UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K


(Mark
One)




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


For the
fiscal year ended December 31, 2009


or


 ̈
            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
      of Incorporation)
            (I.R.S.
      Employer Identification No.)




18872
MacArthur Boulevard, Suite 200


Irvine,
California 92612-1400


(Address
of principal executive offices) (Zip Code)




Registrant’s
telephone number, including area code (949) 225-4500




Securities
registered pursuant to Section 12(b) of the Act:


Common
      Stock, par value $0.001 per share
            The
      NASDAQ Global MarketTitle
      of Class
            Name
      of exchange on which registered





Securities
registered pursuant to Section 12(g) of the Act: None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈    No  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x




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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈




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” and “smaller
reporting company” in Rule 12b-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 Act).    Yes   ̈    No  x




Based on
the closing sale price of $0.43 for our common stock on The NASDAQ Global Market
on June 30, 2009, the aggregate market value of outstanding shares of
common stock held by non-affiliates was approximately $19 million. As of
February 28, 2010, 45,168,706 shares of our common stock were
outstanding.




Documents
Incorporated by Reference


Portions
of our Definitive Proxy Statement for the 2009 Annual Meeting, expected to be
filed within 120 days of our fiscal year end, are incorporated by reference into
Part III of this Annual Report on Form 10-K.


























Explanatory
Note




This
Annual Report on Form 10-K restates our unaudited consolidated condensed
financial statements for the quarterly periods ended June 30, 2009 and September
30, 2009, as discussed in Note 12 to our consolidated financial statements
contained in this Annual Report on Form 10-K.  The restatement relates
to the misclassification of income tax provision (benefit) between continuing
operations and discontinued operations.  Our previously issued
unaudited consolidated condensed financial statements for each of those periods
should not be relied upon.  There was no impact to the net losses or
to the consolidated balance sheets or consolidated statements of cash flows for
these quarterly periods as a result of this misclassification.













Autobytel
Inc.




ANNUAL
REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009





Page
              NumberPart
      IItem 1
            Business
            1Item 1A
            Risk
      Factors
            8Item
      1B
            Unresolved
      Staff Comments
            17Item 2
            Properties
            17Item 3
            Legal
      Proceedings
            17Item 4
            Reserved
            17Part
      IIItem 5
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of
              Equity
      Securities
            18Item 6
            Selected
      Financial Data
            20Item 7
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            20Item 7A
            Quantitative
      and Qualitative Disclosures About Market Risk
            28Item 8
            Financial
      Statements and Supplementary Data
            28Item 9
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            28Item 9A
            Controls
      and Procedures
            28Item 9B
            Other
      Information
            28Part
      IIIItems 10
            Directors,
      Executive Officers and Corporate Governance
            30Items 11
            Executive
      Compensation
            30Items 12
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            30Items 13
            Certain
      Relationships and Related Transactions, and Director
      Independence
            30Items 14
            Principal
      Accounting Fees and Services
            30Part
      IVItem 15
            Exhibits,
      Financial Statement Schedules
            31Signatures
            32














PART
I




FORWARD-LOOKING
STATEMENTS




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 Annual Report and
our proxy statement, parts of which are incorporated herein by reference,
contain such 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, new product expectations
and capabilities, and our outlook regarding our performance and growth are
forward-looking statements. This Annual Report 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 “Item 1A. Risk Factors,” and Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”.
Investors are urged not to place undue reliance on forward-looking statements.
Forward-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.




Item 1.
            Business




Autobytel
Inc. was incorporated in 1996 under the laws of the State of Delaware. Unless
specified otherwise, as used in this Annual Report on Form 10-K, the terms “we,”
“us,” “our,” the “Company” or “Autobytel” refer to Autobytel Inc. and its
subsidiaries.




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 (“Leads”) are consumer internet
requests for pricing and availability of new or used vehicles or for vehicle
financing.  Leads originate from our websites or are purchased from
third parties (“Network Websites”), and are sold primarily to Dealers and
Manufacturers.   Our consumer-facing automotive websites,
including Autobytel.com®,
Autoweb.com®,
AutoSite.com®,
Car.comsm,
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 our websites.  Our
websites are the source of an increasing percentage of our Leads and provide a
significant portion of the page views for the advertising component of our
business.




Available
Information




Our
corporate website is located at www.autobytel.com.
Information on our website is not incorporated by reference in this Annual
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 such material is electronically filed with or
furnished to the SEC and The NASDAQ Stock Market. 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.





1







Significant
Business Developments




Website
Content and Data Enhancements




During
the first half of 2009, we settled all pending litigation related to our US
Patent No. 6,282,517 – “Real Time Communication of Purchase Requests” (“ ‘517
Patent”).  As part of these litigation settlements, and in return for
licenses of our ‘517 Patent, we received approximately $179,000 in cash and
signed long-term license agreements for the receipt of significant automotive
related content and data from the defendants in the litigation (“Settlement
Content and Data”).  The Settlement Content and Data includes
high-resolution photos, automotive pricing data, incentive data, specification
data, editorial content, car reviews, and configuration data.  This
Settlement Content and Data is being utilized on our websites to significantly
expand the data available to consumers during their vehicle research and
shopping experience.  We believe that the additional Settlement
Content and Data will increase the volume of quality traffic to our websites and
enhance the likelihood of their conversion into quality Leads.






In the
second half of 2009, Kelley Blue Book (“KBB”) signed an agreement to license
certain of our patent rights, including the ‘517 Patent, relating to on-line
distribution systems.  In return, we received a long-term license to
publish on our websites KBB’s vehicle value, pricing and specification data as
well as editorial and video content (“KBB Content and Data”).  We
expect to implement KBB Content and Data on our websites during
2010.






Significant
Reduction of Retail Automobile Dealers




Dealers
experienced a significant reduction in new vehicle sales during
2009.  The total volume of new U.S. light vehicle sales in 2009 was at
levels not experienced since 1970, and Chrysler and General Motors, as part of
their bankruptcy reorganizations, announced plans to terminate several thousand
dealer franchise agreements in 2009 and continuing into 2010.  As a
result of these events, as well as the reduction in Dealer marketing budgets,
and investment by Dealers in their proprietary websites, we lost 21% of our
retail dealer customers as of December 31, 2009, compared to December 31,
2008.  The rate of the Dealer losses declined in the fourth quarter of
2009 but there can be no assurance that the rate of this attrition will continue
to decline in the future quarters.






NASDAQ
Minimum Bid Compliance




On
February 10, 2010, we received a written notification from the NASDAQ that we
regained compliance with the $1.00 minimum bid price requirement for continued
listing of our common stock on The NASDAQ Global Market pursuant to NASDAQ
listing Rule 5450(a)(1) and that the matter was now closed.  The
NASDAQ staff had previously notified us in a letter dated September 15, 2009
that our common stock failed to maintain a minimum bid price of $1.00 over the
previous 30 consecutive business days as required by the Listing Rules of The
NASDAQ Stock Market. Since then, however, the closing bid price of our common
stock has been at $1.00 per share or greater for at least 10 consecutive
business days. Accordingly, we had regained compliance with the $1.00 minimum
bid requirement.






Operating
Expenses




We
initiated a series of expense reduction initiatives throughout 2008 and into
2009, that were intended to better align our operating costs with our declining
revenues.  As a result of these efforts, our operating costs declined
sequentially in every calendar quarter of 2009.  In 2010 we expect to
reinvest in our business by adding certain headcount and non-headcount related
costs in an effort to achieve revenue growth.  Therefore, we do not
expect to experience continued declines in our operating expenses in
2010.






Changes
to Executive Management




A number
of our executives either resigned from or were terminated by the Company in late
2008, including our former Chief Executive Officer, James Riesenbach. Effective
February 28, 2009, we also terminated the employment of our former Chief
Financial Officer, Monty Houdeshell.  Jeffrey H. Coats, a member of
the Board of Directors, was appointed as our President and Chief Executive
Officer on December 12, 2008.  Mark Garms, the Company’s Senior
Vice President of Dealer Operations, was named the Company’s Executive Vice
President and Chief Operating Officer effective on January 19, 2009. Curtis
DeWalt, the Company’s Senior Vice President, Finance and Controller, was
appointed to the position of Senior Vice President and Chief Financial Officer
and Wesley Ozima, the Company’s Director of Corporate Accounting, was appointed
to the position of Vice President and Controller, both effective March 1,
2009.







2







Basis
of Presentation




We sold
certain assets and liabilities of our AVV Inc. (“AVV”) business on
January 23, 2008. Accordingly, the results of AVV are presented in the
consolidated financial statements as discontinued operations. As discontinued
operations, AVV is presented on a net basis and stated separately from the
respective captions in continuing operations in the Consolidated Statements of
Operations and Comprehensive Loss.  Expenses included in discontinued
operations are direct costs of the divestiture that were eliminated from future
operations.  Unless stated otherwise, all amounts in this Annual
Report on Form 10-K are presented net of discontinued operations.




Industry
Background




The
internet has been rapidly adopted by consumers for their vehicle purchasing
process, primarily because it has become the best method to easily find the
information necessary to make informed buying decisions. Additionally, the
internet has become a primary tool for consumers to begin communicating with
local automotive dealers regarding vehicle pricing, availability, options, and
financing.  Seventy-six percent of all U.S. new light vehicle
consumer buyers have moved to the internet as a primary vehicle research and
shopping tool.  In addition, most retail automotive Dealers and all
Manufacturers use it as an efficient way to reach those consumers through
marketing programs.  In a survey commissioned by us in January 2010,
70% of the two-hundred Dealers surveyed indicated that they planned to increase
their internet marketing budgets during 2010.




Strategy




Our
goal is to garner a larger share of the billions of dollars spent annually by
Dealers and Manufacturers on automotive marketing services.  We plan
to achieve this objective through the following principal
strategies:




Grow and Effectively Monetize the
Traffic on our Websites.  Our consumer-facing automotive websites
include Autobytel.com®,
Autoweb.com®,
AutoSite.com®,
Car.comsm,
CarSmart.com®,
CarTV.com®, and
MyRide.com®.
Traffic to our websites is obtained through a variety of sources and methods,
including direct navigation to our website, natural search, paid search (search
engine marketing, or “SEM,” which is the practice of bidding on key words on
search engines to drive traffic to a website), direct marketing, and partnering
with other website publishers that provide links to our
websites.  Traffic to our sites is monetized primarily though the
creation of Leads that are delivered to our Dealer and Manufacturer customers to
help them market and sell new and used vehicles, and through the sale of
advertisements on our websites.  We plan to grow and effectively
monetize our websites by:




•
            Increasing traffic acquisition
      activities.We plan to increase the traffic to our
      websites through effective traffic acquisition
      activities.  Increasing the revenue per visit on our sites will
      allow for self funding of traffic acquisition activities.  We
      expect that over time, paid traffic such as SEM will be balanced by
      greater visitation from direct navigation and natural search, which we
      expect to result in increased gross profit
  margins;




•
            Enhancing the quality and user
      experience of our websites.  We recently began enhancing
      the appeal of our websites by integrating the Settlement Content and Data,
      obtained as a result of patent litigation settlements.  We are
      also in the early stages of integrating the KBB Content and Data on our
      websites.  In 2010 we have a number of website improvements
      planned, including enhancing the overall design and functionality of our
      websites.  These enhancements are intended to uniquely position
      our websites as comprehensive best in class destinations for automotive
      purchase research by consumers;




•
            Increasing the conversion rate
      of visitors to Leads on our websites.  Through increased
      SEM activities and significant content, tools, and user interface
      enhancements to our websites, we believe we will be able to increase the
      number of website visits and improve website “engagement,” and the
      conversion of page views into Leads.  We believe that an
      increased conversion rate of page views into Leads could result in higher
      revenue per visitor.





3







Increase the Quality of our
Leads.High quality Leads are those Leads that result in high
transaction (i.e. purchase) closing ratios for our Dealer
customers.  We plan to generate a larger proportion of Leads from our
websites in the future.  Leads that are originated from our websites
are generally higher quality than acquired Leads and increase the overall
quality of our Lead portfolio.  The Leads that we acquire from our
Network Website suppliers are of varying quality, therefore, we plan to continue
to develop and maintain strong relationships with Network Website suppliers that
can consistently provide high quality Leads.




Increase the Number of Dealer
Customers. Our Dealer network is strategically important because it
is the source of a majority of our revenues and is where new products and
services are introduced. Since our inception, we have invested significant
resources to build our Dealer network.  We plan to increase the number
of our retail Dealer customers by:




•
            increasing
      the quality of the Leads delivered to our Dealers to help them market and
      sell new and used vehicles,




•
            providing
      customizable Lead programs to meet our Dealers’ unique marketing
      requirements,




•
            providing
      additional value added marketing services that help Dealers more
      effectively utilize the internet to market and sell new and used
      vehicles,




•
            increasing
      overall Dealer satisfaction by improving all aspects of our
      services.




Increase Lead Sales to Existing
Manufacturer Customers.  We have existing relationships with
most Manufacturers that market their vehicles in the U.S.  We sell
Leads to our Manufacturer customers which they in turn provide to their Dealers
to help them market and sell new and used vehicles.  We plan to
increase our sales to these existing customers primarily by increasing the
quality of the Leads we deliver to them.




Increase Advertising
Revenue.  As traffic to and time spent on our websites by
consumers increases, we will seek to increase our advertising
revenue.  We intend to leverage our relationships with Manufacturers
and their advertising agencies to garner higher rates for our traditional
display advertising.  We also intend to provide new advertising
offerings built around the enhancements to our websites, including editorial
opportunities and sales events.  It is our belief that if the
performance of our advertisements increases (as measured by the click through
rates and other metrics typically monitored by online advertisers), advertisers
will be willing to pay higher rates.  Further, with increased traffic,
we believe that we will become more relevant for larger advertising buys, which
should also increase our advertising rates.  Finally, we plan to
increase the number of our advertising clients and to expand beyond
Manufacturers to include non-Manufacturer advertising clients.




Expand our Products and Services.We gather significant amounts of data on consumer intent as it relates to
purchasing vehicles.  We intend to use this data to create products
and services, including direct business database offerings, which we believe
will ultimately help Dealers market and sell more new and used
vehicles.  We believe that there is significant value in this data and
intend to monetize this asset in the most effective and efficient ways
possible.




Enter into Acquisitions and
Strategic Alliances.  We plan to grow and advance our business
and may do so, in part, through acquisitions and strategic alliances. We
continue to review strategic alternatives that may provide opportunities for
growth.  We believe that acquisitions and strategic alliances may
allow us to increase market share, benefit from advancements in technology, and
strengthen our business operations by enhancing our product and service
offerings.




Our
ability to implement the foregoing plans is subject to risks and uncertainties,
many of which are beyond our control.  Accordingly, there is no
assurance that we will successfully implement our plans and achieve our
goal.  See Item IA. “Risk Factors.”





4







Products
and Services




Lead
Programs




We
provide Dealers and Manufacturers with opportunities to efficiently market their
vehicles to potential customers.  Dealers participate in our Lead
programs and Manufacturers participate in our Lead programs, our display
advertising programs, and our direct marketing programs, reaching consumers that
are in the market for a vehicle.  For consumers who use our Lead
programs, we provide, at no cost to the consumer, an easy way to obtain valuable
information to assist them in their vehicle shopping process. The Lead requests
may be submitted on our websites or Network Websites. For consumers using our
websites, we provide research information, including vehicle specification data,
safety data, pricing data, photos, videos, regional rebate and incentive data,
and additional tools, such as the compare and configuration tools, to assist
them in this process.  We also provide additional content on our
websites, including our database of articles, such as consumer and professional
reviews, and other analysis.  Additional automotive information is
also available on our websites to assist consumers with specific vehicle
research, such as the trade-in value of their current vehicle.




New Vehicle Lead Program.Our
new vehicle Lead program allows consumers to submit requests for pricing and
availability of specific makes and models.  A new vehicle Lead
provides information regarding the make and model of a vehicle, and may also
include additional data regarding the consumers’ needs, including the vehicle
they wish to trade-in, whether they wish to lease or buy, and other options that
are important to their buying decision. A Lead will usually also include the
consumers’ name, phone number, and e-mail address and may include their home
address.




Most of
our Leads are subject to a quality verification system (“QVS”), which is
designed to maintain the quality of our Leads and increase the Lead closing
ratios for our Dealer customers.  The QVS includes the validation of
name, phone number, e-mail address, and postal address.  Our QVS
leverages proprietary systems as well as partnerships with vendors specializing
in customer validation.  After the Lead has been subject to QVS, we
then send the Lead to a Dealer that sells the type of vehicle requested in the
consumers’ area. We also send an e-mail message to the consumer with the
Dealer’s name and phone number and if the Dealer has a dedicated internet
manager, the name of that manager. Dealers contact the consumer, generally
within 24 hours of receiving the Lead with a price quote and availability
information for the requested vehicle.




Dealers
participate in our retail new vehicle Lead program by entering into contracts
directly with us or through major dealer groups. Generally, our Dealer contracts
may be terminated by either party on 30 days’ notice and are non-exclusive. The
majority of our retail Leads revenues consist of either a monthly subscription
or per Lead fee paid by Dealers in our network. We reserve the right to adjust
our fees to retail Dealers upon 30 days notice at any time during the term of
the contract. Manufacturers or their agents participate in our wholesale new
vehicle Lead programs generally by entering into annual agreements with the
right to terminate with a 90 day notice.  Revenue from retail new
vehicle Leads accounted for 45% and 42%, of total revenue in 2009 and 2008,
respectively. Revenue from wholesale Leads accounted for 24% and 25%, of total
revenue in 2009 and 2008, respectively.




Used Vehicle Lead
Program. Our used vehicle Lead program allows consumers to search
for used vehicles according to specific search parameters, such as the price,
make, model, mileage, year and location of the vehicle. The consumer is able to
locate and display the description, price, and, if available, digital images of
vehicles that satisfy their search parameters.  The consumer can then
submit a request for additional information regarding a specific vehicle that we
then deliver to the local Dealer. In addition to sending requests directly
through the websites, consumers may choose to contact the Dealer using a toll
free number posted next to the vehicle search results. We charge each Dealer
that participates in the used vehicle program a monthly subscription or a fee
per Lead.  Revenues from used vehicle Leads accounted for 8% of total
revenues in 2009 and 2008.




Finance Lead Program. 
The finance Leads program is designed to provide consumers, who may not be able
to secure loans through conventional lending sources, the opportunity to obtain
vehicle financing and other services. Consumers can submit a request for vehicle
financing or submit a credit questionnaire for a credit report or other credit
services that are provided by third party providers.  Finance Lead
requests are forwarded to the nearest participating Dealer that offers financing
or, if a Dealer is not available, to an automotive finance institution. We
charge each Dealer and finance institution that participates in the finance Lead
program a monthly subscription or per Lead fee. Revenues from finance Leads
accounted for 10% and 14% of total revenues in 2009 and 2008,
respectively.







5







Advertising
Programs




Our
websites attract an audience of vehicle-shopping and vehicle-buying consumers
that advertisers can target through display advertising. A primary way
advertisers use our websites to reach consumers is through vehicle content
targeting.This allows
automotive marketers to reach consumers while they are researching one of
our several website segments.  We sell advertising that consists of
fixed ad placement and anchor tenant opportunities. We also have a direct
marketing platform that helps manufacturers target in-market consumers during
the often-extended vehicle shopping process. Designed to keep the brand in
consideration, our direct marketing programs allow automotive marketers to
deliver specific communication through either e-mail or direct mail formats to
in-market consumers during their purchase cycle.  Advertising revenues
including direct marketing accounted for 13% and 11% of total revenues in 2009
and 2008, respectively.






Seasonality




Our
quarterly operating results have fluctuated in the past and may fluctuate in the
future due to unforeseen events affecting the economy and industry in which we
operate. Other factors that may adversely affect our quarterly operating results
include our Lead volume, which fluctuates with automotive industry sales volume
that has some measure of seasonality. Typically, volume is highest in the spring
and summer months, with lower volume in the fall and winter months. As
seasonality occurs, investors may not be able to predict our annual operating
results based on a quarter-to-quarter comparison of our operating results.
Seasonality in the automotive industry is likely to cause fluctuations in our
operating results and could have a material adverse effect on our business,
results of operations, and financial condition.






Intellectual
Property




Our
intellectual property include patents and patent applications related to our
innovations, products and services; trademarks related to our brands, products
and services; copyrights in software and creative content; trade secrets; and
other intellectual property rights and licenses of various kinds. We seek to
protect our intellectual property assets through patent, copyright, trade
secret, trademark and other laws and through contractual provisions. We enter
into confidentiality and invention assignment agreements with our employees and
contractors, and non-disclosure agreements with third parties with whom we
conduct business in order to secure our proprietary rights and additionally
limit access to, and disclosure of, our proprietary information.






We have
registered service marks with the United States Patent and Trademark Office,
including Auto-By-Tel, Autobytel.com, MyRide, Autoweb, CarSmart and the
Autobytel.com and MyRide.com logos. We have been issued U.S. Patent Number
6,282,517 (“ ‘517 Patent”) which is directed toward an innovative method and
system for forming and submitting a Lead over the internet and other computer
networks from consumers to suppliers of goods and services. This method permits
suppliers of goods or services to provide enhanced customer service by making
the purchasing process convenient for consumers as well as suppliers. The ‘517
Patent is also directed toward the communication system used to bring consumers
and suppliers closer together. The ‘517 Patent expires on January 14, 2019.
We have sought to enforce our ‘517 Patent through litigation and negotiated
licenses.  We continue to evaluate whether other organizations may be
infringing our ‘517 Patent.  We may evaluate possible licenses for the
‘517 Patent that may include consideration consisting of content and data for
our websites as well as cash payments.  We have also been issued
patents related to on-line aftermarket accessory shopping and on-line auctions.
We cannot assure that these patents will be enforceable by us in litigation. We
have applied for additional service marks and patents. We can not assure that
any additional service marks will be registered or additional patents issued, or
if registered or issued, that they will be enforceable by us in litigation.
Additional information regarding certain risks related to our intellectual
property is included in Part I, Item 1A “Risk Factors” of this Annual
Report on Form 10-K.






