarter. Interest and other income was $0.7 million in second quarter 2009 and primarily represented a gain recognized on the sale of available-for-sale securities.

~~Income taxes.~~ ~~Income tax expense was $35,000 in the second~~The internal controls over the provision for income taxes as of June 30 and September 30, 2009 did not contain specific procedures to address the classification of income taxes, when a loss from continuing operations was present, and other sources of income were also present from discontinued operations and or other comprehensive income (“Specific Procedures”). The lack of these Specific Procedures was a deficiency in our internal controls during the June 30 and September 30, 2009 quarterly periods. The Specific Procedures were included in the control procedures performed as of December 31, 2009, which is what led to the discovery of errors to the quarterly periods ended June 30 and Septem ber 30, 2009. We believe that the internal control deficiency had been remediated as of December 31, 2009. The Specific Procedures were included in the quarterly income tax provision review procedures beginning with the first quarter of 2010. For the second quarter of 2009, the Company recorded an income tax benefit of $495,000. The current quarter tax expense was primarily related to state taxes in Texas and Michigan. The prior year tax benefit was due to realization of losses from continuing operations as the operating losses offset gains and taxes attributable to discontinued operations.

~~Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009~~

2010 % of total net revenues 2009 % of total net revenues $ Change % Change
(Dollar amounts in thousands)
Net revenues:
Lead fees $ 21,979 92 % $ 23,735 87 % $ (1,756 ) (7 )%
Advertising 1,922 8 3,473 13 (1,551 ) (45 )
Other 42 — 107 — (65 ) (61 )
Total net revenues 23,943 100 27,315 100 (3,372 ) (12 )
Cost of revenues (excludes depreciation of $643 and $450 for the six months ended June 30, 2010 and 2009, respectively,) 14,953 62 17,908 66 (2,955 ) (17 )
Gross profit 8,990 38 9,407 34 (417 ) (4 )
Operating expenses:
Sales and marketing 5,671 24 5,245 19 426 8
Technology support 2,980 13 2,687 10 293 11
General and administrative 5,791 24 7,023 26 (1,232 ) (18 )
Patent litigation settlement (2,806 ) (12 ) (2,846 ) (11 ) 40 (1 )
Total operating expenses 11,636 49 12,109 44 �� (473 ) (4 )
Operating loss (2,646 ) (11 ) (2,702 ) (10 ) 56 (2 )
       Interest and other income 490 2 821 3 (331 ) (40 )
Loss before income tax expense (2,156 ) (9 ) (1,881 ) (7 ) (275 ) 15
       Income tax expense (benefit) 48 — (495 ) (2 ) 543 (110 )
Loss from continuing operations (2,204 ) (9 ) (1,386 ) (5 ) (818 ) 59
       Discontinued operations — — 778 3 (778 ) (100 )
Net loss $ (2,204 ) (9 )% $ (608 ) (2 )% $ (1,596 ) 263 %

~~Lead Fees.~~ Lead fees decreased $1.8 million or 7% in first half 2010 compared to first half 2009 and was primarily due to a shift in mix from new and used retail Leads to Manufacturer Leads, which has a lower average sales price per lead. The use of incentives to drive incremental Dealer sign-ups also had a negative impact during the first half 2010. The volume of new and used retail Leads delivered decreased 21%, which was partially offset by an increase in the volume of Leads delivered to Manufacturers and finance Leads delivered of 12% and 23%, respectively, as the automotive consumer credit environment showed signs of recovery in the first half 2010.

~~Advertising.~~ The $1.6 million or 45% decrease in advertising revenues for first half 2010 compared to first half 2009 was due primarily to the elimination of a large traffic partner in the fourth quarter of 2009 and a decrease in page views.

~~Cost of Revenues.~~ The $3.0 million or 17% decrease in the cost of revenues in first half 2010 compared to first half 2009 was primarily due to a decrease of $2.3 million in Lead acquisition costs directly related to reduced volume and the change in mix of Leads delivered and a $0.8 million decrease in traffic acquisition costs.

