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UNITED STATES SECURITIES

AND EXCHANGE COMMISSION

Washington,
D.C. 20549



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Form 10-Q



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

For the quarterly period ended July 1, 2006



| ̈ | 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



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Keystone Automotive Operations,
Inc.

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Pennsylvania                                                  |  | 23-2950980                         
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification 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.)



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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 file. 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 12-b-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 August 15, 2006, Keystone Automotive Holdings, Inc. owns 100% of the registrants common stock.



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##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

QUARTERLY REPORT FOR THE PERIOD

ENDED JULY 1, 2006



|                              |  |                                                                                                                                                               |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                                               |  | Page
|Part 1. Financial Information |  |                                                                                                                                                              
|                              |  |                                                                                                                                                              
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                                                              |  |     
|                              |  |                                                                                                                                                              
|                              |  | Consolidated Balance Sheets  as of July 1, 2006 and December 31, 2005                                                                                        |  | 1   
|                              |  |                                                                                                                                                              
|                              |  | Consolidated Statements of Income and Comprehensive Income  Three months ended July 2, 2005 and July 1, 2006; six months ended July 2, 2005 and July 1, 2006 |  | 2   
|                              |  |                                                                                                                                                              
|                              |  | Consolidated Statements of Cash Flows  Six months ended July 1, 2006 and July 2, 2005                                                                        |  | 3   
|                              |  |                                                                                                                                                              
|                              |  | Notes to Unaudited Consolidated Financial Statements                                                                                                          |  | 4   
|                              |  |                                                                                                                                                              
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                         |  | 13  
|                              |  |                                                                                                                                                              
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                    |  | 22  
|                              |  |                                                                                                                                                              
|Item 4.                       |  | Controls and Procedures                                                                                                                                       |  | 23  
|                              | 
|Part 2. Other Information     |  |                                                                                                                                                              
|                              |  |                                                                                                                                                              
|Item 1.                       |  | Legal Proceedings                                                                                                                                             |  | 24  
|                              |  |                                                                                                                                                              
|Item 1A.                      |  | Risk Factors                                                                                                                                                  |  | 24  
|                              |  |                                                                                                                                                              
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                   |  | 24  
|                              |  |                                                                                                                                                              
|Item 3.                       |  | Defaults upon Senior Securities                                                                                                                               |  | 24  
|                              |  |                                                                                                                                                              
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                                           |  | 24  
|                              |  |                                                                                                                                                              
|Item 5.                       |  | Other Information                                                                                                                                             |  | 24  
|                              |  |                                                                                                                                                              
|Item 6.                       |  | Exhibits                                                                                                                                                      |  | 24  
|                              |  |                                                                                                                                                              
|                              |  | Signatures                                                                                                                                                    |  | 25  



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##### Table of Contents

PART 1. FINANCIAL INFORMATION

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

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                                                                                     |  |                   |         |              |   |        
|---------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------ | - | -------
|                                                                                                     |  | December 31, 2005 |         | July 1, 2006
|                                                                                                     |  | (000s)           |         | (000s)     
|ASSETS                                                                                               |  |                   |         |              |   |        
|Current assets:                                                                                      |  |                   |         |              |   |        
|Cash and cash equivalents                                                                            |  | $                 | 8,172   |              | $ | 1,156  
|Trade accounts receivable, net of allowance for doubtful accounts of $2,160 and $1,530, respectively |  |                   | 53,329  |              |   | 64,205 
|Inventories                                                                                          |  |                   | 114,039 |              |   | 141,955
|Deferred tax assets                                                                                  |  |                   | 4,463   |              |   | 6,210  
|Prepaid expenses and other current assets                                                            |  |                   | 4,442   |              |   | 3,011  
|                                                                                                     |  |                   |         |              |   |        
|Total current assets                                                                                 |  |                   | 184,445 |              |   | 216,537
|Property, plant and equipment, net                                                                   |  |                   | 51,863  |              |   | 54,355 
|Deferred financing costs, net                                                                        |  |                   | 17,067  |              |   | 15,540 
|Goodwill                                                                                             |  |                   | 226,579 |              |   | 225,793
|Capitalized software, net                                                                            |  |                   | 1,585   |              |   | 1,236  
|Intangible assets, net                                                                               |  |                   | 208,054 |              |   | 201,976
|Other assets                                                                                         |  |                   | 2,148   |              |   | 2,373  
|                                                                                                     |  |                   |         |              |   |        
|Total assets                                                                                         |  | $                 | 691,741 |              | $ | 717,810
|                                                                                                     |  |                   |         |              |   |        
|                                                                                                     |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                 |  |                   |         |              |   |        
|Current liabilities:                                                                                 |  |                   |         |              |   |        
|Current maturities of long-term debt                                                                 |  | $                 | 10,470  |              | $ | 11,919 
|Current maturities of capital leases                                                                 |  |                   | 70      |              |   | 15     
|Trade accounts payable                                                                               |  |                   | 53,262  |              |   | 82,624 
|Accrued interest                                                                                     |  |                   | 3,252   |              |   | 3,130  
|Accrued compensation                                                                                 |  |                   | 6,142   |              |   | 6,454  
|Accrued expenses                                                                                     |  |                   | 17,392  |              |   | 15,593 
|                                                                                                     |  |                   |         |              |   |        
|Total current liabilities                                                                            |  |                   | 90,588  |              |   | 119,735
|Long-term debt                                                                                       |  |                   | 350,030 |              |   | 343,458
|Long-term capital leases                                                                             |  |                   | 517     |              |   | 58     
|Long-term liabilities                                                                                |  |                   | 3,105   |              |   | 2,800  
|Deferred tax liabilities                                                                             |  |                   | 60,536  |              |   | 60,555 
|                                                                                                     |  |                   |         |              |   |        
|Total liabilities                                                                                    |  |                   | 504,776 |              |   | 526,606
|                                                                                                     |  |                   |         |              |   |        
|Shareholders Equity                                                                                 |  |                   |         |              |   |        
|Common Stock par value of $0.01 per share: Authorized/Issued 1,000 in 2003                           |  |                   |        |              |   |       
|Contributed capital                                                                                  |  |                   | 186,004 |              |   | 186,956
|Accumulated income                                                                                   |  |                   | 493     |              |   | 3,674  
|Accumulated other comprehensive income                                                               |  |                   | 468     |              |   | 574    
|                                                                                                     |  |                   |         |              |   |        
|Total shareholders equity                                                                           |  |                   | 186,965 |              |   | 191,204
|                                                                                                     |  |                   |         |              |   |        
|Total liabilities and shareholders equity                                                           |  | $                 | 691,741 |              | $ | 717,810
|                                                                                                     |  |                   |         |              |   |        

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



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KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)



|                                             |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  
|-------------------------------------------- |  | ------------------- | ------- | - | ----------------- | - | -------- | ----------- |  | - | ----------- | - |  | - | -------- | -
|                                             |  | Three Months Ending |         |   | Six Months Ending |  
|                                             |  | July 2,2005         |         |   | July 1,2006       |   |          | July 2,2005 |  |   | July 1,2006 |  
|                                             |  | (000s)             |         |   | (000s)           |   |          | (000s)     |  |   | (000s)     |  
|Net sales                                    |  | $                   | 141,543 |   |                   | $ | 169,250  |             |  | $ | 261,406     |   |  | $ | 327,475  |  
|Cost of sales                                |  |                     | (96,421 | ) |                   |   | (115,211 | )           |  |   | (175,643    | ) |  |   | (222,074 | )
|                                             |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  
|Gross profit                                 |  |                     | 45,122  |   |                   |   | 54,039   |             |  |   | 85,763      |   |  |   | 105,401  |  
|Selling, general and administrative expenses |  |                     | (34,856 | ) |                   |   | (41,208  | )           |  |   | (67,248     | ) |  |   | (83,362  | )
|                                             |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  
|Income from operations                       |  |                     | 10,266  |   |                   |   | 12,831   |             |  |   | 18,515      |   |  |   | 22,039   |  
|Other income (expense):                      |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  
|Interest income                              |  |                     | 43      |   |                   |   | 62       |             |  |   | 112         |   |  |   | 133      |  
|Interest expense                             |  |                     | (6,436  | ) |                   |   | (8,567   | )           |  |   | (13,019     | ) |  |   | (17,014  | )
|Other income                                 |  |                     | 41      |   |                   |   | 106      |             |  |   | 51          |   |  |   | 99       |  
|                                             |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  
|Income before income tax                     |  |                     | 3,914   |   |                   |   | 4,432    |             |  |   | 5,659       |   |  |   | 5,257    |  
|Income tax expense                           |  |                     | (784    | ) |                   |   | (1,731   | )           |  |   | (1,466      | ) |  |   | (2,076   | )
|                                             |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  
|Net income                                   |  |                     | 3,130   |   |                   |   | 2,701    |             |  |   | 4,193       |   |  |   | 3,181    |  
|Other comprehensive income:                  |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  
|Foreign currency translation                 |  |                     | (63     | ) |                   |   | 110      |             |  |   | (224        | ) |  |   | 106      |  
|                                             |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  
|Comprehensive income                         |  | $                   | 3,067   |   |                   | $ | 2,811    |             |  | $ | 3,969       |   |  | $ | 3,287    |  
|                                             |  |                     |         |   |                   |   |          |             |  |   |             |   |  |   |          |  

