##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

Form 10-Q



---



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

For the quarterly period ended September 29, 2007



| ̈ | 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: 333-112252



---

Keystone Automotive Operations,
Inc.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 23-2950980                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)

44 Tunkhannock Avenue

Exeter, Pennsylvania 18643

(800) 233-8321

(Address, zip code, and telephone number, including

area code, of registrants principal executive office.)



---

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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes ̈No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

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

Indicate the number of shares outstanding of each of
the registrants classes of common stock, as of the latest practicable date.

As of November 12, 2007, Keystone Automotive
Holdings, Inc. owns 100% of the registrants common stock.



---



---

##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

QUARTERLY REPORT FOR THE PERIOD

ENDED SEPTEMBER 29, 2007



|                              |  |                                                                                                                                                                                            |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                              |  |                                                                                                                                                                                            |  | Page
|Part I. Financial Information |  |                                                                                                                                                                                           
|                              |  |                                                                                                                                                                                           
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                                                                                           |  |     
|                              |  |                                                                                                                                                                                           
|                              |  | Consolidated Balance Sheets  as of December 30, 2006 and September 29, 2007                                                                                                               |  | 1   
|                              |  | Consolidated Statements of Operations and Comprehensive Income  Three months ended September 30, 2006 and September 29, 2007; Nine months ended September 30, 2006 and September 29, 2007 |  | 2   
|                              |  | Consolidated Statements of Cash Flows  Nine months ended September 30, 2006 and September 29, 2007                                                                                        |  | 3   
|                              |  | Notes to Unaudited Consolidated Financial Statements                                                                                                                                       |  | 4   
|                              |  |                                                                                                                                                                                           
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                      |  | 14  
|                              |  |                                                                                                                                                                                           
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                                 |  | 24  
|                              |  |                                                                                                                                                                                           
|Item 4.                       |  | Controls and Procedures                                                                                                                                                                    |  | 25  
|                              | 
|Part II. Other Information    |  |                                                                                                                                                                                           
|                              |  |                                                                                                                                                                                           
|Item 1.                       |  | Legal Proceedings                                                                                                                                                                          |  | 25  
|                              |  |                                                                                                                                                                                           
|Item 1A.                      |  | Risk Factors                                                                                                                                                                               |  | 25  
|                              |  |                                                                                                                                                                                           
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                |  | 25  
|                              |  |                                                                                                                                                                                           
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                                                                            |  | 25  
|                              |  |                                                                                                                                                                                           
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                                                                        |  | 25  
|                              |  |                                                                                                                                                                                           
|Item 5.                       |  | Other Information                                                                                                                                                                          |  | 25  
|                              |  |                                                                                                                                                                                           
|Item 6.                       |  | Exhibits                                                                                                                                                                                   |  | 26  
|                              |  |                                                                                                                                                                                           
|                              |  | Signatures                                                                                                                                                                                 |  | 27  



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Dollars in Thousands)



|                                                                                                     |  |                   |         |   |                    |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                                                                                     |  | December 30, 2006 |         |   | September 29, 2007 |  
|ASSETS                                                                                               |  |                   |         |   |                    |   |         |  
|Current assets:                                                                                      |  |                   |         |   |                    |   |         |  
|Cash and cash equivalents                                                                            |  | $                 | 2,652   |   |                    | $ | 13,558  |  
|Trade accounts receivable, net of allowance for doubtful accounts of $2,370 and $2,582, respectively |  |                   | 53,805  |   |                    |   | 55,177  |  
|Inventories                                                                                          |  |                   | 123,968 |   |                    |   | 131,153 |  
|Deferred tax assets                                                                                  |  |                   | 7,139   |   |                    |   | 9,900   |  
|Prepaid expenses and other current assets                                                            |  |                   | 6,982   |   |                    |   | 7,045   |  
|                                                                                                     |  |                   |         |   |                    |   |         |  
|Total current assets                                                                                 |  |                   | 194,546 |   |                    |   | 216,833 |  
|Property, plant and equipment, net                                                                   |  |                   | 52,363  |   |                    |   | 49,791  |  
|Deferred financing costs, net                                                                        |  |                   | 14,072  |   |                    |   | 12,055  |  
|Goodwill                                                                                             |  |                   | 228,459 |   |                    |   | 228,459 |  
|Capitalized software, net                                                                            |  |                   | 479     |   |                    |   | 557     |  
|Intangible assets, net                                                                               |  |                   | 195,899 |   |                    |   | 186,784 |  
|Other assets                                                                                         |  |                   | 2,665   |   |                    |   | 2,787   |  
|                                                                                                     |  |                   |         |   |                    |   |         |  
|Total assets                                                                                         |  | $                 | 688,483 |   |                    | $ | 697,266 |  
|                                                                                                     |  |                   |         |   |                    |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                 |  |                   |         |   |                    |   |         |  
|Current liabilities:                                                                                 |  |                   |         |   |                    |   |         |  
|Trade accounts payable                                                                               |  | $                 | 39,954  |   |                    | $ | 53,003  |  
|Accrued interest                                                                                     |  |                   | 4,132   |   |                    |   | 9,055   |  
|Accrued compensation                                                                                 |  |                   | 6,803   |   |                    |   | 6,858   |  
|Accrued expenses                                                                                     |  |                   | 12,204  |   |                    |   | 13,217  |  
|Current maturities of long-term debt                                                                 |  |                   | 1,517   |   |                    |   | 2,019   |  
|                                                                                                     |  |                   |         |   |                    |   |         |  
|Total current liabilities                                                                            |  |                   | 64,610  |   |                    |   | 84,152  |  
|Long-term debt                                                                                       |  |                   | 372,876 |   |                    |   | 371,532 |  
|Other long-term liabilities                                                                          |  |                   | 2,138   |   |                    |   | 4,558   |  
|Deferred tax liabilities                                                                             |  |                   | 61,164  |   |                    |   | 58,102  |  
|                                                                                                     |  |                   |         |   |                    |   |         |  
|Total liabilities                                                                                    |  |                   | 500,788 |   |                    |   | 518,344 |  
|                                                                                                     |  |                   |         |   |                    |   |         |  
|Shareholders equity                                                                                 |  |                   |         |   |                    |   |         |  
|Common stock, par value of $0.01 per share: Authorized/Issued 1,000 in 2003                          |  |                   |        |   |                    |   |        |  
|Contributed capital                                                                                  |  |                   | 187,620 |   |                    |   | 189,040 |  
|Accumulated deficit                                                                                  |  |                   | (387    | ) |                    |   | (10,998 | )
|Accumulated other comprehensive income                                                               |  |                   | 462     |   |                    |   | 880     |  
|                                                                                                     |  |                   |         |   |                    |   |         |  
|Total shareholders equity                                                                           |  |                   | 187,695 |   |                    |   | 178,922 |  
|                                                                                                     |  |                   |         |   |                    |   |         |  
|Total liabilities and shareholders equity                                                           |  | $                 | 688,483 |   |                    | $ | 697,266 |  
|                                                                                                     |  |                   |         |   |                    |   |         |  

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



1



---

##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

(Dollars
in Thousands)



|                                             |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  
|-------------------------------------------- |  | ------------------- | -------- | - | ------------------ | - | -------- | ------------------ |  | - | ------------------ | - |  | - | -------- | -
|                                             |  | Three Months Ending |          |   | Nine Months Ending |  
|                                             |  | September 30, 2006  |          |   | September 29, 2007 |   |          | September 30, 2006 |  |   | September 29, 2007 |  
|Net sales                                    |  | $                   | 152,535  |   |                    | $ | 154,304  |                    |  | $ | 480,010            |   |  | $ | 473,187  |  
|Cost of sales                                |  |                     | (102,933 | ) |                    |   | (107,837 | )                  |  |   | (325,696           | ) |  |   | (329,190 | )
|                                             |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  
|Gross profit                                 |  |                     | 49,602   |   |                    |   | 46,467   |                    |  |   | 154,314            |   |  |   | 143,997  |  
|Selling, general and administrative expenses |  |                     | (38,687  | ) |                    |   | (40,961  | )                  |  |   | (121,360           | ) |  |   | (125,793 | )
|                                             |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  
|Income from operations                       |  |                     | 10,915   |   |                    |   | 5,506    |                    |  |   | 32,954             |   |  |   | 18,204   |  
|Other income (expense):                      |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  
|Interest income                              |  |                     | 30       |   |                    |   | 98       |                    |  |   | 163                |   |  |   | 198      |  
|Interest expense                             |  |                     | (8,880   | ) |                    |   | (9,660   | )                  |  |   | (25,894            | ) |  |   | (28,895  | )
|Write-off of deferred financing costs        |  |                     |         |   |                    |   |         |                    |  |   |                   |   |  |   | (6,130   | )
|Other income (expense), net                  |  |                     | 39       |   |                    |   | (12      | )                  |  |   | 138                |   |  |   | (74      | )
|                                             |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  
|Income (loss) before income tax              |  |                     | 2,104    |   |                    |   | (4,068   | )                  |  |   | 7,361              |   |  |   | (16,697  | )
|Income tax (expense) benefit                 |  |                     | (1,117   | ) |                    |   | 1,112    |                    |  |   | (3,193             | ) |  |   | 6,006    |  
|                                             |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  
|Net income (loss)                            |  |                     | 987      |   |                    |   | (2,956   | )                  |  |   | 4,168              |   |  |   | (10,691  | )
|Other comprehensive income (loss):           |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  
|Foreign currency translation                 |  |                     | 4        |   |                    |   | 119      |                    |  |   | 110                |   |  |   | 418      |  
|                                             |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  
|Comprehensive income (loss)                  |  | $                   | 991      |   |                    | $ | (2,837   | )                  |  | $ | 4,278              |   |  | $ | (10,273  | )
|                                             |  |                     |          |   |                    |   |          |                    |  |   |                    |   |  |   |          |  

