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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 September 30, 2004



or



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



For the transition period from              to
            .



Commission file number 0-22239



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Autobytel Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 33-0711569                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer identification number)
|                                                               | 
|18872 MacArthur Boulevard, Irvine, California                  |  | 92612                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



(949) 225-4500

(Registrants telephone number, including area code)



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



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



As of April 30, 2005, there were 41,905,848 shares of the Registrants Common Stock outstanding.



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EXPLANATORY NOTE



In addition to providing financial and other information for our fiscal quarter ended September 30, 2004, we are filing this
Quarterly Report on Form 10-Q to restate our consolidated financial statements for the fiscal quarter ended September 30, 2003, as discussed in Note 3 to our consolidated financial statements. Our previously released financial statements for this
period should not be relied upon.



On November 15, 2004, we
announced that we expected to restate our consolidated financial statements for the second, third and fourth fiscal quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters of 2004, relating to credits issued to customers
that were inappropriately reversed and recognized as revenue during the four fiscal quarters ended March 31, 2004, and outstanding checks issued by us that were voided and the corresponding obligations inappropriately reversed and recorded as an
increase in revenue or a reduction of expenses in the second and third fiscal quarters of 2003 and the second fiscal quarter of 2004.



Upon a further review, we also determined to restate our consolidated financial statements for the full 2002 fiscal year and to include adjustments in our
restated consolidated financial statements for the first, second, third and fourth fiscal quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters of 2004.



The Audit Committee of our Board of Directors, with the assistance of independent counsel and independent forensic
accountants engaged by such independent counsel, undertook a seven-month internal review of the facts giving rise to the restatements described herein and our accounting policies and procedures related thereto. Independent counsel to the Audit
Committee concluded that of the 31 items reviewed in the course of the internal investigation that were ultimately determined to have been improperly accounted for and that are the subject of the restatement of our financial statements, 26 of those
items were the result of error or mistake and not the result of intentional conduct or fraud. With respect to the credits issued to customers that were inappropriately reversed and recognized as revenue and the outstanding checks issued by us that
were voided and the corresponding obligations inappropriately reversed and recorded as an increase in revenue or a reduction of expenses, while there were some facts that may have supported different inferences, independent counsel could not
conclude that the unapplied credit and stale check items were the result of intentional conduct for an improper or illegal purpose. With respect to the failure to make certain accruals in the second fiscal quarter of 2003, as well as the reversal of
accruals for certain bonuses in the third and fourth fiscal quarters of 2002 (see description below), while inferences may be drawn from the facts, based on the evidence reviewed, independent counsel could not conclude that such accounting treatment
was the result of intentional conduct for an improper or illegal purpose. Independent counsel to the Audit Committee also found that former senior management did not set an appropriate tone at the top that was conducive of an effective control
environment. In addition, our financial staff undertook a review of the basis on which we document and prepare our financial statements under generally accepted accounting principles. The aggregate impact of all of the identified inappropriate
accounting items and errors on our balance sheet is a reduction of $0.8 million in our stockholders equity at June 30, 2004, and the net impact on our statements of operations over the period from January 1, 2002 through June 30, 2004 is a
reduction of net income of $3.1 million, of which $1.7 million impacted the first six months of 2004.



Independent counsel to the Audit Committee of the Board of Directors and the forensic accountants retained by such outside counsel have also identified
internal control deficiencies, and have suggested changes, some of which we have begun to implement and others of which we intend to implement during the course of 2005, to our internal controls which are designed to remediate the deficiencies
described in Managements Report on Internal Control Over Financial Reporting set forth on page F-2 of our Annual Report on Form 10-K for the year ended December 31, 2004. Management has reviewed the internal control deficiencies with the Audit
Committee of the Board of Directors, has discussed them with our independent registered public accounting firm, PricewaterhouseCoopers LLP, and has advised the Audit Committee that the deficiencies are indicative of material weaknesses in our
internal control over financial reporting.



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The remedial measures include, but are not limited to, the following:



| |  |  | Establishment of written policies and procedures relating to the access to, and control over, our financial accounting systems.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Development or revision of our written accounting policies and procedures relating to: (i) disbursement checks outstanding greater than 180 days, (ii) unapplied credits on customer
accounts, to require review and approval by our controller or Chief Financial Officer of all debit memos and credit memos of $10,000 or more, (iii) voiding of purchase and disbursement transactions; and (iv) revenue recognition, accruals and
reversals thereof, reclassifications of accruals, and back-up documentation related thereto, and to require review and approval by our Chief Financial Officer of all accruals, individually or in the aggregate, above $100,000.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Implementation of enhanced training for our finance and accounting personnel to familiarize them with our accounting policies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Establishment of a quarterly and annual sub-certification process requiring written confirmation from business unit managers regarding communication of matters pertaining to their
area of responsibility that are nonstandard or that would require disclosure.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recruitment of additional personnel trained in financial reporting under accounting principles generally accepted in the United States to enhance supervision with regard to, among
other things, account reconciliations and documentation supporting our quarterly and annual financial statements.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Implementation of formal training related to compliance with state escheat laws.
| | - |  | --------------------------------------------------------------------------------



| |  |  | Revisions to, and improvement of, our contract management system and yield management system.
| | - |  | ---------------------------------------------------------------------------------------------