~~Sales and Marketing.~~ ~~Sales and marketing expense in first half 2010 increased by $0.4 million or 8% compared to first half of 2009 principally due to increased advertising and personnel costs.~~

~~Technology Support.~~ ~~Technology support expense in first half 2010 increased by $0.3 million or 11% compared to first half of 2009 due to increased personnel costs.~~

~~General and Administrative.~~ ~~General and administrative expense in first half 2010 decreased $1.2 million or 18% compared to first half of 2009 due to the following:~~

~~Interest and other income.~~ Interest and other income was $0.5 million in first half 2010 and consisted primarily of patent and international licensing fees recognized through June 30, 2010. Interest and other income was $0.8 million in first half 2009 and primarily represented a gain on the sale of available-for-sale securities and international licensing fees recognized through June 30, 2009.

~~Liquidity and Capital Resources~~

Six Months Ended June 30,
2010 2009
(in thousands)
Net cash used in operating activities $ (833 ) $ (2,359 )
Net cash (used in) provided by investing activities (489 ) 1,734
Net cash provided by financing activities 102 —

sheet. Subsequent to the June 30, 2009 balance sheet date, we received a further $0.4 million of the escrow amounts, with the remaining $0.2 million subject to certain contingencies. In addition, we sold all of our available-for-sale investments for cash proceeds of $0.6 million in the six months ended June 30, 2009.

~~Off-Balance Sheet Arrangements~~

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-mak ing can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

~~Quantitative and Qualitative~~ ~~Disclosures about Market Risk~~

conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

~~Item 1A.~~ ~~Risk Factors~~

Item 1A.

Risk Factors

~~We are affected by general economic conditions and in particular the automotive industry.~~

·	~~North American vehicle sales remain highly volatile and are expected to track at relatively low levels in 2010,~~

·	~~Dealer consolidations, closings, and bankruptcies continue, and~~

·	~~General Motors and Chrysler continue efforts to stabilize their businesses.~~

If any of our advertising relationships with Manufacturers terminate or decline due to negative marketing conditions redirecting consumer demand (page views) or our advertising rates decline, our revenues will decrease.

Our common stock could be delisted from the NASDAQ Global Market if we are not able to satisfy continued listing requirements, and if this were to occur, the price of our common stock and our ability to raise additional capital may be adversely affected and the ability to buy and sell our stock may be less orderly and efficient.

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There are many risks associated with consummated and potential acquisitions.

It may be difficult to assimilate the operations and personnel of an acquired business into our own business;

Management information and accounting systems of an acquired business must be integrated into our current systems;

We may lose dealers participating in both our network as well as that of the acquired business, if any;

Our management must devote its attention to assimilating the acquired business which diverts attention from other business concerns;

Our strategy is dependent on increasing Purchase Request revenue; Should Dealer attrition occur in our network it could impact Purchase Request revenue and the number of Purchase Requests.

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Uncertainies regarding liquidity and our ability to obtain additional financing for working capital, future capital needs and business opportunities . If we are unable ~~regain compliance,~~to generate positive cash flow or obtain additional financing we may not be able to continue to operate our business.

The Company has historically experienced negative cash flow and losses and at September 30, 2010 had an accumulated deficit of $279 million. Under our current operating plan for 2011, the Company believes that its current cash and cash equivalents are sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, primarily as a result of the recent acquisition of Auto/Cyber, which the Company believes will contribute to reducing negative cash flow, and expense reduction initiatives designed to preserve working capital that were commenced in the fourth qu arter of 2010. However, the Company continues to face many risks and uncertainties, many of which are beyond its control, including those related to general economic conditions and the automotive industry in general, and there can be no assurances given that the Company will be ~~delisted.~~able to meet anticipated cash needs for at least the next 12 months. We may need to raise additional funds in order to develop new or enhance existing services or products, to respond to competitive pressures, or to acquire assets or businesses. There can be no assurances given that additional financing will be available on terms favorable to us, or at all. If ~~our common stock were to be delisted from the NASDAQ Global Market, the price of our common stock, the ability of holders to sell our stock, and~~adequate funds are not available or are not available on acceptable terms, our ability to ~~raise~~develop or enhance services or products or respond to competitive pressures or acquire assets or businesses would be signif icantly limited. If the Company is unable to attain positive cash flow or obtain additional working capital ~~will likely~~on a timely basis on terms favorable to it, the Company may be unable to meet its obligations, withstand adverse business conditions or capitalize on future business opportunities. In addition, our ability to continue to operate our business may also be materially and adversely ~~affected. If our common stock~~affected in the event we are unable to generate positive cash flow and additional financing is ~~delisted and thereafter traded over-the-counter, trading in our stock could~~not available when required.