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



2



---

##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Dollars in Thousands)



|                                                                                  |  |                    |         |   |                    |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | -------- | -
|                                                                                  |  | Nine Months Ending |        
|                                                                                  |  | September 30, 2006 |         |   | September 29, 2007 |  
|Cash flows from operating activities:                                             |  |                    |         |   |                    |   |          |  
|Net income (loss)                                                                 |  | $                  | 4,168   |   |                    | $ | (10,691  | )
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                    |         |   |                    |   |          |  
|Depreciation and amortization                                                     |  |                    | 15,338  |   |                    |   | 15,346   |  
|Amortization of deferred financing charges                                        |  |                    | 2,291   |   |                    |   | 2,218    |  
|Write-off of deferred finance charges                                             |  |                    |        |   |                    |   | 6,130    |  
|Net (gain)/loss on sale of property, plant and equipment                          |  |                    | (143    | ) |                    |   | 76       |  
|Change in deferred income taxes                                                   |  |                    | (1,774  | ) |                    |   | (5,823   | )
|Non-cash stock-based compensation                                                 |  |                    | 1,210   |   |                    |   | 1,411    |  
|Other non-cash charges                                                            |  |                    | 583     |   |                    |   | 3,056    |  
|Net change in operating assets and liabilities, net of acquisitions:              |  |                    |         |   |                    |   |          |  
|(Increase) in trade accounts receivable                                           |  |                    | (5,440  | ) |                    |   | (1,583   | )
|(Increase) in inventory                                                           |  |                    | (25,672 | ) |                    |   | (9,919   | )
|Increase in accounts payable and accrued liabilities                              |  |                    | 7,729   |   |                    |   | 21,416   |  
|Change in other assets/liabilities, net                                           |  |                    | 1,177   |   |                    |   | 213      |  
|                                                                                  |  |                    |         |   |                    |   |          |  
|Net cash (used in)/provided by operating activities                               |  |                    | (533    | ) |                    |   | 21,850   |  
|Cash flows from investing activities:                                             |  |                    |         |   |                    |   |          |  
|Acquisition of businesses                                                         |  |                    | (30     | ) |                    |   |         |  
|Purchase of property, plant and equipment                                         |  |                    | (7,453  | ) |                    |   | (3,367   | )
|Capitalized software costs                                                        |  |                    | (201    | ) |                    |   | (631     | )
|Proceeds from sale of property, plant and equipment                               |  |                    | 805     |   |                    |   | 74       |  
|                                                                                  |  |                    |         |   |                    |   |          |  
|Net cash used in investing activities                                             |  |                    | (6,879  | ) |                    |   | (3,924   | )
|Cash flows from financing activities:                                             |  |                    |         |   |                    |   |          |  
|Borrowing under revolving line-of-credit                                          |  |                    | 11,600  |   |                    |   |         |  
|Repayments under revolving line-of-credit                                         |  |                    | (4,100  | ) |                    |   | (24,300  | )
|Borrowing under long-term debt                                                    |  |                    |        |   |                    |   | 200,000  |  
|Principal repayments on long-term debt                                            |  |                    | (7,796  | ) |                    |   | (176,498 | )
|Repayment of capital leases                                                       |  |                    | (514    | ) |                    |   |         |  
|Proceeds from stock options exercised                                             |  |                    | 61      |   |                    |   | 9        |  
|Payments for deferred financing costs                                             |  |                    |        |   |                    |   | (6,331   | )
|                                                                                  |  |                    |         |   |                    |   |          |  
|Net cash used in financing activities                                             |  |                    | (749    | ) |                    |   | (7,120   | )
|                                                                                  |  |                    |         |   |                    |   |          |  
|Net effects of exchange rates on cash                                             |  |                    | 82      |   |                    |   | 100      |  
|                                                                                  |  |                    |         |   |                    |   |          |  
|(Decrease)/increase in cash and cash equivalents                                  |  |                    | (8,079  | ) |                    |   | 10,906   |  
|Cash and cash equivalents, beginning of period                                    |  |                    | 8,172   |   |                    |   | 2,652    |  
|                                                                                  |  |                    |         |   |                    |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                  | 93      |   |                    | $ | 13,558   |  
|                                                                                  |  |                    |         |   |                    |   |          |  

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



3



---

##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited consolidated financial information herein has been prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) and is in accordance with the Securities and Exchange Commission (SEC) regulations for interim financial reporting. In the opinion of management, the financial statements include all adjustments,
consisting only of normal recurring adjustments, which are considered necessary for a fair statement of the Companys financial position, results of operations, and cash flows for the interim periods. This financial information should be read
in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 30, 2006.



|1. | Background and Basis of Presentation
|-- | ------------------------------------

Keystone
Automotive Operations, Inc. and its wholly-owned subsidiaries (collectively the Company) are wholesale distributors and retailers of aftermarket automotive parts and accessories, operating in all regions of the United States and parts of
Canada. The Company sells and distributes specialty automotive products, such as light truck/SUV accessories, car accessories and trim items, specialty wheels, tires and suspension parts, and high performance products to a fragmented base of
approximately 23,500 customers. The Companys wholesale operations include electronic service features that provide customers the ability to view inventory and place orders via its proprietary electronic catalog. The Company also operates 24
retail stores in Pennsylvania. The Companys corporate headquarters is in Exeter, Pennsylvania.



|2. | Recent Accounting Pronouncements
|-- | --------------------------------

In 2006, the FASB
issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes and Related Implementation Issues. FIN 48 is applicable to all uncertain positions for taxes accounted for under FASB Statement 109
(SFAS 109) Accounting for Income Taxes. It requires that a tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the position is sustainable, based on its technical
merit.

In September of 2006, the FASB issued SFAS No. 157 (SFAS 157) Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not
require any new fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the
impact that SFAS 157 may have on its financial statements.

In February of 2007, the FASB issued SFAS No. 159 (SFAS 159)
The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007. The Company is currently evaluating the requirements of this standard.

On December 15, 2006, the SEC adopted
new measures to grant relief to non-accelerated filers, including the Company, by extending the date of required compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (the Act). Under these new measures, the Company will be
required to comply with the Act in two phases. The first phase will be effective for the Companys fiscal year ending December 29, 2007 and will require the Company to



4



---

##### Table of Contents

furnish a management report on internal control over financial reporting. The second phase will require the Company to provide an auditors attestation
report on internal control over financial reporting beginning with the Companys fiscal year ending January 3, 2009.



|3. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

Principles of Consolidation and Fiscal Year

The consolidated financial statements include the accounts of Keystone
Automotive Operations, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company operates on a 52/53-week per year basis with the year ending on the Saturday nearest December 31. There are 13 weeks included in the three month periods ended September 29, 2007 and September 30, 2006, and 39
weeks in the nine month periods ended September 29, 2007 and September 30, 2006.

For comparative purposes, certain prior period
amounts have been reclassified to conform to the current year presentation. The impact of the reclassifications was not material and did not impact net income (loss).

Inventory

During the three months ended September 29, 2007, the Company recorded provisions for
obsolete, excess and slow moving inventory of $2.6 million, resulting in a total reserve of $3.0 million at September 29, 2007. The Company determined that an increase in the reserve was necessary as a result of (i) certain stock keeping
units (SKUs) related to the Companys acquisition of Reliable Investments, Inc. (Reliable) and Blacksmith Distributing, Inc. (Blacksmith) that have proven more difficult to sell than previously estimated;
(ii) certain vendors discontinuing specific SKUs; and (iii) the Company discontinuing its business relationship with specific vendors. All of these negatively affect the Companys future sales and margin forecasts for the related
inventory. The discontinuances described in items (ii) and (iii) above also negatively affect the Companys ability to return the inventory to those vendors for a full refund.

Stock-Based Compensation

On
March 1, 2007, pursuant to a stock option grant agreement between the Company and Bryant P. Bynum, the Companys former Chief Financial Officer, options to purchase 86,502 shares of Class L common stock and 778,518 shares of Class A
common stock were issued. These new options are fully vested. This represented 65% of the options that were previously granted to Mr. Bynum, all of which were cancelled. In addition, other options to purchase 27,500 shares of Class L common
stock and 247,500 shares of Class A common stock were issued on March 1, 2007. These options have a 5 year vesting period. The Company recorded $0.8 million of expense associated with the grant of the new options in the first quarter. In
the first quarter of 2006, the Company recorded $0.9 million of expense for share-based payments.

In the second quarter of 2007, no new
options were granted. The Company recorded $0.3 million of option expense for the quarter ended June 30, 2007 and an immaterial amount in the second quarter of 2006. In the third quarter of 2007, no new options were granted. The Company
recorded $0.3 million of option expense for the quarter ended September 29, 2007 and $0.3 million in the third quarter of 2006.

Our
weighted average Black-Scholes fair value assumptions are set forth in the table below.



5



---

##### Table of Contents

|                        |  |                    |   |  |                    |  
|----------------------- |  | ------------------ | - |  | ------------------ | -
|                        |  | Nine Months Ended  |  
|                        |  | September 30, 2006 |   |  | September 29, 2007 |  
|Dividend yield          |  | 0                  | % |  | 0                  | %
|Volatility              |  | 25.70              | % |  | 25.70              | %
|Risk free interest rate |  | 5.07               | % |  | 4.56               | %
|Expected life           |  | 2.70               |   |  | 4.50               |  



6



---

##### Table of Contents

Stock option awards as of September 29, 2007, and changes during the period were as follows:



|                                |  |                  |   |  |                                 |       |                                              |           
|------------------------------- |  | ---------------- | - |  | ------------------------------- | ----- | -------------------------------------------- | ----------
|                                |  | Class L Options 
|                                |  | Number of Shares |   |  | Weighted Average Exercise Price |       | Weighted Average Remaining Contractual
Life*
|Outstanding, December 30, 2006  |  | 1,602,932        |   |  |                                 |       |                                              |           
|Granted                         |  | 114,002          |   |  |                                 |       |                                              |           
|Exercised                       |  |                 |   |  |                                 |       |                                              |           
|Forfeited                       |  | (133,080         | ) |  |                                 |       |                                              |           
|Outstanding, March 31, 2007     |  | 1,583,854        |   |  | $                               | 27.89 |                                              | 2.1 years 
|Exercisable, March 31, 2007     |  | 778,938          |   |  | $                               | 30.70 |                                              | 2.0 years 
|                                |  |                  |  
|Outstanding, March 31, 2007     |  | 1,583,854        |   |  |                                 |       |                                              |           
|Granted                         |  |                 |   |  |                                 |       |                                              |           
|Exercised                       |  | (526             | ) |  |                                 |       |                                              |           
|Forfeited                       |  | (185,233         | ) |  |                                 |       |                                              |           
|Outstanding, June 30, 2007      |  | 1,398,095        |   |  | $                               | 27.34 |                                              | 1.9 years 
|Exercisable, June 30, 2007      |  | 678,983          |   |  | $                               | 30.32 |                                              | 1.75 years
|                                |  |                  |  
|Outstanding, June 30, 2007      |  | 1,398,095        |   |  |                                 |       |                                              |           
|Granted                         |  |                 |   |  |                                 |       |                                              |           
|Exercised                       |  |                 |   |  |                                 |       |                                              |           
|Forfeited                       |  | (54,416          | ) |  |                                 |       |                                              |           
|Outstanding, September 29, 2007 |  | 1,343,679        |   |  | $                               | 27.48 |                                              | 1.6 years 
|Exercisable, September 29, 2007 |  | 686,116          |   |  | $                               | 30.23 |                                              | 1.6 years 
|                                | 
|                                |  | Class A Options 
|                                |  | Number of Shares |   |  | Weighted Average Exercise
Price |       | Weighted Average Remaining Contractual
Life*
|Outstanding, December 30, 2006  |  | 14,426,379       |   |  |                                 |       |                                              |           
|Granted                         |  | 1,026,018        |   |  |                                 |       |                                              |           
|Exercised                       |  |                 |   |  |                                 |       |                                              |           
|Forfeited                       |  | (1,197,720       | ) |  |                                 |       |                                              |           
|Outstanding, March 31, 2007     |  | 14,254,677       |   |  | $                               | 0.51  |                                              | 2.1 years 
|Exercisable, March 31, 2007     |  | 7,010,439        |   |  | $                               | 0.43  |                                              | 2.0 years 
|                                |  |                  |  
|Outstanding, March 31, 2007     |  | 14,254,677       |   |  |                                 |       |                                              |           
|Granted                         |  |                 |   |  |                                 |       |                                              |           
|Exercised                       |  | (4,736           | ) |  |                                 |       |                                              |           
|Forfeited                       |  | (1,667,095       | ) |  |                                 |       |                                              |           
|Outstanding, June 30, 2007      |  | 12,582,846       |   |  | $                               | 0.52  |                                              | 1.9 years 
|Exercisable, June 30, 2007      |  | 6,110,841        |   |  | $                               | 0.44  |                                              | 1.75 years
|                                |  |                  |  
|Outstanding, June 30, 2007      |  | 12,582,846       |   |  |                                 |       |                                              |           
|Granted                         |  |                 |   |  |                                 |       |                                              |           
|Exercised                       |  |                 |   |  |                                 |       |                                              |           
|Forfeited                       |  | (489,744         | ) |  |                                 |       |                                              |           
|Outstanding, September 29, 2007 |  | 12,093,102       |   |  | $                               | 0.52  |                                              | 1.6 years 
|Exercisable, September 29, 2007 |  | 6,175,035        |   |  | $                               | 0.44  |                                              | 1.6 years 

---

|* | Weighted Average Remaining Contractual Life based on options that are accounted for under FAS 123 (R).
|- | ------------------------------------------------------------------------------------------------------



|                               |  |                                                          |      
|------------------------------ |  | -------------------------------------------------------- | -----
|                               |  | Aggregate Intrinsic Value of Class A and Class L Options
|                               |  | (000s)                                                 
|Outstanding September 29, 2007 |  | $                                                        | 1,877
|Exercisable September 29, 2007 |  | $                                                        | 1,329



7



---

##### Table of Contents

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the
difference between the calculated stock value as of December 30, 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options
on September 29, 2007.

Taxes

The Company adopted the provisions of FIN 48 at the beginning of its 2007 fiscal year. As a result of the adoption of FIN 48, the Company recognized a decrease in the liability related to unrecognized tax benefits and
an increase in shareholders equity of $0.1 million. As of the beginning of the 2007 fiscal year, the amount of the liability for unrecognized tax benefits after adoption was approximately $2.4 million, of which $1.5 million would impact the
effective tax rate if recognized.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax
expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). As of the beginning of the 2007 fiscal year, the Company had approximately $0.3 million accrued for the payment of interest (net of federal and state tax benefit)
and penalties. During the three and nine months ended September 29, 2007, subsequent to the adoption of FIN 48, the Company recorded an increase of $0.1 million and $0.3 million, respectively, related to the potential payment of unrecognized
tax benefits, penalties and interest related to positions taken during the current year. This expense associated with the increase in the reserve was partially offset during the nine months ended September 29, 2007, by a reduction of $0.2
million resulting from the lapse of statute of limitations for prior periods.

A number of years may elapse before an uncertain tax
position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized
tax benefits reflect the most likely outcome. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash.
Favorable resolution would be recognized as a reduction to our annual tax rate in the period of resolution.

Based upon the expiration of
the state statute of limitations, we do not expect that the total amounts of unrecognized tax benefits will change significantly within the next twelve months. The Company files income tax returns in the United States (U.S.) for federal
and various state jurisdictions and in Canada for federal and provincial jurisdictions. All U.S. federal income tax returns are closed through the short period ended October 30, 2003. The Company has been recently notified of the commencement
of an examination of the open years by the Internal Revenue Service. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The Company and its subsidiaries have a
limited number of state income tax returns in the process of examination. Canadian federal and provincial income tax returns are closed through the year ended December 31, 1998. The Company has not been notified of the commencement of any
examination of the open years by the Canada Revenue Agency.



|4. | Segment Information
|-- | -------------------

Based on the nature of the
Companys reportable operations, facilities and management structure, the Company considers its business to constitute two segments for financial reporting purposes, Distribution and Retail, as described below:

Distribution

The Distribution
segment encompasses seven regions that are economically similar, share a common class of customers and distribute the same products. One of the defining characteristics of this business segment is our hub-and-spoke distribution network. This segment
distributes specialty automotive equipment for vehicles to specialty retailers/installers, and our distribution network is structured to meet the rapid delivery needs of our customers. This network is comprised of: (i) four inventory stocking
warehouse distribution centers, which are located in Exeter,



8



---

##### Table of Contents

Pennsylvania; Kansas City, Kansas; Austell, Georgia; and Corona, California; (ii) 20 non-inventory stocking cross-docks located throughout the East
Coast, Southeast, Midwest, West Coast and parts of Canada; and (iii) our fleet of approximately 360 trucks (compared to over 380 trucks at December 30, 2006) that provide multi-day per week delivery and returns along over 270 routes which
cover 42 states and parts of Canada. Our four warehouse distribution centers hold the vast majority of the Distribution segments inventory and distribute merchandise to cross-docks in their respective regions for next-day or second-day
delivery to customers. The Distribution segment supplies the Retail Operations segment; these intercompany sales are included in the amounts reported as net sales for the Distribution segment in the table below, and are eliminated to arrive at net
sales to third parties.

Retail

The Retail segment of our business operates 24 retail stores in Pennsylvania under the A&A Auto Parts name. A&A stores sell replacement parts and specialty accessories to end-consumers and small jobbers. A&A stores are visible
from high traffic areas and provide customers ease of access and drive-up parking. While a small part of our business, we believe that our retail operations allow us to stay close to end-consumer and product merchandising trends. A&A stores
purchase their inventory from the Distribution segment.



9



---

##### Table of Contents

Financial information for the two reportable segments is as follows:



|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|---------------------------- |  | ------------------- | ------- | - | ------------------ | - | ------- | ------------- |  | - | ------------- | - |  | - | ------- | -
|                             |  | Three Months Ending |         |   | Nine Months Ending |  
|                             |  | September 30,       |         |   | September 29,      |   |         | September 30, |  |   | September 29, |  
|                             |  | 2006                |         |   | 2007               |   |         | 2006          |  |   | 2007          |  
|                             |  | (000s)             |         |   | (000s)            |   |         | (000s)       |  |   | (000s)       |  
|Net Sales                    |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Distribution                 |  | $                   | 150,365 |   |                    | $ | 152,451 |               |  | $ | 474,920       |   |  | $ | 468,645 |  
|Retail                       |  |                     | 6,167   |   |                    |   | 6,486   |               |  |   | 19,117        |   |  |   | 18,714  |  
|Elimination                  |  |                     | (3,997  | ) |                    |   | (4,633  | )             |  |   | (14,027       | ) |  |   | (14,172 | )
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Total                        |  | $                   | 152,535 |   |                    | $ | 154,304 |               |  | $ | 480,010       |   |  | $ | 473,187 |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Interest income              |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Distribution                 |  | $                   | 30      |   |                    | $ | 98      |               |  | $ | 163           |   |  | $ | 198     |  
|Retail                       |  |                     |        |   |                    |   |        |               |  |   |              |   |  |   |        |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Total                        |  | $                   | 30      |   |                    | $ | 98      |               |  | $ | 163           |   |  | $ | 198     |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Interest expense             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Distribution                 |  | $                   | 8,880   |   |                    | $ | 9,660   |               |  | $ | 25,894        |   |  | $ | 28,895  |  
|Retail                       |  |                     |        |   |                    |   |        |               |  |   |              |   |  |   |        |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Total                        |  | $                   | 8,880   |   |                    | $ | 9,660   |               |  | $ | 25,894        |   |  | $ | 28,895  |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Depreciation & amortization  |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Distribution                 |  | $                   | 5,053   |   |                    | $ | 5,084   |               |  | $ | 15,137        |   |  | $ | 15,193  |  
|Retail                       |  |                     | 65      |   |                    |   | 51      |               |  |   | 201           |   |  |   | 153     |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Total                        |  | $                   | 5,118   |   |                    | $ | 5,135   |               |  | $ | 15,338        |   |  | $ | 15,346  |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Income tax (expense) benefit |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Distribution                 |  | $                   | (1,050  | ) |                    | $ | 997     |               |  | $ | (3,612        | ) |  | $ | 5,564   |  
|Retail                       |  |                     | (67     | ) |                    |   | 115     |               |  |   | 419           |   |  |   | 442     |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Total                        |  | $                   | (1,117  | ) |                    | $ | 1,112   |               |  | $ | (3,193        | ) |  | $ | 6,006   |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Net income (loss)            |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Distribution                 |  | $                   | 806     |   |                    | $ | (2,660  | )             |  | $ | 4,714         |   |  | $ | (9,904  | )
|Retail                       |  |                     | 181     |   |                    |   | (296    | )             |  |   | (546          | ) |  |   | (787    | )
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Total                        |  | $                   | 987     |   |                    | $ | (2,956  | )             |  | $ | 4,168         |   |  | $ | (10,691 | )
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|                             |  |                    
|                             |  | Three Months Ending |         |   | Nine Months Ending |  
|                             |  | September 30,       |         |   | September 29,      |   |         | September 30, |  |   | September 29, |  
|                             |  | 2006                |         |   | 2007               |   |         | 2006          |  |   | 2007          |  
|                             |  | (000s)             |         |   | (000s)            |   |         | (000s)       |  |   | (000s)       |  
|Capital Expenditures         |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Distribution                 |  | $                   | 497     |   |                    | $ | 539     |               |  | $ | 7,453         |   |  | $ | 3,323   |  
|Retail                       |  |                     |        |   |                    |   |        |               |  |   |              |   |  |   | 44      |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  
|Total                        |  | $                   | 497     |   |                    | $ | 539     |               |  | $ | 7,453         |   |  | $ | 3,367   |  
|                             |  |                     |         |   |                    |   |         |               |  |   |               |   |  |   |         |  

Net sales in the United States as a percent of total sales decreased in the three
and nine month periods ended September 29, 2007 to approximately 87.9% and 88.3% from 90.3% and 90.1% for the three and nine month periods ended September 30, 2006, respectively. At September 29, 2007 and December 30, 2006,
approximately 99.8% of long-lived assets are in the United States.