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



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KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                  |  |                   |         |   |              |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | -
|                                                                                  |  | Six Months Ending |        
|                                                                                  |  | July 2, 2005      |         |   | July 1, 2006 |  
|                                                                                  |  | (000s)           |         |   | (000s)      |  
|Cash flows from operating activities:                                             |  |                   |         |   |              |   |         |  
|Net income                                                                        |  | $                 | 4,193   |   |              | $ | 3,181   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                   |         |   |              |   |         |  
|Depreciation and amortization                                                     |  |                   | 9,318   |   |              |   | 10,220  |  
|Deferred financing charges                                                        |  |                   | 1,380   |   |              |   | 1,527   |  
|Deferred income taxes                                                             |  |                   | (3,027  | ) |              |   | (1,728  | )
|Non-cash stock-based compensation expense                                         |  |                   |        |   |              |   | 891     |  
|Non-cash charges related to inventory fair value adjustment                       |  |                   | 219     |   |              |   |        |  
|Other non-cash charges                                                            |  |                   | 274     |   |              |   | 629     |  
|Gain on sale of fixed assets                                                      |  |                   |        |   |              |   | 92      |  
|Net change in operating assets and liabilities, net of acquisitions:              |  |                   |         |   |              |   |         |  
|Increase in trade accounts receivable                                             |  |                   | (9,659  | ) |              |   | (11,505 | )
|Increase in inventory                                                             |  |                   | (17,390 | ) |              |   | (27,916 | )
|Increase in accounts payable and accrued liabilities                              |  |                   | 25,291  |   |              |   | 27,328  |  
|Decrease in other assets                                                          |  |                   | 331     |   |              |   | 1,287   |  
|                                                                                  |  |                   |         |   |              |   |         |  
|Net cash provided by operating activities                                         |  |                   | 10,930  |   |              |   | 4,006   |  
|                                                                                  |  |                  
|Cash flows used in investing activities:                                          |  |                   |         |   |              |   |         |  
|Acquisitions of businesses                                                        |  |                   | (30,142 | ) |              |   | 786     |  
|Purchase of property, plant and equipment                                         |  |                   | (4,388  | ) |              |   | (6,956  | )
|Capitalized software costs                                                        |  |                   | (660    | ) |              |   | (150    | )
|Proceeds from sale of property, plant and equipment                               |  |                   | 15      |   |              |   | 741     |  
|                                                                                  |  |                   |         |   |              |   |         |  
|Net cash used in investing activities                                             |  |                   | (35,175 | ) |              |   | (5,579  | )
|                                                                                  |  |                  
|Cash flows from financing activities:                                             |  |                   |         |   |              |   |         |  
|Cash overdraft                                                                    |  |                   |        |   |              |   | 120     |  
|Borrowing under revolving line-of-credit                                          |  |                   | 32,200  |   |              |   |        |  
|Repayment under revolving line-of-credit                                          |  |                   | (5,600  | ) |              |   |        |  
|Principal repayments on long-term debt                                            |  |                   | (12,020 | ) |              |   | (5,123  | )
|Repayment of Capital Leases                                                       |  |                   |        |   |              |   | (514    | )
|Payments for deferred financing costs                                             |  |                   | (24     | ) |              |   |        |  
|Proceeds from stock options exercised                                             |  |                   |        |   |              |   | 61      |  
|                                                                                  |  |                   |         |   |              |   |         |  
|Net cash used in financing activities                                             |  |                   | 14,556  |   |              |   | (5,456  | )
|                                                                                  |  |                   |         |   |              |   |         |  
|Net effects of exchange rates on cash                                             |  |                   | (29     | ) |              |   | 13      |  
|                                                                                  |  |                   |         |   |              |   |         |  
|Increase in cash and cash equivalents                                             |  |                   | (9,718  | ) |              |   | (7,016  | )
|Cash and cash equivalents, beginning of period                                    |  |                   | 12,390  |   |              |   | 8,172   |  
|                                                                                  |  |                   |         |   |              |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                 | 2,672   |   |              | $ | 1,156   |  
|                                                                                  |  |                   |         |   |              |   |         |  

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



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KEYSTONE AUTOMOTIVE OPERATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited consolidated financial information herein has been prepared in accordance with generally accepted accounting principles 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 presentation 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 for the year ended December 31, 2005 of the Company.



|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 the eastern, central, and western regions of
the United States and part of Canada. The Company sells and distributes over 800 lines of 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 16,000 wholesale customers. The Companys wholesale operations include an electronic service strategy allowing its customers access to its proprietary electronic catalog, as well as the
ability to view inventory and place orders. The Company also operates 24 retail stores in Pennsylvania. The Companys corporate headquarters is located in Exeter, Pennsylvania.

On December 23, 2005 pursuant to a Stock Purchase Agreement dated November 11, 2005, as amended by the Amendment to the Stock Purchase
Agreement dated December 13, 2005, the Company acquired all of the issued and outstanding shares of capital stock (including warrants) of Reliable Investments, Inc. (Reliable) for an aggregate consideration of $59.3 million,
consisting of $48.3 million in cash and $11.0 million in seller notes (Reliable Acquisition). In December 2005, Keystone Automotive Holdings, Inc. (Holdings), the parent company, obtained $11 million in seller notes in order
to fund the difference in the Reliable Acquisition between amounts received from the Company in cash and the aggregate consideration of the purchase price. The seller notes are obligations of Holdings, bear interest at a rate of 8% per annum
that is payable in kind on a quarterly basis and mature on November 1, 2011. The seller notes require payment by Holdings prior to the maturity date if an acceleration event occurs, which is either a change of control or an initial
primary underwritten public offering of the common stock of the Company, other than any public offering or sale pursuant to a registration statement on Form S-4, S-8 or a comparable or successor form.

The primary benefit received from the Reliable Acquisition was access to new customers, the ability to consolidate most of Reliables overhead into
the Companys infrastructure and to expand operations in the West Coast and Southeast regions. The results of operations for the Reliable Acquisition have been included in the consolidated financial statements since the date of the acquisition.

The following summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Reliable
Acquisition. Other Intangible Assets mainly represents the fair value of customer agreements that will be amortized over 20 years. The Company is in the process of finalizing the allocation of the purchase price; thus the allocation of
the purchase price is subject to refinement based on the results of the contingent payment for 338(h)(10) election.



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##### Table of Contents

|                            |  |   |         |  
|--------------------------- |  | - | ------- | -
|(in thousands)              |  |   |         |  
|                            | 
|Accounts receivable         |  | $ | 11,314  |  
|Finished goods inventory    |  |   | 27,521  |  
|Other assets                |  |   | 497     |  
|Fixed assets                |  |   | 1,626   |  
|Other Intangible Assets     |  |   | 17,000  |  
|Goodwill                    |  |   | 27,163  |  
|Accounts payable and others |  |   | (25,848 | )
|                            |  |   |         |  
|Purchase Price              |  | $ | 59,273  |  
|                            |  |   |         |  

The following unaudited pro forma statement of operations data present the information for the
three month and six month periods ended July 2, 2005 as if the Reliable Acquisition had occurred as of January 2, 2005:



|                         |  |                                 |         |                               |   |        
|------------------------ |  | ------------------------------- | ------- | ----------------------------- | - | -------
|(in thousands)           |  |                                 |         |                               |   |        
|                         |  | Three months endingJuly 2, 2005 |         | Six months endingJuly 2, 2005
|                         |  | (unaudited)                     |         | (unaudited)                  
|                         |  |                                
|Net Sales                |  | $                               | 178,989 |                               | $ | 330,086
|Income before income tax |  |                                 | 2,828   |                               |   | 4,416  
|Net income               |  | $                               | 1,765   |                               | $ | 2,758  



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

On July 17,
2006, the FASB issued 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, Accounting for
Income Taxes (FAS 109). 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 merits. The Company is in the process of
reviewing the potential impact of FIN 48 on its financial statements.



|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 year basis with the year ending on the Saturday nearest December 31. There are 13 weeks included in the three month periods ended July 2, 2005 and July 1, 2006 and 26 weeks in the six
month periods ended July 2, 2005 and July 1, 2006.