At the direction of, and in consultation with, the Audit Committee, management currently is implementing certain of the
remedial measures and intends to implement the remaining remedial measures during the course of 2005. While this implementation is underway, we are relying on extensive manual procedures and the utilization of outside accounting professionals to
assist us with meeting the objectives otherwise fulfilled by an effective controls environment. While we are implementing changes to our controls environment, there remains a risk that the transitional procedures on which we are currently relying
will fail to be sufficiently effective under the criteria used to assess effectiveness identified in Managements Report on Internal Control Over Financial Reporting. Please see Part I, Item 2. Managements Discussion and Analysis of
Financial Condition and Results of OperationsRisk FactorsOur internal controls and procedures need to be improved.



In addition, we have (i) accepted the resignations of our Chief Executive Officer and President (from such positions), Chief Financial Officer and
Executive Vice President, and Assistant Controller, (ii) appointed a new Chief Executive Officer and President, Chief Operating Officer and Executive Vice President, Chief Financial Officer and Executive Vice President, and Assistant Controller, and
(iii) hired a new Director of Accounting.



The restatement of
the consolidated financial statements for the third fiscal quarter of 2003 are reflected in this Quarterly Report on Form 10-Q, and principally make adjustments relating to the items set forth below, in addition to the adjustments related to
customer credits and outstanding checks described above.



Revenue
adjustments:



| |  |  | Certain revenue generated from the delivery of purchase requests for vehicles was inappropriately recognized in the first, second, third and fourth fiscal quarters of 2003 and the
first and second fiscal quarters of 2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advertising credits earned by customers in the first, second, third and fourth fiscal quarters of 2003 and the first and second fiscal quarters of 2004 were not recorded as a
reduction of advertising revenue in the period earned by the customers and delivery or payment of these credits in subsequent periods was inappropriately recorded as a decrease in advertising revenue;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Inappropriate classification of revenue between lead fees and customer relationship management services revenue in the first, second, third and fourth fiscal quarters of 2003 and
the first and second fiscal quarters of 2004;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Website advertising revenue earned in the first and second fiscal quarters of 2004 that was not recognized in such periods;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate recognition of revenue in the second fiscal quarter of 2004 for advertising services;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Lead fees earned in the second fiscal quarter of 2003 were inappropriately recognized in the third fiscal quarter 2003;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate recognition of revenue during the four fiscal quarters ended June 30, 2004 relating to delivery of purchase requests to two customers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate recognition of certain revenue from a multiple element arrangement in 2002, the first, second, third and fourth fiscal quarters of 2003 and the first and second fiscal
quarters of 2004;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Website advertising revenue in 2002 was inappropriately recognized prior to the delivery of services in 2003; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Lead fees earned in 1999, 2000, and 2001 were inappropriately recognized in the second fiscal quarter of 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------



Expense adjustments:



| |  |  | Credits issued to customers that were inappropriately reversed and recorded as a reduction of sales and marketing expense during 2002 and the fourth fiscal quarter of 2003 in
connection with the cessation of operations of certain subsidiaries;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expense provisions for our participation at an annual trade show that were inappropriately recorded throughout the annual fiscal period preceding the first fiscal quarter of the
following annual fiscal period in which the trade show took place;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate accrual of advertising costs in 2002 that was derecognized and recorded as a reduction of advertising expense in the first fiscal quarter of 2004;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Franchise tax expense was underestimated in the first, second, third and fourth fiscal quarters of 2003 and over-estimated in the first and second fiscal quarters of 2004;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate accruals of subscription costs in the first, second and third fiscal quarters of 2003 that were subsequently derecognized and recorded as a reduction of sales and
marketing expense in the first fiscal quarter of 2004;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Excess accrual of medical costs that should have been derecognized in the second fiscal quarter of 2002, but which was inappropriately derecognized and partially recorded as a
reduction of online advertising costs in the third fiscal quarter of 2003, with the remaining excess recorded as a reduction of compensation costs in the first fiscal quarter of 2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expenses inappropriately recorded in the third fiscal quarter of 2003 associated with services rendered in the second fiscal quarter of 2003;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accrued liabilities that were prematurely derecognized and recorded as a reduction of expenses in the first fiscal quarter of 2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate accrual of commissions expense in 2002 and the six fiscal quarters ended June 30, 2004;
| | - |  | -----------------------------------------------------------------------------------------------------