No customer accounted for more than 2.0% of sales for
the three and nine month periods ended September 29, 2007 and September 30, 2006.



10



---

##### Table of Contents

|5. | Goodwill and Other Intangibles - Net
|-- | ------------------------------------

Goodwill at
September 29, 2007 for the Distribution and Retail segments is $214.9 million and $13.6 million, respectively.

Other intangible assets
are comprised of:



|                                  |  |              |         |      |    |                          |   |         |                               |  |   |        
|--------------------------------- |  | ------------ | ------- | ---- | -- | ------------------------ | - | ------- | ----------------------------- |  | - | -------
|                                  |  | Gross Amount |         | Life |    | Accumulated Amortization |   |         | Balance at December 30, 2006 
|                                  |  | (000s)      |         |      |    | (000s)                  |   |         | (000s)                      
|Retail trade nameA&A             |  | $            | 3,000   |      | 30 |                          | $ | (317    | )                             |  | $ | 2,683  
|eServices trade nameDriverFX.com |  |              | 1,000   |      | 15 |                          |   | (211    | )                             |  |   | 789    
|Wholesale trade nameKeystone     |  |              | 50,000  |      | 30 |                          |   | (5,278  | )                             |  |   | 44,722 
|Vendor agreements                 |  |              | 60,249  |      | 17 |                          |   | (11,200 | )                             |  |   | 49,049 
|Customer relationshipsReliable   |  |              | 17,000  |      | 20 |                          |   | (850    | )                             |  |   | 16,150 
|Customer relationshipsKeystone   |  |              | 100,752 |      | 17 |                          |   | (18,246 | )                             |  |   | 82,506 
|                                  |  |              |         |      |    |                          |   |         |                               |  |   |        
|Total intangibles, net            |  | $            | 232,001 |      |    |                          | $ | (36,102 | )                             |  | $ | 195,899
|                                  |  |              |         |      |    |                          |   |         |                               |  |   |        
|                                  |  |              |         |     
|                                  |  | Gross Amount |         | Life |    | Accumulated Amortization |   |         | Balance at September 29, 2007
|                                  |  | (000s)      |         |      |    | (000s)                  |   |         | (000s)                      
|Retail trade nameA&A             |  | $            | 3,000   |      | 30 |                          | $ | (392    | )                             |  | $ | 2,608  
|eServices trade nameDriverFX.com |  |              | 1,000   |      | 15 |                          |   | (261    | )                             |  |   | 739    
|Wholesale trade nameKeystone     |  |              | 50,000  |      | 30 |                          |   | (6,528  | )                             |  |   | 43,472 
|Vendor agreements                 |  |              | 60,249  |      | 17 |                          |   | (13,858 | )                             |  |   | 46,391 
|Customer relationshipsReliable   |  |              | 17,000  |      | 20 |                          |   | (1,487  | )                             |  |   | 15,513 
|Customer relationshipsKeystone   |  |              | 100,752 |      | 17 |                          |   | (22,691 | )                             |  |   | 78,061 
|                                  |  |              |         |      |    |                          |   |         |                               |  |   |        
|Total intangibles, net            |  | $            | 232,001 |      |    |                          | $ | (45,217 | )                             |  | $ | 186,784
|                                  |  |              |         |      |    |                          |   |         |                               |  |   |        

Amortization expense related to intangible assets for the nine months ended September 29, 2007
and September 30, 2006 was $9.1 million for each period.

We completed our annual impairment testing of goodwill and indefinite-lived
intangible assets for our reporting units as of December 30, 2006 and determined that there was no impairment as of that date.



11



---

##### Table of Contents

|6. | Related Party Transactions
|-- | --------------------------

On October 30,
2003, all of the outstanding stock of Keystone was acquired by Keystone Automotive Holdings, Inc. (Holdings), a newly formed company owned by (i) Bain Capital Partners, LLC (Bain Capital), (ii) its affiliates,
(iii) co-investors and (iv) our management (the Transaction), our sole shareholder. In connection with the Transaction, the Company entered into advisory agreements with Bain Capital and Advent International Corporation
(Advent). The Bain Capital agreement is for general executive and management services, merger, acquisition and divestiture assistance, analysis of financing alternatives and finance, marketing, human resource and other consulting
services. In exchange for these advisory services, Bain Capital will receive a contingent annual advisory services fee of $1.5 million through 2006 and $3.0 million for 2007 through 2013, plus reasonable out-of-pocket fees and expenses, which is
contingent on the Company achieving consolidated Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA), as defined in the Companys credit agreement, of $52.7 million for a given year, including
the impact of the Bain Capital advisory services fee. Adjusted EBITDA is defined as EBITDA adjusted for certain items including sale leaseback transactions, legal fees and litigation settlements, operating cost reductions, franchise taxes, losses
and other unusual or non-recurring charges. Pro-rata reductions, if any, on the annual advisory fees for years 2003 through 2007, based on the Adjusted EBITDA criteria, may be recaptured in periods subsequent to fiscal 2007, if Adjusted EBITDA is
$158 million or more on a cumulative basis over any twelve consecutive fiscal quarters. Additionally, Bain Capital is entitled to transaction fees of 1.0% of the total value of the transaction, plus reasonable out-of-pocket fees and expenses,
related to the completion of any financing or material acquisition or divestiture by Holdings. Bain Capital received a $4.7 million one-time fee for obtaining equity and debt financing for the Transaction, plus reasonable out-of-pocket fees and
expenses related to the Transaction, which was included as part of the purchase price. The Bain Capital annual advisory services agreement has an initial term ending on December 31, 2013, subject to automatic one-year extensions unless the
Company or Bain Capital provides written notice of termination; provided, however, that if the advisory agreement is terminated due to a change in control or an initial public offering of the Company or Holdings prior to the end of its term, then
Bain Capital will be entitled to receive the present value of the advisory services fee that would otherwise have been payable through the end of the term. Bain Capital will receive customary indemnities under the advisory agreement. Selling,
general and administrative expense for the nine month period ended September 29, 2007 included $0.4 million of management fee expense to Bain Capital. Included in the results of operations for the three month period ended September 29,
2007 was a credit of $0.4 million to management fee expense to Bain Capital. Included in accounts payable at September 29, 2007 and September 30, 2006 was $0.4 million and $1.2 million, respectively, payable to Bain Capital.

The Advent advisory agreement covers general executive and management services, assistance with acquisition and divestitures, assistance with financial
alternatives and other services. The Advent annual advisory services fee is $0.1 million, subject to pro-rata reduction should the Bain Capital annual advisory services fee be reduced pursuant to the Adjusted EBITDA criteria outlined above. Selling,
general and administrative expense for the three month period ended September 29, 2007 included less than $0.1 million of management fee credits to Advent. Selling, general and administrative expense for the three month period ended
September 30, 2006 included less than $0.1 million of management fee expense to Advent. Selling, general and administrative expense for the nine month periods ended September 29, 2007 and September 30, 2006 included less than $0.1
million of management fee expense, respectively, to Advent. Included in accounts payable at September 29, 2007 and September 30, 2006 was less than $0.1 million.



12



---

##### Table of Contents

|7. | Commitments and Contingencies
|-- | -----------------------------

The Company is
subject to various legal proceedings and claims which have arisen in the ordinary course of its business. Management does not expect the outcome of such matters to have a material effect, if any, on the Companys consolidated financial
position, results of operations or cash flows.



|8. | Debt
|-- | ----

On January 12, 2007, the Company entered
into (i) a Term Credit Agreement (the Term Loan) by and between the Company, as borrower; Holdings; the Lenders party thereto, Bank of America, N.A. as Administrative Agent, Syndication Agent and Documentation Agent, and the other
parties named therein, and (ii) a Revolving Credit Agreement (the Revolver and, together with the Term Loan, the Credit Agreement) by and between the Company, as borrower, Holdings, the Lenders party thereto, Bank of
America, N.A. as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender, and the other parties named therein. The Credit Agreement effected a refinancing and replacement of the Companys prior senior secured credit agreement
dated October 30, 2003, in order to provide the Company with greater flexibility and liquidity to meet its growth and operational goals. Bain was entitled to receive a 1% transaction fee in exchange for its assistance with the refinancing of
the debt but subsequently waived its rights to receive such fee.

In the first quarter of 2007, the Company wrote-off approximately $6.1
million of deferred financing costs associated with the extinguishment of the prior senior secured credit agreement.

The Term Loan is a
secured $200.0 million facility (with an option to increase by an additional $25.0 million) guaranteed by Holdings and each domestic subsidiary of the Company, and matures on the fifth anniversary of the date of execution. The applicable margin on
the Term Loan is 350 basis points over LIBOR or 250 basis points over the base rate. The Term Loan is secured by a first priority security interest in all machinery and equipment, real estate, intangibles and stock of the subsidiaries of the Company
and Guarantors and a second priority security interest in the Companys receivables and inventory.

The Revolver is an asset-based
facility with a commitment amount of $125.0 million. The Revolver will mature on January 12, 2012. The applicable margin on the Revolver is a grid ranging from 125 to 175 basis points over LIBOR or 25 to 75 basis points over the base rate,
based on undrawn availability. The Companys obligations under the Revolver are secured by a first priority security interest in all of the Companys receivables and inventory and a second priority security interest in the stock of its
subsidiaries and all other assets of the Company and Guarantors.