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Stock-Based Compensation

In May 2004, the Board of Directors (the Board) approved the 2003 Executive Stock Option Plan (the Plan) which is designed to provide incentives to present and future officers, directors, and employees of the Company
(Participants). The Board has the right and power to grant Participants, at any time prior to the termination of the Plan, options in such quantity, at such price, on such terms and subject to such conditions that are consistent with the
Plan and established by the Board. There are two types of options that are issued to each Participant, Class A Common Options and Class L Common Options for the purchase of Holdings Class A common stock and Class L
common stock, respectively (together, the Options). The Options will vest ratably at a rate of 20% per year over five years. Participants must exercise nine Class A Common Options for each Class L Common Option exercised and
must exercise Class A Common Options and Class L Common Options in tandem in the ratio of one Class L Common Option for each nine Class A Common Options. The Options are not transferable by any Participant. If any Options expire
unexercised or unpaid or are canceled, terminated or forfeited in any manner without the issuance of Holdings common stock or payment there under, the shares with respect to such Options that were granted shall again be available under the
Plan.

On May 20, 2004, options to acquire approximately 11.2 million shares of Class A common stock and 1.2 million shares of Class L
common stock of Holdings were issued to certain of the Companys employees. For these shares, the weighted average price of Class L Common Options is $32.04 and the weighted average price of Class A Common Options is $0.39. Prior to
January 1, 2006 as permitted by FAS No. 123, Accounting for Stock Based Compensation, the Company accounted for stock-based compensation using the minimum value method described in APB No. 25, Accounting for Stock Issued to Employees,
and related interpretations. The number of shares of Common Stock issued under the Plan shall not exceed, in aggregate, 14,971,572 shares of Class A Common and 1,663,508 shares of Class L Common. In accordance with APB 25, compensation cost for
stock options was recognized in income based on the excess, if any, of the fair market value of the stock at the date of grant over the amount an employee must pay to acquire the stock. Additionally, the Company also adopted the disclosure
provisions of FAS No. 148, Accounting for Stock Based CompensationTransition and Disclosure.

In the first quarter of 2006, the Company adopted
FAS No. 123(R), Share-Based Payment, which revises FAS No. 123, Accounting for Stock-Based Compensation and supersedes APB 25, Accounting for Stock Issued to Employees. FAS 123(R) requires share-based payments to employees to be recognized
in the financial statements based on a fair-value-based method. As the Company is a nonpublic company under the provisions of FAS 123(R) which followed the nominal vesting approach prior to the adoption of FAS 123(R), we were required to adopt FAS
123(R) using the prospective method. Under the prospective method, the fair-value-based method is applied to all awards issued after December 31, 2005 and any previously issued awards that after December 31, 2005 are modified, repurchased
or cancelled. All outstanding awards that were granted prior to January 1, 2006 and that have not been modified, repurchased or cancelled must continue to be accounted for using the same accounting principles originally applied to those awards.

The Company believes it is appropriate to follow the guidance applicable to nonpublic as defined by FAS 123(R), companies in paragraph 85 of FAS 123(R)
and to not include prior period pro forma disclosures of compensation cost calculated under the minimum value method. The principle of the transition requirements for FAS 123(R) is that unvested awards measured at the minimum value for pro forma
disclosure should not be accounted for under FAS 123(R). The Company has followed this principle in following the prospective transition method upon adoption of FAS 123(R) on January 1, 2006. The Company, therefore, believes it would be
consistent with that principle to no longer include, after adoption of FAS 123(R), the prior period pro forma disclosures calculated using the minimum value method.

On March 3, 2006, pursuant to a stock option grant agreement between the Company and Robert S. Vor Broker, the former Chief Executive Officer, options to purchase 166,351 shares of Class L common stock and
1,497,155 shares of Class A common stock were issued. The new options are fully vested. This represented one-half of the options that were previously granted to Mr. Vor Broker, all of which were canceled. No other options were issued
during the first quarter of 2006. Accordingly, the Company recorded $0.9 million of expense associated with grant of the new



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##### Table of Contents

options in the first quarter. No compensation expense was recorded in the first quarter of 2005 for share-based payments.
The adoption of FAS 123(R) reduced Income before income tax in the first quarter and Net income by $0.9 million and $0.5 million, respectively.

On
June 30, 2006, pursuant to a stock option grant agreement between the Company and Edward Orzetti, President and Chief Executive Officer, options to purchase 408,223 shares of Class L common stock and 3,674,007 shares of Class A common
stock were issued to Mr. Orzetti. The new options are in three separate tranches which are subject to a time vesting schedule. Accordingly, the cost associated with these grants is immaterial for the period ending July 1, 2006 and the
Company has not recorded any expense associated with grant of the new options for this period.

For purposes of determining the fair value of new stock
option awards in the second quarter, the Company used the Black-Scholes option pricing model and the assumptions set forth in the table below. The weighted average grant date fair value of the new options granted in the quarter ended July 1,
2006 was $6.37.



|                        |  |       |  
|----------------------- |  | ----- | -
|                        |  | 2006  |  
|Dividend yield          |  | 0     | %
|Volatility              |  | 25.70 | %
|Risk free interest rate |  | 5.14  | %
|Expected life (years)   |  | 2.75  |  

During the first quarter of 2006, the Company based expected volatility on an average historical volatility of a
publicly traded company with the Wholesale-Motor Vehicle Supplies and New Parts SIC code of the SEC. There are fewer than 3 companies that potentially provide this information. Subsequent to the first quarter, the Company undertook an analysis and
determined that expanding the grouping to include industrial products distribution and auto parts retailers would provide a more accurate estimate of average historical volatility on which to base expected volatility. The average of the groupings of
distribution companies and auto parts retail companies were weighted on a proportional basis of the Companys business segments. The Company believes this will improve the estimate of expected volatility and has adopted this method
prospectively.

The risk free rate is based on the U.S. Treasury yield curve in effect at the time of the grant.

For purposes of determining the fair value of stock option awards forfeited, the Company used the Black-Scholes option pricing model and the assumptions set forth in the
table below. The weighted average grant date fair value of the forfeited options in the quarter ended July 1, 2006 was $3.34.



|                        |  |       |  
|----------------------- |  | ----- | -
|                        |  | 2006  |  
|Dividend yield          |  | 0     | %
|Volatility              |  | 25.70 | %
|Risk free interest rate |  | 1.23  | %
|Expected life (years)   |  | 0.17  |  



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Stock option awards as of July 1, 2006 and changes during the period then ended were as follows:



|                               |  |                                         |            |   |                                |   |                                           |  |           
|------------------------------ |  | --------------------------------------- | ---------- | - | ------------------------------ | - | ----------------------------------------- |  | ----------
|                               |  | Class L Options:                       
|                               |  | Number of shares                        |            |   | Weighted AverageExercise Price |   | Weighted AverageRemainingContractual Life
|Outstanding, December 31, 2005 |  |                                         | 1,244,643  |   |                                |   |                                           |  |           
|Granted                        |  |                                         | 166,351    |   |                                |   |                                           |  |           
|Exercised                      |  |                                         |           |   |                                |   |                                           |  |           
|Forfeited                      |  |                                         | (374,188   | ) |                                |   |                                           |  |           
|Outstanding, April 1, 2006     |  |                                         | 1,036,806  |   |                                | $ | 32.04                                     |  | 3.0 years 
|Exercisable, April 1, 2006     |  |                                         | 514,534    |   |                                | $ | 32.04                                     |  | 3.0 years 
|                               |  |                                         |           
|Outstanding, April 1, 2006     |  |                                         | 1,036,806  |   |                                |   |                                           |  |           
|Granted                        |  |                                         | 408,223    |   |                                |   |                                           |  |           
|Exercised                      |  |                                         | (2,305     | ) |                                |   |                                           |  |           
|Forfeited                      |  |                                         | (6,566     | ) |                                |   |                                           |  |           
|Outstanding, July 1, 2006      |  |                                         | 1,436,158  |   |                                | $ | 28.96                                     |  | 2.75 years
|Exercisable, July 1, 2006      |  |                                         | 510,986    |   |                                | $ | 32.04                                     |  | 2.75 years
|                               | 
|                               |  | Class A Options:                       
|                               |  | Number of shares                        |            |   | Weighted AverageExercise Price |   | Weighted AverageRemainingContractual Life
|Outstanding, December 31, 2005 |  |                                         | 11,201,791 |   |                                |   |                                           |  |           
|Granted                        |  |                                         | 1,497,155  |   |                                |   |                                           |  |           
|Exercised                      |  |                                         |           |   |                                |   |                                           |  |           
|Forfeited                      |  |                                         | (3,367,689 | ) |                                |   |                                           |  |           
|Outstanding, April 1, 2006     |  |                                         | 9,331,257  |   |                                | $ | 0.39                                      |  | 3.0 years 
|Exercisable, April 1, 2006     |  |                                         | 4,630,794  |   |                                | $ | 0.39                                      |  | 3.0 years 
|                               |  |                                         |           
|Outstanding, April 1, 2006     |  |                                         | 9,331,257  |   |                                |   |                                           |  |           
|Granted                        |  |                                         | 3,674,007  |   |                                |   |                                           |  |           
|Exercised                      |  |                                         | (20,742    | ) |                                |   |                                           |  |           
|Forfeited                      |  |                                         | (59,108    | ) |                                |   |                                           |  |           
|Outstanding, July 1, 2006      |  |                                         | 12,925,414 |   |                                | $ | 0.48                                      |  | 2.75 years
|Exercisable, July 1, 2006      |  |                                         | 4,598,855  |   |                                | $ | 0.39                                      |  | 2.75 years
|                               |  |                                         |           
|                               |  | Aggregate IntrinsicValue of As and Ls |            |   |                                |   |                                          
|                               |  | (in thousands):                         |            |   |                                |   |                                          
|Outstanding, April 1, 2006     |  | $                                       | 3,272      |   |                                |   |                                           |  |           
|Exercisable, April 1, 2006     |  | $                                       | 1,626      |   |                                |   |                                           |  |           