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| |  |  | Inappropriate excess accrual of commissions expense in the first fiscal quarter of 2003 that was derecognized and recorded as a reduction of commissions expense in the first fiscal
quarter of 2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Excess accrual for lease abandonment that was inappropriately derecognized in the second fiscal quarter of 2003; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | State income tax expenses were not recorded during the first and second fiscal quarters of 2004. The state tax expenses relate to two states where subsidiaries operate on a
profitable basis;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the second fiscal quarter of 2003, there was a lack of provision for annual employee cash bonus compensation which was recorded in the third fiscal quarter of 2003;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Purchase price for an acquisition which took place in 2004 was inappropriately allocated to certain intangible assets instead of goodwill;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The equity method of accounting was inappropriately applied for our investment in Autobytel.Europe; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | A series of loans made by Autobytel.Europe was inappropriately recorded at cost instead of net realizable value.
| | - |  | ----------------------------------------------------------------------------------------------------------------



The restatements of the consolidated financial statements for the full 2002
and 2003 fiscal years are reflected in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the Form 10-K). The restatement of the consolidated financial statements for the first fiscal quarter of 2004 is reflected
in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005 (the March 10-Q), and the restatements of the consolidated financial statements for the second fiscal quarter of 2003 and the second fiscal quarter of 2004
are reflected in an amendment to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004 (the 10-Q/A).



Concurrently with the filing of this Quarterly Report on Form 10-Q, we are filing with the SEC the Form 10-K, the March 10-Q, and the 10-Q/A. No
amendments have been made to our Annual Reports on Form 10-K for the fiscal years 2002 or 2003, or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003, June 30, 2003, September 30, 2003, or March 31, 2004, as all
relevant changes have been reflected in this Quarterly Report on Form 10-Q, the Form 10-Q/A, the March 10-Q, and the Form 10-K. Our previously filed Annual Reports on Form 10-K for the fiscal years ended 2002 and 2003, and our previously filed
Quarterly Reports on Form 10-Q for the fiscal periods ended March 31, 2002, June 30, 2002, September 30, 2002, March 31, 2003, June 30, 2003, September 30, 2003, March 31, 2004, and June 30, 2004 should not be relied upon.



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INDEX



|           |  |                                                                                                                         |  |     
|---------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                         |  | Page
|           |  | PART I. FINANCIAL INFORMATION                                                                                           |  |     
|           |  |                                                                                                                        
|ITEM 1.    |  | Consolidated Financial Statements (unaudited):                                                                          |  |     
|           |  |                                                                                                                        
|           |  | Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 (restated)                                   |  | 7   
|           |  |                                                                                                                        
|           |  | Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2004 and 2003 (restated) |  | 8   
|           |  |                                                                                                                        
|           |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 (restated)                  |  | 9   
|           |  |                                                                                                                        
|           |  | Notes to Consolidated Financial Statements                                                                              |  | 11  
|           |  |                                                                                                                        
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 41  
|           |  |                                                                                                                        
|ITEM 4.    |  | Controls and Procedures                                                                                                 |  | 71  
|           |  |                                                                                                                        
|           |  | PART II. OTHER INFORMATION                                                                                              |  |     
|           |  |                                                                                                                        
|ITEM 1.    |  | Legal Proceedings                                                                                                       |  | 73  
|           |  |                                                                                                                        
|ITEM 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                             |  | 75  
|           |  |                                                                                                                        
|ITEM 5.    |  | Other Information                                                                                                       |  | 76  
|           |  |                                                                                                                        
|ITEM 6.    |  | Exhibits                                                                                                                |  | 76  
|           | 
|Signatures |  | 77                                                                                                                     



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PART I. FINANCIAL INFORMATION



Item 1.Consolidated Financial Statements



AUTOBYTEL INC.



CONSOLIDATED
BALANCE SHEETS

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

(unaudited)