Competition




In the
automotive-related Leads marketing services and advertising marketplace we
compete for Dealer and Manufacturer customers.  Competition in our
core Lead referral business continued to be dynamic in 2009.  We
continue to compete with several companies that maintain business models similar
to ours.  Although some smaller competitors have scaled back their
Lead activities during 2009, competition has increased from larger competitors
that traditionally have competed in the used vehicle market.  In 2009
Dealers continued to invest in their proprietary websites and traffic
acquisition activities.   We expect this trend to continue as
Dealers strive to own and control more lead generating assets under their
captive brands.  Additionally, all major Manufacturers that market
their vehicles in the U.S. have their own websites and many of these
Manufacturers have launched on-line buying services to market their products
directly to consumers.






In 2009,
we continued to observe new and emerging revenue models particularly with
respect to Leads delivered through Manufacturer programs.  These
emerging models have put pressure on pricing and gross profit margins; however,
it is still to be determined whether these new and emerging revenue models will
take hold.







6







In the
advertising marketplace, we compete with major internet portals, transaction
based websites, automotive vertical companies and numerous lifestyle websites.
We also compete with traditional marketing channels, such as print, radio and
television.




Operations
and Technology




We
believe that our future success is significantly dependent upon our ability to
continue to deliver high-performance, reliable and comprehensive websites,
enhance consumer and Dealer communications, maintain the highest levels of
information privacy and ensure transactional security. Our websites are hosted
at a secure third-party data center facility. This data center includes
redundant power infrastructure, redundant network connectivity, fire detection
and suppression systems and security systems to prevent unauthorized access. Our
network and computer systems are built on industry standard
technology.




System
enhancements are primarily intended to accommodate increased traffic across our
websites, improve the speed in which Leads are processed and introduce new and
enhanced products and services. System enhancements entail the implementation of
sophisticated new technology and system processes. We plan to continue to make
investments in technology as we believe appropriate.




Government
Regulation




We are
subject to laws and regulations generally applicable to providers of advertising
and commerce over the internet, including federal and state laws and regulations
governing data security and privacy; unfair and deceptive acts and practices;
advertising; contests, sweepstakes and promotions; and content regulation. For
additional, important information related to government regulation of our
business, please review the information set forth in Part I, Item 1A“Risk
Factors” of this Annual Report on Form 10-K.




Employees




As of
February 28, 2010, we had 120 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.





7





Item 1A.
            Risk
      Factors




In
addition to the factors discussed in the “Liquidity and Capital Resources”
section of Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in this Annual Report on Form
10-K, the following additional factors may affect our future results. The risks
described below are not the only risks facing us. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial may also materially and adversely affect our business.






Except
for fiscal years 2003 and 2004, we have had a history of net annual losses. We
may not be profitable in the future. If we are unable to achieve profitability
in the future and we continue to lose money, our operations will not be
financially viable.




Except
for fiscal years 2003 and 2004, we have experienced net annual losses and as of
December 31, 2009 we had an accumulated deficit of $274 million. We may not
be able to achieve profitability in the future.  Our potential for
future profitability must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in rapidly
evolving markets, such as the market for internet commerce. We believe that to
achieve and sustain profitability, we must, among other things:




·
            Continue
      to send new and used automotive Leads to Dealers that result in sufficient
      Dealer transactions to justify our
fees;




·
            Expand
      the number of Dealers in our
networks;




·
            Sustain
      and expand our relationships with
Manufacturers;




·
            Increase
      the volume of Leads that originate on our
  websites;




·
            Expand
      lead referral sales to other automotive-related
  markets;




·
            Assure
      continued access to a high volume of high quality Leads at acceptable
      prices from third party sources;




·
            Maintain
      a high degree of customer
satisfaction;




·
            Provide
      secure and easy to use websites for
consumers;




·
            Increase
      visibility of our brand names;




·
            Defend
      and enforce our intellectual property
rights;




·
            Design
      and implement effective internal control
  systems;




·
            Continue
      to attract, train, retain and motivate qualified personnel;
      and




·
            Continue
      to upgrade and enhance our technologies to accommodate expanded service
      offerings and increased consumer
traffic.






We cannot
be certain that we will be successful in achieving these goals or that if we are
successful in achieving these goals, that we will be profitable in the
future.






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




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 economic
conditions have affected the automotive industry, which is currently
experiencing what is considered to be the most challenging environment of the
past several decades:




·
            North
      American vehicle sales have decreased
  significantly,




·
            Dealer
      consolidations, closings, and bankruptcies have increased
      significantly,




·
            General
      Motors and Chrysler filed for and emerged from bankruptcy in 2009,
      and




·
            Auto
      sales in the United States are expected to continue to remain at
      relatively low levels in 2010.







8







Our
strategy is dependent on increasing Lead referral revenue; Lead referral revenue
is directly impacted by attrition in our Dealer network and the number of Leads
delivered to our Dealers; if Dealer attrition continues to increase and the
total  number of Leads delivered to our Dealers continues to decrease,
our revenues will continue to decrease.




Our
strategy and achievement of profitability are dependent on our ability to
increase Lead referral revenue. If we are not successful in increasing Lead
referral revenue, then we may not be able to achieve profitability in the
future. Increasing Lead referral revenue is dependent upon our ability to
attract and retain qualified Dealers and Manufacturers, as well as expand lead
referral sales to other automotive-related markets.






We derive
a majority of our revenue from Lead referral fees paid by Dealers participating
in our Dealer network. In 2008 and 2009 we experienced attrition in the number
of our Dealers and a decrease in the total number of Leads delivered. Our
revenues have decreased as a result of Dealer attrition.  If Dealer
attrition increases or continues at the current rate and we are unable to add
new Dealers to mitigate the attrition, our revenues will continue to
decrease.  We cannot provide any assurances that we will be able to
reduce the level of Dealer attrition, and our failure to do so could materially
and adversely affect our business, results of operations and financial
condition. In addition to Dealer attrition and reduction in Leads delivered, if
Manufacturers or Dealers require us to decrease the fees we charge for our
services, our revenues will decline, which could have a material adverse effect
on our business, results of operations and financial condition.






From time
to time, a Dealer group or Manufacturer may significantly decrease the number of
Dealers participating in our Dealer network or the number of Leads accepted from
us. A material factor affecting Dealer attrition is our ability to provide
Dealers and Manufacturers with high quality Leads at acceptable prices. High
quality Leads are those that result in high closing ratios. Closing ratio is the
number of vehicles purchased at a Dealer generated from Leads divided by to the
total number of Leads sent to that Dealer. Generally, our Dealer agreements are
cancelable by either party upon 30 days notice. Participating Dealers may
terminate their relationship with us for any reason, including an unwillingness
to accept our subscription terms, as a result of joining alternative marketing
programs, or due to the quality of our Leads. We cannot provide any assurances
that Dealers will not terminate their agreements with us.






While we
have a large customer population making up our revenue base, we have one
Manufacturer customer that accounts for more than 5% of our
revenue.  The loss of that customer could have a material adverse
effect on our business, results of operations and financial
condition.






If
any of our advertising relationships with Manufacturers terminate or decline or
our advertising rates decline, our revenues will decrease.




We depend
on automotive Manufacturers for substantially all of our advertising revenues.
The termination of any of these relationships, a decline in the level of
advertising with us, reductions in advertising rates or any significant failure
to develop additional sources of advertising would cause our revenues to
decline, which could have a material adverse effect on our business, results of
operations and financial condition. We periodically negotiate revisions to
existing agreements and these revisions could decrease our advertising revenues
in future periods. A number of our advertising agreements with Manufacturers may
be terminated without cause. We may not be able to maintain our relationship
with Manufacturers on favorable terms or find alternative comparable
relationships capable of replacing advertising revenues on terms satisfactory to
us. If we cannot do so, our revenues would decline, which could have a material
adverse effect on our business, results of operations and financial
condition.






If
Manufacturers are subject to product recalls or other business interruption, our
revenues may decrease and our business could suffer.




Manufacturers are periodically subject
to product recalls.In
early 2010, Toyota Motor Sales (“Toyota”) announced product recalls related to
several of its vehicle models.  These product recalls resulted in a
decline in Lead requests by our Toyota Dealers, including the elimination of
Leads for certain Toyota vehicle models or the cancellation of the Lead program
with us.  Toyota franchises comprise a significant portion of the
Dealers on our retail new car leads program and a substantial portion of that
program’s volume of Leads and revenue.  If we cannot replace these
Lead sales with Lead sales to other customers, our results of operations or
financial condition will be materially and adversely
impacted.






Competition
could affect our market share, pricing, cost structure and Lead
supply.




The
success we achieve in our Leads businesses is dependent on our ability to
originate or acquire and sell high quality Leads in sufficient volumes at
profitable margins. These Leads may be submitted by consumers through our
websites or purchased from Network Websites. We actively compete for Dealer and
Manufacturer customers with companies that







9





maintain
automotive Lead referral businesses that are very similar to ours. Several of
these competitors are larger than us and may have greater financial resources
than we have. In addition to competition for customers, we also compete with
several of these companies in the acquisition of Leads from third party Lead
suppliers. If we lose customers or quality Lead supply volume to our
competitors, or if our pricing or cost to acquire Leads is impacted, our
business, results of operations and financial condition will be materially and
adversely impacted.




The
success we achieve in our advertising business is dependent on our ability to
attract and acquire consumers to our websites and monetize that traffic at
profitable margins with advertisers. Our consumer facing websites compete with
offerings from the major internet portals, transaction based sites, automotive
verticals (websites with content that is primarily automotive in nature) and
numerous lifestyle websites. Our advertising business is characterized by
minimal barriers to entry, and new competitors may be able to launch competitive
services at relatively low costs. If our websites do not provide a compelling,
differentiated user experience, we may lose visitors to competing sites.
Further, if our website traffic continues to decline, we may lose relevance to
our major advertisers who may reduce or eliminate their advertising
buys.




We cannot
provide any assurances that we will be able to compete successfully against
current or future competitors, many of which have substantially more technical
and financial resources as well as existing brand recognition. In addition,
competitive pressures may result in increased marketing costs, decreased traffic
to our websites or loss of market share that may materially and adversely affect
our business, results of operations and financial condition.






Our
quarterly financial results are subject to significant fluctuations that may
make it difficult for investors to predict our future performance.




Our
quarterly operating results have fluctuated in the past and may fluctuate in the
future due to unforeseen events affecting the economy and industry in which we
operate. Other factors that may adversely affect our quarterly operating results
include our Lead volume, which fluctuates with automotive industry sales volume
that has some measure of seasonality. Typically, volume is highest in the spring
and summer months, with lower volume in the fall and winter months. As
seasonality occurs, investors may not be able to predict our annual operating
results based on a quarter-to-quarter comparison of our operating results.
Seasonality in the automotive industry is likely to cause fluctuations in our
operating results and could have a material adverse effect on our business,
results of operations and financial condition.






Risks
Associated with Governmental Regulation




We have
identified below areas of government regulation, which if changed or interpreted
to apply to our business, we believe could be costly for us. These laws and
regulations include motor vehicle brokerage licensing laws, motor vehicle dealer
licensing laws, franchise laws, insurance licensing laws, financial services
laws, data security and privacy laws, and tax laws.




Uncertainty
exists in the application of various laws and regulations to our business. New
laws or regulations applicable to our business, or expansion or interpretation
of existing laws and regulations to apply to our business, could subject us to
licensing, claims, judgments and remedies, including monetary liabilities and
limitations on our business practices, and could increase administrative costs
or adversely affect our business. Although we do not believe that
existing laws or regulations materially and adversely impact us, our business
could be significantly affected by different interpretations or applications of
existing laws or regulations, future laws or regulations, or actions or rulings
by judicial or regulatory authorities. We operate in a regulatory climate in
which there is uncertainty as to the application of various laws and regulations
to our business. Our operations may be subjected to adoption, expansion or
interpretation of various laws and regulations, and compliance with these laws
and regulations may require us to obtain licenses at an undeterminable and
possibly significant initial and annual expense. These additional expenditures
may increase future overhead, thereby potentially reducing our future results of
operations. There can be no assurance that future laws or regulations or
interpretations or expansions of existing laws or regulations will not impose
requirements on internet commerce that could substantially impair the growth of
e-commerce and harm our business, results of operations and financial condition.
The adoption of additional laws or regulations may decrease the popularity or
impede the expansion of e-commerce and internet marketing, restrict our present
business practices, require us to implement costly compliance procedures or
expose us and/or our customers to potential liability, which, in turn, could
adversely affect our business.




We may be
considered to “operate” or “do business” in states where our customers conduct
their business, resulting in regulatory action. In the event any state’s
regulatory requirements impose state specific requirements on us or include us
within an industry-specific regulatory scheme, we may be required to modify our
marketing programs in that state in a manner that may undermine the program’s
attractiveness to consumers or Dealers. In the alternative, if we determine that
the licensing and related requirements are overly burdensome, we may elect to
terminate operations in such state. In each case, our business, results of
operations and financial condition could be materially and adversely
affected.







10









If automotive
dealer or broker laws apply to us we may be required to modify or eliminate our
marketing programs. If we are unable to market our services in the manner we
currently market our services, our revenues may decrease and our business may
suffer. All states comprehensively regulate vehicle sales and lease
transactions, including strict licensure requirements for dealers and, in some
states, brokers. Most of these laws and regulations, we believe, specifically
address only traditional vehicle purchase and lease transactions, not
internet-based lead referral transactions. We do not believe that our marketing
services qualify as automobile brokerage activity and, therefore, we do not
believe that state motor vehicle dealer or broker licensing requirements apply
to us. However, if any state’s regulatory requirements relating to motor vehicle
dealers or brokers are deemed applicable to us and we do not comply with those
regulatory requirements, we may become subject to fines, penalties or other
requirements and may be required to modify our marketing programs or pricing
models in those states in a manner that undermines the attractiveness of the
program to consumers or Dealers. If we determine that the licensing or other
regulatory requirements in a given state are overly burdensome, we may elect to
terminate operations in that state. In each case, our revenues may decline and
our business, results of operations and financial condition could be materially
and adversely affected. In some states we have modified our marketing programs
or pricing models to reduce uncertainty regarding our compliance with local
laws. As we introduce new services, we may need to incur additional costs
associated with additional licensing regulations and regulatory
requirements.






If franchise laws
apply to us we may be required to modify or eliminate our marketing programs. If
we are unable to market our services in the manner we currently market our
services, our revenues may decrease and our business may suffer.We
believe that neither our relationship with our Dealers nor our Dealer
subscription agreements constitute “franchises” under federal or state franchise
laws. However, if any state’s regulatory requirements relating to franchises or
our method of business impose additional requirements on us or include us within
an industry-specific regulatory scheme, we may be required to modify our
marketing programs in that state in a manner that undermines the program’s
attractiveness to consumers or Dealers. If our relationship or written agreement
with our Dealers were found to be a “franchise” under federal or state franchise
laws, we could be subject to additional requirements, such as franchise
disclosure and registration requirements, and limitations on our ability to
effect changes in our relationships with our Dealers, which may negatively
impact our ability to compete and cause our revenues to decrease and our
business to suffer. If we become subject to fines or other penalties or if we
determine that the franchise and related requirements are overly burdensome, we
may elect to terminate operations in that state. If this happens, our revenues
may decline and our business, results of operations and financial condition
could be materially and adversely affected.






If financial
broker licensing requirements apply to us in states where we are not currently
licensed, we will be required to obtain additional licenses and our business may
suffer. We provide a connection through our websites that allows
consumers to obtain finance information and submit Leads for vehicle financing
to third party lenders. We also acquire finance-related Leads from third
parties. We receive marketing fees from financial institutions or Dealers in
connection with this advertising activity. We do not demand nor do we receive
any fees from consumers for this service. In the event states require us to be
licensed as a financial broker, we may be unable to comply with a state’s laws
or regulations, or we could be required to incur significant fees and expenses
to obtain any financial broker required license and comply with regulatory
requirements. In the event states require us to be licensed and we are unable to
do so, or we are otherwise unable to comply with laws or regulations required by
changes in current operations or the introduction of new services, we could be
subject to fines or other penalties or be compelled to discontinue operations in
those states, and our business, results of operations and financial condition
could be materially and adversely affected.






If insurance
licensing requirements apply to us in states where we are not currently
licensed, we will be required to obtain additional licenses and our business may
suffer.We provide links on our websites enabling consumers to receive
quotes for insurance and extended warranty coverage from third parties. All
on-line applications for quotes are completed on the respective insurance
carriers’ or other third party websites. We receive marketing fees from
participants in connection with this advertising activity. We do not receive any
premiums from consumers nor do we charge consumers fees for our services. We do
not believe that these activities require us to be licensed under state
insurance laws. However, if any state insurance licensing laws were determined
to be applicable to us and if we are required to be licensed and we are unable
to do so, or we are otherwise unable to comply with laws or regulations, we
could be subject to fines or other penalties or be compelled to discontinue
operations in those states, and our business, results of operations and
financial condition could be materially and adversely affected.







11












Changes in the
taxation of internet commerce may result in increased costs.




Because
our business is dependent on the internet, the adoption of new local, state or
federal tax laws or regulations or new interpretations of existing laws or
regulations by governmental authorities may subject us to additional local,
state or federal sales, use or income taxes and could decrease the growth of
internet usage or marketing or the acceptance of internet commerce which could,
in turn, decrease the demand for our services and increase our costs and our
business, results of operations and financial condition could be materially and
adversely affected. Tax authorities in a number of states are currently
reviewing and re-evaluating the tax treatment of companies engaged in internet
commerce, including the application of sales taxes to internet commerce
businesses similar to ours. We accrue for tax contingencies based upon our
best estimate of the taxes ultimately expected to be paid, which we update over
time as more information becomes available.  The amounts ultimately paid in
resolution of reviews or audits by taxing authorities could be materially
different from the amounts we have accrued and result in additional tax expense,
and our business, results of operations and financial condition could be
materially and adversely affected.






Data
Security and Privacy Risks




Our
business is subject to various laws, rules and regulations relating to data
security and privacy. New data security and privacy laws, rules and regulations
may be adopted regarding the internet or other on-line services that could limit
our business flexibility or cause us to incur higher compliance
costs.






Compliance with
anti-spam laws, rules and regulations may impose significant costs and burdens
on our e-mail marketing activities, and violations of these laws and regulations
could subject us to fines or other enforcement actions. Among other laws,
rules and regulations, federal and state legislation regulating e-mail
communications and internet advertising, such as proposed or adopted
privacy-related laws that restrict or prohibit unsolicited e-mail (commonly
known as “spam”) may adversely affect our ability to market our services to
consumers in a cost-effective manner. Violation of these laws may result in
monetary fines or penalties or damage to our reputation. The CAN-SPAM Act of
2003, or CAN-SPAM, became effective in the United States on January 1,
2004. CAN-SPAM imposes complex and often burdensome requirements in connection
with sending commercial e-mail. In addition, the language of CAN-SPAM contains
ambiguities, not all rules implementing CAN-SPAM have yet been promulgated, and
courts have not yet interpreted key provisions of CAN-SPAM. Depending on how the
law is interpreted and applied, CAN-SPAM may impose significant costs and
burdens on our e-mail marketing practices.






Failure to comply
with data privacy laws, rules and regulations may significantly impact our
internet Leads referral business. Various laws, rules and regulations
govern the collection, use, retention, sharing and security of data that we
receive from our users, advertisers, and affiliates. In addition, we have and
post on our website our own privacy policies and practices concerning the
collection, use and disclosure of user data and personal information. Any
failure, or perceived failure, by us to comply with our posted privacy policies
or with any data-related consent orders, Federal Trade Commission requirements
or orders or other federal or state privacy or consumer protection-related laws,
regulations or industry self-regulatory principles could result in proceedings
or actions against us by governmental entities or others, which could
potentially have an adverse effect on our business. Further, failure or
perceived failure by us to comply with our policies, applicable requirements, or
industry self-regulatory principles related to the collection, use, sharing or
security of personal information or other privacy-related matters could result
in a loss of user confidence in us, damage to our brands, and ultimately in a
loss of users, advertisers, or Lead referral and advertising affiliates which
could adversely affect our business. It is not possible to predict whether new
legislation or regulations concerning data privacy and retention issues related
to our business will be adopted. Certain proposals, if adopted, could impose
requirements that may result in a decrease in our user registrations and
revenues. In addition, the interpretation and application of user data
protection laws are currently unsettled.






Increased
security risks of on-line Leads collection and referral, advertising and
e-commerce may cause us to incur significant expenses and may negatively impact
our credibility and business. A significant issue for on-line businesses
like ours is the secure transmission of confidential and personal information
over public networks. Concerns over the security of transactions conducted on
the internet, consumer identity theft and user privacy have been significant
barriers to growth in consumer use of the internet, on-line advertising, and
e-commerce. Despite our implementation of security measures, however, our
computer systems may be susceptible to electronic or







12








physical
computer break-ins, viruses and other disruptive harms and security breaches.
Advances in computer capabilities, new discoveries in the field of cryptography
or other developments may specifically compromise our security measures. Any
perceived or actual unauthorized disclosure of personally identifiable
information regarding website visitors, whether through breach of our network by
an unauthorized party, employee theft or misuse, or otherwise, could harm our
reputation and brands, substantially impair our ability to attract and retain
our audiences, or subject us to claims or litigation arising from damages
suffered by consumers, and thereby harm our business and operating results. If
consumers experience identity theft after using any of our websites, we may be
exposed to liability, adverse publicity and damage to our reputation. To the
extent that identity theft gives rise to reluctance to use our websites or a
decline in consumer confidence in financial transactions over the internet, our
business could be adversely affected. Alleged or actual breaches of the network
of one of our business partners or competitors whom consumers associate with us
could also harm our reputation and brands. In addition, we could incur
significant costs in complying with the multitude of state, federal and foreign
laws regarding the unauthorized disclosure of personal information. For example,
California law requires companies to inform individuals of any security breaches
that result in their personal information being stolen. Because our success
depends on the acceptance of on-line services and e-commerce, we may incur
significant costs to protect against the threat of security breaches or to
alleviate problems caused by those breaches. Internet fraud has been increasing
over the past few years, and fraudulent on-line transactions, should they
continue to increase in prevalence, could also adversely affect the customer
experience and therefore our business, operating results and financial
condition.