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##### Table of Contents

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the
difference between the calculated stock price as of February 25, 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 July 1, 2006.



|4. | Goodwill and other intangibles - net
|-- | ------------------------------------

The change in
the carrying amount of goodwill for the three months ended July 1, 2006 by reportable segment is as follows:



|                                                          |  |       |         |   |              |   |         |        |  |   |       
|--------------------------------------------------------- |  | ----- | ------- | - | ------------ | - | ------- | ------ |  | - | ------
|(in thousands)                                            |  | Total |         |   | Distribution |   |         | Retail
|Successor:                                                |  |       |         |   |              |   |         |        |  |   |       
|Balance as of January 3, 2004                             |  | $     | 178,780 |   |              | $ | 165,180 |        |  | $ | 13,600
|Working Capital Adjustment                                |  |       | 1,300   |   |              |   | 1,300   |        |  |   |      
|Transaction related costs                                 |  |       | 393     |   |              |   | 393     |        |  |   |      
|                                                          |  |       |         |   |              |   |         |        |  |   |       
|Balance as of January 1, 2005                             |  | $     | 180,473 |   |              | $ | 166,873 |        |  | $ | 13,600
|Working Capital Adjustment for the Blacksmith Acquisition |  |       | 286     |   |              |   | 286     |        |  |   |      
|Transaction related costs for the Blacksmith Acquisition  |  |       | 153     |   |              |   | 153     |        |  |   |      
|Transaction related goodwill                              |  |       | 45,667  |   |              |   | 45,667  |        |  |   |      
|                                                          |  |       |         |   |              |   |         |        |  |   |       
|Balance as of December 31, 2005                           |  | $     | 226,579 |   |              | $ | 212,979 |        |  | $ | 13,600
|Working Capital Adjustment for the Relaible Acquisition   |  |       | (786    | ) |              |   | (786    | )      |  |   |      
|                                                          |  |       |         |   |              |   |         |        |  |   |       
|Balance as of July 1, 2006                                |  |       | 225,793 |   |              |   | 212,193 |        |  |   | 13,600
|                                                          |  |       |         |   |              |   |         |        |  |   |       

Intangible assets are comprised of:



|                                    |  |                     |         |      |    |                         |   |         |                             |  |   |        
|----------------------------------- |  | ------------------- | ------- | ---- | -- | ----------------------- | - | ------- | --------------------------- |  | - | -------
|(in thousands)                      |  | Gross CarryingValue |         | Life |    | AccumulatedAmortization |   |         | Balance atDecember 31, 2005
|Retail trade name  A&A             |  | $                   | 3,000   |      | 30 |                         | $ | (217    | )                           |  | $ | 2,783  
|eServices trade name  DriverFX.com |  |                     | 1,000   |      | 15 |                         |   | (144    | )                           |  |   | 856    
|Wholesale trade name  Keystone     |  |                     | 50,000  |      | 30 |                         |   | (3,611  | )                           |  |   | 46,389 
|Vendor agreements                   |  |                     | 60,249  |      | 17 |                         |   | (7,656  | )                           |  |   | 52,593 
|Vendor agreements                   |  |                     | 17,000  |      | 20 |                         |   |        |                             |  |   | 17,000 
|Customer relationships              |  |                     | 100,752 |      | 17 |                         |   | (12,319 | )                           |  |   | 88,433 
|                                    |  |                     |         |      |    |                         |   |         |                             |  |   |        
|Total intangibles, net              |  | $                   | 232,001 |      |    |                         | $ | (23,947 | )                           |  | $ | 208,054
|                                    |  |                     |         |      |    |                         |   |         |                             |  |   |        
|                                    |  |                     |         |      |    |                         |   |         |                            
|                                    |  |                     |         |     
|(in thousands)                      |  | Gross CarryingValue |         | Life |    | AccumulatedAmortization |   |         | Balance atJuly 1, 2006     
|Retail trade name  A&A             |  | $                   | 3,000   |      | 30 |                         | $ | (267    | )                           |  | $ | 2,733  
|eServices trade name  DriverFX.com |  |                     | 1,000   |      | 15 |                         |   | (177    | )                           |  |   | 823    
|Wholesale trade name  Keystone     |  |                     | 50,000  |      | 30 |                         |   | (4,444  | )                           |  |   | 45,556 
|Vendor agreements                   |  |                     | 60,249  |      | 17 |                         |   | (9,428  | )                           |  |   | 50,821 
|Vendor agreements                   |  |                     | 17,000  |      | 20 |                         |   | (425    | )                           |  |   | 16,575 
|Customer relationships              |  |                     | 100,752 |      | 17 |                         |   | (15,284 | )                           |  |   | 85,468 
|                                    |  |                     |         |      |    |                         |   |         |                             |  |   |        
|Total intangibles, net              |  | $                   | 232,001 |      |    |                         | $ | (30,025 | )                           |  | $ | 201,976
|                                    |  |                     |         |      |    |                         |   |         |                             |  |   |        

Amortization expense related to intangible assets for the six months ended July 1, 2006 and July 2, 2005
was $6.1 million and $5.5 million, respectively.



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We completed our annual impairment testing of goodwill and indefinite-lived intangible assets for our
reporting units as of December 31, 2005 and determined that there was no impairment as of that date.



|5. | 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 Operations, as described below:

Distribution

The Distribution
segment aggregates five regions or operating segments that are economically similar, share a common class of customers, and distribute the same products. This segment of our business is our hub-and-spoke distribution network. This segment
distributes specialty automotive equipment for vehicles to specialty retailers/installers and our network is designed to meet the availability and 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) 19 non-inventory stocking cross-docks located throughout the East Coast, Midwest, West Coast and
parts of Canada; and (iii) our fleet of over 350 trucks that provide multi-day per week delivery and returns along over 270 routes which cover 42 states and parts of Canada. The Exeter, Kansas City, Austell and Corona warehouse distribution
centers hold our entire 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 inter-company 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 Operations

The Retail Operations segment of our business operates 24 retail stores in
Pennsylvania under the A&A Auto Parts name. A&A stores sell replacement parts, as well as specialty parts, to consumers and are primarily located in stand-alone facilities. 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, the Company believes 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.



10



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##### Table of Contents

The financial information for these two segments is as follows:



|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|---------------------------- |  | ------------------- | ------- | - | ----------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                             |  | Three Months Ending |         |   | Six Months Ending |  
|(in thousands)               |  | July 2, 2005        |         |   | July 1, 2006      |   |         | July 2, 2005 |  |   | July 1, 2006 |  
|Net Sales                    |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Distribution                 |  | $                   | 139,422 |   |                   | $ | 167,426 |              |  | $ | 257,576      |   |  | $ | 324,555 |  
|Retail                       |  |                     | 7,580   |   |                   |   | 6,853   |              |  |   | 13,821       |   |  |   | 12,950  |  
|Elimination                  |  |                     | (5,459  | ) |                   |   | (5,029  | )            |  |   | (9,991       | ) |  |   | (10,030 | )
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Total                        |  | $                   | 141,543 |   |                   | $ | 169,250 |              |  | $ | 261,406      |   |  | $ | 327,475 |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Interest income              |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Distribution                 |  | $                   | 43      |   |                   |   | 62      |              |  | $ | 112          |   |  | $ | 133     |  
|Retail                       |  |                     |        |   |                   |   |        |              |  |   |             |   |  |   |        |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Total                        |  | $                   | 43      |   |                   | $ | 62      |              |  | $ | 112          |   |  | $ | 133     |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Interest expense             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Distribution                 |  | $                   | (6,436  | ) |                   |   | (8,567  | )            |  | $ | (13,019      | ) |  | $ | (17,014 | )
|Retail                       |  |                     |        |   |                   |   |        |              |  |   |             |   |  |   |        |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Total                        |  | $                   | (6,436  | ) |                   | $ | (8,567  | )            |  | $ | (13,019      | ) |  | $ | (17,014 | )
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Depreciation & amortization  |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Distribution                 |  | $                   | 4,671   |   |                   |   | 4,989   |              |  | $ | 9,168        |   |  | $ | 10,084  |  
|Retail                       |  |                     | 73      |   |                   |   | 67      |              |  |   | 150          |   |  |   | 136     |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Total                        |  | $                   | 4,744   |   |                   | $ | 5,056   |              |  | $ | 9,318        |   |  | $ | 10,220  |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Income tax (expense) benefit |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Distribution                 |  | $                   | (761    | ) |                   |   | (1,845  | )            |  | $ | (1,535       | ) |  | $ | (2,500  | )
|Retail                       |  |                     | (23     | ) |                   |   | 114     |              |  |   | 69           |   |  |   | 424     |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Total                        |  | $                   | (784    | ) |                   | $ | (1,731  | )            |  | $ | (1,466       | ) |  | $ | (2,076  | )
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Net income (loss)            |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Distribution                 |  | $                   | 3,046   |   |                   |   | 3,029   |              |  | $ | 4,387        |   |  | $ | 3,969   |  
|Retail                       |  |                     | 84      |   |                   |   | (328    | )            |  |   | (194         | ) |  |   | (788    | )
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Total                        |  | $                   | 3,130   |   |                   | $ | 2,701   |              |  | $ | 4,193        |   |  | $ | 3,181   |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|                             |  |                    
|                             |  | Three Months Ending |         |   | Six Months Ending |  
|(in thousands)               |  | July 2, 2005        |         |   | July 1, 2006      |   |         | July 2, 2005 |  |   | July 1, 2006 |  
|Capital Expenditures         |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Distribution                 |  | $                   | 2,677   |   |                   |   | 4,785   |              |  | $ | 4,375        |   |  | $ | 6,956   |  
|Retail                       |  |                     | 5       |   |                   |   |        |              |  |   | 13           |   |  |   |        |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  
|Total                        |  | $                   | 2,682   |   |                   | $ | 4,785   |              |  | $ | 4,388        |   |  | $ | 6,956   |  
|                             |  |                     |         |   |                   |   |         |              |  |   |              |   |  |   |         |  