FORWARD-LOOKING STATEMENTS

Statements in this document that are not historical facts are hereby identified as forward-looking statements for the purposes of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) and Section 27A of the Securities Act of 1933 (the Securities Act). Keystone Automotive Operations, Inc. (we,
us or the Company) cautions readers that such forward-looking statements, including, without limitation, those relating to the Companys future business prospects, results from acquisitions, revenue, working
capital, liquidity, capital needs, leverage levels, interest costs and income, wherever they occur in this document or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Companys senior
management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. You can identify these statements by forward-looking words such as
expect, anticipate, plan, believe, seek, estimate, outlook, trends, future benefits, strategies, goals and similar
words. Such forward-looking statements should, therefore, be considered in light of the factors set forth in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.



13



---

##### Table of Contents

The forward-looking statements contained in this report are made under the caption
Managements Discussion and Analysis of Financial Condition and Results of Operations. Moreover, the Company, through its senior management, may from time to time make forward-looking statements about matters described
herein or other matters concerning the Company.

The Company disclaims any intent or obligation to update forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following Managements Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with the
condensed consolidated financial statements and notes thereto included as part of this Quarterly Report on Form 10-Q. This report contains forward-looking statements that are based upon current expectations. We sometimes identify forward-looking
statements with such words as may, will, expect, anticipate, estimate, seek, intend, believe or similar words concerning future events. The
forward-looking statements contained herein, include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, research and development expenses, general and
administrative expenses, capital resources, additional financings or borrowings and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed below and elsewhere in this Quarterly Report on Form 10-Q
that could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge you to carefully review the section of this report entitled Forward-Looking Statements as well as the
risk factors set forth in the Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

Terms used herein such
as the Company, Keystone, we, us and our are references to Keystone Automotive Operations, Inc. and its affiliates, as the context requires.

Overview

General Business Overview

We are a wholesale distributor and retailer of aftermarket automotive parts and accessories, operating throughout the United States and in parts of
Canada. The Company sells and distributes specialty automotive products, such as light truck/SUV accessories, car accessories and trim items, specialty wheels, tires and suspension parts, and high performance products to a fragmented base of
approximately 23,500 customers. Our wholesale operations include electronic service features that provide customers the ability to view inventory and place orders via its proprietary electronic catalog. The Company also operates 24 retail stores in
Pennsylvania. Our corporate headquarters is in Exeter, Pennsylvania.

Our Distribution and Retail Operations constitute two business
segments which are more fully described below.

Distribution

The Distribution segment encompasses seven regions that are economically similar, share a common class of customers and distribute the same products. One
of the defining characteristics of this business segment is our hub-and-spoke delivery network. This segment distributes specialty automotive equipment for vehicles to specialty retailers/installers and our distribution network is structured to meet
the rapid delivery needs of our customers. This network is comprised of: (i) four inventory stocking warehouse distribution centers, which are located in Exeter, Pennsylvania; Kansas City, Kansas; Austell, Georgia; and Corona, California;
(ii) 20 non-inventory stocking cross-docks spread throughout the East Coast, Southeast, Midwest, West Coast and parts of Canada; and (iii) our fleet of approximately 360 trucks (as compared to over 380 trucks at December 30, 2006)
that provide multi-day per week delivery and returns along our over 270 routes which cover 42 states and parts of Canada. Our four warehouse distribution centers hold the vast majority of the Distribution segments inventory and distribute
merchandise to cross-docks in their respective regions for next-day or second-day delivery to customers.



14



---

##### Table of Contents

Retail

The Retail segment of our business operates 24 retail stores in Pennsylvania under the A&A Auto Parts name. A&A stores sell replacement parts and specialty accessories to end-consumers and small jobbers.
A&A stores are visible from high traffic areas and provide customers ease of access and drive-up parking. While a small part of our business, we believe that our retail operations allow us to stay close to end-consumer and product merchandising
trends. A&A stores purchase their inventory from the Distribution segment.

Operations Overview

For the three and nine month periods ended September 29, 2007, our net sales increased 1.2% and decreased 1.4%, respectively, versus the three and
nine month periods ending September 30, 2006. Our Distribution segment generated $147.8 million, or 95.8%, of our net sales and $454.5 million, or 96.0%, of our net sales in the three and nine month periods ended September 29, 2007,
respectively, compared to $146.4 million and $460.9 million or 96.0%, of our net sales in the three and nine month periods ended September 30, 2006, respectively. Our Retail segment generated $6.5 million, or 4.2%, and $18.7 million, or 4.0%,
of our net sales in the three and nine month periods ended September 29, 2007, respectively, compared to $6.2 million and $19.1 million, or 4.0%, of our net sales in the three and nine month periods ended September 30, 2006, respectively.

Our net income decreased by $4.0 million and $14.9 million, respectively, for the three and nine month periods ended September 29,
2007, to a net loss of $3.0 million and a net loss of $10.7 million, respectively, compared to income of $1.0 million and $4.2 million for the three and nine month periods ended September 30, 2006, respectively. The three and nine month periods
ended September 29, 2007 were each impacted by lower product selling margins, an increase in selling, general and administrative expense and higher interest expense. The nine month period ending September 29, 2007 was also impacted by
lower sales and the write-off of $6.1 million of deferred financing costs.

Items Affecting Comparability

Comparability between 2007 and 2006 periods

The
Company operates on a 52/53-week per year basis with the year ending on the Saturday nearest December 31. There are 13 and 39 weeks included in the three and nine month periods ended September 29, 2007 and September 30, 2006,
respectively.

Results of Operations

The tables and discussion presented below are based on the consolidated operations of the Company, except where otherwise noted. The table below summarizes our operating performance and sets forth a comparison of the three months ended
September 29, 2007 to the three months ended September 30, 2006:



15



---

##### Table of Contents

|                                             |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  
|-------------------------------------------- |  | ------------------ | -------- | - | ------------- | - | -------- | ------- |  | - | ------- | - |  | ----- | -
|                                             |  | Three Months Ended |         
|                                             |  | September 30,      |          |   | September 29, |   |          | Dollar  |  |   | Percent |  
|                                             |  | 2006               |          |   | 2007          |   |          | Change  |  |   | Change  |  
|                                             |  | (000s)            |          |   | (000s)       |   |          | (000s) |  |   |         |  
|Net sales                                    |  | $                  | 152,535  |   |               | $ | 154,304  |         |  | $ | 1,769   |   |  | 1.2   | %
|Cost of sales                                |  |                    | (102,933 | ) |               |   | (107,837 | )       |  |   | (4,904  | ) |  | 4.8   |  
|                                             |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  
|Gross profit                                 |  |                    | 49,602   |   |               |   | 46,467   |         |  |   | (3,135  | ) |  | (6.3  | )
|Selling, general and administrative expenses |  |                    | (38,687  | ) |               |   | (40,961  | )       |  |   | (2,274  | ) |  | 5.9   |  
|                                             |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  
|Income from operations                       |  |                    | 10,915   |   |               |   | 5,506    |         |  |   | (5,409  | ) |  | (49.6 | )
|Other income (expense):                      |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  
|Interest income                              |  |                    | 30       |   |               |   | 98       |         |  |   | 68      |   |  | 226.7 |  
|Interest expense                             |  |                    | (8,880   | ) |               |   | (9,660   | )       |  |   | (780    | ) |  | 8.8   |  
|Other, net                                   |  |                    | 39       |   |               |   | (12      | )       |  |   | (51     | ) |  | *     |  
|                                             |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  
|Income (loss) before income tax              |  |                    | 2,104    |   |               |   | (4,068   | )       |  |   | (6,172  | ) |  | *     |  
|Income tax (expense) benefit                 |  |                    | (1,117   | ) |               |   | 1,112    |         |  |   | 2,229   |   |  | *     |  
|                                             |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  
|Net income (loss)                            |  |                    | 987      |   |               |   | (2,956   | )       |  |   | (3,943  | ) |  | *     |  
|Other comprehensive income:                  |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  
|Foreign currency translation                 |  |                    | 4        |   |               |   | 119      |         |  |   | 115     |   |  | *     |  
|                                             |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  
|Comprehensive income (loss)                  |  | $                  | 991      |   |               | $ | (2,837   | )       |  | $ | (3,828  | ) |  | *     |  
|                                             |  |                    |          |   |               |   |          |         |  |   |         |   |  |       |  

---

|* | Percentage change intentionally left blank.
|- | -------------------------------------------

The
following table provides additional information setting forth the percentages of net sales that certain items of operating results constitute for the periods indicated:



|                                             |  |                    |   |  |               |   
|-------------------------------------------- |  | ------------------ | - |  | ------------- | --
|                                             |  | Three Months Ended |  
|                                             |  | September 30,      |   |  | September 29, |   
|                                             |  | 2006               |   |  | 2007          |   
|Statement of operations data:                |  |                    |   |  |               |   
|Net sales                                    |  | 100.0              | % |  | 100.0         | % 
|Cost of sales                                |  | 67.5               |   |  | 69.9          |   
|                                             |  |                    |   |  |               |   
|Gross profit                                 |  | 32.5               |   |  | 30.1          |   
|Selling, general and administrative expenses |  | 25.4               |   |  | 26.5          |   
|                                             |  |                    |   |  |               |   
|Income from operations                       |  | 7.1                |   |  | 3.6           |   
|Interest income                              |  | 0.0                |   |  | 0.1           |   
|Interest expense                             |  | 5.8                |   |  | 6.3           |   
|Other income (expense), net                  |  | 0.0                |   |  | (0.0          | ) 
|                                             |  |                    |   |  |               |   
|Income (loss) before income tax              |  | 1.3                |   |  | (2.6          | ) 
|Income tax (expense) benefit                 |  | (0.7               | ) |  | 0.7           |   
|                                             |  |                    |   |  |               |   
|Net income (loss)                            |  | 0.6                | % |  | (1.9          | )%
|                                             |  |                    |   |  |               |   

Three Months Ended September 29, 2007 Compared to the Three Months Ended September 30, 2006

Net Sales. Net sales represent the sales of product and promotional items, fees, and all shipping and handling costs paid by
customers, less any customer-related incentives and a reserve for future returns.

Net sales for the quarter ended September 29, 2007
were $154.3 million, an increase of $1.8 million, or 1.2%, compared to $152.5 million for the same period in the prior year. The sales increase was driven by increased focus on customer service and greater inventory availability. The modest growth
in sales was achieved in spite of continued



16



---

##### Table of Contents

conservative consumer spending on discretionary items driven by higher gasoline prices and general economic uncertainty. The Southeast, West Coast and
National Accounts (customers that participate in retail markets on a national or multi-region basis) geographies delivered single digit growth in net sales versus the prior period, while the Midwest and Canada geographies achieved double digit
growth versus the same period in the prior year. Sales from our Dropship fulfillment operations (shipping via third party delivery directly to the end-consumer on behalf of our customer) decreased by double digits, while our Northeast geography
experienced a low single-digit decline in net sales growth versus the same period in the prior year.