Technology
Risks




If we fail to
detect click-through fraud, we could lose the confidence of our advertisers,
thereby causing our business to suffer.  We are exposed to the
risk of fraudulent clicks on our advertisements by persons seeking to increase
the advertising fees paid to us. Click-through fraud occurs when a person clicks
on an advertisement displayed on our website in order to generate revenue to us
and to increase the cost for the advertiser. If we are unable to monitor and
prevent this type of fraudulent activity, we may have to issue retroactive
refunds of amounts previously paid to us if any such fraud is later detected.
This fraud could lead advertisers to become dissatisfied with our advertising
programs, which, in turn, could lead to a loss of advertisers and
revenue.






Our success is
dependent on keeping pace with advances in technology. If we are unable to keep
pace with advances in technology, consumers may stop using our services and our
revenues will decrease. If we are required to invest substantial amounts in
technology, our results of operations will suffer.  The
internet and electronic commerce markets are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service and product introductions embodying new technologies and the emergence
of new industry standards and practices that could render our existing websites
and technology obsolete. These market characteristics are intensified by the
emerging nature of the market and the fact that many companies are expected to
introduce new internet products and services in the near future. If we are
unable to adapt to changing technologies, our business, results of operations
and financial condition could be materially and adversely affected. Our
performance will depend, in part, on our ability to continue to enhance our
existing services, develop new technology that addresses the increasingly
sophisticated and varied needs of our prospective customers, license leading
technologies and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. The development of
our websites and other proprietary technology entails significant technical and
business risks. We may not be successful in using new technologies effectively
or adapting our websites, or other proprietary technology to customer
requirements or to emerging industry standards. In addition, if we are required
to invest substantial amounts in technology in order to keep pace with
technological advances, our results of operations will suffer.






Interruptions or
failures in our information technology platforms, communication systems, or
security systems could harm our operating results.Our
information technology and communications systems are susceptible to outages and
interruptions due to fire, flood, earthquake, power loss, telecommunications
failures, cyber attacks, terrorist attacks, failure of redundant systems and
disaster recovery plans and similar events. Such outages and interruptions could
damage our reputation and harm our operating results.  We are insured
for some, but not all, of these events.  Even for those events for
which we are insured and have coverage under the terms and conditions of the
applicable policies, there are no assurances given that the coverage limits
would be sufficient to cover all losses we might incur or
experience.




We rely
on third-party providers for our primary and secondary internet connections. Our
co-location service which provides environmental and power support for our
technology platforms, communication systems, and security systems is received
from a third-party provider. We have little or no control over these third-party
providers. Any disruption of the services they provide us or any failure of
these third-party providers to effectively plan for increases in capacity could,
in turn, cause delays or disruptions in our services.







13









Despite
our network security measures, our information technology platforms are
vulnerable to computer viruses, worms, physical and electronic break-ins,
sabotage, and similar disruptions from unauthorized tampering, as well as
coordinated denial-of-service attacks. We do not have multiple site capacity for
all of our services. In the event of delays or disruptions to services we rely
on third-party providers to perform disaster recovery planning and services on
our behalf. We are vulnerable to extended failures to the extent that planning
and services are not adequate to meet our continued technology platform,
communication or security systems’ needs.






Securities
Market Risks




The public market
for our common stock may be volatile, especially since market prices for
internet-related and technology stocks have often been unrelated to operating
performance.Our common stock is currently listed on The NASDAQ Global
Market, but we cannot assure that an active trading market will be sustained or
that the market price of the common stock will not decline. The stock market in
general has experienced significant price fluctuations. The market price of our
common stock is likely to be highly volatile and could be subject to wide
fluctuations in response to factors such as:




·
            Actual
      or anticipated variations in our quarterly operating
    results;




·
            Historical
      and anticipated operating metrics such as the number of participating
      Dealers, the visitors to our websites and the frequency with which they
      transact;




·
            Announcements
      of new product or service
offerings;




·
            Technological
      innovations;




·
            Low
      trading volumes;




·
            Competitive
      developments, including actions by
  Manufacturers;




·
            Changes
      in financial estimates by securities analysts or our failure to meet such
      estimates;




·
            Conditions
      and trends in the internet, electronic commerce and automotive
      industries;




·
            Our
      ability to comply with the conditions to continued listing of our stock on
      the NASDAQ




Global
      Market;




·
            Adoption
      of new accounting standards affecting the technology or automotive
      industry, and




·
            General
      market or economic conditions and other
factors.




Further,
the stock markets, and in particular The NASDAQ Global Market, have experienced
price and volume fluctuations that have particularly affected the market prices
of equity securities of many technology companies and have often been unrelated
or disproportionate to the operating performance of those companies. These broad
market factors have affected and may adversely affect the market price of our
common stock. In addition, general economic, political and market conditions,
such as recessions, interest rates, energy prices, international currency
fluctuations, terrorist acts, military actions or wars, may adversely affect the
market price of our common stock. In the past, following periods of volatility
in the market price of a company’s securities, securities class action
litigation has often been instituted against companies with publicly traded
securities. This litigation could result in substantial costs and a diversion of
management’s attention and resources, which would have a material adverse effect
on our business, results of operations and financial condition.






Our common stock
could be delisted from The NASDAQ Global Market if we are not able to maintain
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.Our common stock is currently listed on The NASDAQ
Global Market. Continued listing ofa
security on The NASDAQ Global Market is conditioned upon compliance with various
continued listing standards. There can be no assurancethat
we will continue to satisfy the requirements for maintaining a NASDAQ Global
Market listing.  The standards for continued listing require, among
other things, that the closing minimum bid price for the listed securities be at
least $1.00 per share for 30 consecutive trading days.




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 such stock, and our ability to
raise additional capital may be adversely affected. If delisted, our stock would
still be publicly traded but if we sought to relist our stock on The NASDAQ
Global Market we would be required to comply with all of the initial listing
requirements to be relisted on The NASDAQ Global Market, which in some instances
are more stringent than the continued listing requirements.







14












Risks
Associated with Intellectual Property and Other Litigation




Litigation
regarding intellectual property rights is common in the internet and software
industries. We expect that internet technologies and software products and
services may be increasingly subject to third-party infringement claims as the
number of competitors in our industry segment grows and the functionality of
products in different industry segments overlaps.






Misappropriation
or infringement of our intellectual property and proprietary rights could impair
our competitive position. Enforcement actions to protect our intellectual
property could materially and adversely affect our business, results of
operations and financial condition.Our ability to compete depends upon
our proprietary systems and technology.  While we rely on trademark,
trade secret, patent and copyright law, confidentiality agreements and technical
measures to protect our proprietary rights, we believe that the technical and
creative skills of our personnel, continued development of our proprietary
systems and technology, brand name recognition and reliable website maintenance
are more essential in establishing and maintaining a leadership position and
strengthening our brands. As part of our confidentiality procedures, we
generally enter into confidentiality agreements with our employees and
consultants and limit access to our trade secrets and technology. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our services or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our proprietary rights is difficult.
We cannot assure that the steps taken by us will prevent misappropriation of
technology or that the agreements entered into for that purpose will be
enforceable. Effective trademark, service mark, patent, copyright and trade
secret protection may not be available where our products and services are made
available on-line. In addition, litigation may be necessary to enforce or
protect our intellectual property rights or to defend against claims of
infringement or invalidity. Litigation, even if successful, could result in
substantial costs and diversion of resources and management attention and could
materially and adversely affect our business, results of operations and
financial condition. Misappropriation of our intellectual property or potential
litigation could also have a material adverse effect on our business, results of
operations and financial condition.






We face risk of
claims from third parties relating to intellectual property. These claims and
liabilities could harm our business. There can be no assurance that our
services do not infringe on the intellectual property rights of third parties.
Claims of infringement, even if unsuccessful, could result in substantial costs
and diversion of resources and management attention and could materially and
adversely affect our business. If we are not successful, we may be subject to
preliminary and permanent injunctive relief and monetary damages which may be
trebled in the case willful infringements.






We could be
adversely affected by other litigation. If we were subject to a significant
adverse litigation outcome, our financial condition could be materially and
adversely affected.  From time to time, we are involved in
litigation or legal matters not related to intellectual property rights and
arising from the normal course of our business activities. The actions filed
against us and other litigation or legal matters, even if not meritorious, could
result in substantial costs and diversion of resources and management attention
and an adverse outcome in litigation could materially and adversely affect our
business, results of operations and financial condition. Our liability insurance
may not cover all potential claims to which we are exposed and may not be
adequate to indemnify us for all liability that may be imposed. Any imposition
of liability that is not covered by insurance or is in excess of our insurance
coverage could have a material adverse effect on our business, results of
operations and financial condition. See Part II, Item 8, Note 6, “Commitments
and Contingencies—Litigation” of this Annual Report on Form 10-K.






We could be
adversely affected by actions of third parties that could subject us to
litigation that could significantly and adversely affect our business.  We could face liability for information retrieved or obtained
from or transmitted over the internet by third parties and liability for
products sold over the internet by third parties. We could be exposed to
liability with respect to third-party information that may be accessible through
our websites, links or vehicle review services. These claims might, for example,
be made for defamation, negligence, patent, copyright or trademark infringement,
personal injury, breach of contract, unfair competition, false advertising,
invasion of privacy or other legal theories based on the nature, content or
copying of these materials. These claims might assert, among other things that,
by directly or indirectly providing links to websites operated by third parties
we should be liable for copyright or trademark infringement or other wrongful
actions by such third parties through those websites. It is also possible that,
if any third-party content provided on our websites contains errors,







15








consumers
could make claims against us for losses incurred in reliance on such
information. Any claims could result in costly litigation, divert management’s
attention and resources, cause delays in releasing new or upgrading existing
services or require us to enter into royalty or licensing
agreements.




We also
enter into agreements with other companies under which any revenue that results
from the purchase or use of services through direct links to or from our
websites or on our websites is shared. In addition, we acquire personal
information and data in the form of Leads purchased from third party websites
involving consumers who submitted personally identifiable information and data
to the third parties and not directly to us. These arrangements may expose us to
additional legal risks and uncertainties, including disputes with such parties
regarding revenue sharing, local, state and federal government regulation and
potential liabilities to consumers of these services, even if we do not provide
the services ourselves or have direct contact with the consumer. These
liabilities can include liability for violations by such third parties of laws,
rules and regulations, including those related to data security and privacy laws
and regulations; unsolicited e-mail, text messaging, telephone or wireless voice
marketing; and licensing. We cannot provide any assurance that any
indemnification provided to us in our agreements with these third parties, if
available, will be adequate.






We
are uncertain of our ability to obtain additional financing for our future
capital needs. If we are unable to obtain additional financing we may not be
able to continue to operate our business.




Under our
current operating plan for 2010, we currently anticipate that our cash and cash
equivalents and short-term investments will be sufficient to meet our
anticipated needs for working capital and other cash requirements at least for
the next 12 months. We may need to raise additional funds sooner, however, in
order to develop new or enhance existing services or products or to respond to
competitive pressures, or to acquire assets or businesses. There can be no
assurance that additional financing will be available on terms favorable to us,
or at all. Recent macro-economic conditions include reported reductions in
available credit. If adequate funds are not available or are not available on
acceptable terms, our ability to develop or enhance services or products or
respond to competitive pressures or acquire assets or businesses would be
significantly limited. In addition, our ability to continue to operate our
business may also be materially and adversely affected in the event additional
financing is not available when required.






Our
certificate of incorporation and bylaws, stockholder rights 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 stockholder rights 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 allow us to
issue preferred stock with rights senior to those of the common stock without
any further vote or action by the stockholders. These provisions provide 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, these provisions 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 the stockholder rights plan, if a person or group acquires 15% 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. In addition, under certain circumstances, all right holders,
other than the acquirer, will be entitled to receive at the then exercise price
of a right that number of shares of common stock of the acquiring company which,
at the time, has a market value of two times the exercise price of the right.
The initial exercise price of a right is $65. These charter and rights
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.




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 attempting to acquire control of us.







16







If our internal
controls and procedures fail, our financial condition, results of operations and
cash flow could be materially and adversely affected.




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. In making its
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2009, management used the criteria described in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). A material weakness is a control deficiency,
or combination of control deficiencies, that results in a more than remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.




Management
determined that we had no material weaknesses in our internal control over
financial reporting as of December 31, 2009. Our internal controls may not
prevent all potential errors and fraud, because any control system, no matter
how well designed, can only provide reasonable and not absolute assurance that
the objectives of the control system will be achieved. We have had material
weaknesses in our internal control over financial reporting in the past and
there is no assurance that we will not have one or more material weaknesses in
the future resulting from failure of our internal controls and
procedures.




Our
ability to report our financial results on a timely and accurate basis could be
adversely affected by a failure in our internal control over financial
reporting. If our financial statements are not fairly presented, investors may
not have an accurate understanding of our operating results and financial
condition. If our financial statements are not timely filed with the SEC, we
could be delisted from The NASDAQ Global Market. If either or both of these
events occur, it could have a material adverse affect on our ability to operate
our business and the market price of our common stock. In addition, a failure in
our internal control over financial reporting could materially and adversely
affect our financial condition, results of operations, and cash
flow.





Item 1B.
            Unresolved Staff
      Comments




Not
applicable.




Item 2.
            Properties




Our
headquarters are located in an office building in Irvine, California. We lease a
total of approximately 26,000 square feet. The lease expires on July 31,
2011, with two one-year extension options available. Car.com is located in an
office building in Troy, Michigan and occupies approximately 4,700 square feet.
This lease expires on January 31, 2011. We believe that our existing
facilities are adequate to meet our needs and that existing needs and future
growth can be accommodated by leasing alternative or additional
space.




Item 3.
            Legal
      Proceedings




See Note
6 of the “Notes to Consolidated Financial Statements” in Part II, Item 8,
“Financial Statements and Supplementary Data” of this Annual Report on Form
10-K, which is incorporated by reference herein.




Item 4.
            Reserved





17





PART
II




Item 5.
            Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities








Our
common stock, par value $0.001 per share, is listed on The NASDAQ Global Market
and trades under the symbol “ABTL.” The following table sets forth, for the
calendar quarters indicated, the range of high and low sales prices of our
common stock.





Year
            
            High
            
            
            Low2008First
      Quarter
            
            $
            2.93
            
            
            $
            1.95Second
      Quarter
            
            $
            2.06
            
            
            $
            1.25Third
      Quarter
            
            $
            1.53
            
            
            $
            0.93Fourth
      Quarter
            
            $
            0.98
            
            
            $
            0.382009First
      Quarter
            
            $
            0.57
            
            
            $
            0.23Second
      Quarter
            
            $
            0.54
            
            
            $
            0.25Third
      Quarter
            
            $
            0.70
            
            
            $
            0.41Fourth
      Quarter
            
            $
            1.10
            
            
            $
            0.59




As of
February 28, 2010, there were 505 holders of record of our common stock. We
have never declared or paid any cash dividends on our common stock and we do not
expect to pay any cash dividends in the foreseeable future. As of March 1, 2010,
our common stock closing price was $1.06.





18







Performance
Graph




The
following graph shows a comparison of cumulative total stockholder returns for
our common stock, the NASDAQ Composite, the S&P Automobile Manufacturers
Index, and the S&P Smallcap 600 Automotive Retail Index. The comparisons
reflected in the graph and table below are not intended to predict the future
performance of our stock and may not be indicative of our future performance.
The data regarding our common stock assume an investment in our common stock at
the closing price of $6.04 per share of our common stock on December 31,
2004.







Cumulative Total Return12/04
              
              
              
              12/05
              
              
              
              12/06
              
              
              
              12/07
              
              
              
              12/08
              
              
              
              12/09Autobytel
              
              $
              100.00
              
              
              $
              81.79
              
              
              $
              57.95
              
              
              $
              45.53
              
              
              $
              7.45
              
              
              $
              16.56NASDAQ
      Composite
              
              
              100.00
              
              
              
              101.33
              
              
              
              114.01
              
              
              
              123.71
              
              
              
              73.11
              
              
              
              105.61S&P
      Automobile Manufacturers
              
              
              100.00
              
              
              
              53.31
              
              
              
              68.51
              
              
              
              59.22
              
              
              
              14.12
              
              
              
              46.53S&P
      Smallcap 600 Automotive Retail
              
              
              100.00
              
              
              
              98.66
              
              
              
              123.00
              
              
              
              77.74
              
              
              
              38.58
              
              
              
              70.51





19





Item 6.
            Selected Financial
      Data


Not
      applicable.




Item 7.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations




You
should read the following discussion of our results of operations and financial
condition in conjunction with the “Risk Factors” included in Part I,
Item 1A and our Consolidated Financial Statements and related Notes thereto
included in Part II, Item 8 of this Annual Report on
Form 10-K.




Overview




For the
year ended December 31, 2009 our results of operations were affected and
may continue to be affected in the future, by various factors, including, but
not limited to, the following:




·
            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 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:




·
            North
      American vehicle sales have decreased
  significantly,




·
            Dealer
      consolidations, closings, and bankruptcies have increased
      significantly,




·
            General
      Motors and Chrysler filed for and emerged from bankruptcy in 2009,
      and




·
            Auto
      sales in the United States are expected to continue to remain at
      relatively low levels into 2010.




·
            The
      market for Leads, including:




·
            The
      effects of competition and Lead sourcing (i.e., Leads from our websites
      versus Leads acquired from third parties) on our supply and acquisition
      costs of quality Leads and the resulting effects on sales, pricing and
      margins for our services and products,
and




·
            A
      declining Dealer base and a corresponding decline in the number of Leads
      delivered to our Dealers in the
aggregate.




·
            The
      market for advertising services,
including:




·
            Variations
      in spending by Manufacturers and others for our advertising
      services,




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




·
            The
      cost of acquiring traffic to our websites,
and




·
            The
      rates attainable from our
advertisers.






Basis
of Presentation




We sold
certain assets and liabilities of our AVV Inc. (“AVV”) business on
January 23, 2008. Accordingly, the results of AVV are presented in the
consolidated financial statements as discontinued operations. As discontinued
operations, revenues and expenses of AVV are presented on a net basis and stated
separately from the respective captions in continuing operations in the
Consolidated Statements of Operations and Comprehensive Loss.





20







Results
of Operations




The
following table sets forth our results of operations as a percentage of
revenues:





Years Ended December 31,2009
              
              
              2008Revenues:Lead
      fees
              
              
              87
              %
              
              
              89
              %Advertising
              
              
              13
              
              
              
              11Other
              
              
              —
              
              
              
              —Total
      net revenues:
              
              
              100
              
              
              
              100Cost
      of revenues (excludes depreciation of $1,088 in 2009 and $1,844 in
      2008)
              
              
              64
              
              
              
              72Gross
      margin
              
              
              36
              
              
              
              28Operating
      expenses:Sales
      and marketing
              
              
              19
              
              
              
              25Technology
      support
              
              
              10
              
              
              
              22General
      and administrative
              
              
              22
              
              
              
              32Patent
      litigation settlement
              
              
              (5
              )
              
              
              (4
              )Goodwill
      impairment
              
              
              —
              
              
              
              73Total
      operating expenses
              
              
              46
              
              
              
              148Operating
      loss
              
              
              (10
              )
              
              
              (120
              )Interest
      and other income
              
              
              2
              
              
              
              2Benefit
      from income taxes
              
              
              (1
              )Loss
      from continuing operations
              
              
              (7
              )
              
              
              (118
              )Discontinued
      operations, net
              
              
              2
              
              
              
              6Net
      loss
              
              
              (4
              )%
              
              
              (112
              )%


Revenues
by groups of similar services and gross profits are as follows:




Years Ended December
      31,
              
              
              2009 vs. 2008
      Change2009
              
              
              2008
              
              
              $
              
              
              
              %(dollar
      amounts in thousands)Revenues:Lead
      fees
              
              $
              46,236
              
              
              $
              63,169
              
              
              $
              (16,933
              )
              
              
              (27
              )%Advertising
              
              
              6,508
              
              
              
              7,794
              
              
              
              (1,286
              )
              
              
              (16
              )Other
      revenues
              
              
              174
              
              
              
              196
              
              
              
              (22
              )
              
              
              (11
              )Total
      net revenues
              
              $
              52,918
              
              
              $
              71,159
              
              
              $
              (18,241
              )
              
              
              (26
              )%Cost
      of revenues (excludes depreciation of $1,088 in 2009 and $1,844 in
      2008)
              
              
              33,986
              
              
              
              51,384
              
              
              
              (17,398
              )
              
              
              (34
              )Gross
      profit
              
              $
              18,932
              
              
              $
              19,775
              
              
              $
              (843
              )
              
              
              (4
              )%


Lead Fees. Lead Fees
decreased $16.9 million or 27% in 2009 compared to 2008.  The decrease
in Lead fees was primarily due to the 19% decline in total Leads
delivered.  The year-over-year Lead volume decline was comprised of
the following (i) a 16% decline in retail leads delivered, primarily due to the
significant decline in our retail dealer base (decrease
of 21% year-over-year); which was the result of dealership terminations,
closures, reductions in dealer marketing budgets, the redirection of dealer
marketing dollars away from third party Lead programs and towards proprietary
dealership websites, partially offset by an increase in the average number of
Leads delivered per retail dealer; (ii) a 38% decline in finance leads delivered
due to the continued tightening of the credit markets in 2009; and (iii) a 14%
decline in wholesale leads delivered, due to the continued financial
difficulties of our wholesale customers during 2009.  In addition to
year-over-year volume declines we also experienced an approximate 10%
year-over-year decrease in the average sales price of Leads delivered, which was
the result of pricing pressure, particularly from our wholesale customers during
2009.


21




Advertising.  The
$1.3 million or 16% decrease in advertising revenues in 2009 compared to 2008
was primarily due to the pullback by advertisers in 2009, a reduction in overall
advertising rates, a reduction in page views on our websites which reduces our
recognized advertising revenue, and lower revenue related to our direct
marketing sales.  This overall decrease in advertising revenue was
partially offset by the recognition of deferred revenue of $0.7 million, which
was related to advertising campaigns that were closed out with certain
advertisers.




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 providers, including internet portals and on-line automotive information
providers. Other cost of revenues consists of search engine marketing (“SEM”)
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. SEM, sometimes referred to as
paid search marketing, is the practice of bidding on keywords on search engines
to drive traffic to a website.