Net sales in the United States increased as a percent of total sales in the three and six month periods ended
July 1, 2006 to approximately 89.9% and 91.4%, from 88.8% and 90.3% for the three and six month periods ended July 2, 2005, respectively. At July 1, 2006 and January 1, 2005, approximately 99.6% and 99.4%, respectively, of
long-lived assets are in the United States.



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No customer accounted for more than 2.0% of sales for the three and six month periods ended July 1,
2006 and July 2, 2005.



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

On October 30,
2003, all of the outstanding stock of Keystone was acquired by 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). In connection with the Transaction, the Company entered into advisory agreements with Bain Capital and 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 charges. Pro-rata reductions, if any, on the annual advisory fees for fiscal 2003 and 2004, 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 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 three and six month periods ended July 1, 2006 and July 2, 2005 included $0.4 million and $0.8 million of management fee
expense. Included in accounts payable at July 1, 2006 and December 31, 2005 was $2.3 million and $1.5 million, respectively.

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 and six month periods ended July 1, 2006 and
July 2, 2005 included less than $0.1 million of management fee expense, respectively. Included in accounts payable at July 1, 2006 and December 31, 2005 was an immaterial amount and zero, respectively.



|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.



12



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##### Table of Contents

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.

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
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 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 risk factors set forth in other documents we file from time to time with the SEC.

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

Items Affecting Comparability

Comparability between 2006 and 2005
periods

The Company operates on a 52/53-week year basis with the year ending on the Saturday nearest December 31. There are 13
weeks included in the three month periods ended July 1, 2006 and July 2, 2005 and 26 weeks in the six month periods ended July 1, 2006 and July 2, 2005.

On May 18, 2005 and December 23, 2005 Keystone acquired all of the shares of capital stock of Blacksmith Distributing Inc.
(Blacksmith) and Reliable, respectively, distributors of auto parts and accessories located in Elkhart,



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##### Table of Contents

Indiana and Overland Park, Kansas, respectively. The results of operations for these acquisitions have been included in
the consolidated financial statements since the respective dates of the acquisitions.

Overview

For the three month and six month periods ended July 1, 2006, net sales increased 19.6% and 25.3%, respectively, over the three month and six month
periods ended July 2, 2005. The Distribution segment generated $162.4 million or 96.0% and $314.5 million or 96.0% of the net sales in the three month and six month periods ended July 1, 2006, respectively, compared to $134.0 million or
94.6% and $247.6 million or 94.7% of the net sales in the three and six month periods ended July 2, 2005, respectively. The Retail Operations segment generated $6.8 million or 4.0% and $13.0 million or 4.0% of the net sales in the three and six
month periods ended July 1, 2006, respectively, compared to $7.6 million or 5.4% and $13.8 million or 5.3% of net sales in the three and six month periods ended July 2, 2005, respectively. Sales in the Northeast continued to show single
digit growth over the three month and six month periods ended July 1, 2006 as a result primarily the integration of Blacksmith and Reliable customers somewhat offset by lower sales to our existing base. We believe that volatility in fuel prices
combined with slower new car sales and general economic uncertainty reduced traffic in our customers stores. The Midwest and West Coast regions continue their respective double digit growth for the three month and six month periods ended
July 1, 2006. This growth was the result of our continued expansion into these markets and the acquisition of Reliable and Blacksmith partially offset by anticipated attrition with the acquired customer group. Attrition is caused by customers
wanting to maintain a diverse supplier base as well as expected competitive activities. The Canada region had single digit grow for the three month period and double digit growth for the six month period ending July 2, 2006. The net impact of
vendor supported promotional activities positively impacted sales by $1.6 million and $3.6 million for the three and six month periods ending July 1, 2006, respectively, compared to $1.1 million and $3.5 million for the three and six month
periods ending July 2, 2005, respectively.

Gross margin dollars increased by 19.8% and 22.9% for the three and six month periods
ending July 1, 2006, respectively. The gross margin percentage was 31.9% and 32.2% compared to 31.9% and 32.8% for the three and six month periods ending July 2, 2005, respectively. The net impact of vendor supported promotional activities
positively impacted gross profit by $1.9 million and $7.0 million for the three and six month periods ending July 1, 2006, respectively, compared to $2.5 million and $6.5 million for the three and six month periods ending July 2, 2005,
respectively. The three and six month periods ending July 2, 2005 included $0.2 million or 0.2% and 0.1% of net sales expense, respectively, for the fair market value adjustment on inventory related to the purchase of Blacksmith. The increase
in gross profit dollars is due to the increase in sales partially offset by increased freight expense as a result of expanded geographic regions and the serving of smaller customers due to the Reliable acquisition.

Selling, general and administrative expenses increased by $6.4 million and $16.1 million, or 18.2% and 24.0% for the three and six month period ended
July 1, 2006. Included in selling, general and administrative expenses for the three and six month period ended July 1, 2006 are $1.8 million and $7.1 million of cost associated with operating and integration cost of Reliable. Additional
costs in delivery, sales, and warehouse contributed to the increase in selling, general and administrative cost for the three month and six month period ended July 1, 2006, including a new distribution center that became operational in June
2006. As a percentage of sales, selling, general and administrative expense for the three and six month periods ended July 1, 2006 was 24.3% and 25.5% compared to 24.6% and 25.7% for the three and six month periods ended July 2, 2005.

Net income decreased by $0.4 million and $1.0 million for the three and six month periods ending July 1, 2006 to $2.7 million and
$3.2 million, respectively, compared to an income of $3.1 million and $4.2 million for the three and six month periods ending July 2, 2005, respectively. The three and six month period ended July 1, 2006 was impacted by higher net sales
and offset by an increase in selling, general and administrative expense and interest expense.



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##### Table of Contents

Segment Information

We operate two business segments: Distribution and Retail Operations as described below.

Distribution

The distribution segment of our business (Distribution) consists of our warehouse distribution operations supported by our hub-and-spoke
delivery network. The Distribution segment for the three and six month periods ending July 1, 2006 generated $162.4 million and $314.5 million of net sales or 96.0% of the total net sales, respectively, for the periods. Sales for the three and
six month periods grew 21.3% and 27.0%, respectively, over the same periods in the prior year. This segment distributes specialty automotive equipment for vehicles to specialty retailer/installers and our network is designed to meet the availability
and 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) 19 non-inventory stocking cross-docks spread throughout the East Coast, Midwest, West Coast and parts of Canada; and (iii) our fleet of over 350 trucks that provide multi-day per week delivery and returns along our over 270 routes
which cover 42 states and parts of Canada. The Exeter, Kansas City, Austell and Corona warehouse distribution centers hold all of our inventory and distribute merchandise to cross-docks in their respective regions for next-day or second-day delivery
to customers.

We believe that our hub-and-spoke distribution network has enabled us to achieve significant competitive advantages in
delivery service, customer service, and our ability to expand efficiently.