|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                     |  | September 30,2004 |          |   | December 31,2003 |  
|                                                                                                                                     |  |                   |          |   | (restated)       |  
|ASSETS                                                                                                                               |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                      |  |                   |          |   |                  |   |          |  
|Domestic cash and cash equivalents                                                                                                   |  | $                 | 20,133   |   |                  | $ | 45,643   |  
|Restricted international cash and cash equivalents (Note 4.)                                                                         |  |                   | 8,131    |   |                  |   |         |  
|Short-term investments                                                                                                               |  |                   | 19,500   |   |                  |   | 9,991    |  
|Accounts receivable, net of allowances for bad debts and customer credits of $1,012 and $1,764, respectively                         |  |                   | 17,319   |   |                  |   | 11,335   |  
|Prepaid expenses and other current assets                                                                                            |  |                   | 2,617    |   |                  |   | 1,140    |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                 |  |                   | 67,700   |   |                  |   | 68,109   |  
|Long-term investments                                                                                                                |  |                   | 9,000    |   |                  |   | 6,000    |  
|Property and equipment, net                                                                                                          |  |                   | 3,252    |   |                  |   | 2,138    |  
|Capitalized internal use software, net                                                                                               |  |                   | 339      |   |                  |   | 1,024    |  
|Investment in equity investee (Note 4.)                                                                                              |  |                   |         |   |                  |   | 3,938    |  
|Goodwill                                                                                                                             |  |                   | 70,697   |   |                  |   | 16,830   |  
|Acquired intangible assets, net                                                                                                      |  |                   | 4,694    |   |                  |   | 315      |  
|Other assets                                                                                                                         |  |                   | 117      |   |                  |   | 155      |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                         |  | $                 | 155,799  |   |                  | $ | 98,509   |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITY                                                                              |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                 |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                     |  | $                 | 5,107    |   |                  | $ | 3,741    |  
|Accrued expenses                                                                                                                     |  |                   | 6,459    |   |                  |   | 4,595    |  
|Current portion of deferred revenues                                                                                                 |  |                   | 4,048    |   |                  |   | 4,216    |  
|Accrued domestic restructuring                                                                                                       |  |                   | 121      |   |                  |   | 258      |  
|Other current liabilities                                                                                                            |  |                   | 1,839    |   |                  |   | 1,517    |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                            |  |                   | 17,574   |   |                  |   | 14,327   |  
|Long-term deferred revenue                                                                                                           |  |                   | 11       |   |                  |   | 178      |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                                    |  |                   | 17,585   |   |                  |   | 14,505   |  
|Minority interest (Note 4.)                                                                                                          |  |                   | 4,084    |   |                  |   |         |  
|                                                                                                                                     |  |                  
|Commitments and contingencies (Note 8.)                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                     |  |                  
|Stockholders equity:                                                                                                                |  |                   |          |   |                  |   |          |  
|Preferred stock, $0.001 par value; 11,445,187 shares authorized; none outstanding                                                    |  |                   |         |   |                  |   |         |  
|Common stock, $0.001 par value; 200,000,000 shares authorized; 41,808,517 and 37,786,767 shares issued and outstanding,
respectively |  |                   | 42       |   |                  |   | 38       |  
|Additional paid-in capital                                                                                                           |  |                   | 281,789  |   |                  |   | 236,544  |  
|Accumulated other comprehensive income                                                                                               |  |                   | 1,626    |   |                  |   | 1,620    |  
|Accumulated deficit                                                                                                                  |  |                   | (149,327 | ) |                  |   | (154,198 | )
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                           |  |                   | 134,130  |   |                  |   | 84,004   |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total liabilities, minority interest and stockholders equity                                                                        |  | $                 | 155,799  |   |                  | $ | 98,509   |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  



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



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AUTOBYTEL INC.



CONSOLIDATED
STATEMENTS OF OPERATIONS

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

(unaudited)



|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                               |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|                                               |  | 2004                             |            |   | 2003                            |   |            | 2004 |  |   | 2003       |  
|                                               |  |                                  |            |   | (Restated)                      |   |            |      |  |   | (Restated) |  
|Revenues                                       |  | $                                | 32,453     |   |                                 | $ | 22,772     |      |  | $ | 88,193     |   |  | $ | 64,443     |  
|                                               |  |                                  |            |  
|Costs and expenses:                            |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Cost of revenues                               |  |                                  | 13,049     |   |                                 |   | 8,703      |      |  |   | 36,465     |   |  |   | 26,618     |  
|Sales and marketing                            |  |                                  | 6,333      |   |                                 |   | 5,223      |      |  |   | 19,416     |   |  |   | 14,836     |  
|Product and technology development             |  |                                  | 5,115      |   |                                 |   | 4,368      |      |  |   | 14,925     |   |  |   | 11,200     |  
|General and administrative                     |  |                                  | 4,411      |   |                                 |   | 2,721      |      |  |   | 11,944     |   |  |   | 9,159      |  
|Amortization of acquired intangible assets     |  |                                  | 451        |   |                                 |   | 26         |      |  |   | 782        |   |  |   | 35         |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total costs and expenses                       |  |                                  | 29,359     |   |                                 |   | 21,041     |      |  |   | 83,532     |   |  |   | 61,848     |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income from operations                         |  |                                  | 3,094      |   |                                 |   | 1,731      |      |  |   | 4,661      |   |  |   | 2,595      |  
|Interest income                                |  |                                  | 244        |   |                                 |   | 74         |      |  |   | 649        |   |  |   | 204        |  
|Income (loss) in equity investee               |  |                                  |           |   |                                 |   | 29         |      |  |   | (84        | ) |  |   | (195       | )
|Foreign currency exchange gain                 |  |                                  |           |   |                                 |   | 10         |      |  |   | 20         |   |  |   | 10         |  
|Other expense                                  |  |                                  | (10        | ) |                                 |   |           |      |  |   | (9         | ) |  |   |           |  
|Minority interest                              |  |                                  | (27        | ) |                                 |   |           |      |  |   | (74        | ) |  |   |           |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income before income taxes                     |  |                                  | 3,301      |   |                                 |   | 1,844      |      |  |   | 5,163      |   |  |   | 2,614      |  
|Provision for income taxes                     |  |                                  | (92        | ) |                                 |   | (1         | )    |  |   | (292       | ) |  |   | (8         | )
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income                                     |  | $                                | 3,209      |   |                                 | $ | 1,843      |      |  | $ | 4,871      |   |  | $ | 2,606      |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income per share:                          |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                          |  | $                                | 0.08       |   |                                 | $ | 0.05       |      |  | $ | 0.12       |   |  | $ | 0.08       |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                        |  | $                                | 0.07       |   |                                 | $ | 0.05       |      |  | $ | 0.11       |   |  | $ | 0.07       |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Shares used in computing net income per share: |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                          |  |                                  | 41,757,703 |   |                                 |   | 37,212,616 |      |  |   | 40,413,342 |   |  |   | 33,442,305 |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                        |  |                                  | 44,300,265 |   |                                 |   | 40,933,384 |      |  |   | 43,917,425 |   |  |   | 36,079,233 |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Comprehensive income:                          |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income                                     |  | $                                | 3,209      |   |                                 | $ | 1,843      |      |  | $ | 4,871      |   |  | $ | 2,606      |  
|Translation adjustment                         |  |                                  | (61        | ) |                                 |   | (440       | )    |  |   | 6          |   |  |   | 220        |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Comprehensive income                           |  | $                                | 3,148      |   |                                 | $ | 1,403      |      |  | $ | 4,877      |   |  | $ | 2,826      |  
|                                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  