The $17.4
million or 34% decrease in the cost of revenues in 2009 compared to 2008 was
primarily due to a decrease of $5.7 million in Lead acquisition costs, which was
due to the decline in sales volumes, the $4.3 asset impairment charge recorded
in 2008 that did not recur in 2009, a $2.6 million decrease in depreciation, a
$1.5 million decrease in SEM, a $1.2 million decrease in hosting and data
content charges, and other cost decreases of $2.1 million (including other
traffic acquisition cost increases of $1 million, and severance of $0.3
million).




Our SEM
declined year-over-year.  However, in the third and fourth quarters of
2009 we increased the rate of our SEM activities to increase the consumer
traffic to our websites.  Depreciation and website hosting costs have
decreased due to the impairment of the software and computer hardware related to
the MyRide website.  The impairment was the result of our decision to
discontinue the use of the MyRide software platform in the fourth quarter of
2008.





Operating
expenses were as follows:


Years Ended December 31,
              
              
              2009 vs. 2008 Change2009
              
              
              2008
              
              
              
              
              
              $
              
              %(dollar
      amounts in thousands)Operating
      expenses:Sales
      and marketing
              
              $
              10,179
              
              
              $
              17,997
              
              
              $
              (7,818
              )
              
              
              (43
              )%Technology
      support
              
              
              5,244
              
              
              
              15,391
              
              
              
              (10,147
              )
              
              
              (66
              )General
      and administrative
              
              
              11,591
              
              
              
              22,635
              
              
              
              (11,044
              )
              
              
              (49
              )Patent
      litigation settlement
              
              
              (2,892
              )
              
              
              (2,667
              )
              
              
              (225
              )
              
              
              8Goodwill
      impairment
              
              
              —
              
              
              
              52,074
              
              
              
              (52,074
              )
              
              
              (100
              )Total
      operating expenses
              
              $
              24,122
              
              
              $
              105,430
              
              
              $
              (81,308
              )
              
              
              (77
              )%
  Sales and Marketing.Sales and
marketing expense for the year ended December 31, 2009 decreased by $7.8
million or 43% compared to the prior year, due principally to personnel
reductions in 2008, resulting in salary and benefit reductions of approximately
$5.5 million, which includes $1.4 million of severance related costs recorded in
2008 that did not recur in 2009, a decrease in bad debt expense of $0.4 million,
a decrease in stock compensation expense of $0.4 million and other net decreases
of $1.5 million related to other internal cost containment
initiatives.




Technology Support.Technology support cost includes compensation and related costs for
personnel responsible for enhancing the features, content and functionality of
our websites, and our internet-based communications platform for Lead referral,
costs associated with our telecommunications and computer infrastructure, and
costs related to data and technology maintenance.




Technology
support expense for the year ended December 31, 2009 decreased by $10.1 million
or 66% compared to the prior year, primarily due to personnel reductions in
2008, resulting in salary and benefit reductions of approximately $8 million,
which includes $2.5 million of severance related costs recorded in 2008 that did
not recur in 2009, a decrease in depreciation and technology related maintenance
costs of $1.0 million, a decrease in stock compensation expense of $0.5 million,
a decrease in professional fees of $0.4 million, and other net cost reductions
of $0.2 million.




22





General and Administrative.General and administrative expense for the year ended December 31,
2009 decreased by $11.0 million or 49%, compared to the prior year. The decrease
was primarily due to:




·
            A
      decrease in net personnel and temporary labor expense, resulting in salary
      and benefit reductions of approximately $4.6 million, which includes the
      $2.7 of severance related costs recorded in 2008 that did not recur in
      2009,


·
            A
      decrease in professional fees of $2.0 million, primarily as a result of
      cost containment initiatives,


·
            A
      $1.2 impairment charge recorded in 2008 associated with the write-off of a
      capitalized software project that was no longer under development or
      expected to be placed in service,


·
            A
      $1.1 million decrease in other net cost
  reductions,


·
            A
      $1.0 million decrease in stock
compensation,


·
            A
      $0.6 million decrease in taxes, depreciation, insurance, and maintenance,
      and


·
            A
      $0.5 million decrease in rent expense, primarily as a result of reducing
      our rented square footage at our Irvine California location during
      2009,




Patent Litigation Settlement.
In 2004, we brought a lawsuit for patent infringement against Dealix Corporation
(“Dealix”). In December 2006, we entered into a settlement agreement with Dealix
(the “Settlement Agreement”). The agreement provides that Dealix will pay us a
total of $20.0 million in settlement payments for a mutual release of claims and
a license from us to Dealix and its parent company the Cobalt Group, of certain
of our patent and patent applications. On March 13, 2007, we 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 annual anniversary dates of the
initial payment. In March 2009, we received the second of three $2.7 million
settlement payments. We recorded the payment in the period it was received, as a
reduction to costs and operating expenses. The remaining settlement payment is
guaranteed by WP Equity Partners, Inc., a Warburg Pincus affiliate and is
expected to be received in March of 2010. We have been unable to assess with
reasonable assurance the collectability of the remaining payment under the
Settlement Agreement as we do not have financial information to support the
credit worthiness
of the debtor or guarantor. We do not have reasonable assurance that we will
receive the remaining payment on its due date or at all and therefore have not
recorded any amounts receivable related to the Settlement Agreement as of
December 31, 2009 or 2008.




Goodwill Impairment. During
2008 we performed our annual impairment test by first comparing the carrying
value of Autobytel to its fair value based on market capitalization at that
date. As the carrying value exceeded the fair value, the second step impairment
measurement was performed based on a discounted projection of future cash flows
and market methods of determining fair value. As a result of this testing, a
non-cash impairment charge of $52.1 million was recorded during
2008.




Interest and Other Income.
Interest and other income decreased by $0.3 million or 24% to $1.0 million for
the year ended December 31, 2009, compared to $1.3 million for the prior year.
The decrease was primarily due to a decrease in interest income of $0.8 million,
which was primarily the result of lower interest rate environment in 2009,
partially offset by the gain on sale of an available-for-sale investment of $0.6
million during 2009.





Segment
Information




We
conduct our business within one business segment, which is defined as providing
automotive marketing services.




23





Liquidity
and Capital Resources




The table
below sets forth a summary of our cash flow for the years ended
December 31, 2009 and 2008:


Years Ended
    December 31,2009
              
              
              2008(in
      thousands)Net
      cash used in operating activities
              
              $
              (4,529
              )
              
              $
              (19,998
              )Net
      cash provided by investing activities
              
              
              2,233
              
              
              
              19,141Net
      cash provided by financing activities
              
              
              —
              
              
              
              649
   Our principal
sources of liquidity are from proceeds from the divestiture of a business and
the Dealix patent litigation settlement payment. We continue to have no debt.
Our cash and cash equivalents totaled $25.1 million as of December 31, 2009
compared to cash and cash equivalents of $27.4 million as of December 31,
2008.




As
discussed above, we entered into a Settlement Agreement with Dealix, which
provides for settlement payments. We received the settlement payments in 2009,
2008, and 2007. The remaining settlement payment is due in March of
2010.  We have been unable to assess with reasonable assurance the
collectability of the remaining payment under the Settlement Agreement as we do
not have financial information to support the credit worthiness of the debtor or
guarantor. We do not have reasonable assurance that we will receive the
remaining payment on its due dates or at all, and therefore, we have not
recorded any amounts receivable related to the Settlement Agreement as of
December 31, 2009 and cannot rely on the remaining payment as a source of
future liquidity.




Net Cash Used
in Operating Activities. Net cash
used in operating activities in 2009 of $4.5 million resulted primarily from a
net operating loss and the change in working capital, which was the result of a
year-over-year decrease in accounts payable and accrued expenses.  The
net decrease in accounts payable and accrued expenses was primarily due to the
timing of vendor and employee severance payments.  Accounts receivable
decreased by $0.6 million and is due to overall decline in our sales during 2009
and the timing of our collections at each period end.  The days of
sales outstanding (“DSO”) declined to 53 days from 64 days for the months ended
December 31, 2009 and 2008, respectively, which was due primarily to an
enhanced collection effort in 2009.





Net cash
used in operating activities in 2008 resulted primarily from an operating loss
and an increase in working capital, partially offset by gains from the
disposition of AVV. The increase in working capital was primarily the result of
a decrease in accounts payable and accrued expenses, a decrease in deferred
revenues, a decrease in accounts receivable and an increase in other
liabilities. The decrease in accounts payable and accrued expenses was primarily
due to timing of vendor payments, including professional fees related to
enforcing our intellectual property rights. Our standard payment terms for our
invoices usually average 30 days net. The decrease in deferred revenues and the
increase in other liabilities relate to a decline in delivery of advertising,
which resulted from our initiative to eliminate lower quality traffic sources.
The decrease in accounts receivable is primarily due to collection efforts,
timing of payments and clean-up of various outstanding amounts.




Net Cash
Provided by Investing Activities. Our
primary sources of cash from investing activities in 2009 of $2.2 million were
from the sale of an available-for-sale investment of $0.6 million and $1.8
million escrow proceeds related to our 2008 divestiture, partially offset by
$0.1 million of purchases of property and equipment.




Net cash
provided by investing activities of $19.1 in 2008 million was primarily due to
proceeds received from the sale of our AVV business of $21.4 million, partially
offset by the purchases of property and equipment (primarily information
technology related equipment and software).




Net Cash
Provided by Financing Activities. Our
primary source of cash from financing activities is from the exercise of stock
options and the issuance of common stock pursuant to the employee stock purchase
plan. There were no option exercises during 2009 and in 2008 net cash provided
by option exercises and awards issued under the employee stock purchase plan was
$0.6 million. Our future cash flows from employee stock options will depend on
the future timing, value, and amount of stock option exercises, if any.
Additionally, we suspended our employee stock purchase plan in the second half
of 2008 and do not expect to receive any proceeds from the employee stock
purchase plan in 2010.




Prospective Capital Needs. We
experienced negative operating cash flow in 2009 and at December 31, 2009 had an
accumulated deficit of $274 million. The automotive industry continued to
struggle during 2009, which had a negative effect on our cash
flows.  Based on our current operating plan for 2010, we expect that
our net operating cash flows will improve from 2009 levels. We continue to face
many risks and uncertainties related to general economic conditions and the
automotive industry in particular, however, we believe current cash and cash
equivalents are sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months.




24





C ontractual
Obligations




The
following table provides aggregated information about our outstanding
contractual obligations as of December 31,
2009:





Years Ending
    December 31,(in
      thousands)2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            2014 and
              thereafter
            
            
            TotalOperating
      leases (a)
            
            $
            659
            
            
            $
            335
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            994Purchase
      obligations (b)
            
            
            1,148
            
            
            
            443
            
            
            
            234
            
            
            
            234
            
            
            
            19
            
            
            
            2,078Total
            
            $
            1,807
            
            
            $
            778
            
            
            $
            234
            
            
            $
            234
            
            
            $
            19
            
            
            $
            3,072




(a)
            Operating
      lease obligations as defined by FASB Topic, “Accounting for Leases,” and
      disclosed in Note 6 of the consolidated financial statements included in
      Part II, Item 8 of this Annual Report on Form
  10-K.


(b)
            Purchase
      obligations are agreements to purchase goods and services that are
      enforceable and legally binding that specify all significant terms,
      including: fixed or minimum quantities to be purchased; fixed, minimum or
      variable price provisions; and the approximate timing of the
      transaction.






Off-Balance
Sheet Arrangements




We do not
have any material off-balance sheet arrangements.




Critical
Accounting Policies and Estimates




We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”), which requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. We believe the following critical accounting
policies, among others, require significant judgment in determining estimates
and assumptions used in the preparation of our Consolidated Financial
Statements.  Accordingly, actual results could differ materially from
our estimates. To the extent that there are material differences between these
estimates and our actual results, our financial condition or results of
operations may be affected. For a detailed discussion of the application of
these and other accounting policies, see Note 2 of the “Notes to Consolidated
Financial Statements” in Part II, Item 8 “Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K.




Revenue Recognition. Lead
fees consist of vehicle buying purchase request fees for new and used vehicles,
and finance request fees (“Leads”).  Fees paid by customers
participating in our Lead programs are comprised of monthly transaction and/or
subscription fees.  Advertising revenues represent fees for display
advertising on our websites.




We
recognize revenues when evidence of an arrangement exists, pricing is fixed and
determinable, collection is reasonably assured, and delivery or performance of
service has occurred. Lead fees are generally recognized as revenue in the
period the service is provided. Advertising revenues are generally recognized in
the period the advertisements are displayed on our websites. Fees billed prior
to providing services are deferred, as they do not satisfy all U.S. GAAP revenue
recognition criteria. Deferred revenues are recognized as revenue over the
periods services are provided.




Investments.  We
had an investment in one publicly traded company’s equity securities, acquired
as part of an acquisition in 2001, categorized as
available-for-sale.  Investments categorized as available-for-sale are
measured at fair value with unrealized gains and losses included in accumulated
comprehensive income as a separate component of stockholders’ equity. We record
our investment based on level-one inputs, which are quoted market prices in
active markets for identical assets or liabilities.   During
2009, we sold our investment and recorded a gain of $0.6 million, which is
classified as other income on the Consolidated Statement of Operations and
Comprehensive Loss.  As of December 31, 2008, the balance of the
investment was $0.6 million, with $0.6 million recorded in accumulated other
comprehensive income.




25





Allowances for Bad Debt and Customer
Credits. We estimate and record allowances for potential bad debts
and customer credits based on factors such as the write-off percentages, the
current business environment and known concerns within our accounts receivable
balances.




The
allowance for bad debts is our estimate of bad debt expense that could result
from the inability or refusal of our customers to pay for our services.
Additions to the estimated allowance for bad debts are recorded as an increase
in general and administrative expenses and are based on factors such as
historical write-off percentages, the current business environment and the known
concerns within the current aging of accounts receivable. Reductions in the
estimated allowance for bad debts due to subsequent cash recoveries are recorded
as a decrease in general and administrative expenses. As specific bad debts are
identified, they are written-off against the previously established estimated
allowance for bad debts and have no impact on operating expenses.




The
allowance for customer credits is our estimate of adjustments for services that
do not meet our customers’ requirements. Additions to the estimated allowance
for customer credits are recorded as a reduction in revenues and are based on
historical experience of: (i) the amount of credits issued; (ii) the
length of time after services are rendered that the credits are issued; (iii)
other factors known at the time; and (iv) future expectations. Reductions in the
estimated allowance for customer credits are recorded as an increase in
revenues. As specific customer credits are identified, they are written-off
against the previously established estimated allowance for customer credits and
have no impact on revenues.




If there
is a decline in the general economic environment that negatively affects the
financial condition of our customers or an increase in the number of customers
that are dissatisfied with our services, additional estimated allowances for bad
debts and customer credits may be required and the impact on our business,
results of operations or financial condition could be material.  We
generally do not require collateral to support our accounts
receivables.




Contingencies. From time
to time we may be subject to proceedings, lawsuits and other claims. We assess
the likelihood of any adverse judgments or outcomes of these matters as well as
potential ranges of probable losses. We record a loss contingency when an
unfavorable outcome is probable and the amount of the loss can be reasonably
estimated. The amount of allowances required, if any, for these contingencies is
determined after analysis of each individual case. The amount of allowances may
change in the future if there are new material developments in each matter. At
December 31, 2009, we did not record any allowances for contingencies. Gain
contingencies are not recorded until all elements necessary to realize the
revenue are present. Any legal fees incurred in connection with a contingency
are expensed as incurred.




Fair Value of Financial
Instruments. The estimated fair values of our financial instruments, such
as cash, cash equivalents, accounts receivable and accounts payable are carried
at cost, which approximates their fair value because of the short-term maturity
of these instruments.




Share-Based Compensation
Expense. We account for our share-based compensation using the fair
value method in accordance with the Stock Compensation Topic of the
Codification.  Under these provisions, we recognize share-based
compensation net of an estimated forfeiture rate and therefore only recognize
compensation cost for those shares expected to vest over the service period of
the award. The fair value of each stock option award is estimated on the
date of grant using the Black-Scholes option pricing model based on the
underlying common stock closing price as of the date of grant, the expected
term, expected stock price volatility, and expected risk-free interest
rates.




Calculating
share-based compensation expense requires the input of highly subjective
assumptions, including the expected term of the share-based awards, expected
stock price volatility, and expected pre-vesting option forfeitures. We
estimate the expected life of options granted based on historical experience,
which we believe are representative of future behavior. We estimate the
volatility of the price of our common stock at the date of grant based on
historical volatility of the price of our common stock for a period equal to the
expected term of the awards. We have used historical volatility because we
have a limited number of options traded on our common stock to support the use
of an implied volatility or a combination of both historical and implied
volatility. The assumptions used in calculating the fair value of share-based
awards represent our best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if
factors change and we use different assumptions, our share-based compensation
expense could be materially different in the future. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for
those shares expected to vest. We estimate the forfeiture rate based on
historical experience of our share-based awards that are granted, exercised and
cancelled. If our actual forfeiture rate is materially different from our
estimate, the share-based compensation expense could be significantly different
from what we have recorded in the current period.




Income Taxes. We account for
income taxes under the liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. We
record a valuation allowance, if necessary, to reduce deferred tax assets to an
amount we believe is more likely than not to be realized. During the current
period, we continued to maintain a full valuation allowance against our net
deferred tax asset.




As of
December 31, 2009, we had $0.5 million of unrecognized tax benefits. These
unrecognized tax benefits reduced our deferred tax assets which were subject to
a valuation allowance of $0.5 million. There were no material changes to our
uncertain tax positions during the current period. Our policy is to recognize
interest and penalties accrued on any unrecognized tax benefits as a component
of income tax expense. As of December 31, 2009, we did not have any accrued
interest or penalties associated with any unrecognized tax benefits, and no
interest expense was recognized in 2009.




26





Impairment of
Goodwill.  Goodwill and other intangible assets with indefinite
lives are no longer subject to amortization but are tested for impairment
annually or whenever events or changes in circumstances indicate that the asset
might be impaired. During 2008 we performed our annual impairment test by first
comparing the carrying value of Autobytel to its fair value based on market
capitalization at that date. As the carrying value exceeded the fair value, the
second step impairment measurement was performed based on a discounted
projection of future cash flows and market methods of determining fair value. As
a result of this testing, the entire goodwill balance of $52.1 million was
impaired and written-off as an expense in 2008.




Impairment of Long-Lived Assets and
Other Intangible Assets.We periodically review long-lived assets to
determine if there is any impairment of these assets. We assess 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. Our judgments regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
long-lived assets and other intangibles. Future events could cause us to
conclude that impairment indicators exist and that the assets should be reviewed
to determine their fair value. We assess 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. If the carrying amount of an asset
exceeds its estimated future undiscounted cash flows, an impairment 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 many assumptions and estimates. Once the valuation is determined,
we will write-down these assets to their determined fair value, if necessary.
Any write-down could have a material adverse effect on our financial condition
and results of operations. During 2008 we recorded $5.5 million of impairment
charges. The charges were comprised of (i) impairment charges of $4.3
million to reduce the net book value of certain capitalized software related to
the MyRide website to its estimated fair value, and (ii) an impairment of
$1.2 million associated with the write-off of capitalized software projects that
are no longer being developed or expected to be placed in service for their
intended use. At December 31, 2009, we had approximately $1.0 million of
remaining long-lived assets that could be subject to future
impairment.  We did not record any impairment in 2009.




Recent
Accounting Pronouncements




In June
2009, the Financial Accounting Standards Board (“FASB”) issued the Generally
Accepted Accounting Principles Topic of the FASB Accounting Standards
CodificationTM.  The
Generally Accepted Accounting Principles Topic of the Codification is the single
source of U.S. GAAP in the preparation of financial statements, except for rules
and interpretive releases of the SEC under authority of federal securities laws,
which are sources of authoritative guidance for SEC registrants. The
Codification was not meant to create new accounting and reporting guidance, but
rather to simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into accounting topics within a consistent
organizational structure. The Codification supersedes all existing non-SEC
accounting and reporting standards and is effective for financial statements
issued for interim and annual periods ending after September 15,
2009.




The FASB
no longer issues new standards in the form of Statements, FASB Staff Positions,
or Emerging Issues Task Force Abstracts; instead, it issues Accounting Standards
Updates (ASU’s). The FASB will not consider ASU’s as authoritative in their own
right; rather these updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases for conclusions
on the change(s) in the Codification. In the description that follows, we
provide reference to the Codification Topics and Subtopics, as
appropriate.




Fair Value
Measurements. Accounting Standards Codification
(“ASC”) 820 “Fair Value Measurements and Disclosures.”In
September 2006, the FASB established a framework for measuring fair value and
expanded the disclosures of fair value measurements.  This new
guidance is effective for financial statements issued for periods beginning
after November 15, 2007. In February 2008, the FASB deferred the effective
date of the new guidance for non-financial assets and liabilities that are not
recorded at fair value on a recurring basis until periods beginning after
November 15, 2008.  We adopted the non-deferred portion of this
guidance on January 1, 2008 and the previously deferred portion of this guidance
on January 1, 2009 and it did not have an impact on our consolidated financial
statements.




Derivative
and Hedging Activities. ASC 815 “Derivatives and
Hedging.”  In March 2008, the FASB issued new guidance that
calls for new disclosure for derivative and hedging activities and is effective
for periods beginning after November 15, 2008. Since we do not have any
Derivatives or Hedging Activities, the adoption of this new guidance on
January 1, 2009 did not have any effect on our consolidated financial
statements.




Non-Controlling Interests. ASC 810
“Consolidations.”  In December 2007, the FASB established new
accounting guidance and disclosure requirements for non-controlling interests in
a subsidiary. Since we do not have non-controlling interests in our
subsidiaries, the adoption of this new guidance on January 1, 2009 did not
have any effect on our consolidated financial statements.




Business
Combinations. ASC 805 “Business Combinations.”In December 2007, the FASB established principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non- controlling interest in the acquiree. The new requirements also provide
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of
financial statements to evaluate the nature and financial effects of the
business combination.  The new guidance is effective for business
combinations occurring after December 31, 2008. The adoption of this new
guidance did not have any effect on our consolidated financial
statements.