Retail Operations

This segment of our business operates 24 retail stores primarily in Eastern Pennsylvania under the A&A Auto Parts name. A&A stores sell
replacement parts, as well as specialty parts, to consumers and are primarily located in stand-alone facilities. A&A stores are visible from high traffic areas and provide customers ease of access and drive-up parking. These retail operations
generated for the three and six month periods ending July 1, 2006, $6.8 million and $13.0 million of net sales or 4.0%, respectively, of the total net sales for such periods. Sales for the three and six month periods decreased 10.1% and 6.3%,
respectively, over the same periods in the prior year. While a small part of our business, we believe that our retail operations allow us to stay close to end-consumers and product merchandising trends. A&A stores purchase their inventory from
the Distribution segment.



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##### Table of Contents

Related Party Transactions

In connection with the purchase of the Company by Keystone Automotive Holdings, Inc., (the Transaction) the Company entered into advisory agreements with Bain Capital and 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 resources 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 charges. Pro-rata reductions, if any, on the
annual advisory fees for fiscal 2003 and 2004, 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 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 three and six month periods ended July 1, 2006 and
July 2, 2005 included $0.4 million and $0.8 million of management fee expense, respectively. Included in accounts payable at July 1, 2006 and December 31, 2005 was $2.3 million and $1.5 million, respectively.

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 and six month periods ended July 1, 2006 and July 2, 2005 included less than $0.1 million of management fee expense, respectively. Included in accounts payable at July 1, 2006
and December 31, 2005 was an immaterial amount and zero, respectively.



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##### Table of Contents

Results of Operations

The following table sets forth the percentages of net sales that certain items of operating data constitute for the periods indicated:



|                                            |  |                    |   |  |                  |   |  |              |   |  |              |  
|------------------------------------------- |  | ------------------ | - |  | ---------------- | - |  | ------------ | - |  | ------------ | -
|                                            |  | Three Months Ended |   |  | Six Months Ended |  
|                                            |  | July 2, 2005       |   |  | July 1, 2006     |   |  | July 2, 2005 |   |  | July 1, 2006 |  
|Statement of operations data:               |  |                    |   |  |                  |   |  |              |   |  |              |  
|Net sales                                   |  | 100.0              | % |  | 100.0            | % |  | 100.0        | % |  | 100.0        | %
|Cost of sales                               |  | 68.1               |   |  | 68.1             |   |  | 67.2         |   |  | 67.8         |  
|Gross profit                                |  | 31.9               |   |  | 31.9             |   |  | 32.8         |   |  | 32.2         |  
|Selling, general and adminstrative expenses |  | 24.6               |   |  | 24.3             |   |  | 25.7         |   |  | 25.5         |  
|Income from operations                      |  | 7.3                |   |  | 7.6              |   |  | 7.1          |   |  | 6.7          |  
|Interest expense                            |  | 4.5                |   |  | 5.1              |   |  | 5.0          |   |  | 5.2          |  
|Other income (expense), net                 |  | 0.0                |   |  | 0.1              |   |  | 0.0          |   |  | 0.0          |  
|Income before income tax expense            |  | 2.8                |   |  | 2.6              |   |  | 2.2          |   |  | 1.6          |  
|Income tax expense                          |  | 0.6                |   |  | 1.0              |   |  | 0.6          |   |  | 0.6          |  
|Net income                                  |  | 2.2                |   |  | 1.6              |   |  | 1.6          |   |  | 1.0          |  

Three Months Ended July 1, 2006 Compared to the Three Months Ended July 2, 2005

The following table sets forth a comparison of the three month period ended July 1, 2006 to the three month period ended July 2, 2005:



|                                             |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  
|-------------------------------------------- |  | ------------------- | ------- | - | ----------- | - | -------- | ------------ |  | - | ------------- | - |  | ------ | -
|                                             |  | Three Months Ending |        
|                                             |  | July 2,2005         |         |   | July 1,2006 |   |          | DollarChange |  |   | PercentChange |  
|(in thousands)                               |  |                     |         |   |             |   |          |              |  |   |               |  
|Net sales                                    |  | $                   | 141,543 |   |             | $ | 169,250  |              |  | $ | 27,707        |   |  | 19.6   | %
|Cost of sales                                |  |                     | (96,421 | ) |             |   | (115,211 | )            |  |   | (18,790       | ) |  | 19.5   | %
|                                             |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  
|Gross profit                                 |  |                     | 45,122  |   |             |   | 54,039   |              |  |   | 8,917         |   |  | 19.8   | %
|Selling, general and administrative expenses |  |                     | (34,856 | ) |             |   | (41,208  | )            |  |   | (6,352        | ) |  | 18.2   | %
|                                             |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  
|Income from operations                       |  |                     | 10,266  |   |             |   | 12,831   |              |  |   | 2,565         |   |  | 25.0   | %
|Other income (expense):                      |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  
|Interest income                              |  |                     | 43      |   |             |   | 62       |              |  |   | 19            |   |  | 44.2   | %
|Interest expense                             |  |                     | (6,436  | ) |             |   | (8,567   | )            |  |   | (2,131        | ) |  | 33.1   | %
|Other income (expense), net                  |  |                     | 41      |   |             |   | 106      |              |  |   | 65            |   |  | 158.5  | %
|                                             |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  
|Income before income tax                     |  |                     | 3,914   |   |             |   | 4,432    |              |  |   | 518           |   |  | 13.2   | %
|Income tax expense                           |  |                     | (784    | ) |             |   | (1,731   | )            |  |   | (947          | ) |  | 120.8  | %
|                                             |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  
|Net income                                   |  |                     | 3,130   |   |             |   | 2,701    |              |  |   | (429          | ) |  | -13.7  | %
|Other comprehensive income:                  |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  
|Foreign currency translation                 |  |                     | (63     | ) |             |   | 110      |              |  |   | 173           |   |  | -274.6 | %
|                                             |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  
|Comprehensive income                         |  | $                   | 3,067   |   |             | $ | 2,811    |              |  | $ | (256          | ) |  | -8.3   | %
|                                             |  |                     |         |   |             |   |          |              |  |   |               |   |  |        |  

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. The primary driver increasing net sales in existing locations continues to be the Distribution segment, including the addition of
new truck routes and new customers in both existing and new regions and the acquisitions of Blacksmith and Reliable in the second half of 2005. The growth rate in the Northeast and Canada was at a single digit rate while the Midwest and West Coast
regions continued to grow at a double digit rate over the prior period ended July 2, 2005. The net impact of vendor supported promotional activities increased sales by $1.6 million and $1.1 million for the three month periods ended July 1,
2006 and July 2, 2005, respectively.



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##### Table of Contents

Gross Profit. Gross profit represents net sales less cost of sales which includes third-party
delivery costs. Vendor supported promotional activities positively impacted sales and cost of sales by $1.6 million and $0.3 million for a net impact of $1.9 million, or 1.1% of net sales, for the three month period ended July 1, 2006 compared
to $1.1 million and $1.4 million for a net impact of $2.5 million, or 1.7% of net sales for the three month period ended July 2, 2005. The increase in gross profit dollars was due to the 19.6% increase in net sales. Gross margin for the three
month periods ended July 1, 2006 and July 2, 2005 was 31.9%. Gross profit for the three month period ending July 2, 2005 includes a non-cash charge of $0.2 million or 0.2% of net sales related to the recognition of a portion of the
fair market value adjustment on inventory recorded as part of the Blacksmith Acquisition.

Selling, General and Administrative
Expenses. Selling, general and administrative expenses include all non-product related operating expenses, including depreciation and amortization, occupancy, warehousing, delivery, marketing, selling, information technology, and general and
administrative expenses less certain benefits received from promotional activities. Included in selling, general and administrative expenses for the three month period ended July 1, 2006 and July 2, 2005 are $1.8 million and $1.4 million
of expenses associated with operating and integration costs of Reliable and Blacksmith. Also included in the three month period ended July 2, 2005 are $1.0 million of expense related to sales consulting services and professional fees related to
the implementation of Sarbanes-Oxley Section 404, a charge of $1.1 million related to the settlement of a lawsuit for professional fees and other settlement charges for an intellectual property infringement lawsuit. The delivery expense for the
three month period ending July 1, 2006 increased by $2.0 million due to the impact of increase in fuel prices and the cost of operating new delivery routes. Selling and warehouse expenses in 2006 increased by $1.0 million and $1.8 million,
respectively, due to head count increases and other operating expenses within the departments and the addition of the new Austell, Georgia distribution center that became operational in June 2006.

Interest Expense. Interest expense increased by $2.2 million, or 33.1%, to $8.6 million for the three month period ended July 1, 2006, $6.4
million for the three month period ended July 2, 2005, due primarily to an increase in debt related to the Reliable Acquisition and a change in variable interest rates.

Income Tax Expense. Income tax expense increased from the three month period ended July 2, 2005 with an effective tax rate of 20.0% compared to an
effective tax rate of 39.3% for the three month period ended July 1, 2006. The three month period ended July 2, 2005 was benefited by a net $0.8 million due to the resolution of certain state tax audits, Federal tax audits for the 2002 and
October 20, 2003 tax years, a Canadian transfer pricing inquiry and certain other refinements to estimates of state deferred tax assets and liabilities.