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



8



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##### Table of Contents

AUTOBYTEL INC.



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)



|                                                                                                               |  |                                 |         |   |            |   |        |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---------- | - | ------ | -
|                                                                                                               |  | Nine Months Ended September 30, |        
|                                                                                                               |  | 2004                            |         |   | 2003       |  
|                                                                                                               |  |                                 |         |   | (restated) |  
|Cash flows from operating activities:                                                                          |  |                                 |         |   |            |   |        |  
|Net income                                                                                                     |  | $                               | 4,871   |   |            | $ | 2,606  |  
|Adjustments to reconcile net income to net cash provided by operating activities:                              |  |                                 |         |   |            |   |        |  
|Non-cash charges:                                                                                              |  |                                 |         |   |            |   |        |  
|Depreciation and amortization                                                                                  |  |                                 | 1,216   |   |            |   | 1,029  |  
|Amortization of capitalized internal use software                                                              |  |                                 | 685     |   |            |   | 811    |  
|Amortization of acquired intangible assets                                                                     |  |                                 | 923     |   |            |   | 60     |  
|Provision for bad debt                                                                                         |  |                                 | 154     |   |            |   | 349    |  
|Provision for customer credits                                                                                 |  |                                 | 1,231   |   |            |   | 1,273  |  
|Impairment of acquired intangible assets                                                                       |  |                                 | 173     |   |            |   |       |  
|Loss on disposal of property and equipment                                                                     |  |                                 | 20      |   |            |   |       |  
|Stock based compensation                                                                                       |  |                                 |        |   |            |   | 51     |  
|Loss in equity investee                                                                                        |  |                                 | 84      |   |            |   | 195    |  
|Minority interest                                                                                              |  |                                 | 74      |   |            |   |       |  
|Changes in assets and liabilities, excluding the effect of acquisitions and consolidation of Autobytel.Europe: |  |                                 |         |   |            |   |        |  
|Accounts receivable                                                                                            |  |                                 | (2,240  | ) |            |   | (1,984 | )
|Prepaid expenses and other current assets                                                                      |  |                                 | (477    | ) |            |   | 2,382  |  
|Other assets                                                                                                   |  |                                 | 17      |   |            |   | 23     |  
|Accounts payable                                                                                               |  |                                 | (395    | ) |            |   | 771    |  
|Accrued expenses                                                                                               |  |                                 | (973    | ) |            |   | (607   | )
|Deferred revenues                                                                                              |  |                                 | (616    | ) |            |   | (147   | )
|Accrued domestic restructuring                                                                                 |  |                                 | (137    | ) |            |   | (173   | )
|Accrued international licensee liabilities                                                                     |  |                                 | (1,541  | ) |            |   |       |  
|Other current liabilities                                                                                      |  |                                 | 236     |   |            |   | 59     |  
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Net cash provided by operating activities                                                                      |  |                                 | 3,305   |   |            |   | 6,698  |  
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Cash flows from investing activities:                                                                          |  |                                 |         |   |            |   |        |  
|Acquisitions of businesses, net of cash acquired                                                               |  |                                 | (20,631 | ) |            |   | (4,952 | )
|Maturities of short-term investments                                                                           |  |                                 | 17,991  |   |            |   |       |  
|Purchases of short-term and long-term investments                                                              |  |                                 | (42,500 | ) |            |   |       |  
|Redemptions of long-term investments                                                                           |  |                                 | 12,000  |   |            |   |       |  
|Changes in restricted cash and cash equivalents                                                                |  |                                 | 2,005   |   |            |   | 28     |  
|Return of investment in Autobytel.Europe                                                                       |  |                                 |        |   |            |   | 2,152  |  
|Purchases of property and equipment                                                                            |  |                                 | (1,449  | ) |            |   | (703   | )
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Net cash used in investing activities                                                                          |  |                                 | (32,584 | ) |            |   | (3,475 | )
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Cash flows from financing activities:                                                                          |  |                                 |         |   |            |   |        |  
|Payments of capital lease obligations                                                                          |  |                                 | (225    | ) |            |   | (32    | )
|Net proceeds from sale of common stock                                                                         |  |                                 | 3,994   |   |            |   | 28,150 |  
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Net cash provided by financing activities                                                                      |  |                                 | 3,769   |   |            |   | 28,118 |  
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Effect of exchange rates on cash                                                                               |  |                                 |        |   |            |   | 40     |  
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                           |  |                                 | (25,510 | ) |            |   | 31,381 |  
|Cash and cash equivalents, beginning of period                                                                 |  |                                 | 45,643  |   |            |   | 27,543 |  
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Cash and cash equivalents, end of period                                                                       |  | $                               | 20,133  |   |            | $ | 58,924 |  
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Supplemental disclosure of cash flow information:                                                              |  |                                 |         |   |            |   |        |  
|Cash paid during the period for income taxes                                                                   |  | $                               | 84      |   |            | $ | 8      |  
|                                                                                                               |  |                                 |         |   |            |   |        |  
|Cash paid during the period for interest                                                                       |  | $                               | 9       |   |            | $ | 5      |  
|                                                                                                               |  |                                 |         |   |            |   |        |  