27







Item 7A.
            Quantitative and Qualitative
      Disclosures about Market
Risk




At
December 31, 2009 we had $25.1 million in cash and cash equivalents
(“Cash”).






Item 8.
            Financial Statements and
      Supplementary Data




Our
Consolidated Balance Sheets as of December 31, 2009 and 2008 and our
Consolidated Statements of Operations and Comprehensive Loss, Stockholders’
Equity and Cash Flows for each of the years in the two-year period ended
December 31, 2009, together with the reports of our independent registered
public accounting firm, begin on page F-1 of this Annual Report on Form 10-K and
are incorporated herein by reference.






Item 9.
            Changes in and Disagreements
      with Accountants on Accounting and Financial
    Disclosure




None.






Item 9A.
            Controls and
      Procedures




Disclosure
Controls and Procedures




We have
established and maintain disclosure controls and procedures that are designed to
ensure that material information relating to the Company and its subsidiaries
required to be disclosed by us in the reports that are filed under the
Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded,
processed, summarized and reported in the time periods specified in the SEC’s
rules and forms, and that this information is accumulated and communicated to
our management, including our Chief Executive and Chief Financial Officers, as
appropriate to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only a reasonable assurance of achieving the desired
control objectives, and management was necessarily required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.




Under the
supervision and with the participation of our management, including our Chief
Executive and Financial Officers, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as of December 31, 2009. Based on this evaluation, the Chief
Executive and Financial Officers concluded that the Company’s disclosure
controls and procedures were effective as of December 31,
2009.




Management’s
Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f)
under the Exchange Act. Under the supervision and with the participation of
management, including the Company’s Chief Executive Officer and Chief Financial
Officer, management conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting as of December 31,
2009. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. In making this assessment,
management used the criteria set forth in the framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) entitled Internal Control—Integrated
Framework. Based on this evaluation, management has concluded that the
Company’s internal control over financial reporting was effective as of
December 31, 2009.




The
effectiveness of our internal control over financial reporting as of
December 31, 2009 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report as set
forth below in this Annual Report on Form 10-K.




Changes
in Internal Control Over Financial Reporting




There
have been no changes in internal controls over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rules 13a-15 of
the Exchange Act that have occurred during the fourth quarter of fiscal year
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.






Item 9B.
            Other
      Information




None.





28





Report
of Independent Registered Public Accounting Firm








The Board
of Directors and Stockholders


Autobytel
Inc.






We have
audited Autobytel Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Autobytel Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an
opinion on the company’s internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, Autobytel Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the COSO
criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the accompanying consolidated balance sheets of
Autobytel Inc. as of December 31, 2009 and 2008, and the related consolidated
statements of operations and comprehensive loss, stockholders’ equity, and cash
flows for each of the two years in the period ended December 31, 2009 of
Autobytel Inc. and our report dated March 4, 2010 expressed an unqualified
opinion thereon.










/s/ ERNST& YOUNGLLP


Orange
County, California


March 4,
2010





29







PART
III




Item 10
            Directors, Executive Officers
      and Corporate Governance




The
information called for by this Item 10 is incorporated by reference to the
following sections of our definitive Proxy Statement for our 2010 Annual Meeting
of Stockholders that will be filed not later than 120 days after December 31,
2009, (“2010 Proxy Statement”) “Directors,” “Nominees for Class III Directors,”
“Other Directors,” “Code of Conduct and Ethics,” “Management,” “Attendance at
Meetings and Board Committees” and “Section 16(a) Beneficial Ownership Reporting
Compliance.”






Item 11
            Executive
      Compensation




The
information called for in this Item 11 is incorporated by reference to the
following sections of the 2010 Proxy Statement: “Executive Compensation,”
“Compensation Committee Interlocks and Insider Participation,” and “Compensation
Committee Report.”






Item 12
            Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters




The
information called for in this Item 12 is incorporated by reference to the
following sections of the 2010 Proxy Statement: “Security Ownership of Owners
and Certain Beneficial Management” and “Securities Authorized for Issuance Under
Equity Compensation Plans.”






Item 13
            Certain Relationships and
      Related Transactions, and Director
  Independence




The
information called for in this Item 13 is incorporated by reference to the
following sections of the 2010 Proxy Statement: “Certain Relationships and
Related Transactions” and “Director Independence.”






Item 14
            Principal Accounting Fees and
      Services




The
information called for in this Item 14 is incorporated by reference to the
following sections of the 2010 Proxy Statement: “Principal Accountant Fees and
Services,” “Audit Related Fees,” “Tax Fees,” “All Other Fees,” and “Pre-Approval
Policy.”





30





PART
IV




Item 15.
            Exhibits and Financial
      Statement Schedules




(a) The
following documents are filed as a part of this Annual Report on Form
10-K:




(1)
            Financial
      Statements:





PageIndex
            F-1Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets
            F-3Consolidated
      Statements of Operations and Comprehensive Loss
            F-4Consolidated
      Statements of Stockholders’ Equity
            F-5Consolidated
      Statements of Cash Flows
            F-6Notes
      to Consolidated Financial Statements
            F-7




(2)
            Financial Statement
      Schedules:





Schedule
      II—Valuation and Qualifying Accounts
            F-25




All other
schedules have been omitted since the required information is presented in the
financial statements and the related notes or is not applicable.




(3)
            Exhibits:




The
exhibits filed or furnished as part of this Annual Report on Form 10-K are
listed in the Index to Exhibits immediately preceding such exhibits, which Index
to Exhibits is incorporated herein by reference.








31





SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 4th day of March,
2010.





AUTOBYTEL INC.By:
            /s/
      JEFFREY H. COATSJeffrey
      H. CoatsPresident,
      Chief Executive Officer and Director




POWER
OF ATTORNEY




KNOW ALL
PERSONS BY THESE PRESENTS, that each of Autobytel Inc., a Delaware corporation,
and the undersigned Directors and Officers of Autobytel Inc. hereby constitute
and appoint Jeffrey H. Coats, Curtis E. DeWalt or Glenn E. Fuller as its or his
true and lawful attorneys-in-fact and agents, for it or him and in its or his
name, place and stead, in any and all capacities, with full power to act alone,
to sign any and all amendments to this report, and to file each such amendment
to this report, with all exhibits thereto, and any and all documents in
connection therewith, with the Securities and Exchange Commission, hereby
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform any and all acts and things requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as it or he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them may
lawfully do or cause to be done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
              Title
              Date/s/ MICHAEL J.
      FUCHSMichael
      J. Fuchs
              Chairman
      of the Board and Director
              March
      4, 2010/s/ JEFFREY H.
      COATSJeffrey H.
      Coats
              President,
      Chief Executive Officer and Director (Principal Executive
      Officer)
              March
      4, 2010/s/ CURTIS E.
      DEWALTCurtis E.
      DeWalt
              Senior
      Vice President and Chief Financial Officer (Principal Financial
      Officer)
              March
      4, 2010/s/ WESLEY
      OZIMAWesley
      Ozima
              Vice
      President and Controller (Principal
                Accounting
      Officer)
              March
      4, 2010/s/ MARK N.
      KAPLANMark
      N. Kaplan
              Director
              March
      4, 2010/s/ MARK R.
      ROSSMark
      R. Ross
              Director
              March
      4, 2010/s/ JEFFREY M.
      STIBELJeffrey M.
      Stibel
              Director
              March
      4, 2010/s/ JANET M.
      THOMPSONJanet M.
      Thompson
              Director
              March
      4, 2010





32





AUTOBYTEL
INC.




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageReports
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets
            F-3Consolidated
      Statements of Operations and Comprehensive Loss
            F-4Consolidated
      Statements of Stockholders’ Equity
            F-5Consolidated
      Statements of Cash Flows
            F-6Notes
      to Consolidated Financial Statements
            F-7








F-1





Report
of Independent Registered Public Accounting Firm







The Board
of Directors and Stockholders


Autobytel
Inc.







We have
audited the accompanying consolidated balance sheets of Autobytel Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of
operations and comprehensive loss, stockholders’ equity, and cash flows for each
of the two years in the period ended December 31, 2009. Our audits also included
the financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Autobytel Inc. at
December 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended December 31, 2009,
in conformity with U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Autobytel Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 4, 2010
expressed an unqualified opinion thereon.








/s/ ERNST& YOUNGLLP


Orange
County, California


March 4,
2010














F-2





AUTOBYTEL
INC.




CONSOLIDATED
BALANCE SHEETS


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









December 31,
              2009
            
            
            December 31,
              2008AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            25,097
            
            
            $
            27,393Accounts
      receivable, net of allowances for bad debts and customer credits of $1,107
      and $1,277 at December 31, 2009 and 2008,
respectively
            
            
            8,573
            
            
            
            10,047Prepaid
      expenses and other current assets
            
            
            594
            
            
            
            1,378Total
      current assets
            
            
            34,264
            
            
            
            38,818Property
      and equipment, net
            
            
            1,003
            
            
            
            2,421Investment
      and other assets
            
            
            123
            
            
            
            763Total
      assets
            
            $
            35,390
            
            
            $
            42,002Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
            
            $
            2,539
            
            
            $
            3,579Accrued
      expenses and other current liabilities
            
            
            4,028
            
            
            
            6,432Deferred
      revenues
            
            
            603
            
            
            
            1,835Total
      current liabilities
            
            
            7,170
            
            
            
            11,846Non-current
      liabilities
            
            
            79
            
            
            
            181Total
      liabilities
            
            
            7,249
            
            
            
            12,027Commitments
      and contingencies (Note 6)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; 45,168,706 and
      45,219,679 shares issued and outstanding at December 31, 2009 and2008,
      respectively
            
            
            45
            
            
            
            45Additional
      paid-in capital
            
            
            301,831
            
            
            
            300,720Accumulated
      other comprehensive income
            
            
            —
            
            
            
            568Accumulated
      deficit
            
            
            (273,735
            )
            
            
            (271,358
            )Total
      stockholders’ equity
            
            
            28,141
            
            
            
            29,975Total
      liabilities and stockholders’ equity
            
            $
            35,390
            
            
            $
            42,002























The
accompanying notes are an integral part of these consolidated financial
statements.








F-3





AUTOBYTEL
INC.




CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(in
thousands, except per-share data)









Years Ended
    December 31,2009
            
            
            2008Revenues:Lead
      fees
            
            $
            46,236
            
            
            $
            63,169Advertising
            
            
            6,508
            
            
            
            7,794Other
      revenues
            
            
            174
            
            
            
            196Total
      net revenues
            
            
            52,918
            
            
            
            71,159Cost
      of revenues (excludes depreciation of $1,088 in 2009 and $1,844 in
      2008)
            
            
            33,986
            
            
            
            51,384Gross
      profit
            
            
            18,932
            
            
            
            19,775Operating
      expenses:Sales
      and marketing
            
            
            10,179
            
            
            
            17,997Technology
      support
            
            
            5,244
            
            
            
            15,391General
      and administrative
            
            
            11,591
            
            
            
            22,635Patent
      litigation settlement
            
            
            (2,892
            )
            
            
            (2,667
            )Goodwill
      impairment
            
            
            —
            
            
            
            52,074Total
      operating expenses
            
            
            24,122
            
            
            
            105,430Operating
      loss
            
            
            (5,190
            )
            
            
            (85,655
            )Interest
      and other income
            
            
            1,028
            
            
            
            1,346Benefit
      from income taxes
            
            
            (606
            )
            
            
            —Loss
      from continuing operations
            
            
            (3,556
            )
            
            
            (84,309
            )Discontinued
      operations, net
            
            
            1,179
            
            
            
            4,393Net
      loss
            
            $
            (2,377
            )
            
            $
            (79,916
            )Basic
      and diluted loss per common share:Loss
      from continuing operations
            
            $
            (0.08
            )
            
            $
            (1.91
            )Discontinued
      operations, net
            
            
            0.03
            
            
            
            0.10Basic
      and diluted loss per common share
            
            $
            (0.05
            )
            
            $
            (1.81
            )Comprehensive
      loss:Net
      loss
            
            $
            (2,377
            )
            
            $
            (79,916
            )Unrealized
      loss from investment
            
            
            —
            
            
            
            (118
            )Comprehensive
      loss
            
            $
            (2,377
            )
            
            $
            (80,034
            )























The
accompanying notes are an integral part of these consolidated financial
statements.








F-4





AUTOBYTEL
INC.




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(in
thousands, except share data)









Common Stock
            
            
            Additional
              Paid-In
              Capital
            
            
            Accumulated
              Other
              Comprehensive
              Income (Loss)
            
            
            Accumulated
              Deficit
            
            
            TotalNumber of
              Shares
            
            
            AmountBalance,
      December 31, 2007
            
            
            43,788,633
            
            
            $
            44
            
            
            $
            296,964
            
            
            $
            686
            
            
            $
            (191,442
            )
            
            $
            106,252Shares
      issued pursuant to stock awards, net
            
            
            1,340,000
            
            
            
            1
            
            
            
            511
            
            
            
            —
            
            
            
            —
            
            
            
            512Issuance
      of common stock under employee stock purchase plan
            
            
            91,046
            
            
            
            —
            
            
            
            137
            
            
            
            —
            
            
            
            —
            
            
            
            137Share-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            3,108
            
            
            
            —
            
            
            
            —
            
            
            
            3,108Unrealized
      loss
              from
      investment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (118
            )
            
            
            —
            
            
            
            (118
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (79,916
            )
            
            
            (79,916
            )Balance,
      December 31, 2008
            
            
            45,219,679
            
            
            
            45
            
            
            
            300,720
            
            
            
            568
            
            
            
            (271,358
            )
            
            
            29,975Shares
      forfeited pursuant to stock awards
            
            
            (50,973
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Share-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            1,111
            
            
            
            —
            
            
            
            —
            
            
            
            1,111Realized
      gains reclassified
              to
      the Statement of Operations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (568
            )
            
            
            —
            
            
            
            (568
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,377
            )
            
            
            (2,377
            )Balance,
      December 31, 2009
            
            
            45,168,706
            
            
            $
            45
            
            
            $
            301,831
            
            
            $
            —
            
            
            $
            (273,735
            )
            
            $
            28,141


















The
accompanying notes are an integral part of these consolidated financial
statements.








F-5





AUTOBYTEL
INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)









Years Ended
    December 31,2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (2,377
            )
            
            $
            (79,916
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            1,620
            
            
            
            4,933Provision
      for bad debt
            
            
            1,051
            
            
            
            1,443Provision
      for customer credits
            
            
            982
            
            
            
            1,295Write-off
      of capitalized software
            
            
            —
            
            
            
            5,512Gain
      on AVV divestiture
            
            
            (1,787
            )
            
            
            (4,204
            )Share-based
      compensation
            
            
            1,111
            
            
            
            3,108Goodwill
      impairment
            
            
            —
            
            
            
            52,074Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (559
            )
            
            
            (986
            )Prepaid
      expenses and other current assets
            
            
            784
            
            
            
            328Investment
      and other non-current assets
            
            
            (576
            )
            
            
            85Accounts
      payable
            
            
            (1,040
            )
            
            
            (2,278
            )Accrued
      expenses and other current liabilities
            
            
            (2,404
            )
            
            
            (1,398
            )Deferred
      revenues
            
            
            (1,232
            )
            
            
            91Non-current
      liabilities
            
            
            (102
            )
            
            
            (85
            )Net
      cash used in operating activities
            
            
            (4,529
            )
            
            
            (19,998
            )Cash
      flows from investing activities:Maturities
      of short-term investments
            
            
            —
            
            
            
            14,050Purchases
      of short-term investments
            
            
            —
            
            
            
            (14,050
            )Purchases
      of property and equipment
            
            
            (134
            )
            
            
            (2,255
            )Proceeds
      from sale of investment
            
            
            580
            
            
            
            —Proceeds
      from AVV divestiture
            
            
            1,787
            
            
            
            21,396Net
      cash provided by investing activities
            
            
            2,233
            
            
            
            19,141Cash
      flows from financing activities:Net
      proceeds from stock option exercises and awards issued under the employee
      stock purchase plan
            
            
            —
            
            
            
            649Net
      cash provided by financing activities
            
            
            —
            
            
            
            649Net
      decrease in cash and cash equivalents
            
            
            (2,296
            )
            
            
            (208
            )Cash
      and cash equivalents, beginning of period
            
            
            27,393
            
            
            
            27,601Cash
      and cash equivalents, end of period
            
            $
            25,097
            
            
            $
            27,393Supplemental
      disclosure of cash flow information:Cash
      paid for income taxes
            
            $
            161
            
            
            $
            119
























The
accompanying notes are an integral part of these consolidated financial
statements.








F-6





AUTOBYTEL
INC.




NOTES
TO CONSOLIDATED 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 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®, 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 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.




The
Company continued to experience negative cash flow in 2009 and at December 31,
2009 had an accumulated deficit of $274 million. Based on the Company’s current
operating plan for 2010, it expects that its net operating cash flows will
improve from 2009 levels.  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.
            Summary
      of Significant Accounting Policies





Basis of
Presentation. The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.   The Company
sold certain assets and liabilities of its AVV Inc. business on January 23,
2008, the “Divestiture” (See Note 4). Accordingly, the Divesture is presented in
the Consolidated Statements of Operations and Comprehensive Loss as discontinued
operations. As discontinued operations, revenues and expenses of the Divestiture
are presented on a net basis and stated separately from the respective captions
in continuing operations in the Consolidated Statements of Operations and
Comprehensive Loss.  Expenses included in discontinued operations were
direct costs of the Divesture that were eliminated from future
operations.





Use of
Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include, but are not limited
to, allowances for bad debts and customer credits, useful lives of depreciable
assets and capitalized software costs, long-lived asset impairments, goodwill
and purchased intangible asset valuations, accrued liabilities and valuation
allowance for deferred tax assets and stock-based compensation expense. Actual
results could differ from those estimates.





Cash and Cash
Equivalents. For
purposes of the Consolidated Balance Sheets and the Consolidated Statements of
Cash Flows, the Company considers all highly liquid investments with an original
maturity of 90 days or less at the date of purchase to be cash equivalents. Cash
and cash equivalents represent amounts held by the Company for use by
the Company, and are recorded at cost which approximates fair
value.





Investments. Autobytel
had an investment in one publicly traded company’s equity securities, acquired
as part of an acquisition in 2001, categorized as
available-for-sale.  Investments categorized as available-for-sale are
measured at fair value with unrealized gains and losses included in accumulated
comprehensive income as a separate component of stockholders’ equity. The
Company records its investment based on level-one inputs, which are quoted
market prices in active markets for identical assets or
liabilities.   During 2009, the Company sold its investment and
recorded a gain of $0.6 million, which is classified as other income on the
Consolidated Statement of Operations and Comprehensive Loss.  As of
December 31, 2008, the balance of the investment was $0.6 million, with
$0.6 million recorded in accumulated other comprehensive income.





F-7


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  Accounts
Receivable. Credit is
extended to customers based on an evaluation of the customer’s financial
condition, and when credit is extended, collateral is generally not required.
Interest is not normally charged on receivables.





Allowances
for Bad Debts and Customer Credits. The
allowance for bad debts is an estimate of bad debt expense that could result
from the inability or refusal of customers to pay for services. Additions to the
estimated allowance for bad debts are recorded to general and administrative
expenses and are based on factors such as historical write-off percentages, the
current business environment and known concerns within the current aging of
accounts receivable. Reductions in the estimated allowance for bad debts due to
subsequent cash recoveries are recorded as a decrease in general and
administrative expenses. As specific bad debts are identified, they are
written-off against the previously established estimated allowance for bad debts
with no impact on operating expenses.




The
allowance for customer credits is an estimate of adjustments for services that
do not meet the customer requirements. Additions to the estimated allowance for
customer credits are recorded as a reduction of revenue and are based on the
Company’s historical experience of: (i) the amount of credits issued;
(ii) the length of time after services are rendered that the credits are
issued; (iii) other factors known at the time; and (iv) future
expectations. Reductions in the estimated allowance for customer credits are
recorded as an increase in revenues. As specific customer credits are
identified, they are written-off against the previously established estimated
allowance for customer credits with no impact on revenues.




Contingencies. From time
to time the Company may be subject to proceedings, lawsuits and other
claims.  The Company assesses the likelihood of any adverse judgments
or outcomes of these matters as well as potential ranges of probable losses. The
Company records a loss contingency when an unfavorable outcome is probable and
the amount of the loss can be reasonably estimated. The amount of allowances
required, if any, for these contingencies is determined after analysis of each
individual case. The amount of allowances may change in the future if there are
new material developments in each matter. At December 31, 2009, the Company
did not record any allowances for contingencies. Gain contingencies are not
recorded until all elements necessary to realize the revenue are present. Any
legal fees incurred in connection with a contingency are expensed as
incurred.





Fair Value of
Financial Instruments. The
Company’s financial instruments, including cash, cash equivalents, accounts
receivable and accounts payable are carried at cost, which approximates their
fair value due to the relatively short-term maturity of these
instruments.





Concentration
of Credit Risk 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, investments and accounts
receivable. Cash and cash equivalents are primarily maintained with two
financial institutions in the United States. Deposits held by banks that exceed
the amount of insurance provided for such deposits. Generally these deposits may
be redeemed upon demand. Accounts receivable are primarily derived from fees
billed to automotive dealers and automotive manufacturers.




The
Company has a concentration of credit risk with its automotive industry related
accounts receivable balances, and in particular with three U.S. automobile
manufacturers (General Motors, Chrysler LLC, and Ford) (“Detroit Three”). During
2009 approximately 13% of the Company’s total revenues were derived from the
Detroit Three, and approximately 20% of its total gross accounts receivable are
receivable from the Detroit Three at December 31, 2009. The Company
generally requires no collateral to support its accounts receivables and
maintains an allowance for bad debts for potential credit losses.  The
Company has no pre-bankruptcy receivables from either General Motors or Chrysler
as of December 31, 2009. In 2009
and 2008, no customer accounted for greater than 10% of total revenues, and the
Company had no balances due from any customer that accounted for more than 10%
of total accounts receivable as of December 31, 2009 or 2008.