Gross Profit. Gross profit
represents net sales less the cost of sales. Cost of sales includes third-party delivery costs. Gross profit decreased $3.1 million to $46.5 million for the three months ended September 29, 2007 compared to $49.6 million for the three months
ended September 30, 2006. Gross margin as a percent of sales for the three months ended September 29, 2007 and September 30, 2006 was 30.1% and 32.5%, respectively. The decline in gross margin versus the same period in the prior year
was attributable to lower product selling margins resulting from competitive pressures in the marketplace and the timing of the recording of the benefit from vendor supported promotional activities. Vendor supported promotional activities positively
impacted sales and the cost of sales by $0.4 million and $2.6 million, respectively, for a net impact of $3.0 million, or 1.9% of net sales, for the three months ended September 29, 2007. This compares to $0.5 million and $2.6 million,
respectively, for a net impact of $3.1 million, or 2.0% of net sales, for the three months ended September 30, 2006.

During the three
months ended September 29, 2007, the Company recorded provisions for obsolete, excess and slow moving inventory of $2.6 million, resulting in a total reserve of $3.0 million at September 29, 2007. The Company determined that an increase in
the reserve was necessary as a result of (i) certain SKUs related to the Companys acquisition of Reliable and Blacksmith that have proven to be more difficult to sell than previously estimated; (ii) certain vendors discontinuing
specific SKUs; and (iii) the Company discontinuing its business relationship with specific vendors. All of these negatively affect the Companys future sales and margin forecasts for the related inventory. The discontinuances described in
items (ii) and (iii) above also negatively affect the Companys ability to return the inventory to those vendors for a full refund.

Selling, General and Administrative Expenses. Included in selling, general and administrative expense are all non-product related operating expenses  warehouse, marketing, delivery, selling and general and administrative
including depreciation and amortization, occupancy, and information technology less certain benefits received from promotional activities. Selling, general and administrative expenses increased by $2.3 million, or 5.9%, for the three months ended
September 29, 2007. As a percentage of sales, selling, general and administrative expense for the three months ended September 29, 2007 was 26.5% compared to 25.4% for the three months ended September 30, 2006.

The following items are the primary drivers of the increase in selling, general and administrative expenses for the three months ended September 29,
2007. Warehouse expense increased by $0.8 million, to $8.2 million compared to $7.4 million for the same period in the prior year, driven by incremental employee-related cost, rent expense and a lower level of cost capitalization in inventory.
Delivery expense increased by $0.5 million, to $11.7 million compared to $11.2 million for the same period in the prior year, driven by employee-related expense and repairs and maintenance for vehicles. Selling expense increased by $0.2 million, to
$8.2 million compared to $8.0 million for the same period in the prior year, driven by investments designed to improve the service levels to our customers. General & administrative expense increased by $0.7 million, to $12.1 million
compared to $11.4 million for the same period in the prior year, driven by increased employee expenses.

Interest Expense. Interest
expense increased by $0.8 million, or 8.8%, to $9.7 million for the three months ended September 29, 2007 compared to $8.9 for the same period in the prior year. The increase is related to our debt refinancing that was completed in January
2007, which resulted in higher average indebtedness and increasing variable interest rates.

Income Tax Expense. Income tax expense
decreased by $2.2 million, to a benefit of $1.1 million for the three months ended September 29, 2007 from an expense of $1.1 million for the three months ended September 30, 2006. Our effective tax rate was 27.3% for the three months
ended September 29, 2007 compared to an effective tax rate of 53.1% for the three months ended September 30, 2006. The lower effective tax rate is primarily attributable to a reduction in the reserve for uncertain tax positions due to the
lapse of prior year statute of limitations and a lower effective state tax rate for certain divisions versus the prior year.



17



---

##### Table of Contents

Net Income. Net income decreased by $4.0 million to a loss of $3.0 million for the three months
ended September 29, 2007 compared to $1.0 million income for the same period in the prior year. The decrease is attributed to the $3.1 million decrease in gross profit, the $2.3 million increase in selling, general and administrative expense,
and the $0.8 million increase in interest expense for the three months ended September 29, 2007.These decreases to income before income tax were partially offset by a corresponding decrease in income tax expense of $2.2 million, from an
expense of $1.1 million to a benefit of $1.1 million.

Results by Reportable Segment. Consolidated net sales for the Distribution
segment increased $1.4 million, or 1.0%, for the three months ended September 29, 2007 compared to the same period in the prior year. The sales increase was driven by increased focus on customer service and greater inventory availability. Net
income for the Distribution segment decreased by $3.5 million for the three months ended September 29, 2007 compared to the three months ended September 30, 2006. The decrease is due largely to the increase in sales being more than offset
by lower gross margin, an increase in selling, general and administrative expense and an increase in interest expense.

The Retail
segments sales increased by $0.3 million, or 5.2%, for the three months ended September 29, 2007 versus the same period in the prior year. The Retail segments net income decreased by $0.4 million compared to the three months ended
September 30, 2006 due to lower gross profit margin and higher operating expenses.

Nine Months Ended September 29, 2007 Compared to the Nine
Months Ended September 30, 2006

The following table sets forth a comparison of the nine months ended September 29, 2007 to
the nine months ended September 30, 2006.



|                                             |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   
|-------------------------------------------- |  | ----------------- | -------- | - | ------------- | - | -------- | ------- |  | - | ------- | - |  | ----- | --
|                                             |  | Nine Months Ended |         
|                                             |  | September 30,     |          |   | September 29, |   |          | Dollar  |  |   | Percent |  
|                                             |  | 2006              |          |   | 2007          |   |          | Change  |  |   | Change  |  
|                                             |  | (000s)           |          |   | (000s)       |   |          | (000s) |  |   |         |  
|Net sales                                    |  | $                 | 480,010  |   |               | $ | 473,187  |         |  | $ | (6,823  | ) |  | (1.4  | )%
|Cost of sales                                |  |                   | (325,696 | ) |               |   | (329,190 | )       |  |   | (3,494  | ) |  | 1.1   |   
|                                             |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   
|Gross profit                                 |  |                   | 154,314  |   |               |   | 143,997  |         |  |   | (10,317 | ) |  | (6.7  | ) 
|Selling, general and administrative expenses |  |                   | (121,360 | ) |               |   | (125,793 | )       |  |   | (4,433  | ) |  | 3.7   |   
|                                             |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   
|Income from operations                       |  |                   | 32,954   |   |               |   | 18,204   |         |  |   | (14,750 | ) |  | (44.8 | ) 
|Other income (expense):                      |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   
|Interest income                              |  |                   | 163      |   |               |   | 198      |         |  |   | 35      |   |  | 21.5  |   
|Interest expense                             |  |                   | (25,894  | ) |               |   | (28,895  | )       |  |   | (3,001  | ) |  | 11.6  |   
|Write-off of deferred financing costs        |  |                   |         |   |               |   | (6,130   | )       |  |   | (6,130  | ) |  | *     |   
|Other, net                                   |  |                   | 138      |   |               |   | (74      | )       |  |   | (212    | ) |  | *     |   
|                                             |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   
|Income (loss) before income tax              |  |                   | 7,361    |   |               |   | (16,697  | )       |  |   | (24,058 | ) |  | *     |   
|Income tax (expense) benefit                 |  |                   | (3,193   | ) |               |   | 6,006    |         |  |   | 9,199   |   |  | *     |   
|                                             |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   
|Net income (loss)                            |  |                   | 4,168    |   |               |   | (10,691  | )       |  |   | (14,859 | ) |  | *     |   
|Other comprehensive income:                  |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   
|Foreign currency translation                 |  |                   | 110      |   |               |   | 418      |         |  |   | 308     |   |  | *     |   
|                                             |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   
|Comprehensive income (loss)                  |  | $                 | 4,278    |   |               | $ | (10,273  | )       |  | $ | (14,551 | ) |  | *     |   
|                                             |  |                   |          |   |               |   |          |         |  |   |         |   |  |       |   

---

|* | Percentage change intentionally left blank.
|- | -------------------------------------------



18



---

##### Table of Contents

The following table provides additional information setting forth the percentages of net sales that
certain items of operating results constitute for the periods indicated:



|                                             |  |                   |   |  |               |   
|-------------------------------------------- |  | ----------------- | - |  | ------------- | --
|                                             |  | Nine Months Ended |  
|                                             |  | September 30,     |   |  | September 29, |   
|                                             |  | 2006              |   |  | 2007          |   
|Statement of operations data:                |  |                   |   |  |               |   
|Net sales                                    |  | 100.0             | % |  | 100.0         | % 
|Cost of sales                                |  | 67.8              |   |  | 69.6          |   
|                                             |  |                   |   |  |               |   
|Gross profit                                 |  | 32.2              |   |  | 30.4          |   
|Selling, general and administrative expenses |  | 25.3              |   |  | 26.6          |   
|                                             |  |                   |   |  |               |   
|Income from operations                       |  | 6.9               |   |  | 3.8           |   
|Interest income                              |  |                  |   |  | 0.1           |   
|Interest expense                             |  | 5.4               |   |  | 6.1           |   
|Other income (expense), net                  |  | 0.0               |   |  | 0.0           |   
|Write-off of deferred financing costs        |  |                  |   |  | 1.3           |   
|                                             |  |                   |   |  |               |   
|Income (loss) before income tax              |  | 1.5               |   |  | (3.5          | ) 
|Income tax (expense) benefit                 |  | (0.6              | ) |  | 1.3           |   
|                                             |  |                   |   |  |               |   
|Net income (loss)                            |  | 0.9               | % |  | (2.2          | )%
|                                             |  |                   |   |  |               |   

Net Sales. Net sales decreased by $6.8 million, or 1.4%, from $480.0 million to $473.2
million. The decrease is driven by a combination of factors, including (i) a decrease in consumer spending on discretionary items driven by higher gasoline prices and general economic uncertainty, (ii) a year over year decline in truck and
SUV sales, which directly impacts our business, (iii) a decrease in the net impact of vendor supported promotional activities and (iv) expected customer attrition in the aftermath of the Companys integration of the operations of
Reliable, which was acquired in December 2005. Sales from our Dropship fulfillment operations (shipping via third party delivery directly to the end-consumer on behalf of our customer) decreased by double digits while the Northeast, Southeast and
National Accounts (customers that participate in retail markets on a national or multi-region basis) experienced single digit-declines compared to the nine months ended September 30, 2006. The net impact of vendor supported promotional
activities positively impacted sales by $3.1 million in the nine months ended September 29, 2007 compared to $4.1 million for the same period in the previous year. Partially offsetting the sales declines were strong double-digit growth rates in
the Midwest and Canada and low single-digit growth in the West Coast.