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##### Table of Contents

Supplemental disclosure of non-cash investing activities:



| |  |  | In June 2003, in conjunction with the acquisition of AVV, Inc., assets of $10,191 were acquired (including $173 of property and equipment acquired under capital leases), liabilities
of $1,023 were assumed and 711,109 shares of common stock valued at $4,316 were issued. (See Note 5.)
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March 2004, Autobytel consolidated Autobytel.Europe due to the adoption of FIN 46R. As a result of this adoption, Autobytel recorded $10,459 (including $10,425 of restricted
international cash and cash equivalents) in assets, $2,300 in liabilities and $4,161 in minority interest. (See Note 4.)
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In April 2004, in conjunction with the acquisition of iDriveonline, Inc., tangible and intangible assets of $12,672 were acquired, liabilities of $770 were assumed and 474,501
shares of common stock valued at $6,775 were issued. (See Note 5.)
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In April 2004, in conjunction with the acquisition of Stoneage Corporation, tangible and intangible assets of $53,715 were acquired (including $149 of property and equipment
acquired under capital leases), liabilities of $3,547 were assumed and 2,257,733 shares of common stock valued at $33,770 were issued. Additionally, based on the determination of the Stoneage Corporation final purchase price allocation, 47,511
additional shares of common stock valued at $710 were issued in July 2004. (See Note 5.)
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







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



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AUTOBYTEL INC.



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

(unaudited)



1. Organization and Operations of Autobytel



Autobytel Inc. (Autobytel) is an automotive marketing services company that helps dealers sell cars and manufacturers build brands through efficient
marketing and advertising primarily through the Internet. Autobytel provides products and programs to automotive dealers and manufacturers to help them increase marketing efficiency and reduce customer acquisition costs. Autobytel owns and operates
the automotive Web sites Autobytel.com, Autoweb.com, Car.com, CarSmart.com and Autosite.com. Autobytel is also a leading provider of customer relationship management (CRM) products and programs, which consist of lead management products, customer
loyalty and retention marketing programs, and data extraction services for dealers. Autobytel is also a provider of automotive marketing data and technology.



Autobytel is a Delaware corporation incorporated on May 17, 1996. Its principal corporate offices are located in Irvine, California. Autobytel completed
an initial public offering in March 1999 and its common stock is listed on the Nasdaq National Market under the symbol ABTLE.



2. Summary of Significant Accounting Policies



Unaudited Interim Financial Statements



The accompanying interim consolidated financial statements as of September 30, 2004, and for the three months and nine months ended September 30, 2004 and
2003, are unaudited. The accompanying consolidated financial statements as of December 31, 2003 and for the three months and nine months ended September 30, 2003 have been restated (see Note 3). The unaudited interim consolidated financial
statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of Autobytels management, reflect all adjustments, which are of a normal recurring nature, necessary to fairly state
Autobytels consolidated balance sheets and statements of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Autobytels results for an interim period are
not necessarily indicative of the results that may be expected for the year.