F-8


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)







Property and
Equipment. Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three years. Amortization of
leasehold improvements is provided using the straight-line method over the
shorter of the remaining lease term or the estimated useful lives of the
improvements. Repair and maintenance costs are charged to operating expenses as
incurred. Gains or losses resulting from the retirement or sale of property and
equipment are recorded as operating income or expenses,
respectively.





Operating
Leases. The
Company leases office space, certain office equipment and a domain name under
operating lease agreements which expire on various dates through 2011, with
options to renew on expiration of the original lease terms. Reimbursed tenant
improvements are considered in determining straight-line rent expense, and are
amortized over the shorter of their estimated useful lives or the lease term.
The lease term begins on the date of initial possession of the leased property
for purposes of recognizing rent expense on a straight-line basis over the term
of the lease. Lease renewal periods are considered on a lease-by-lease basis and
are generally not included in the initial lease term.





Capitalized
Internal Use Software and Website Development Costs. The
Company capitalizes costs to develop internal use software in accordance with
the Internal-Use Software and the Website Development Costs Topics, which
require the capitalization of external and internal computer software costs and
website development costs, respectively, incurred during the application
development stage. The application development stage is characterized by
software design and configuration activities, coding, testing and installation.
Training and maintenance costs are expensed as incurred while upgrades and
enhancements are capitalized if it is probable that such expenditures will
result in additional functionality. Capitalized internal use software
development costs are amortized using the straight-line method over an estimated
useful life of three years. Capitalized website development costs, once placed
in service are amortized using the straight-line method over the estimated
useful life of the related websites.





Impairment of
Long-Lived Assets. The
Company periodically reviews its long-lived assets and intangibles assets
subject to amortization to determine if there is any impairment of these assets.
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. The Company evaluates
these 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 impairment 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. As discussed in Note 3, the Company recorded an impairment loss of
$5.5 million on certain of its long-lived assets in 2008. The Company did not
record any impairments in 2009.





Goodwill. Goodwill
represents the excess of the purchase price for business acquisitions over the
fair value of identifiable assets and liabilities acquired. The Company
evaluates the carrying value of enterprise goodwill for impairment. Testing for
impairment of goodwill is a two-step process. The first step requires the
Company to compare the enterprise’s carrying value to its fair value. If the
fair value is less than the carrying value, enterprise goodwill is potentially
impaired and the Company then completes the second step to measure the
impairment loss, if any. The second step requires the calculation of the implied
fair value of goodwill by deducting the fair value of all tangible and
intangible net assets from the fair value of the reporting unit. If the implied
fair value of goodwill is less than the carrying amount of enterprise goodwill,
an impairment loss is recognized equal to the difference. The Company evaluates
enterprise goodwill, at a minimum, on an annual basis, in the second quarter of
each year or whenever events or changes in circumstances suggest that the
carrying amount of goodwill may be impaired.




During
2008, the Company performed its annual impairment test by first comparing the
carrying value of the Company to its fair value based on its market
capitalization at that date. As the carrying value exceeded the fair value, the
second step impairment measurement was performed based on a discounted
projection of future cash flows and market methods of determining fair value. As
a result of this testing, the entire goodwill balance of $52.1 million was
impaired and written-off as an expense in 2008.





F-9


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)







Revenue
Recognition. Lead fees
consist of vehicle buying purchase request fees for new and used vehicles, and
finance request fees (“Leads”).  Fees paid by customers participating
in the Company’s Lead programs are comprised of monthly transaction and/or
subscription fees.  Advertising revenues represent fees for display
advertising on the Company’s websites.




The
Company recognizes revenues when evidence of an arrangement exists, pricing is
fixed and determinable, collection is reasonably assured, and delivery or
performance of service has occurred. Lead fees are generally recognized as
revenue in the period the service is provided. Advertising revenues are
generally recognized in the period the advertisements are displayed on the
Company’s websites. Fees billed prior to providing services are deferred, as
they do not satisfy all U.S. GAAP revenue recognition criteria. Deferred
revenues are recognized as revenue over the periods services are
provided.





Income
Taxes. The
Company accounts for income taxes under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company records a valuation
allowance, if necessary, to reduce deferred tax assets to an amount it believes
is more likely than not to be realized.





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, assuming that any
proceeds from the exercise of stock options and unvested restricted stock would
be used to purchase common stock at the average market price during the
period.




The
following are the share amounts utilized to compute the basic and diluted net
loss per share for the years ended December 31:




2009
              
              
              2008Basic
      and diluted loss per share:Weighted
      average common shares outstanding
              
              
              44,947,865
              
              
              
              44,329,851Weighted
      average unvested restricted stock outstanding
              
              
              (385,023
              )
              
              
              (242,787
              )Basic
      and dilutive shares
              
              
              44,562,842
              
              
              
              44,087,064
  Potentially
dilutive securities representing approximately 8.2 million and
7.7 million shares of common stock for the years ended December 31,
2009 and 2008, respectively, were excluded from the computation of diluted loss
for these periods because their effect would have been
anti-dilutive.





Share-Based
Compensation. The
Company grants restricted stock and stock option awards (the “Awards”) under
several of its share-based compensation Plans (the “Plans”), that are more fully
described in Note 8.  The Company recognizes share-based compensation
based on the Awards’ fair value, net of estimated forfeitures on a straight line
basis over the requisite service periods, which is generally over the awards’
respective vesting period, or on an accelerated basis over the estimated
performance periods for options with performance conditions.




Restricted
stock fair value is measured on the grant date based on the quoted market price
of Company’s common stock, and the stock option fair value is estimated on the
grant date using the Black-Scholes option pricing model based on the underlying
common stock closing price as of the date of grant, the expected term, stock
price volatility, and risk-free interest rates.





Business
Segment. The
Company conducts its business within the United States and within one business
segment which is defined as providing automotive and marketing
services.





F-10


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)








Reclassifications. Certain
reclassifications have been made to prior years’ 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.





Advertising
Expense. Advertising
costs are expensed in the period incurred. Advertising expense in 2009 and 2008
was $3.9 million and $7.2 million, respectively.




Recently Adopted
Accounting Pronouncements.


In June 2009,
the Financial Accounting Standard Board (“FASB”) issued the Generally Accepted
Accounting Principles Topic of the FASB Accounting Standards CodificationTM
(“Codification”).  The Generally Accepted Accounting Principles Topic
of the Codification is the single source of U.S. GAAP in the preparation of
financial statements, except for rules and interpretive releases of the SEC
under authority of federal securities laws, which are sources of authoritative
guidance for SEC registrants. The Codification was not meant to create new
accounting and reporting guidance, but rather to simplify user access to all
authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into
accounting topics within a consistent organizational structure. The Codification
supersedes all existing non-SEC accounting and reporting standards and is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.




The FASB
no longer issues new standards in the form of Statements, FASB Staff Positions,
or Emerging Issues Task Force Abstracts; instead, it issues Accounting Standards
Updates (“ASU’s”). The FASB will not consider ASU’s as authoritative in their
own right; rather these updates will serve only to update the Codification,
provide background information about the guidance, and provide the bases for
conclusions on the change(s) in the Codification. In the description that
follows, reference to the Codification Topics and Subtopics are provided, as
appropriate.





Fair Value
Measurements. Accounting Standards Codification
(“ASC”) 820 “Fair Value Measurements and Disclosures.”In
September 2006, the FASB established a framework for measuring fair value and
expanded the disclosures of fair value measurements.  This new
guidance is effective for financial statements issued for periods beginning
after November 15, 2007. In February 2008, the FASB deferred the effective
date of the new guidance for non-financial assets and liabilities that are not
recorded at fair value on a recurring basis until periods beginning after
November 15, 2008.  The Company adopted the non-deferred portion
of this guidance on January 1, 2008 and adopted the previously deferred portion
of this guidance on January 1, 2009 and it did not have an impact on the
Company’s consolidated financial statements.





Derivative
and Hedging Activities. ASC 815 “Derivatives and
Hedging.”  In March 2008, the FASB issued new guidance that
calls for new disclosure for derivative and hedging activities and is effective
for periods beginning after November 15, 2008. Since the Company does not
have any Derivatives or Hedging Activities, the adoption of this new guidance on
January 1, 2009 did not have any effect on the Company’s consolidated
financial statements.





Non-Controlling Interests. ASC 810
“Consolidations.”  In December 2007, the FASB established new
accounting guidance and disclosure requirements for non-controlling interests in
a subsidiary. Since the Company does not have non-controlling interests in its
subsidiaries, the adoption of this new guidance on January 1, 2009 did not
have any effect on the Company’s consolidated financial statements.





Business
Combinations. ASC 805 “Business Combinations.”In December 2007, the FASB established principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non- controlling interest in the acquiree. The new requirements also provide
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of
financial statements to evaluate the nature and financial effects of the
business combination.  The new guidance is effective for business
combinations occurring after December 31, 2008. The adoption of this new
guidance did not have any effect on the Company’s consolidated financial
statements.





F-11


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






3.         Selected
Balance Sheet Accounts




Property
and Equipment




Property
and equipment consists of the following:


As of December 31,2009
            
            
            2008(in
      thousands)Computer
      software and hardware
            
            $
            9,183
            
            
            $
            9,138Furniture
      and equipment
            
            
            1,432
            
            
            
            1,715Leasehold
      improvements
            
            
            949
            
            
            
            1,249Capitalized
      internal use software
            
            
            912
            
            
            
            91212,476
            
            
            
            13,014Less—Accumulated
      depreciation and amortization
            
            
            (11,473
            )
            
            
            (10,593
            )Property and Equipment, net
            
            $
            1,003
            
            
            $
            2,421




During
2008 the Company recorded impairment charges of $4.3 million to reduce the net
book value of certain capitalized software related to the MyRide website to its
estimated fair value. This impairment was recorded pursuant to impairment
indicators including the decision to discontinue the use of the MyRide software
platform as well as lower than expected website ‘traffic” and the related impact
on the Company’s projected cash flows. The $4.3 million impairment charge is
classified as cost of revenues in the 2008 Consolidated Statements of Operations
and Comprehensive Loss.




The
Company also recorded an expense of $1.2 million in 2008, associated with the
write-off of capitalized software projects that are no longer being developed or
expected to be placed in service for their intended use. This amount is included
in general and administrative and technology support in the 2008 Consolidated
Statement of Operations and Comprehensive Loss.




As of
December 31, 2009 and 2008, capitalized internal use software, net of
amortization, and development in process were $0.1 million and $0.4 million,
respectively.  Depreciation and amortization expense related to
property and equipment was $1.6 million and $4.8 million for the years ended
December 31, 2009 and 2008, respectively.




Accrued
Expenses and Other Current Liabilities




As of
December 31, 2009 and 2008, accrued expenses and other current liabilities
consisted of the following:




As of December 31,2009
              
              
              2008(in
      thousands)Compensation
      and related costs
              
              $
              2,629
              
              
              $
              2,288Accrued
      severance
              
              
              43
              
              
              
              2,614Professional
      fees
              
              
              71
              
              
              
              340Other
      accrued expenses
              
              
              596
              
              
              
              261Amounts
      due to customers
              
              
              468
              
              
              
              583Other
      current liabilities
              
              
              221
              
              
              
              346Total
      accrued expenses and other current liabilities
              
              $
              4,028
              
              
              $
              6,432








F-12








AUTOBYTEL
INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)





4.         AVV
Divestiture




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 (“AVV”) 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 2008, which is classified as discontinued operations in the
Consolidated Statements of Operations and Comprehensive Loss. The Company and
Dominion also agreed to a $1.9 million escrow in connection with the sale (the
“Escrow”).  During 2009, the Company received approximately $1.8
million of the Escrow, with the remaining $0.1 million distributed to
Dominion.  The $1.8 million Escrow received in by the Company in 2009
is classified as a gain on sale, discontinued operations.




The AVV
results of operations are presented as discontinued operations for all periods
presented. As discontinued operations, revenues and expenses have been
aggregated and stated separately from the respective captions of continuing
operations in the Consolidated Statements of Operations and Comprehensive Loss.
Expenses include direct costs of the business that were eliminated from future
operations.  For the years ended December 31, 2009 and 2008 the
results of operations of AVV are reported as discontinued operations, net of
taxes, as follows:





Years Ended December 31,2009
            
            
            2008(in
      thousands)Total
      net revenues:
            
            $
            —
            
            
            $
            568Cost
      of revenues
            
            
            —
            
            
            
            —Gross
      profit
            
            
            —
            
            
            
            568Operating
      expenses:Sales
      and marketing
            
            
            —
            
            
            
            150Technology
      support
            
            
            —
            
            
            
            114General
      and administrative
            
            
            —
            
            
            
            53Total
      operating costs
            
            
            —
            
            
            
            317Gain
      on sale
            
            
            1,787
            
            
            
            4,204Provision
      for income taxes
            
            
            608
            
            
            
            62Discontinued
      operations, net
            
            $
            1,179
            
            
            $
            4,393







5.
            Patent
      Litigation Settlement




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 (the
“Settlement Agreement”). The Settlement Agreement provides that Dealix will 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 remainder to be paid out in installments of $2.7 million on the
next three anniversary dates of the initial payment. The Company received the
first of three installments of $2.7 million in March 2008, and in March 2009,
the Company received the second installment of $2.7 million pursuant to the
Settlement Agreement. The Company records the payments as patent litigation
settlement in the period payment is received, as a reduction to operating
expenses. The remaining payment is guaranteed by WP Equity Partners, Inc., a
Warburg Pincus affiliate. The Company has been unable to assess with reasonable
assurance the collectability of the remaining payment under the Settlement
Agreement as the Company does not have financial information to support the
credit worthiness of the debtor or guarantor. The Company does not have
reasonable assurance that it will receive the remaining payment on its due date
or at all and therefore has not recorded any amounts receivable related to the
Settlement Agreement as of December 31, 2009 or 2008.




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





F-13








AUTOBYTEL
INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)







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. 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, long-term 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 lead technology
(“‘517 Patent”). In the lawsuit, Edmunds sought a declaration that its business
activities, some of which include generating automotive leads, did not infringe
the ‘517 Patent and that such patent was invalid. On February 20, 2009,
this declaratory relief action was dismissed by the court. In March 2009, the
Company entered into a settlement 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
leads-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.




6.
            Commitments
      and Contingencies




Operating
Leases




The
Company leases its facilities and certain office equipment under operating
leases which expire on various dates through 2011. On February 6, 2009 the
Company amended its operating lease for its corporate offices in Irvine,
California (the “Lease”). Effective March 31, 2009, (i) the term of
the Lease was extended from October 1, 2010 to July 31, 2011, with two
options to extend the Lease for a period of one year each, (ii) the rentable
square footage under the Lease was reduced by approximately 55% (from 60,000
square feet to 26,000 square feet), and (iii) the monthly rent under the Lease
was reduced by approximately 60%. The Company’s future minimum lease payments on
leases with non-cancelable terms in excess of one year were as follows (in
thousands):





Years Ending
    December 31,2010
            
            $
            6592011
            
            
            335Thereafter
            
            
            —$
            994


Rent
expense included in operating expenses was $0.9 million and $1.4 million for the
years ended December 31, 2009 and 2008, respectively.




Guarantees




The
Company guarantees an operating lease commitment for one of its wholly owned
subsidiaries. The maximum guarantee amount is approximately $0.1 million which
represents the remaining commitment, through January 2011, on such operating
lease arrangements as of December 31, 2009.





F-14


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






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 without cause
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 of control.




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 and certain of the
Company’s current and former directors and officers (the “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.  Objector’s, including the objectors that
filed the petition seeking permission to appeal, filed notices of appeal of the
Court’s order finally approving the settlement.  The time to file
additional appeals has run. 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 (the
“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 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 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.  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 Autoweb’s
case are intended to serve as test cases.  Plaintiffs’ filed an
opposition to the petition.  Objectors, including objectors that filed
the petition seeking permission to appeal, filed notices of appeal of the
Court’s order finally approving the settlement.  The time to file
additional appeals has run.    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.





F-15








AUTOBYTEL
INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






7.        
Retirement Savings Plan




The
Company has a retirement savings plan which qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code ("IRC") (the
"401(k) Plan".) The 401(k) Plan covers all employees of the Company who are
over 21 years of age and is effective on the first day of the month following
date of hire. Under the 401(k) Plan, participating employees are allowed to
defer up to 50% of their pretax salaries not to exceed the maximum IRC deferral
amount. The Company contributions to the 401(k) Plan are discretionary. The
Company contributed $0.2 million and $0.4 million, for the years ended December
31, 2009 and 2008, respectively.




8.
            Stock-Based
      Incentive Plans




The
Company has established several Plans that provide for stock-based awards (the
“Awards”) primarily in the form of stock options and restricted stock awards
(RSA’s). Certain of these Plans provide for awards to employees, the Company’s
Board of Directors, and independent consultants. The Awards were granted under
the 1996 Stock Incentive Plan, the 1998 Stock Option Plan, the 1999 Stock Option
Plan, the 1999 Employee and Acquisition Related Stock Option Plan, the 2000
Stock Option Plan, the Amended and Restated 2001 Restricted Stock and Option
Plan, the 2004 Restricted Stock and Option Plan, and the 2006 Inducement Stock
Option Plan. An aggregate of 1.5 million shares of Company common stock are
reserved for future issuance under the Plans at December 31,
2009.




Share-based
compensation expense is included in costs and expenses in the Consolidated
Statements of Operations as follows:





Years Ended
    December 31,2009
            
            
            2008(in
      thousands)Share-based
      compensation expense:Cost
      of revenues
            
            $
            32
            
            
            $
            177Sales
      and marketing
            
            
            358
            
            
            
            756Technology
      support
            
            
            115
            
            
            
            601General
      and administrative
            
            
            606
            
            
            
            1,566Share-based
      compensation expense included incontinuing
      operations
            
            
            1,111
            
            
            
            3,100Share-based
      compensation expense included indiscontinued
      operations
            
            
            —
            
            
            
            8Total
      share-based compensation expense
            
            $
            1,111
            
            
            $
            3,108




Certain
Awards accelerated their vesting in accordance with their respective original
award agreements. The total expense related to these accelerated vested Awards
was approximately $0.1 million and $0.7 million for the years ended
December 31, 2009 and 2008, respectively.  As of
December 31, 2009, there was approximately $1 million of unrecognized
compensation expense related to unvested stock-based Award grants. This expense
is expected to be recognized over a weighted average period of approximately 1.8
years.




Stock
Options




The fair
value of stock options is estimated on the grant date using the Black-Scholes
option pricing model based on the underlying common stock closing price as of
the date of grant, the expected term, stock price volatility, and risk-free
interest rates. The expected risk-free interest rate is based on United States
treasury yield for a term consistent with the expected life of the stock option
in effect at the time of grant. Expected volatility is based on the Company’s
historical experience for a period equal to the expected life. The Company has
used historical volatility because it has a limited number of options traded on
its common stock to support the use of an implied volatility or a combination of
both historical and implied volatility. The Company estimates the expected life
of options granted based on historical experience, which it believes is
representative of future behavior.  The dividend yield is not
considered in the option-pricing formula since the Company has not paid
dividends in the past and has no current plans to do so in the future. The
estimated forfeiture rate used is based on historical experience and is adjusted
based on actual experience.




The
Company grants its options at exercise prices that are not less than the fair
market value of the Company’s common stock on the date of grant. Stock options
generally have a ten year maximum contractual term and generally vest one-third
on the first anniversary of the grant date and ratably over twenty-four months,
thereafter. The vesting of certain stock options is accelerated under certain
conditions, including upon a change in control of the Company or involuntary
termination of employment.





F-16


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Awards
granted under the Company’s stock option plans were estimated to have a weighted
average grant date fair value per share of $0.23 and $0.62 for the years ended
December 31, 2009 and 2008, respectively, based on the Black-Scholes
option-pricing model on the date of grant using the following weighted average
assumptions:





Years Ended December 31,2009
            
            2008Expected
      volatility
            75%
            
            62%Expected
      risk-free interest rate
            1.7%
            
            2.9%Expected
      life (years)
            4.1
            
            4.1





A summary of
the Company’s outstanding stock options as of December 31, 2009, and
changes during the year then ended is presented below:





Number
      of
              Options
            
            
            Weighted Average
              Exercise Price
              per
      Share
            
            
            Weighted
              Average
              Remaining
              Contractual
              Term
            
            
            Aggregate
              Intrinsic
              Value(years)
            
            
            (thousands)Outstanding
      at December 31, 2008
            
            
            6,869,878
            
            
            $
            3.88
            
            
            
            4.1
            
            
            
            —Granted
            
            
            3,038,409
            
            
            
            0.43Exercised
            
            
            —
            
            
            
            —Forfeited
      or expired
            
            
            (2,108,383
            )
            
            
            3.58Outstanding
      at December 31, 2009
            
            
            7,799,904
            
            
            $
            2.62
            
            
            
            6.0
            
            
            $
            1,630Vested
      and expected to vest at December 31, 2009
            
            
            7,341,287
            
            
            $
            2.70
            
            
            
            5.9
            
            
            $
            1,468Exercisable
      at December 31, 2009
            
            
            4,312,285
            
            
            $
            4.27
            
            
            
            3.4
            
            
            $
            9




Service-Based
Options




During
the years ended December 31, 2009 and 2008, the Company granted 1,970,159 and
1,882,500 service-based stock options, with weighted average grant date fair
values of $0.25 and $0.60, respectively.




The
Company’s President and Chief Executive Officer was granted 1,000,000 of the
total service based options during the year ended December 31, 2009 (“CEO
Awards”).  The CEO Awards vest on the first anniversary of the grant
date and have an exercise price of $0.35, which was higher than the closing
price of the Company’s common stock on the grant date.  The shares
that are issuable upon exercise of the CEO Award options are subject to
restrictions on resale that lapse over time (as to one-third on the first
anniversary of the grant date and thereafter will lapse as to the remaining
two-thirds of the shares in equal one-twelfth (1/12) installments of the
original number of shares subject to the options each quarter until all resale
restrictions have lapsed).  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.




Market
Condition Options




In 2009
the Company granted 1,068,250 stock options to substantially all employees at
exercise prices equal to the price of the stock on the grant date of $0.35, with
a fair market value per option granted of $0.19, using 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
exercisable.  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
exercisable (“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 exercisable (“Market Condition B”).
Certain of these options will accelerate vesting upon a change in
control.  During 2009 Market Condition A was achieved.