Gross Profit. Gross profit decreased $10.3 million to $144.0
million for the nine months ended September 29, 2007, compared to $154.3 for the same period in the prior year. The decline was attributable to lower product selling margins resulting from competitive pressures in the marketplace and lower
benefits from vendor supported promotional activities. Vendor supported promotional activities positively impacted sales and the cost of sales by $3.1 million and $6.7 million, respectively, for a net impact of $9.8 million, or 2.1% of net sales,
for the nine months ended September 29, 2007. This compares to $4.1 million and $6.0 million, respectively, for a net impact of $10.1 million, or 2.1% of net sales, for the nine months ended September 30, 2006. Gross margin as a percent of
sales for the nine months ended September 29, 2007 and September 30, 2006 was 30.4% and 32.2%, respectively.

During the nine
months ended September 29, 2007, the Company recorded provisions for obsolete, excess and slow moving inventory of $2.9 million, resulting in a total reserve of $3.0 million at September 29, 2007. The Company determined that an increase in
the reserve was necessary as a result of (i) certain SKUs related to the Companys acquisition of Reliable and Blacksmith that have proven to be more difficult to sell than previously estimated; (ii) certain vendors discontinuing
specific SKUs; and (iii) the Company discontinuing its business relationship with specific vendors. All of these negatively affect both the Companys future sales and margin forecasts for the related inventory. The discontinuances
described in items (ii) and (iii) above also negatively affect the Companys ability to return the inventory to those vendors for a full refund.



19



---

##### Table of Contents

Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased by $4.4 million, or 3.7%, for the nine months ended September 29, 2007 compared to the nine months ended September 30, 2006. As a percentage of sales, selling, general and administrative expense for the nine months ended
September 29, 2007 was 26.6% compared to 25.3% for the nine months ended September 30, 2006.

The following items are the primary
drivers of the increase in selling, general and administrative expense. Warehouse expense for the nine months ended September 29, 2007 increased by $3.9 million, to $24.6 million from $20.7 million in the same period in the prior year, driven
by increased employee related cost driven by the June 2006 opening of a new distribution facility in Austell, Georgia and the February 2007 consolidation of our California warehousing operations into a new, larger facility; increased rent expense
driven by the Georgia and California warehouse investments; and a decrease in the impact of inventory capitalization. Delivery expense for the nine months ended September 29, 2007 increased by $1.8 million, to $34.6 million from $32.8 million
in the same period in the prior year, driven by increased employee related cost of operating new and existing delivery routes. General and administration expense for the nine months ended September 29, 2007 increased by $2.9 million, to $39.5
million from $36.6 million in the same period in the prior year, driven by incremental professional fees and employee expenses. These drivers of the overall increase in selling, general and administrative expenses for the nine months ended
September 29, 2007 were partially offset by the elimination of approximately $4.7 million of expenses associated with discontinued operations of Reliable.

Interest Expense. Interest expense increased by $3.0 million, or 11.6%, to $28.9 million for the nine months ended September 29, 2007 from $25.9 in the same period in the prior year driven by our debt
refinancing that was completed in January 2007, which resulted in higher average indebtedness and increasing variable interest rates.

Write-off of Deferred Finance Cost.In January 2007 we refinanced our term loans and line of credit portion of our debt, resulting in the write-off of $6.1 million of unamortized deferred finance cost related to the prior senior
secured credit agreement.

Income Tax Expense. Income tax expense decreased by $9.2 million to a benefit of $6.0 million for the
nine months ended September 29, 2007 from an expense $3.2 million for the nine months ended September 30, 2006. Our effective tax benefit rate was 36.0% for the nine months ended September 29, 2007 compared to an effective tax expense
rate of 43.4% for the nine months ended September 30, 2006. The effective tax rate for the prior year was negatively impacted by higher state income taxes due to the increased expense related to the amendment of prior year state income tax
returns.

Net Income. Net income decreased by $14.9 million to a loss of $10.7 million for the nine months ended September 29,
2007 compared to $4.2 million of net income for the nine months ended September 30, 2006. The decrease is primarily attributed to the $6.1 million non-cash charge for the write-off of unamortized deferred finance cost discussed above, the
decline in gross profit, and the increases in selling, general and administrative expenses and interest expense. These decreases to income (loss) before income tax were partially offset by the current year income tax benefit.

Results by Reportable Segment. Consolidated net sales for the Distribution segment decreased $6.4 million, or 1.4%, for the nine months ended
September 29, 2007 versus the same period in the prior year. The decrease was due to a combination of factors, including (i) a decrease in consumer spending on discretionary items driven by higher gasoline prices and general economic
uncertainty, (ii) a year over year decline in truck and SUV sales, which directly impacts our business, (iii) a decrease in the net impact of vendor supported promotional activities and (iv) expected customer attrition related to the
Reliable acquisition. Net income for the Distribution segment decreased by $14.6 million for the nine months ended September 29, 2007. The decrease is due largely to the decrease in sales, lower gross margin, an increase in selling, general and
administrative expense, a non-cash write-off for deferred finance cost and an increase in interest expense.

The Retail segments
sales decreased by $0.4 million, or 2.1%, for the nine months ended September 29, 2007 versus the same period in the prior year. The Retail segments net income decreased by $0.2 million for the nine months ended September 29, 2007
compared to the nine months ended September 30, 2006 due to lower sales and higher expenses partially offset by higher gross margins.



20



---

##### Table of Contents

Liquidity and Capital Resources

Operating Activities. Net cash provided by operating activities during the nine months ended September 29, 2007 was $21.9 million compared
with a net use of cash by operating activities of $0.5 million for the nine months ended September 30, 2006. The increase in cash from operating activities was driven primarily by a reduction in net working capital, partially offset by a
decrease in net income for the period. The decrease in net working capital was driven primarily by a $21.4 million increase in operating liabilities, partially offset by a $9.9 million increase in net inventory. Also benefiting cash from operating
activities for the nine months is the add-back of the $6.1 million non-cash write-off of deferred financing costs associated with our January 2007 refinancing and a $2.9 million non-cash write-off for obsolete inventory.

Investing Activities. Net cash used in investing activities was $3.9 million for the period ended September 29, 2007; a reduction of $3.0
million from the net cash used in investing activities of $6.9 million in the period ended September 30, 2006. The decrease in investing activities is related to higher prior year purchases of property, plant and equipment associated with the
opening of the distribution center in Austell, Georgia.

Financing Activities. Net cash used in financing activities during the
period ended September 29, 2007 was $7.1 million compared to net cash used in financing activities of $0.8 million during the period ended September 30, 2006. The period ended September 29, 2007 includes $6.3 million of new deferred
finance charges related to the new Credit Agreement. The periods ended September 29, 2007 and September 30, 2006 included a term loan payment of $1.5 million and $7.8 million, respectively.

On January 12, 2007, we entered into a term credit agreement or the Term Loan, with Holdings; the Lenders party thereto, Bank of America, N.A. and
the other parties named therein, and a revolving credit agreement with Holdings, the Lenders party thereto, Bank of America, N.A., and the other parties named therein. We refer to the Term Loan and the Revolving Credit Agreement together as the
Credit Agreement. The Credit Agreement refinances and replaces our prior senior secured credit agreement dated October 30, 2003, and provides us with greater operational flexibility and liquidity to meet our growth and operational
goals.

Our principal sources of liquidity are cash flow from operations and borrowings under our Credit Agreement. We believe that these
funds will provide us with sufficient liquidity and capital resources to meet our current and future financial obligations, including our scheduled principal and interest payments, as well as provide funds for working capital, capital expenditures,
and other needs for at least the next twelve months. Given our historical operating performance, including working capital needs, capital expenditures, and operating costs needed to support organic growth, we believe that our principal sources of
liquidity will be sufficient to support our cash requirements through the maturity of our Credit Agreement. However, in the event that we consummate an acquisition during this period, our Credit Agreement contains certain restrictions that may not
allow us to fund the total cost of an acquisition from our current sources of liquidity and may require additional borrowings. As of September 29, 2007, we had $104.9 million in available cash and borrowing capacity under our revolving credit
facility. Our principal uses of cash are debt service requirements, capital expenditures, working capital requirements, restrictive distributions to Holdings, and acquisitions.

Debt Service. The Credit Agreement consists of a five year asset based revolving credit facility with a commitment amount of $125.0 million and a
five-year term loan facility amortizing $200.0 million. As of September 29, 2007, under our Credit Agreement and our 9.75% Senior Subordinated Notes due 2013 the Notes, we had total indebtedness of $373.5 million and $91.3 million
of borrowing availability as defined by our revolving credit agreement, subject to customary conditions.

Borrowings under the Credit
Agreement generally bear interest based on a margin over, at our option, the base rate or the reserve-adjusted LIBOR. As of September 29, 2007 the applicable margin was 125 basis points over LIBOR or 25 basis points over the base rate for
revolving credit loans and 350 basis points over LIBOR or 250 basis points over the base rate for the Term Loan. Our obligations under the revolving credit agreement are secured by a first priority security interest in all of our receivables and
inventory and a second priority security interest in the stock of our subsidiaries and all other assets of us and the guarantors. The Term Loan is secured by a first priority security interest in all machinery and equipment, real estate, intangibles
and stock of the subsidiaries of us and the guarantors under the Term Loan, and a second priority security interest in our receivables and inventory.



21



---

##### Table of Contents

The Notes mature in 2013 and are fully and unconditionally guaranteed by each of our existing domestic
restricted subsidiaries, jointly and severally, on a senior subordinated basis. Interest on the Notes accrues at the rate of 9.75% per annum and is payable semi-annually in cash in arrears on May 1 and November 1, commencing on
May 1, 2004. The Notes and the guarantors are unsecured senior subordinated obligations and will be subordinated to all of our subsidiaries and guarantors existing and future senior debt. If we cannot make payments required by the
Notes, the subsidiary guarantors are required to make the payments.