Net Income. Net income decreased by $0.4 million, or 13.7%, to $2.7 million for the period ended July 1, 2006, as compared to $3.1 million for the three month period ended July 2, 2005.
The decrease is primarily attributed to the $6.4 million increase in selling, general and administrative expense and a $2.1 million increase in interest expense, offset by the 19.6% increase in sales during the three month period ended July 1,
2006 as compared to the three month period ended July 2, 2005.

Results by Reportable Segment. Consolidated net sales for the
Distribution segment increased $28.4 million or 21.2% for the three month period ended July 1, 2006 over the three month period ended July 2, 2005. The increase in the Distribution segment is due primarily to the acquisitions of Blacksmith
and Reliable, new customer growth, increased customer penetration, and geographic expansion.

The Retail Operations segment sales decreased
by $0.7 million, or 9.6% for the three month period ended July 1, 2006 compared to the three month period ended July 2, 2005. The decrease is primarily due to a decrease of customer traffic in the Companys stores. The Retail
Operations segment is not expected to contribute significantly to the Companys growth, as a result of managements decision not to expand beyond the current 24 retail stores.

Net income for the Distribution segment decreased by $17k, or 0.6%, for the three month period ended July 1, 2006 compared to the three month period
ended July 2, 2005. The decrease is due largely to the increase in selling, general and administrative expense and other expenses. The Retail Operations segment net income decreased by $0.4 million, or 490.5% for the three month period ended
July 1, 2006 compared to the three month period ended July 2, 2005.



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##### Table of Contents

Six Months Ended July 1, 2006 Compared to the Six Months Ended July 2, 2005

The following table sets forth a comparison of the six month period ended July 1, 2006 to the six month period ended July 2, 2005:



|                                             |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  
|-------------------------------------------- |  | ----------------- | -------- | - | ----------- | - | -------- | ------------ |  | - | ------------- | - |  | ------ | -
|                                             |  | Six Months Ending |         
|                                             |  | July 2,2005       |          |   | July 1,2006 |   |          | DollarChange |  |   | PercentChange |  
|(in thousands)                               |  |                   |          |   |             |   |          |              |  |   |               |  
|Net sales                                    |  | $                 | 261,406  |   |             | $ | 327,475  |              |  | $ | 66,069        |   |  | 25.3   | %
|Cost of sales                                |  |                   | (175,643 | ) |             |   | (222,074 | )            |  |   | (46,431       | ) |  | 26.4   | %
|                                             |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  
|Gross profit                                 |  |                   | 85,763   |   |             |   | 105,401  |              |  |   | 19,638        |   |  | 22.9   | %
|Selling, general and administrative expenses |  |                   | (67,248  | ) |             |   | (83,362  | )            |  |   | (16,114       | ) |  | 24.0   | %
|                                             |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  
|Income from operations                       |  |                   | 18,515   |   |             |   | 22,039   |              |  |   | 3,524         |   |  | 19.0   | %
|Other income (expense):                      |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  
|Interest income                              |  |                   | 112      |   |             |   | 133      |              |  |   | 21            |   |  | 18.8   | %
|Interest expense                             |  |                   | (13,019  | ) |             |   | (17,014  | )            |  |   | (3,995        | ) |  | 30.7   | %
|Other income (expense), net                  |  |                   | 51       |   |             |   | 99       |              |  |   | 48            |   |  | 94.1   | %
|                                             |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  
|Income before income tax                     |  |                   | 5,659    |   |             |   | 5,257    |              |  |   | (402          | ) |  | -7.1   | %
|Income tax expense                           |  |                   | (1,466   | ) |             |   | (2,076   | )            |  |   | (610          | ) |  | 41.6   | %
|                                             |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  
|Net income                                   |  |                   | 4,193    |   |             |   | 3,181    |              |  |   | (1,012        | ) |  | -24.1  | %
|Other comprehensive income:                  |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  
|Foreign currency translation                 |  |                   | (224     | ) |             |   | 106      |              |  |   | 330           |   |  | -147.3 | %
|                                             |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  
|Comprehensive income                         |  | $                 | 3,969    |   |             | $ | 3,287    |              |  | $ | (682          | ) |  | -17.2  | %
|                                             |  |                   |          |   |             |   |          |              |  |   |               |   |  |        |  

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. The primary driver increasing net sales in existing locations continues to be the Distribution segment, including the addition of
new truck routes and new customers in both existing and new regions and the acquisitions of Blacksmith and Reliable in the second half of 2005 . The growth rate in the Northeast was at a single digit rate while the Midwest, West Coast and Canada
regions continued to grow at a double digit rate over the prior period ended July 2, 2005. The net impact of vendor supported promotional activities increased sales by $3.6 million and $3.5 million for the six month periods ended July 1,
2006 and July 2, 2005, respectively.

Gross Profit. Gross profit represents net sales less cost of sales which includes
third-party delivery costs. Vendor supported promotional activities positively impacted sales and cost of sales by $3.6 million and $3.4 million for a net impact of $7.0 million, or 2.1% of net sales for the six month period ended July 1, 2006
compared to $3.5 million and $3.0 million for a net impact of $6.5 million, or 2.5%, of net sales for the six month period ended July 2, 2005. The increase in gross profit dollars was due to the 25.3% increase in net sales. Gross margin for the
six month periods ended July 1, 2006 and July 2, 2005 was 32.2% and 32.8%, respectively. Gross profit for the six month period ending July 2, 2005 includes a non-cash charge of $0.2 million or 0.1% of net sales related to the
recognition of a portion of the fair market value adjustment on inventory recorded as part of the Blacksmith acquisition.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses include all non-product related operating expenses, including depreciation and amortization, occupancy, warehousing, delivery, marketing, selling, information
technology, and general and administrative expenses less certain benefits received from promotional activities. Included in selling, general and administrative expenses for the six month period ended July 1, 2006 and July 2, 2005 are $7.1
million and $1.3 million of expenses associated with operating and integration costs of Reliable and



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##### Table of Contents

Blacksmith, respectively. Also included in the six month period ended July 2, 2005 are $2.3 million of expense related to sales consulting services and
professional fees related to the implementation of Sarbanes-Oxley Section 404 and a charge of $1.4 million related to a lawsuit settlement for professional fees and settlement charges of an intellectual property infringement lawsuit. The
delivery expense for the six month period ending July 1, 2006 increased by $3.8 million due to the impact of increase in fuel prices and the cost of operating new delivery routes. Selling and warehouse expenses in 2006 increased by $2.0 million
and $2.5 million, respectively, due to head count increases and other operating expenses within the departments and the addition of the new Austell, Georgia distribution center that became operational in June 2006.

Interest Expense. Interest expense increased by $4.0 million, or 30.7%, to $17.0 million for the six month period ended July 1, 2006 as
compared to $13.0 million for the six month period ended July 2, 2005 due primarily to an increase in debt related to the Reliable Acquisition and a change in variable interest rates.

Income Tax Expense. Income tax expense increased by $0.6 million, or 41.6% to an expense of $2.1 million with an effective tax rate of 39.5% for
the six month period ended July 1, 2006 from an expense of $1.5 million for the six month period ended July 2, 2005 with an effective tax rate of 25.9%. The Companys provision for income taxes for the six months ended July 2,
2005 was benefited by a net $0.8 million due to the resolution of certain state tax audits, Federal tax audits for the 2002 and October 20, 2003 tax years, a Canadian transfer pricing inquiry and certain other refinements to estimates of state
deferred tax assets and liabilities.

Net Income. Net income decreased by $1.0 million, or 24.1%, to $3.2 million for
the period ended July 1, 2006 from an income of $4.2 million for the six month period ended July 2, 2005. The decrease is primarily attributed to the $16.1 million increase in selling, general and administrative expense and a $4.0 million
increase in interest expense, offset by the 25.3% increase in sales during the six month period ended July 1, 2006 as compared to the three month period ended July 2, 2005.

Results by Reportable Segment. The Distribution segment increased $66.9 million in consolidated net sales for the six month period ended
July 1, 2006 over the six month period ended July 2, 2005. The increase in the Distribution segment is due primarily to the acquisitions of Reliable and Blacksmith, new customer growth, increased customer penetration, and geographic
expansion.

The Retail segment sales decreased by $0.6 million, related to a decrease of customer traffic in the stores. The Retail segment
is not expected to contribute significantly to the Companys growth because of our decision not to expand beyond the current 24 retail stores.

Net income for the Distribution segment decreased by $0.4 million, or 9.5%, for the six month period ended July 1, 2006 compared to the three month period ended July 2, 2005. The decrease is due largely to the increase in selling,
general and administrative expense and other expenses. The Retail Operations segment net income decreased by $0.6 million, or 306.2%, for the six month period ended July 1, 2006 compared to the three month period ended July 2, 2005.