F-17


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Performance
Condition Options





In 2008,
216,667 options were provided to certain executives with vesting contingent upon
meeting certain performance criteria.  The performance period for
these options concluded in March 2009. Of the 216,667 options provided in 2008,
200,000 were forfeited due to termination.




No options were exercised during
2009.  The total
intrinsic value of options exercised during 2008 was
$43,000.




Restricted
Stock Awards (“RSA’s”)




During
2008, the Company granted an aggregate of 1,020,000 RSA’s that are subject to
forfeiture. The forfeiture restrictions lapse as to one-third of the restricted
stock awards on the first anniversary of the grant date and ratably over
twenty-four months thereafter. The lapsing of the forfeiture restrictions is
accelerated under certain conditions, including upon a change of control of the
Company or involuntary termination. Compensation expense for restricted stock
awards is measured on the grant date using the quoted market price of the
Company’s common stock on the grant date.




A summary
of the changes in the Company’s RSA’s during the year ended December 31,
2009 are presented below:





RSA Units
            
            
            Weighted Average
              Grant Date Fair
              ValueUnvested
      at January 1, 2009
            
            
            720,000
            
            
            $
            1.06Vested/Forfeiture
      Restriction Lapse
            
            
            (284,004
            )
            
            
            1.06Forfeited
            
            
            (50,973
            )
            
            
            1.06Unvested
      at December 31, 2009
            
            
            385,023
            
            
            $
            1.06




Employee
Stock Purchase Plan




The
Company’s Employee Stock Purchase Plan (“ESPP”) was adopted in 1996, amended in
2003 and 2007, and terminates in 2017. The ESPP permits eligible employees to
purchase shares of the Company’s common stock at 85% of the lower of the fair
market value of the common stock on the first or last day of each six month
purchase period. The ESPP authorized the purchase of up to 650,000 shares of
common stock. The ESPP was suspended by the Company’s Board of Directors during
2008 and continues to be suspended in 2009.




Preferred
Shares Purchase Rights Plan




In July
2004, the Board of Directors approved the adoption of a stockholder rights plan
under which all stockholders of record as of August 10, 2004 received rights to
purchase shares of Series A Junior Participating Preferred Stock. The rights
were distributed as a non-taxable dividend and will expire July 30,
2014.




The
rights will be exercisable only if a person or group acquires 15% or more of the
common stock of the Company or announces a tender offer for 15% or more of the
common stock. If a person or group acquires 15% or more of the common stock, all
rightholders, except the acquirer, will be entitled to acquire at the then
exercise price of a right that number of shares of the Company’s common stock
which at the time will have a market value of two times the exercise price of
the right. Under certain circumstances, all rightholders, other than the
acquirer, will be entitled to receive at the then exercise price of a right that
number of shares of common stock of the acquiring company which at the time will
have a market value of two times the exercise price of the right. The initial
exercise price of a right was $65.00.




The Board
of Directors may terminate the rights plan at any time or redeem the rights
prior to the time a person or group acquires more than 15% of the Company’s
common stock.




In
January 2009, the stockholder rights plan was amended to allow Coghill Capital
Management LLC and certain of its affiliates (collectively “Coghill”) to hold up
to 8,118,410 shares without becoming an acquiring person under the stockholders
rights, subject to various conditions set forth in the amendment, including
Coghill’s execution of and compliance with a standstill agreement.




On April
23, 2009, the Board of Directors of the Company approved, and the Company
entered into, an Amended and Restated Rights Agreement (“Amended Rights
Agreement”) dated as of April 24, 2009.  The Amended Rights Agreement
incorporates the following material changes to the original rights agreement:
(i) the purchase price was decreased to $1.40 per right; (ii) the Board of
Directors may effect an exchange of the rights at an exchange ratio of one share
of the Company’s common stock per right (an “ Exchange ”) at any time after a
person becomes an acquiring person (as defined in the Amended Rights Agreement)
in accordance with the Amended Rights Agreement; and (iii) in effecting an
Exchange, the Company may enter into a trust agreement by which it transfers to
the trust created by such trust agreement (the “ Trust ”), all shares of the
Company’s common stock issued pursuant to the Exchange. The Trust would hold the
shares of the Company’s common stock for the benefit of stockholders entitled to
receive them pursuant to the Exchange. Stockholders would receive shares from
the Trust after complying with the relevant terms of the trust
agreement.




F-18




AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


9.
            Accrued
      Liability Related to Work Force
Reduction




The
Company’s Board of Directors, at the recommendation of management, approved a
reduction in the number of its employee workforce by approximately 116 employees
(the “Reductions”) during 2008. The Reductions reinforced management’s
commitment to improve cash flow and reduce further losses. The Company also
terminated the employment of its former Chief Executive Officer in 2008. As a
result of the Reductions and termination of the former Chief Executive Officer,
the Company recorded a $6.9 million charge, consisting of severance and other
related termination expenses, during the year ended December 31, 2008 as
follows:





Year Ended
              December 31, 2008(in
      thousands)Cost
      of revenues
            
            $
            300Sales
      and marketing
            
            
            1,400Technology
      support
            
            
            2,500General
      and administrative
            
            
            2,700Total
            
            $
            6,900





The Company
paid approximately $3.6 million of the severance and other related termination
costs during 2008 and paid substantially all remaining cost amounts during 2009.
Pursuant to the former Chief Executive Officer’s employment agreement, he
received a severance payment of $1.7 million in December 2008, and is entitled
to the continuation of certain insurance benefits for a period of 24 months
following his termination.




10.       Income
Taxes





The benefit
for income taxes from continuing operations consists of the following for the
years ended December 31:





2009
            
            
            2008(in
      thousands)Current:Federal
            
            $
            (635
            )
            
            $
            —State
            
            
            29
            
            
            
            —(606
            )
            
            
            —Deferred:Federal
            
            
            —
            
            
            
            —State
            
            
            —
            
            
            
            ——
            
            
            
            —Total
      income tax benefit
            
            $
            (606
            )
            
            $
            —




The
Company has allocated a tax benefit to its continuing operations, offset by a
tax provision charged to discontinued operations.  The income from
discontinued operations is considered when determining the amount of tax benefit
that results from, and allocated to, a loss from continuing operations. The
income from discontinued operations represents a source of income that enables
the Company to realize a tax benefit on the loss from continuing operations. As
a result, we have allocated an income tax benefit to the loss from continuing
operations.  The allocation of the tax benefit to continuing
operations was not considered material in 2008.





F-19


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






The
reconciliations of the U.S. federal statutory rate to the effective income tax
rate for the years ended December 31, 2009 and 2008 are as
follows:


2009
              
              
              2008Tax
      provision at U.S. federal statutory rates
              
              
              (35.0
              )%
              
              $
              (35.0
              )%State
      taxes
              
              
              (4.1
              )
              
              
              0.1Non-deductible
      permanent items
              
              
              (41.1
              )
              
              
              0.1Incentive
      stock options
              
              
              2.0
              
              
              
              0.1Goodwill
              
              
              —
              
              
              
              28.2Change
      in federal valuation allowance
              
              
              51.0
              
              
              
              6.5Effective income tax rate
              
              
              (27.2
              )%
              
              
              0.0
              %





Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred taxes as of December 31, 2009 and 2008 are as
follows:





2009
            
            
            2008(in
      thousands)Deferred
      tax assets:Allowance
      for doubtful accounts
            
            $
            430
            
            
            $
            498Accrued
      liabilities
            
            
            228
            
            
            
            259Net
      operating loss carry-forwards
            
            
            35,869
            
            
            
            33,245Fixed
      assets
            
            
            593
            
            
            
            692Intangible
      assets
            
            
            3,327
            
            
            
            4,259Share-based
      compensation expense
            
            
            4,473
            
            
            
            4,106Deferred
      revenue
            
            
            13
            
            
            
            758Other
            
            
            20
            
            
            
            60Total
      gross deferred tax assets
            
            
            44,953
            
            
            
            43,877Deferred
      tax liabilities:Intangible
      assets
            
            
            —
            
            
            
            (16
            )Other
            
            
            —
            
            
            
            (221
            )Total
      gross deferred tax liabilities
            
            
            —
            
            
            
            (237
            )Valuation
      allowance
            
            
            (44,953
            )
            
            
            (43,640
            )Net
      deferred income taxes
            
            $
            —
            
            
            $
            —




At
December 31, 2009, the Company had recorded a valuation allowance of $45
million on its net deferred tax assets. Based on the weight of available
evidence, the Company believes that it is more likely than not that these
deferred tax assets will not be realized.





F-20


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






At
December 31, 2009 and 2008, the Company had federal and state net operating
loss carry-forwards of approximately $97.5 million and $61.6 million,
respectively (“NOL’s”). The federal net operating loss carry-forwards expire
through 2029 as follows (in millions):





2021
            
            $
            26.62022
            
            
            2.72023
            
            
            —2024
            
            
            4.42025
            
            
            7.72026
            
            
            26.42027
            
            
            15.52028
            
            
            5.22029
            
            
            9.0$
            97.5




The state
net operating loss carry-forwards expire through 2030 as follows (in
millions):





2015
            
            $
            15.92016
            
            
            3.92017
            
            
            5.92018
            
            
            21.32019
            
            
            3.22029
            
            
            11.4$
            61.6




Utilization
of our net operating loss and tax credit carry-forwards may be subject to a
substantial annual limitation due to ownership change limitations that may have
occurred or that could occur in the future, as required by Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as similar state
provisions. These ownership changes may limit the amount of NOL carry-forwards
that can be utilized annually to offset future taxable income and tax,
respectively.  A Section 382 ownership change occurred in 2006;
however, based on management’s current estimate, this change does not limit the
utilization of the NOL's presented above as of December 31, 2009.  As
a result of an acquisition in 2001, approximately $9.9 million of the NOL’s are
subject to an annual limitation of approximately $0.5 million per
year.




The
federal and state net operating losses begin to expire in 2021 and 2015,
respectively. Approximately $10.8 million and $5.0 million, respectively,
of the federal and state net operating loss carry-forwards were incurred by
subsidiaries prior to the date of the Company’s acquisition of such
subsidiaries. The Company established a valuation allowance of $4.1 million at
the date of acquisitions related to these subsidiaries. The tax benefits
associated with the realization of such net operating losses will be credited to
the provision for income taxes. In addition, federal and state net operating
losses of approximately $13.5 million and $8.5 million, respectively, relate to
stock option deductions. Therefore, to the extent that the valuation allowance
is reduced in the future and such options are realized, approximately $4.7
million and $0.3 million, respectively, will be credited to stockholder’s equity
rather than to income tax benefit.




At
December 31, 2009, deferred tax assets exclude approximately $0.6 million
and $0.1 million of tax-effected federal and state net operating losses
pertaining to tax deductions from stock-based compensation. Upon future
realization of these benefits, the Company expects to increase additional
paid-in capital and reduce income taxes payable. The benefit of excess stock
option deductions is not recorded until such time that the deductions reduce
income taxes payable. For purposes of determining when the stock options reduce
income taxes payable, the Company has adopted the “with and without” approach
whereby the Company considers net operating losses arising from continuing
operations prior to net operating losses attributable to excess stock option
deductions.




At
December 31, 2009, the Company has federal and state research and development
tax credit carry-forwards of $0.3 million and $0.2 million, respectively, which
begin to expire in 2021.





F-21


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






As of
December 31, 2009 and 2008, the Company had unrecognized tax benefits of
approximately $0.5 million, all of which, if subsequently recognized, would have
affected the Company’s tax rate.  A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:





2009
            
            
            2008(in
      thousands)Balance
      at January 1,
            
            $
            500
            
            
            $
            500Additions
      based on tax positions related to the current year
            
            
            —
            
            
            
            —Reductions
      based on tax positions related to prior years and
    settlements
            
            
            —
            
            
            
            —Reductions
      based on the lapse of the statutes of limitations
            
            
            —
            
            
            
            —Balance
      at December 31,
            
            $
            500
            
            
            $
            500




The
Company files income tax returns in the United States and various state
jurisdictions. In general, the Company is no longer subject to U.S. federal and
state income tax examinations for years prior to 2004 (except for the use of tax
losses generated prior to 2004 that may be used to offset taxable income in
subsequent years). The Company does not believe there will be any material
changes in its unrecognized tax positions over the next 12 months.




The
Company’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. The Company did
not have any accrued interest or penalties associated with any unrecognized tax
benefits in the years ended December 31, 2009 and 2008.






11.           Related
Party Transactions




The
spouse of the Company’s Executive Vice President and Chief Operating Officer was
employed by the Company from February 2005 to July 2008. Her base annual salary
was $152,000 and she was eligible for a bonus of up to 20% of her base salary.
Her salary and bonus payment in 2008 totaled $119,000.




The
Company utilized the services of The Search Agency, a provider of search engine
marketing and search engine optimization services. Jeffrey M. Stibel, a director
of the Company, is an equity owner of The Search Agency. The Company incurred
costs of approximately $50,000 and $500,000 for services provided by The Search
Agency for the years ended December 31, 2009 and 2008, respectively. The
accounts payable related to The Search Agency in the Company’s Consolidated
Balance Sheet as of December 31, 2009 and 2008 were zero and $23,000,
respectively. All such services were provided in the ordinary course of business
at prices and on terms and conditions that the Company believes are the same as
those that would result from arm’s-length negotiations between unrelated
parties.




On April
3, 2009 the Compensation Committee approved the payment of $70,000 to Maverick
Associates LLC for consulting services rendered to the Company by Mr. Jeffrey H.
Coats during 2008 (prior to his appointment as the Company’s President and Chief
Executive Officer) in connection with the Company’s evaluation of strategic
alternatives and development and implementation of cost reduction initiatives.
Mr. Coats is the sole member of Maverick Associates.





F-22


AUTOBYTEL
INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






12.
            Quarterly
      Financial Data (Unaudited)




The Company is restating
its unaudited consolidated condensed financial statements for the three and six
month periods ended June 30, 2009 and the three and nine month periods ended
September 30, 2009 related to the misstatement of the provision (benefit) for
income taxes between continuing and discontinued operations.  During
these periods the Company did not consider the income from discontinued
operations when determining the amount of tax benefit that results from, and is
allocated to, the loss from continuing operations. The income from discontinued
operations represents a source of income that enables the Company to realize a
tax benefit on the loss from continuing operations. The following tables set
forth selected statements of operations and comprehensive loss data, presenting
previously reported amounts and amounts as corrected.







Three
      Months Ended June 30, 2009
            
            
            Six
      Months Ended June 30, 2009As
      Previously Reported
            
            
            Correction
      of Error
            
            
            As
      Corrected for Error
            
            
            As
      Previously Reported
            
            
            Correction
      of Error
            
            
            As
      Corrected for ErrorOperating
      loss
            
            $
            (2,199
            )
            
            $
            —
            
            
            $
            (2,199
            )
            
            $
            (2,702
            )
            
            $
            —
            
            
            $
            (2,702
            )Interest
      income and other income
            
            
            675
            
            
            
            —
            
            
            
            675
            
            
            
            821
            
            
            
            —
            
            
            
            821Benefit
      from income taxes
            
            
            —
            
            
            
            (495
            )
            
            
            (495
            )
            
            
            —
            
            
            
            (495
            )
            
            
            (495
            )Loss
      from continuing operations
            
            
            (1,524
            )
            
            
            495
            
            
            
            (1,029
            )
            
            
            (1,881
            )
            
            
            495
            
            
            
            (1,386
            )Discontinued
      operations, net
            
            
            1,273
            
            
            
            (495
            )
            
            
            778
            
            
            
            1,273
            
            
            
            (495
            )
            
            
            778Net
      loss
            
            $
            (251
            )
            
            $
            —
            
            
            $
            (251
            )
            
            $
            (608
            )
            
            $
            —
            
            
            $
            (608
            )Basic
      and diluted loss per share:Loss
      from continuing operations
            
            $
            (0.03
            )
            
            $
            0.01
            
            
            $
            (0.02
            )
            
            $
            (0.04
            )
            
            $
            0.01
            
            
            $
            (0.03
            )Discontinued
      operations, net
            
            
            0.03
            
            
            
            (0.01
            )
            
            
            0.02
            
            
            
            0.03
            
            
            
            (0.01
            )
            
            
            0.02Basic
      and diluted loss per common share
            
            $
            (0.01
            )
            
            $
            —
            
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            —
            
            
            $
            (0.01
            )















Three
      Months Ended September 30, 2009
            
            
            Nine
      Months Ended September 30, 2009As
      Previously Reported
            
            
            Correction
      of Error
            
            
            As
      Corrected for Error
            
            
            As
      Previously Reported
            
            
            Correction
      of Error
            
            
            As
      Corrected for ErrorOperating
      loss
            
            $
            (1,411
            )
            
            $
            —
            
            
            $
            (1,411
            )
            
            $
            (4,113
            )
            
            $
            —
            
            
            $
            (4,113
            )Interest
      income and other income
            
            
            94
            
            
            
            —
            
            
            
            94
            
            
            
            915
            
            
            
            —
            
            
            
            915Benefit
      from income taxes
            
            
            124
            
            
            
            (256
            )
            
            
            (132
            )
            
            
            124
            
            
            
            (751
            )
            
            
            (627
            )Loss
      from continuing operations
            
            
            (1,441
            )
            
            
            256
            
            
            
            (1,185
            )
            
            
            (3,322
            )
            
            
            751
            
            
            
            (2,571
            )Discontinued
      operations, net
            
            
            642
            
            
            
            (256
            )
            
            
            386
            
            
            
            1,915
            
            
            
            (751
            )
            
            
            1,164Net
      loss
            
            $
            (799
            )
            
            $
            —
            
            
            $
            (799
            )
            
            $
            (1,407
            )
            
            $
            —
            
            
            $
            (1,407
            )Basic
      and diluted loss per share:Loss
      from continuing operations
            
            $
            (0.03
            )
            
            $
            —
            
            
            $
            (0.03
            )
            
            $
            (0.07
            )
            
            $
            0.01
            
            
            $
            (0.06
            )Discontinued
      operations, net
            
            
            0.01
            
            
            
            —
            
            
            
            0.01
            
            
            
            0.04
            
            
            
            (0.01
            )
            
            
            0.03Basic
      and diluted loss per common share
            
            $
            (0.02
            )
            
            $
            —
            
            
            $
            (0.02
            )
            
            $
            (0.03
            )
            
            $
            —
            
            
            $
            (0.03
            )







F-23











AUTOBYTEL
INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)









Below is
a summary table of the Company’s quarterly data for the years ended December 31,
2009 (as restated for the quarters ended June 30, 2009 and September 30, 2009 as
above) and December 31, 2008.




Quarter EndedDec 31,
              2009
            
            
            Sep 30,
              2009 (a)
            
            
            Jun 30,
              2009 (b)
            
            
            Mar 31,
              2009 (c)
            
            
            Dec 31,
              2008 (d)
            
            
            Sep 30,
              2008 (e)
            
            
            Jun 30,
              2008 (f)
            
            
            Mar 31,
              2008 (g)(in
      thousands, except per-share amounts)Total
      net revenues
            
            $
            12,250
            
            
            $
            13,354
            
            
            $
            13,444
            
            
            $
            13,870
            
            
            $
            14,206
            
            
            $
            17,270
            
            
            $
            18,986
            
            
            $
            20,697Gross
      profit (loss)
            
            
            4,787
            
            
            
            4,740
            
            
            
            4,422
            
            
            
            4,983
            
            
            
            (32
            )
            
            
            6,163
            
            
            
            6,772
            
            
            
            6,872Loss
      from continuing operations
            
            
            (985
            )
            
            
            (1,185
            )
            
            
            (1,029
            )
            
            
            (357
            )
            
            
            (15,058
            )
            
            
            (5,811
            )
            
            
            (57,354
            )
            
            
            (6,086
            )Net
      loss
            
            $
            (970
            )
            
            $
            (799
            )
            
            $
            (251
            )
            
            $
            (357
            )
            
            $
            (15,054
            )
            
            $
            (5,627
            )
            
            $
            (57,285
            )
            
            $
            (1,950
            )Basic
      and diluted loss per share from continuing operations:
            
            $
            (0.02
            )
            
            $
            (0.03
            )
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.34
            )
            
            $
            (0.13
            )
            
            $
            (1.30
            )
            
            $
            (0.14
            )





(a)
            Net
      loss includes a net $0.6 million gain related to the sale of certain
      assets and liabilities of AVV


(b)
            Net
      loss includes a net $1.3 million gain related to the sale of certain
      assets and liabilities of AVV


(c)
            Loss
      from continuing operations and net loss includes a $2.7 million litigation
      settlement gain


(d)
            Gross
      loss includes a non-cash impairment charge of $4.3 million, Loss from
      continuing operations and net loss includes
              non-cash
      impairment charges of $5.5 million and $5.1 million of severance and other
      related employee termination
expenses


(e)
            Loss
      from continuing operations and net loss includes $1.8 million of severance
      and other related employee termination
expenses


(f)
            Loss
      from continuing operations and net loss includes a non-cash goodwill
      impairment charge of $52.1 million


(g)
            Net
      loss includes a net $4.2 million gain related to the sale of certain
      assets and liabilities of AVV, Inc. a data extraction and
              customer
      relationship management software business and a $2.7 million litigation
      settlement payment








F-24





AUTOBYTEL
      INC.




SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS







Years Ended
    December 31,2009
            
            
            2008(in
      thousands)Allowance
      for bad debts:Beginning
      balance
            
            $
            966
            
            
            $
            329Additions
            
            
            1,051
            
            
            
            1,443Write-offs
            
            
            (1,195
            )
            
            
            (806
            )Ending
      balance
            
            $
            822
            
            
            $
            966Allowance
      for customer credits:Beginning
      balance
            
            $
            311
            
            
            $
            205Additions
            
            
            982
            
            
            
            1,295Write-offs
            
            
            (1,008
            )
            
            
            (1,189
            )Ending
      balance
            
            $
            285
            
            
            $
            311Tax
      valuation allowance:Beginning
      balance
            
            $
            43,640
            
            
            $
            39,183(Credited)
      Charged to tax expense
            
            
            1,890
            
            
            
            4,802Charged
      (credited) to other
            
            
            (577
            )
            
            
            (345
            )Ending
      balance
            
            $
            44,953
            
            
            $
            43,640








F-25





EXHIBIT
INDEX
 
 Number
                  
                  Description2.1
                  
                  Asset
      Purchase Agreement, dated as of January 23, 2008, between the
      Company, AVV, Inc. and Dominion Enterprises is incorporated herein by
      reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the
      Securities and Exchange Commission (“SEC”) on January 29, 2008 (SEC
      File No. 000-22239)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 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,
      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)10.1
                  **
                  Form
      of Indemnification Agreement between Autobytel and its directors and
      officers is incorporated herein by reference to Exhibit 10.1
      of  Registration Statement on Form S-1 filed with the SEC on
      January 15, 1999 and declared effective (as amended) on March 25, 1999
      (SEC File No. 333-70621) (“S-1 Registration
    Statement”)10.2
                  **
                  Form
      of Outside Director Stock Option Agreement under the 2004 Restricted Stock
      and Option Plan is incorporated herein by reference to Exhibit 10.1 of the
      Current Report on Form 8-K filed with the SEC on September 14, 2005 (SEC
      File No. 000-22239) (“September 2005 8-K”)10.3
                  **
                  Form
      of Letter Agreement (amending certain stock option agreements with Outside
      Directors) is incorporated herein by reference to Exhibit 10.2 of the
      September 2005 8-K10.4
                  **
                  autobytel.com
      inc. 1998 Stock Option Plan is incorporated herein by reference to Exhibit
      10.8 of Amendment No. 1 to the S-1 Registration Statement filed with the
      SEC on February 9, 1999 (SEC File No. 333-70621) (“Amendment No. 1 to
      S-1 Registration Statement”)10.5
                  **
                  autobytel.com
      inc. 1999 Stock Option Plan is incorporated herein by reference to Exhibit
      10.30 of Amendment No. 1 to S-1 Registration Statement10.6
                  **
                  autobytel.com
      inc. 1999 Employee and Acquisition Related Stock Option Plan is
      incorporated herein by reference to Exhibit 10.1 of the Registration
      Statement on Form S-8  filed with the SEC on November 1,
      1999 (SEC File No. 333-90045)10.7
                  **
                  Amendment
      No. 1 to the autobytel.com inc. 1998 Stock Option Plan dated September 22,
      1999 is incorporated herein by reference to Exhibit 10.2 of Form 10-Q for
      the quarterly period ended September 30, 1999 filed with the SEC on
      November 12, 1999 (SEC File No.  000-22239)10.8
                  **
                  Amendment
      No. 1 to the autobytel.com inc. 1999 Stock Option Plan, dated September
      22, 1999 is incorporated herein by reference to Exhibit 10.1 of Form 10-Q
      for the quarterly period ended September 30, 1999 filed with the SEC on
      November 12, 1999  (SEC File
  No. 000-22239)10.9
                  **
                  1996
      Stock Incentive Plan and related agreements are incorporated herein by
      reference to Exhibit 10.6 of  Amendment No. 1 to S-1
      Registration Statement
   
  Number
                    
                    Description10.10
                    **
                    autobytel.com
      inc. 2000 Stock Option Plan is incorporated herein by reference to Exhibit
      99.1 of the Registration Statement on Form S-8 filed with the SEC on June
      15, 2000 (SEC File No. 333-39396)10.11
                    **
                    Employment
      Agreement, dated April 27, 2005, between Autobytel and Richard Walker is
      incorporated herein by reference to Exhibit 10.3 of the Current Report on
      Form 8-K filed with the SEC on  May 3, 2005 (SEC File No. .
      000-22239)10.12
                    **
                    autobytel.com
      inc. 2001 Restricted Stock Plan is incorporated herein by reference to
      Annex D to the Registration Statement on Form S-4
      originally  filed with the SEC on May 11, 2001 (SEC File No.
      333-60798)
                      and
      amended on July 17, 2001.10.13
                    **
                    Amendment
      No. 1 to the Auto-by-Tel Corporation 1996 Stock Incentive Plan is
      incorporated herein by reference to Exhibit (d)(2) of Schedule TO filed
      with the SEC on December 14, 2001 (SEC File No. 005-58067) (“Schedule
      TO”)10.14
                    **
                    Amendment
      No. 2 to the autobytel.com inc. 1998 Stock Option Plan is incorporated
      herein by reference to Exhibit (d)(5) of the Schedule
TO10.15
                    **
                    Amendment
      No. 2 to the autobytel.com inc. 1999 Stock Option Plan is incorporated
      herein by reference to Exhibit (d)(8) of the Schedule
TO10.16
                    **
                    Amendment
      No. 1 to the autobytel.com inc. 1999 Employee and Acquisition Related
      Stock Option Plan is incorporated herein by reference to Exhibit (d)(10)
      of the Schedule TO10.17
                    **
                    Amendment
      No. 1 to the autobytel.com inc. 2000 Stock Option Plan is incorporated
      herein by reference to Exhibit (d)(12) of the Schedule
  TO10.18
                    **
                    Amendment
      No. 2 to the autobytel.com inc. 2000 Stock Option Plan is incorporated
      herein by reference to Exhibit 10.46 of the Annual Report on Form 10-K for
      the Year Ended December 31, 2001 filed with the SEC on March 22, 2002 (SEC
      File No. 000-22239)10.19
                    **
                    Form
      of Stock Option Agreement pursuant to Auto-by-Tel Corporation 1996 Stock
      Incentive Plan is incorporated herein by reference to Exhibit (d)(13) of
      the Schedule TO10.20
                    **
                    Form
      of Stock Option Agreement pursuant to autobytel.com inc. 1998 Stock Option
      Plan is incorporated herein by reference to Exhibit (d)(14) of the
      Schedule TO10.21
                    **
                    Form
      of Stock Option Agreement pursuant to autobytel.com inc. 1999 Stock Option
      Plan is incorporated herein by reference to Exhibit (d)(15) of the
      Schedule TO10.22
                    **
                    Form
      of Stock Option Agreement pursuant to autobytel.com inc. 1999 Employee and
      Acquisition Related Stock Option Plan is incorporated herein by reference
      to Exhibit (d)(16) of the Schedule TO10.23
                    **
                    Form
      of Stock Option Agreement pursuant to autobytel.com inc. 2000 Stock Option
      Plan is incorporated herein by reference to Exhibit (d)(17) of the
      Schedule TO10.24
                    **
                    Form
      of Performance Stock Option Agreement pursuant to autobytel.com inc. 1999
      Stock Option Plan is incorporated herein by reference to Exhibit (d)(18)
      of the Schedule TO10.25
                    **
                    Form
      of Non-employee Director Stock Option Agreement pursuant to Auto-by-Tel
      Corporation 1996 Stock Incentive Plan is incorporated herein by reference
      to Exhibit (d)(19) of the Schedule TO10.26
                    **
                    Employment
      Agreement, dated May 30, 2005, between Autobytel and Michael Schmidt is
      incorporated herein by reference to Exhibit 10.1 of the Current Report on
      Form 8-K filed with the SEC on June 2, 2005 (SEC File No.
      000-22239)10.27
                    **
                    Employment
      Agreement, dated July 19, 2005, between Autobytel and Ariel Amir is
      incorporated herein by reference to Exhibit 10.1 of the Current Report on
      Form 8-K filed with the SEC on July 22, 2005 (SEC File No.
      000-22239)
   
   Number
                      
                      Description10.28
                      **
                      Letter
      Agreement, dated September 21, 2005, between Autobytel and Jill Richling
      is incorporated herein by reference to Exhibit 10.1 of the Current Report
      on Form 8-K filed with the SEC on December 12, 2005 (SEC File No.
      000-22239)10.29
                      **
                      Autobytel
      Inc. Amended and Restated 2001 Restricted Stock and Option Plan is
      incorporated herein by reference to Exhibit 4.7 of Post-Effective
      Amendment to Registration Statement on Form S-8  filed with the
      SEC on July 31, 2003 (SEC File No. 333-67692)10.30
                      **
                      Form
      of Outside Director Stock Option Agreement under the Autobytel 1999 Stock
      Option Plan is incorporated herein by reference to Exhibit 10.1 of the
      Current Report on Form 8-K filed with the SEC on November 3, 2004
      (SEC File No. 000-22239) (“November 3, 2004 Form 8-K”)10.31
                      **
                      Form
      of Outside Director Stock Option Agreement under the Autobytel 2004
      Restricted Stock and Option Plan is incorporated herein by reference to
      Exhibit 10.2 of the November 3, 2004 Form 8-K10.32
                      **
                      Autobytel
      Inc. 2004 Restricted Stock and Option Plan is incorporated herein by
      reference to Exhibit 4.8 of the Registration Statement on Form
      S-8  with the SEC on June 28, 2004 (SEC File
      No. 333-116930)  (“June 28, 2004 Form
  S-8”)10.33
                      **
                      Form
      of Employee Stock Option Agreement under the Autobytel 2004 Restricted
      Stock and Option Plan is incorporated herein by reference to Exhibit 4.9
      of the June 28, 2004 Form S-810.34
                      **
                      Stock
      Option Agreement dated September 21, 2004 between Autobytel and Ariel Amir
      is incorporated herein by reference to Exhibit 10.61 of the Annual Report
      on Form 10-K for the Year Ended December 31, 2004 filed with the SEC on
      May 31, 2005 (SEC File No. 000-22239) (“2004 Form
10-K”)10.35
                      **
                      Stock
      Option Agreement, dated September 21, 2004, between Autobytel and Richard
      Walker is incorporated herein by reference to Exhibit 10.62 of the 2004
      Form 10-K10.36
                      **
                      Letter
      agreement, dated March 9, 2004 between Autobytel and Michael F. Schmidt is
      incorporated herein by reference to Exhibit 10.64 of the 2004 Form
      10-K10.37
                      **
                      Form
      of Stock Option Agreement under the Autobytel 2004 Restricted Stock and
      Option Plan is incorporated herein by reference to Exhibit 10.65 of the
      2004 Form 10-K10.38
                      **
                      Employment
      Agreement dated March 1, 2006 between Autobytel Inc. and James E.
      Riesenbach is incorporated herein by reference to Exhibit 10.1 of the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on March 7, 2006  (SEC File No. 000-22239), as
      amended by Amendment No.1 to Employment Agreement dated December 10, 2008,
      which is incorporated herein by reference to Exhibit 10.2 of the Current
      Report on Form 8-K filed with the SEC on December 15, 2008 (SEC File No.
      000-22239)10.39
                      **
                      First
      Amendment to Employment Agreement dated March 7, 2006 between Autobytel
      Inc. and Richard Post is incorporated herein by reference to Exhibit 10.2
      of the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on March 7, 2006 (SEC File No. 000-22239)10.40
                      **
                      First
      Amendment to Employment Agreement dated March 7, 2006 between Autobytel
      Inc. and Richard Walker is incorporated herein by reference to Exhibit
      10.3 of the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on March 7, 2006 (SEC File No.
    000-22239)10.41
                      **
                      2006
      Inducement Stock Option Plan is incorporated herein by reference to
      Exhibit 4.9 of the Registration Statement on Form S-8  filed
      with the Securities and Exchange Commission on June 16, 2006 (SEC
      File No. 333-135076) (“2006 Form S-8”)10.42
                      **
                      Form
      of Employee Inducement Stock Option Agreement is incorporated herein by
      reference to Exhibit 4.10 of the 2006 Form S-810.43
                      **
                      Inducement
      Stock Option Agreement dated March 20, 2006 between James E. Riesenbach
      and Autobytel is incorporated herein by reference to Exhibit 4.11 of the
      2006 Form S-810.44
                      †
                      Settlement
      Agreement entered into as of December 19, 2006 among Autobytel Inc., The
      Cobalt Group, Inc., Dealix Corporation and for limited purposes WP Equity
      Partners, Inc. is incorporated herein by reference to Exhibit 10.76 of the
      Annual Report on Form 10-K for the Year Ended December 31, 2006 filed with
      the SEC on March 15, 2007 (SEC File No. 000-22239) (“2006 Form
      10-K”)10.45
                      **
                      Employment
      Agreement, made as of February 8, 2002, between Autobytel Inc. and Mark
      Garms is incorporated herein by reference to Exhibit 10.79 of the 2006
      Form 10-K
   
   Number
                        
                        Description10.46
                        **
                        Letter
      agreement, dated July 12, 2004, between Autobytel Inc. and Mark Garms is
      incorporated herein by reference to Exhibit 10.80 of the 2006 Form
      10-K10.47
                        **
                        Employment
      Agreement, dated as of January 30, 2007 between the Company and Mr.
      Houdeshell is incorporated herein by reference to Exhibit 10.1 of the
      Current Report on Form 8-K filed with the SEC on February 2, 2007
      (SEC File No. 000-22239), as amended by Amendment No.1 to Employment
      Agreement dated December 20, 2008, which is incorporated herein by
      reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the
      SEC on February 4, 2009 (SEC File No. 000-22239)10.48
                        **
                        Inducement
      Stock Option Agreement, dated January 30, 2007 between the Company and
      Mr. Houdeshell is incorporated herein by reference to Exhibit 10.2 of
      the Current Report on Form 8-K filed with the SEC on February 2, 2007 (SEC
      File No. 000-22239)10.49
                        
                        Stock
      Purchase Agreement, dated as of June 29, 2007, between the Company,
      Retention Performance Marketing, Inc. and Call Command, Inc. is
      incorporated herein by reference to Exhibit 10.1 of the Current Report on
      Form 8-K filed with the SEC on July 5, 2007 (SEC File No.
      000-22239)10.50
                        **
                        First
      Amendment to Employment Agreement, dated as of July 19, 2007, between
      the Company and Ariel Amir is incorporated herein by reference to Exhibit
      10.1 of the Current Report on Form 8-K filed with the SEC on July 20,
      2007 (SEC File No. 000-22239)10.51
                        **
                        Letter
      Agreement dated October 4, 2007 between the Company and Curtis DeWalt is
      incorporated herein by reference to Exhibit 10.1 of the Current Report on
      Form 8-K filed with the SEC on November 15, 2007 (SEC File No.
      000-22239)10.52
                        **
                        Letter
      Agreement dated October 30, 2007 between the Company and Curtis DeWalt is
      incorporated herein by reference to Exhibit 10.2 of the Current Report on
      Form 8-K filed with the SEC on November 15, 2007 (SEC File No.
      000-22239)10.53
                        **
                        Employment
      Agreement dated December 11, 2008 between Autobytel Inc. and Jeffrey H.
      Coats is incorporated herein by reference to Exhibit 10.1 of the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      December 15, 2008 (SEC File No. 000-22239)10.54
                        **
                        Employment
      Agreement dated February 8, 2002 between Company and Mark A. Garms, as
      amended by Memorandum dated as of December 8, 2008 and Memorandum dated as
      of March 1, 2009 is incorporated herein by reference to Exhibit 10.75 of
      the Annual Report on Form 10-K for the Year Ended December 31, 2008 filed
      with the SEC on March 13, 2009 (SEC File No. 000-22239) (“2008 Form
      10-K”)10.55
                        **
                        Amended
      and Restated Severance Agreement dated as of September 29, 2008 between
      the Company and Mark A. Garms is incorporated herein by reference to
      Exhibit 10.3 of the Current Report on Form 8-K filed with the SEC on
      October 3, 2008 (SEC File No. 000-22239)10.56
                        **
                        Letter
      Agreement dated October 10, 2006 between Company and Glenn E. Fuller, as
      amended by Memorandum dated April 18, 2008, Memorandum dated as of
      December 8, 2008, and Memorandum dated as of March 1, 2009 is incorporated
      herein by reference to Exhibit 10.77 of the 2008 Form
  10-K10.57
                        **
                        Amended
      and Restated Severance Agreement dated as of September 29, 2008 between
      the Company and Glenn E. Fuller is incorporated herein by reference to
      Exhibit 10.4 of the Current Report on Form 8-K filed with the SEC on
      October 3, 2008 (SEC File No. 000-22239)10.58
                        **
                        Letter
      Agreement dated October 4, 2007 between Company and Curtis E. DeWalt, as
      amended by Memorandum dated as of December 8, 2008 and Memorandum dated
      March 1, 2009 is incorporated herein by reference to Exhibit 10.79 of the
      2008 Form 10-K10.59
                        **
                        Amended
      and Restated Severance Agreement dated as of September 29, 2008 between
      the Company and Curtis E. DeWalt is incorporated herein by reference to
      Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on March
      9, 2009 (SEC File No. 000-22239)
   
   Number
                          
                          Description10.60
                          **
                          Letter
      Agreement dated August 6, 2004 between Company and Wesley Ozima, as
      amended by Memorandum dated March 1, 2009 is incorporated herein by
      reference to Exhibit 10.81 of the 2008 Form 10-K10.61
                          **
                          Amended
      and Restated Severance Agreement dated as of November 15, 2008
      between Company and Wesley Ozima is incorporated herein by reference to
      Exhibit 10.82 of the 2008 Form 10-K10.62
                          **
                          Form
      of Restricted Stock Award under the Amended and Restated 2001 Restricted
      Stock and Option Plan and the 2004 Restricted Stock and Option Plan is
      incorporated herein by reference to Exhibit 10.1 of the Current Report on
      Form 8-K filed with the SEC on October 3, 2008 (SEC File No. 000-22239)
      (“October 3, 2008 Form 8-K”)10.63
                          **
                          Form
      of Option Agreement under the 1998 Stock Option Plan, the 1999 Employee
      and Acquisition Related Stock Option Plan and the 1999 Stock Option Plan
      is incorporated herein by reference to Exhibit 10.2 of the October 3, 2008
      Form 8-K10.64
                          **
                          1996
      Employee Stock Purchase Plan is incorporated herein by reference to
      Exhibit 10.7 of Amendment No. 1 to S-1 Registration
    Statement10.65
                          **
                          2003
      Amendment to Auto-By-Tel Corporation 1996 Employee Stock Purchase Plan is
      incorporated herein by reference to Exhibit 4.8 of the Registration
      Statement on Form S-8  with the SEC on July 31, 2003 (SEC
      File No. 333-107525)10.66
                          **
                          2007
      Amendment to Auto-By-Tel Corporation 1996 Employee Stock Purchase Plan is
      incorporated herein by reference to Exhibit 10.2 of Form 10-Q for the
      quarterly period ended June 30, 2007 filed with the SEC on
                            August
      9, 2007 (SEC File No. 000-22239)10.67
                          **
                          Amendment
      No. 2 to the Autobytel.com Inc. 1999 Employee and Acquisition Related
      Stock Option Plan, dated May 1, 2009 is incorporated herein by reference
      to Exhibit 10.86 of the Quarterly Report on Form 10-Q for the Quarter
      Ended June 30, 2009 files with the SEC on July 24, 2009 (SEC File No.
      000-22239) (“Second Quarter 2009 Form 10-Q”)10.68
                          **
                          Amendment
      No. 3 to the Autobytel.com Inc. 2000 Stock Option Plan, dated May 1, 2009
      is incorporated herein by reference to Exhibit 10.87 of the Second Quarter
      2009 Form 10-Q10.69
                          **
                          Amendment
      No. 1 to the Autobytel Inc. Amended and Restated 2001 Restricted Stock and
      Option Plan, dated May 1, 2009 is incorporated herein by reference to
      Exhibit 10.88 of the Second Quarter 2009 Form 10-Q10.70
                          **
                          Amendment
      No. 1 to the Autobytel Inc. 2004 Restricted Stock and Option Plan, dated
      May 1, 2009 is incorporated herein by reference to Exhibit 10.89 of the
      Second Quarter 2009 Form 10-Q10.71
                          **
                          Amendment
      No. 1 To The Autobytel Inc. 2006 Inducement Stock Option Plan, dated May
      1, 2009 is incorporated herein by reference to Exhibit 10.90 of the Second
      Quarter 2009 Form 10-Q10.72
                          **
                          Autobytel
      Inc. Amended and Restated Employment Agreement, dated effective as of
      April 3, 2009 between Autobytel and Jeffrey H. Coats is incorporated
      herein by reference to Exhibit 10.91 of the Second Quarter 2009 Form
      10-Q10.73
                          **
                          Autobytel
      Inc. 2000 Stock Option Plan, Stock Option Award Agreement, dated effective
      as of April 3, 2009 between Autobytel and Jeffrey H. Coats is incorporated
      herein by reference to Exhibit 10.92 of the Second Quarter 2009 Form
      10-Q10.74
                          **
                          Autobytel
      Inc. Amended and Restated 2001 Restricted Stock and Option Plan, Stock
      Option Award Agreement, dated effective as of April 3, 2009 between
      Autobytel and Jeffrey H. Coats is incorporated herein by reference to
      Exhibit 10.93 of the Second Quarter 2009 Form 10-Q10.75
                          **
                          Autobytel
      Inc. 2004 Restricted Stock and Option Plan, Stock Option Award Agreement,
      dated effective as of April 3, 2009 between Autobytel and Jeffrey H. Coats
      is incorporated herein by reference to Exhibit 10.94 of the Second Quarter
      2009 Form 10-Q
   
   Number
                          
                          Description10.76
                          *
      **
                          Employment
      Agreement dated February 1, 2010 between Autobytel Inc. and Stephen
      Lind10.77
                          *
      **
                          Severance
      Benefits Agreement dated February 1, 2010 between Autobytel Inc. and
      Stephen Lind23.1
                          *
                          Consent
      of Independent Registered Public Accounting Firm, Ernst & Young
      LLP24.1
                          *
                          Power
      of Attorney (included in the signature page hereto)31.1
                          *
                          Chief
      Executive Officer Section 302 Certification of Periodic Report, dated
      March 4, 201031.2
                          *
                          Chief
      Financial Officer Section 302 Certification of Periodic Report, dated
      March 4, 201032.1
                          *
                          Chief
      Executive Officer and Chief Financial Officer Section 906 Certification of
      Periodic Report, datedMarch
      4,
2010






*
            Filed
      herewith.


**
            Management
      Contract or Compensatory Plan or
Arrangement


†
            Confidential
      treatment has been requested with regard to certain portions of this
      document. Such portions were filed separately with the Securities and
      Exchange Commission.