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be less efficient. If we sought to re-list our stock on the NASDAQ Global Market, we would be required to comply with all of the initial listing requirements to be re-listed on the NASDAQ Global Market, which in some instances are more stringent than the continued listing requirements.

Our certificate of incorporation and bylaws, tax benefit preservation plan and Delaware law contain provisions that could discourage a third party from acquiring us or limit the price third parties are willing to pay for our stock.

~~Provisions of our amended and restated certificate of incorporation and bylaws relating to our corporate governance and provisions in our tax benefit preservation plan (“Tax Benefit Preservation Plan~~”) could make it difficult for a third party to acquire us, and could discourage a third party from attempting to acquire control of us. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.

Our amended and restated certificate of incorporation allow us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the stockholders. Our amended and restated certificate of incorporation also provides that the board of directors is divided into three classes, which may have the effect of delaying or preventing changes in control or change in our management because less than a majority of the board of directors are up for election at each annual meeting. In addition, provisions in our amended and restated certificate of incorporation and bylaws impose various procedural and other requirements which could make it more difficult for stockholders to effect corporate actions such as a merger, asset sale or other change of control of us.

~~Under our Tax Benefit Preservation Plan, rights to purchase capital stock of the Company (“Rights~~”) have been distributed as a dividend at the rate of one Right for each share of Common Stock. Each Right entitles its holder, upon triggering of the Rights, to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at a price of $8.00 (as such price may be adjusted under the Tax Benefit Preservation Plan) or, in certain circumstances, to instead acquire shares of Common Stock. The Rights will convert into a right to acquire Common Stock or other capital stock of the Company in certain circumstances and subject to certain exceptions. The Rights will be triggered upon the acquisition of 4.90% or more of t he Company’s outstanding Common Stock or future acquisitions by any existing holders of 4.90% or more of the Company’s outstanding Common Stock. If a person or group acquires 4.90% or more of our common stock, all rights holders, except the acquirer, will be entitled to acquire at the then exercise price of a right that number of shares of our common stock which, at the time, has a market value of two times the exercise price of the right.

We are also subject to Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together with affiliates and associates, owns or did own 15% or more of the corporation’s voting stock. Section 203 could discourage a third party from atte mpting to acquire control of us.

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Item 6. Exhibits

2.1*‡	Asset Purchase Agreement dated as of September 16, 2010, by and among Autotropolis, Inc., a Florida corporation, Cyber Ventures, Inc., a Florida corporation, William Ferriolo, Ian Bentley and the Ian Bentley Revocable Trust created U/A/D 3/1/2005, Autobytel Inc., a Delaware corporation, and Autobytel Acquisition Subsidiary, Inc., a Delaware corporation.

3.1	Fifth Amended and Restated Certificate of Incorporation of Autobytel Inc. (formerly Autobytel.com Inc. (“Autobytel” or the “Company”)) certified by the Secretary of State of Delaware (filed December 14, 1998), as amended by Certificate of Amendment dated March 1, 1999, Second Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated July 22, 1999, Third Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated August 14, 2001, Certificate of Designation of Series A Junior Participating Preferred Stock dated July 30, 2004, and Amended Certificate of Designation of Series A Junior Participating Preferred Stock dated April 24, 2009, which is incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on For m 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239)

3.2	Second Amended and Restated Bylaws of Autobytel dated August 1, 2009, which is incorporated herein by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 filed with the SEC on October 23, 2009 (SEC File No. 000-22239)

4.1	Form of Common Stock Certificate of Autobytel is incorporated herein by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 filed with the SEC on November 14, 2001 (SEC File No. 000-22239)

4.2	Amended and Restated Rights Agreement, dated as of April 24, 2009, between Autobytel and Computershare Trust Company, N.A., successor-in-interest to U.S. Stock Transfer Corporation (which includes the form of Amended Certificate of Designation of the Series A Junior Participating Preferred Stock of Autobytel as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C,C), which is incorporated herein by reference to Exhibit 4.2 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239)

4.3	First Amendment to Amended and Restated Rights Agreement, dated May 26, 2010 is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)