Capital Expenditures. We expect to spend approximately $7.0
million on capital expenditures in 2007. Through the nine months ended September 29, 2007, $4.0 million was spent on capital expenditures. Although the Credit Agreement contains restrictions on the total amount of our annual capital
expenditures, management believes that the amount of capital expenditures permitted to be made under the Credit Agreement is adequate to grow our business according to our business strategy and to maintain the properties and business of our
continuing operations.

Working Capital. Working capital totaled approximately $132.7 million at September 29, 2007 and
$129.9 million at December 30, 2006. We maintain sizable inventory in order to help secure our position as a critical link in the industry between vendors and customers, and believe that we will continue to require working capital consistent
with recent past experience. Our working capital needs are seasonal, and we build working capital in the winter months in anticipation of the peak spring and summer season, during which time our working capital tends to be reduced.

Acquisitions. As a part of our business strategy, we will continue to evaluate acquisition and business expansion opportunities in regions that
are not well served by our existing distribution facilities or where we believe significant business synergies exist. We cannot guarantee that any acquisitions will be consummated. If we do consummate any acquisition, it could be material to our
business and require us to incur additional debt under our Credit Agreement or otherwise. There can be no assurance that additional financing will be available when required or, if available, that it will be on terms satisfactory to us.

Off-Balance Sheet Arrangements

None.



22



---

##### Table of Contents

Contractual and Commercial Commitments Summary

The following table presents our long-term contractual cash obligations as of September 29, 2007.



|                                   |  |                        |      |        |   |        |  |            |      |       |   |       |  |   |      
|---------------------------------- |  | ---------------------- | ---- | ------ | - | ------ |  | ---------- | ---- | ----- | - | ----- |  | - | -----
|(in millions)                      |  |                        |      |        |   |        |  |            |      |      
|                                   |  | Payments Due by Period
|                                   |  | Q4                     |      | 2008 - |   | 2010 - |  | 2012 and   |      |      
|                                   |  | 2007                   |      | 2009   |   | 2011   |  | Thereafter |      | Total
|Contractual Obligations (1)        |  |                        |      |        |   |        |  |            |      |       |   |       |  |   |      
|Term loan                          |  | $                      | 0.5  |        | $ | 4.0    |  | $          | 3.5  |       | $ | 190.5 |  | $ | 198.5
|Senior subordinated notes          |  |                        |     |        |   |       |  |            |     |       |   | 175.0 |  |   | 175.0
|Revolving credit facility          |  |                        |     |        |   |       |  |            |     |       |   |      |  |   |     
|Capital leases                     |  |                        |     |        |   | 0.1    |  |            |     |       |   |      |  |   | 0.1  
|Operating lease obligations        |  |                        | 2.1  |        |   | 14.5   |  |            | 7.2  |       |   | 7.9   |  |   | 31.7 
|Interest on indebtedness (2)       |  |                        | 17.7 |        |   | 69.0   |  |            | 68.3 |       |   | 31.9  |  |   | 186.9
|Other long-term liabilities        |  |                        |     |        |   | 1.0    |  |            | 0.6  |       |   | 1.3   |  |   | 2.9  
|                                   |  |                        |      |        |   |        |  |            |      |       |   |       |  |   |      
|Total contractual cash obligations |  | $                      | 20.3 |        | $ | 88.6   |  | $          | 79.6 |       | $ | 406.6 |  | $ | 595.1
|                                   |  |                        |      |        |   |        |  |            |      |       |   |       |  |   |      

---

|(1) | The Company is contingently liable for certain advisory fees. See FN 6 of the financial statements included herein.
|--- | -------------------------------------------------------------------------------------------------------------------

|(2) | Represents interest on the Notes and interest on the Credit Agreement assuming LIBOR of 8.9 %. Each increase or decrease in LIBOR of 100 basis points would result in an increase or
decrease in annual interest on the senior credit facilities of $2.0 million assuming outstanding indebtedness of $198.5 million under our Credit Agreement.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company adopted the provisions of FIN 48 at the beginning of its 2007 fiscal year. As a result of the adoption of FIN 48, the Company recognized a decrease in the liability related to unrecognized tax benefits and
an increase in shareholders equity of $0.1 million. As of the beginning of the 2007 fiscal year, the amount of the liability for unrecognized tax benefits after adoption was approximately $2.4 million. During the three and nine months ended
September 29, 2007, subsequent to the adoption of FIN 48, the Company recorded an increase of $0.1 million and $0.3 million, respectively, related to the potential payment of unrecognized tax benefits, penalties and interest related to
positions taken during the current year. This expense associated with the increase in the reserve was partially offset during the nine months ended September 29, 2007, by a reduction of $0.2 million resulting from the lapse of statute of
limitations for prior periods. A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved.

The Company files income tax returns in the U.S. for federal and various state jurisdictions and in Canada for federal and provincial jurisdictions. All
U.S. federal income tax returns are closed through the short period ended October 30, 2003. The Company has been recently notified of the commencement of an examination of the open years by the Internal Revenue Service. State income tax returns
are generally subject to examination for a period of three to five years after filing of the respective return. The Company and its subsidiaries have a limited number of state income tax returns in the process of examination. Canadian federal and
provincial income tax returns are closed through the year ended December 31, 1998. The Company has not been notified of the commencement of any examination of the open years by the Canada Revenue Agency.

In addition to unrecognized tax benefits, the Company has valuation allowances related to tax benefits in certain jurisdictions arising from net
operating losses and related tax loss carryforwards. On an ongoing basis, the Company reassesses the need for such valuation allowances based on recent operating results, its assessment of the likelihood of future taxable income and developments in
the relevant tax jurisdictions.



23



---

##### Table of Contents

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 (SFAS 157) Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The statement applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact that SFAF 157 may have on its financial statements.

In February of 2007, the FASB issued SFAS No. 159 (SFAS 159) The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company is currently evaluating
the requirements of this standard.

On December 15, 2006, the SEC adopted new measures to grant relief to non-accelerated filers,
including the Company, by extending the date of compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (the Act). Under these measures, the Company will be required to comply with the Act in two phases. The first phase
will be effective for the Companys fiscal year ending December 29, 2007 and will require the Company to furnish a management report on internal control over financial reporting. The second phase will require the Company to provide an
auditors attestation report on internal control over financial reporting beginning with the Companys fiscal year ending January 3, 2009.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We are exposed to certain market risks as part of our on-going business operations. Primary exposure includes changes in interest rates as borrowings under our senior credit facilities bear interest at floating rates
based on LIBOR or the base rate, in each case plus an applicable borrowing margin. We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt. For fixed-rate debt, interest rate changes affect the fair market value
but do not affect earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally do not affect the fair market value but do impact our earnings and cash flows, assuming other factors are held constant.

We may use derivative financial instruments, where appropriate, to manage our interest rate risks. However, as a matter of policy, we will not enter into
derivative or other financial investments for trading or speculative purposes. We do not have any speculative or leveraged derivative transactions. Most of our sales are denominated in U.S. dollars; thus our financial results are not subject to any
material foreign currency exchange risks.

Both the industry in which we operate and our distribution methods are affected by the
availability and price of fuel. Because we use a fleet of trucks to deliver specialty automotive equipment parts to our customers, the general upward trend in the cost of fuel over the past several years has caused us to incur increased costs in
operating our fleet, which has an adverse effect on our financial condition and results of operations.

There have been no material changes
in Quantitative and Qualitative disclosures in 2007 from the disclosures included in the Companys Annual Report on Form 10-K for the year ended December 30, 2006. Reference is made to Item 7A included in the Companys Annual
Report on Form 10-K for the year ended December 30, 2006 and the caption Liquidity and Capital Resources under Item 2 of this Quarterly Report on Form 10-Q.

Interest Rate Risk and Sensitivity Analysis

On January 12, 2007, the Company entered into the
Credit Agreement to refinance our debt and replace the Companys existing senior secured credit agreement. As of September 29, 2007, the Company has $373.6 million in debt, including $0.1 million in debt related to capital leases. The
revolving credit facility was undrawn and the interest rate on



24



---

##### Table of Contents

the $175 million of our Senior Subordinated Notes is fixed at 9.75%. As of September 29, 2007, our exposure to changes in interest rates is related to
our Term Loans of $198.5 million which provides for quarterly principal and interest payments at LIBOR plus 350 basis points and matures in 2012. Based on the amount outstanding and affected by variable interest rates, a 100 basis point change would
result in an approximately $2.0 million change to interest expense.



|Item 4. | Controls and Procedures
|------- | -----------------------

The
Companys Chief Executive Officer and Chief Financial Officer, after evaluating (1) the design of procedures to ensure that material information relating to us is made known to our Chief Executive Officer and Chief Financial Officer by
others and (2) the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report, have concluded that the
Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in rules and forms of the Securities and Exchange Commission.

Changes in Internal Controls. No change in our
internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 29, 2007 that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The Company
is not currently a party to any material legal proceedings. The Company is a party to various lawsuits arising in the normal course of business, and has certain contingent liabilities arising from various other pending claims and legal proceedings.
While the amount of liability that may result from these matters cannot be determined, we believe the ultimate liability will not materially affect our financial position, results of operations or cash flows.



|Item 1A. | Risk Factors
|-------- | ------------

For a more
detailed explanation of the factors affecting our business, please refer to the Forward-Looking Statements Section in this report and in the Risk Factors section in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2006.

There have been no material changes from Risk Factors previously disclosed in our Annual Report on Form 10-K for
the fiscal year ended December 30, 2006.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



|Item 5. | Other Information
|------- | -----------------

None.



25



---

##### Table of Contents

|Item 6. | Exhibits
|------- | --------

(a) Exhibits



|     |  |                                                                                              
|---- |  | ---------------------------------------------------------------------------------------------
|31.1 |  | Certification by Edward H. Orzetti pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Certification by Donald T. Grimes pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
|     | 
|32.1 |  | Certification by Edward H. Orzetti pursuant to 18 U.S.C. ss. 1350.                           
|     | 
|32.2 |  | Certification by Donald T. Grimes pursuant to 18 U.S.C. ss. 1350.                            



26



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Exeter, Pennsylvania, on November 12, 2007.



KEYSTONE AUTOMOTIVE OPERATIONS, INC./s/ EDWARD H. ORZETTIEdward H. OrzettiChief Executive Officer and President/s/ DONALD T. GRIMESDonald T. GrimesChief Financial Officer




27