Liquidity and Capital Resources

Operating Activities. Net cash provided by operating activities during the period ended July 1, 2006 was $4.0 million compared with net cash provided by operating activities of $10.9 million for the period ended July 2,
2005. The decrease in net cash provided by operating activities for the period ended July 1, 2006 was primarily due to a $10.5 million increase in inventory as a result of the Reliable acquisition compared to the period ended July 2, 2005.

Investing Activities. Net cash used in investing activities was $5.6 million for the period ended July 1, 2006, a decrease of
$29.6 million from the net cash used in investing activities of $35.2 million in the period ended July 2, 2005. The decrease in investing activities is related to the Blacksmith Acquisition that occurred in the second quarter of 2005.



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Financing Activities. Net cash used in financing activities during the period ended July 1,
2006 was $5.5 million compared to net cash source in financing activities of $14.6 million during the period ended July 2, 2005. The period ended July 2, 2005 includes a $26.6 million borrowing under the revolving line-of-credit for the
Blacksmith Acquisition. The periods ended July 1, 2006 and July 2, 2005 included a term loan payment of $5.1 million and $12.0 million, respectively.

Our principal sources of liquidity are cash flow from operations and borrowings under our senior secured credit facilities. We believe that these funds will provide us with sufficient liquidity and capital resources
for us to meet our current and future financial obligations, including our scheduled principal and interest payments, as well as to 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, capital expenditures, and operating costs necessary 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 senior secured credit facilities. In the event that we consummate an acquisition during this period, the total cost of the acquisition may not be funded completely from our current sources of liquidity and may require
additional borrowings. As of July 1, 2006, we had $47.2 million in 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. As of July 1, 2006, we had total indebtedness of $355.4
million and $46.1 million of borrowings available under our senior credit facilities and senior subordinated notes, subject to customary conditions. We have $3.9 million of letters of credit that reduce availability under the senior credit
facilities.

The senior secured credit facilities consist of a five-year $50.0 million revolving credit facility, a six-year Term Loan B
facility amortizing $115.0 million, and a five-year Term Loan C facility amortizing $90.0 million. Borrowings under the senior credit facilities generally bear interest based on a margin over, at our option, the base rate or the reserve-adjusted
LIBOR. Prior to April 1, 2005, the applicable margin was 3.25% over LIBOR and 2.25% over the base rate for revolving credit loans and 2.75% over LIBOR and 1.75% over the base rate for Term Loan B. As of April 1, 2005, the 2.75% over LIBOR
and the 1.75% over the base rate for the Term Loan B were amended to 2.0% over LIBOR and 1.0% over the base rate for term loans. The credit agreement was amended to reflect these reductions in interest rates and a Form 8-K was filed on April 8,
2005. Term Loan C was acquired during the period ending December 31, 2005 and the applicable margin is 2.5% over LIBOR and 1.5% over the base rate for term loans. Effective December 23, 2005 the Term B margin is also 2.5% over LIBOR and
1.5% over the base rate. The senior credit facilities are secured by first priority interests in, and mortgages on, substantially all of our tangible and intangible assets and first priority pledges of all the equity interests owned by us in our
existing and future domestic subsidiaries.

The senior subordinated 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 3/4% 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 and guarantees 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 $9.0 million on capital expenditures in 2006. Through the six months
ended July 1, 2006, $7.0 million was spent on capital expenditures. We expect capital expenditures in 2007 and thereafter to be approximately $6.0 million annually. The senior credit facilities contain restrictions on our ability to make
capital expenditures. Based on current estimates, management believes that the amount of capital expenditures permitted to be made under the senior credit facilities are 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 $96.8
million at July 1, 2006 and $93.9 million at December 31, 2005. We maintain sizable inventory in order to help secure our position as a critical link in the industry between vendors and consumers, and believe that we will continue to
require working capital consistent with past experience. Our working capital needs are seasonal, and we build working capital in the winter months when sales are slower in



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anticipation of the peak summer driving season, during which time our working capital tends to be reduced and the opening of the Austell facility. As a
result of the acquisitions we acquired sizeable inventory that was duplicative of our existing inventory. Therefore we expect inventory as a relation to sales to decrease over the next 12 months.

Acquisitions. As a part of our business strategy, we will continue to evaluate acquisition 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 senior secured credit facilities 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.

Contractual and Commercial Commitments Summary

The
following tables present our long-term contractual cash obligations as of July 1, 2006.



|                                   |  |                        |      |            |   |            |  |                    |       |       |   |       |  |   |      
|---------------------------------- |  | ---------------------- | ---- | ---------- | - | ---------- |  | ------------------ | ----- | ----- | - | ----- |  | - | -----
|                                   |  | Payments Due by Period
|(in millions)                      |  | 2006                   |      | 2007 -2009 |   | 2010 -2012 |  | 2013 andthereafter |       | Total
|Contractual Obligations (1)        |  |                        |      |            |   |            |  |                    |       |       |   |       |  |   |      
|Term Loan B                        |  | $                      | 4.9  |            | $ | 85.7       |  | $                  |      |       | $ |      |  | $ | 90.6 
|Term Loan C                        |  |                        | 0.5  |            |   | 2.7        |  |                    | 86.6  |       |   |      |  |   | 89.8 
|Senior subordinated notes          |  |                        |     |            |   |           |  |                    |      |       |   | 175.0 |  |   | 175.0
|Capital leases                     |  |                        |     |            |   | 0.1        |  |                    |      |       |   |      |  |   | 0.1  
|Operating lease obligations        |  |                        | 3.1  |            |   | 13.5       |  |                    | 5.4   |       |   | 5.0   |  |   | 27.0 
|Interest on indebtedness (2)       |  |                        | 18.7 |            |   | 86.4       |  |                    | 56.9  |       |   | 14.3  |  |   | 176.3
|                                   |  |                        |      |            |   |            |  |                    |       |       |   |       |  |   |      
|Total contractual cash obligations |  | $                      | 27.2 |            | $ | 188.4      |  | $                  | 148.9 |       | $ | 194.3 |  | $ | 558.8
|                                   |  |                        |      |            |   |            |  |                    |       |       |   |       |  |   |      

---

|(1) | The Company is contingently liable for certain advisory fees. See FN 6 of the Interim Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------

|(2) | Represents interest on the notes and interest on the senior credit facility assuming LIBOR of 7.91%. Each increase or decrease in LIBOR of 0.125% would result in an increase or
decrease in annual interest on the senior credit facilities of $0.2 million assuming outstanding indebtedness of $180.4 million under our senior credit facilities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Recent Accounting Pronouncements

On July 17, 2006, the FASB issued 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, Accounting for Income Taxes (FAS 109). 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 merits. The Company is in the process of reviewing the potential impact of FIN 48 on its
financial statements.

Item 3. Quantitative and Qualitative Disclosure 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 prime rate, in each case plus an applicable
borrowing margin. We manage our interest rate risk by balancing the



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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 currently 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 current high price of fuel has caused us to incur increased costs in operating our fleet, which have an
adverse effect on our business, financial condition, and results of operations.

There have been no material changes in Quantitative and
Qualitative disclosures in 2006 from the disclosures included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005. Reference is made to Item 7A included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2005 and the caption Liquidity and Capital Resources under Item 2 of this Quarterly Report on Form 10-Q.

Interest Rate Risk and Sensitivity Analysis

In connection with the Transaction in October 2003, we entered into a Credit
Agreement that provides for a Revolving Credit Facility and Term Loan Facility, and issued Senior Subordinated Notes. As of July 1, 2006, the Company has $355.4 million in debt. The Revolving Credit Facility was not drawn on and the interest
rate on the $175 million of Senior Subordinated Notes is fixed at 9.75%. As of July 1, 2006, our exposure to changes in interest rates is related to our Term Loans of $180.4 million which provided for quarterly principal and interest payments
and is LIBOR plus 2.50 percent and matures in 2009, and our undrawn revolver. Based on the amount outstanding and affected by variable interest rates, a 100 basis point change would result in an approximately $1.8 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 CEO and CFO 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 effective.

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 July 1, 2006 that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting. The Reliable Acquisition occurred on December 23, 2005 and was outside the internal control over financial reporting of the Company. However, management has reviewed all financial
statement information related to Reliable.



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PART 2. OTHER INFORMATION

Item 1.Legal Proceedings

The Company is not currently a party to any material
legal proceedings. The Company is 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 Risk Factors section in our Form 10-K for the fiscal year ended December 31, 2005.

There have been no material changes
from Risk Factors previously disclosed in our Form10-K.

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.

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 Bryant P. Bynum 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 Bryant P. Bynum pursuant to 18 U.S.C. ss. 1350.
| | ---- | ----------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Exeter, Pennsylvania, on August 15, 2006.



KEYSTONE AUTOMOTIVE OPERATIONS, INC./s/ EDWARD H. ORZETTIEdward H. OrzettiChief Executive Officer and President/s/ BRYANT P. BYNUMBryant P. BynumExecutive Vice President andChief Financial Officer




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