4.4	Tax Benefit Preservation Plan, dated as of May 26, 2010, between Autobytel Inc. and Computershare Trust Company, N.A., as rights agent, together with the following exhibits thereto: Exhibit A – Form of Right Certificate; Exhibit B – Summary of Rights to Purchase Shares of Preferred Stock of Autobytel Inc. is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)

~~10.1~~4.5*	~~Consulting Services Agreement, effective June 21,~~Convertible Subordinated Promissory Note dated September 16, 2010 ~~between~~(Principal Amount $5,000,000) issued by Autobytel Inc. to Autotropolis, Inc. and ~~Mark A. Garms is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 25, 2010 (SEC File No. 000-22239)~~Cyber Ventures, Inc.

~~10.2~~4.6*	Warrant to Purchase 2,000,000 Shares of Autobytel Inc. Common Stock dated September 16, 2010 ~~Equity Incentive Plan is incorporated~~issued by ~~reference~~Autobytel Inc. to ~~Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on June 25, 2010 (SEC File No. 000-22239)~~Autotropolis, Inc. and Cyber Ventures, Inc.

~~10.3~~4.7*	~~Form of Amended and Restated Indemnification~~Shareholders Agreement dated as of ~~July 21,~~September 17, 2010 ~~between~~by and among Autobytel Inc., a Delaware corporation, Autotropolis, Inc., a Florida corporation, Cyber Ventures, Inc., a Florida corporation, William Ferriolo, Ian Bentley and ~~its officers and directors is incorporated herein by reference to Exhibit 99.1 of~~ the ~~Current Report on Form 8-K filed with the SEC on July 22, 2010 (SEC File No. 000-22239)~~

10.4*	~~Form of Officer and Director Indemnification Agreement~~Ian Bentley Revocable Trust created U/A/D 3/1/2005

31.1*	Chief Executive Officer Section 302 Certification of Periodic Report dated ~~August 13, 2010.~~November 12, 2010

31.2*	Chief Financial Officer Section 302 Certification of Periodic Report dated ~~August 13, 2010.~~November 12, 2010

32.1*	Chief Executive Officer and Chief Financial Officer Section 906 Certification of Periodic Report dated ~~August 13, 2010.~~November 12, 2010

*	Filed herewith

‡

Certain schedules in this Exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K. Autobytel Inc. will furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request; provided, however, that Autobytel Inc. may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.

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			AUTOBYTEL INC.

			By:	/s/ Curtis E. DeWalt
				Curtis E. DeWalt
				Senior Vice President and Chief Financial Officer
				(Duly Authorized Officer and Principal Financial Officer)


Date: ~~August 13,~~November 12, 2010

	By:	/s/ Wesley Ozima
		Wesley Ozima
		Vice President and Controller
		(Principal Accounting Officer)

2.1*‡	Asset Purchase Agreement dated as of September 16, 2010, by and among Autotropolis, Inc., a Florida corporation, Cyber Ventures, Inc., a Florida corporation, William Ferriolo, Ian Bentley and the Ian Bentley Revocable Trust created U/A/D 3/1/2005, Autobytel Inc., a Delaware corporation, and Autobytel Acquisition Subsidiary, Inc., a Delaware corporation.

3.1	Fifth Amended and Restated Certificate of Incorporation of Autobytel Inc. (formerly Autobytel.com Inc. (“Autobytel” or the “Company”)) certified by the Secretary of State of Delaware (filed December 14, 1998), as amended by Certificate of Amendment dated March 1, 1999, Second Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated July 22, 1999, Third Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated August 14, 2001, Certificate of Designation of Series A Junior Participating Preferred Stock dated July 30, 2004, and Amended Certificate of Designation of Series A Junior Participating Preferred Stock dated April 24, 2009, which is incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on ~~Form~~For m 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239)

3.2	Second Amended and Restated Bylaws of Autobytel dated August 1, 2009, which is incorporated herein by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 filed with the SEC on October 23, 2009 (SEC File No. 000-22239)

4.1	Form of Common Stock Certificate of Autobytel is incorporated herein by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 filed with the SEC on November 14, 2001 (SEC File No. 000-22239)

4.2	Amended and Restated Rights Agreement, dated as of April 24, 2009, between Autobytel and Computershare Trust Company, N.A., successor-in-interest to U.S. Stock Transfer Corporation (which includes the form of Amended Certificate of Designation of the Series A Junior Participating Preferred Stock of Autobytel as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C,C), which is incorporated herein by reference to Exhibit 4.2 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239)

4.3	First Amendment to Amended and Restated Rights Agreement, dated May 26, 2010 is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)

4.4	Tax Benefit Preservation Plan, dated as of May 26, 2010, between Autobytel Inc. and Computershare Trust Company, N.A., as rights agent, together with the following exhibits thereto: Exhibit A – Form of Right Certificate; Exhibit B – Summary of Rights to Purchase Shares of Preferred Stock of Autobytel Inc. is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)

~~10.1~~4.5*	~~Consulting Services Agreement, effective June 21,~~Convertible Subordinated Promissory Note dated September 16, 2010 ~~between~~(Principal Amount $5,000,000) issued by Autobytel Inc. to Autotropolis, Inc. and ~~Mark A. Garms is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 25, 2010 (SEC File No. 000-22239)~~Cyber Ventures, Inc.

~~10.2~~4.6*	Warrant to Purchase 2,000,000 Shares of Autobytel Inc. Common Stock dated September 16, 2010 ~~Equity Incentive Plan is incorporated~~issued by ~~reference~~Autobytel Inc. to ~~Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on June 25, 2010 (SEC File No. 000-22239)~~Autotropolis, Inc. and Cyber Ventures, Inc.

~~10.3~~4.7*	~~Form of Amended and Restated Indemnification~~Shareholders Agreement dated as of ~~July 21,~~September 17, 2010 ~~between~~by and among Autobytel Inc., a Delaware corporation, Autotropolis, Inc., a Florida corporation, Cyber Ventures, Inc., a Florida corporation, William Ferriolo, Ian Bentley and ~~its officers and directors is incorporated herein by reference to Exhibit 99.1 of~~ the ~~Current Report on Form 8-K filed with the SEC on July 22, 2010 (SEC File No. 000-22239)~~

10.4*	~~Form of Officer and Director Indemnification Agreement~~Ian Bentley Revocable Trust created U/A/D 3/1/2005

31.1*	Chief Executive Officer Section 302 Certification of Periodic Report dated ~~August 13, 2010.~~November 12, 2010

31.2*	Chief Financial Officer Section 302 Certification of Periodic Report dated ~~August 13, 2010.~~November 12, 2010

32.1*	Chief Executive Officer and Chief Financial Officer Section 906 Certification of Periodic Report dated ~~August 13, 2010.~~November 12, 2010

‡

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net revenues:
Lead fees	$	11,245		$	11,583		$	21,979		$	23,735
Advertising		869			1,786			1,922			3,473
Other revenues		17			75			42			107
Total net revenues		12,131			13,444			23,943			27,315
Cost of revenues (excludes depreciation of $321 and $197 for the three months ended June 30, 2010 and 2009, respectively and $643 and $450 for the six months ended June 30, 2010 and 2009, respectively)		7,889			9,022			14,953			17,908
Gross profit		4,242			4,422			8,990			9,407
Operating expenses:
Sales and marketing		2,904			2,542			5,671			5,245
Technology support		1,583			1,226			2,980			2,687
General and administrative		3,077			3,032			5,791			7,023
Patent litigation settlement		(43	)		(179	)		(2,806	)		(2,846	)
Total operating expenses		7,521			6,621			11,636			12,109

Operating loss		(3,279	)		(2,199	)		(2,646	)		(2,702	)
Interest and other income		313			675			490			821
Loss before income tax expense		(2,966	)		(1,524	)		(2,156	)		(1,881	)
Income tax expense (benefit)		35			(495	)		48			(495	)
Loss from continuing operations		(3,001	)		(1,029	)		(2,204	)		(1,386	)
Discontinued operations		—			778			—			778
Net loss and comprehensive loss	$	(3,001	)	$	(251	)	$	(2,204	)	$	(608	)

Basic and diluted loss per common share:
Loss from continuing operations	$	(0.07	)	$	(0.02	)	$	(0.05	)	$	(0.03	)
Discontinued operations, net		—			0.02			—			0.02
Basic and diluted loss per common share	$	(0.07	)	$	(0.01	)	$	(0.05	)	$	(0.01	)