Although Autobytel believes that all adjustments necessary for a fair presentation of the interim periods presented are included and that the disclosures are adequate, these consolidated financial statements and
related notes are unaudited and should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2004 included in Autobytels Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on May 31, 2005.



Principles of Consolidation



Investments in
entities which Autobytel has the ability to exercise significant influence, but not control, are accounted for using the equity method. On March 31, 2004, Autobytel adopted FIN 46R and determined it was the primary beneficiary of Autobytel.Europe
LLC (Autobytel.Europe). As a result of adopting FIN46R, Autobytel consolidated Autobytel.Europe in its consolidated financial statements. Autobytel owns 49% of Autobytel.Europe. (See Note 4.)



All intercompany transactions and balances have been eliminated in
consolidation.



Use of Estimates in the Preparation of
Financial Statements



The preparation of financial
statements in conformity with generally accepted accounting principles requires Autobytel to make estimates and assumptions that affect the reported amounts of assets and liabilities and



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.



Cash and Cash Equivalents



For purposes of the
consolidated balance sheets and the consolidated statements of cash flows, Autobytel considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Domestic cash and cash
equivalents represent amounts held by Autobytel for use by Autobytel.



Restricted Cash and Cash Equivalents



Restricted international cash and cash equivalents represent amounts held by Autobytel.Europe for use as directed by Autobytel.Europe and are not available to Autobytel.



Short-Term and Long-Term Investments



Autobytel categorized its debt securities as either held-to-maturity or available-for-sale investments in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All held-to-maturity securities with remaining maturities of less than one year are classified as short-term investments and all held-to-maturity securities
with remaining maturities greater than one year are classified as long-term investments and are reported at amortized cost. Autobytel categorized auction rate securities as available-for-sale short-term investments. Auction rate securities are
reported at cost, which approximates fair market value due to the interest rate reset feature of these securities. As such, no unrealized gains or losses related to these securities were recognized during the three months and nine months ended
September 30, 2004 and 2003. The cost of securities sold is based on the specific identification method.



Autobytel reviews its investments in debt securities for potential impairment on a regular basis. As part of the evaluation process, Autobytel considers
the credit ratings of these securities and Autobytels intent and ability to hold the investment for a period of time sufficient to allow for any anticipated improvement of the investee financial condition. Autobytel will record an impairment
loss on investments for any other-than-temporary decline in fair value of these debt securities below their cost basis. For the three months and nine months ended September 30, 2004 and 2003, Autobytel did not record any impairment losses that were
related to other-than-temporary decline in fair value of its debt securities.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



As of September 30, 2004 and December 31, 2003, the amortized cost basis, aggregate fair value,
unrealized gains and losses by security type were as follows:



|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|------------------------------------------- |  | ------------------- | ------ | ------------------- | - | --------------- |  | ---------------- | -- |  | - | --
|                                            |  | AmortizedCost Basis |        | AggregateFair Value |   | UnrealizedGains |  | UnrealizedLosses
|September 30, 2004:                         |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|                                            |  |                     |        |                    
|Short-term investments, available for sale: |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|Auction rate securities                     |  | $                   | 13,500 |                     | $ | 13,500          |  | $                |   |  | $ |  
|Short-term investments, held-to-maturity:   |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|Government sponsored agency bonds           |  |                     | 6,000  |                     |   | 5,985           |  |                  |   |  |   | 15
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|                                            |  |                     | 19,500 |                     |   | 19,485          |  |                  |   |  |   | 15
|Long-term investments, held-to-maturity:    |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|Government sponsored agency bonds           |  | $                   | 9,000  |                     | $ | 8,955           |  | $                |   |  | $ | 45
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|Total as of September 30, 2004              |  | $                   | 28,500 |                     | $ | 28,440          |  | $                |   |  | $ | 60
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|December 31, 2003:                          |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|                                            |  |                     |        |                    
|Short-term investments, available for sale: |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|Auction rate securities                     |  | $                   | 6,000  |                     | $ | 6,000           |  | $                |   |  | $ |  
|Short-term investments, held-to-maturity:   |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|Commercial paper                            |  |                     | 3,991  |                     |   | 3,991           |  |                  |   |  |   |  
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|                                            |  |                     | 9,991  |                     |   | 9,991           |  |                  |   |  |   |  
|Long-term investments, held-to-maturity:    |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|Government sponsored agency bonds           |  |                     | 6,000  |                     |   | 6,020           |  |                  | 20 |  |   |  
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |   
|Total as of December 31, 2003               |  | $                   | 15,991 |                     | $ | 16,011          |  | $                | 20 |  | $ |  
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |   



The following
represents the contractual maturities of investments as of September 30, 2004:



|                                 |  |                     |       
|-------------------------------- |  | ------------------- | ------
|                                 |  | AmortizedCost Basis
|Due within one year              |  | $                   | 6,000 
|Due after one through five years |  |                     | 9,000 
|Due after five years             |  |                     | 13,500
|                                 |  |                     |       
|                                 |  | $                   | 28,500
|                                 |  |                     |       



Certain auction rate
securities have been reclassified from cash equivalents to short-term investments. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days. Auction rate
securities have interest rate resets through a modified Dutch auction, at pre-determined short-term intervals, usually every 7, 28 or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer.
Interest paid during a given period is based upon the interest rate determined during the prior auction.



Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided
through the interest rate reset. Based on Autobytels ability either to liquidate its holdings or to roll its investment over to the next reset period, Autobytel has historically classified some or all of these instruments as cash equivalents
if the period between interest rate resets was 90 days or less.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



Autobytel accounts for these marketable securities in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Such investments are classified as available for sale and are reported at fair value in Autobytels consolidated balance sheets. The short-term nature and structure, the
frequency with which the interest rate resets and the ability to sell auction rate securities at par and at Autobytels discretion indicates that such securities should more appropriately be classified as short-term investments with the intent
of meeting Autobytels short-term working capital requirements.



Based upon Autobytels re-evaluation of these securities, Autobytel has reclassified as short-term investments auction rate securities previously classified as cash equivalents for each of the periods presented in the accompanying
consolidated balance sheets. This resulted in a $6,000 reclassification from cash and cash equivalents to short-term investments at December 31, 2003.



Revenues



Autobytel classifies revenues as lead fees, advertising, customer relationship management (CRM) services, and data, applications and other.



Revenues by groups of similar services are as follows for the three and nine
months ended September 30, 2005 and 2004, respectively (all amounts in thousands):



|                             |  |                                 |        |                                |   |        |  |            |        |  |   |       
|---------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---------- | ------ |  | - | ------
|                             |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                             |  | 2004                            |        | 2003                           |   | 2004   |  | 2003      
|                             |  |                                 |        | (Restated)                     |   |        |  | (Restated)
|Revenues:                    |  |                                 |        |                                |   |        |  |            |        |  |   |       
|Lead fees                    |  | $                               | 22,414 |                                | $ | 16,094 |  | $          | 61,378 |  | $ | 47,632
|Advertising                  |  |                                 | 3,551  |                                |   | 2,719  |  |            | 9,818  |  |   | 8,430 
|CRM services                 |  |                                 | 5,382  |                                |   | 2,483  |  |            | 13,342 |  |   | 4,435 
|Data, applications and other |  |                                 | 1,106  |                                |   | 1,476  |  |            | 3,655  |  |   | 3,946 
|                             |  |                                 |        |                                |   |        |  |            |        |  |   |       
|Total revenues               |  | $                               | 32,453 |                                | $ | 22,772 |  | $          | 88,193 |  | $ | 64,443
|                             |  |                                 |        |                                |   |        |  |            |        |  |   |       



Computation of
Basic and Diluted Net Income per share



Net income per
share has been calculated under SFAS No. 128, Earnings per Share. SFAS No. 128 requires companies to compute earnings per share under two different methods, basic and diluted. Basic net income per share is calculated by dividing the net
income by the weighted average shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing the net income by the weighted average shares of common stock outstanding during the period and dilutive
potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock options net of shares of common stock assumed to be
repurchased by the company from the exercise proceeds.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



The following table sets forth the computation of basic and diluted net income per share:



|                                                                     |  |                                 |            |                                 |   |            |  |            |            |  |   |           
|-------------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------- | - | ---------- |  | ---------- | ---------- |  | - | ----------
|                                                                     |  | Three Months EndedSeptember 30, |            | Nine Months Ended September 30,
|                                                                     |  | 2004                            |            | 2003                            |   | 2004       |  | 2003      
|                                                                     |  |                                 |            | (Restated)                      |   |            |  | (Restated)
|Numerator:                                                           |  |                                 |            |                                 |   |            |  |            |            |  |   |           
|Net income                                                           |  | $                               | 3,209      |                                 | $ | 1,843      |  | $          | 4,871      |  | $ | 2,606     
|                                                                     |  |                                 |            |                                
|Denominator:                                                         |  |                                 |            |                                 |   |            |  |            |            |  |   |           
|Weighted average common shares and denominator for basic calculation |  |                                 | 41,757,703 |                                 |   | 37,212,616 |  |            | 40,413,342 |  |   | 33,442,305
|Weighted average effect of dilutive securities:                      |  |                                 |            |                                 |   |            |  |            |            |  |   |           
|Employee stock options                                               |  |                                 | 2,542,562  |                                 |   | 3,716,437  |  |            | 3,504,083  |  |   | 2,632,597 
|Employee stock purchase plan                                         |  |                                 |           |                                 |   | 4,331      |  |            |           |  |   | 4,331     
|                                                                     |  |                                 |            |                                 |   |            |  |            |            |  |   |           
|Denominator for diluted calculation                                  |  |                                 | 44,300,265 |                                 |   | 40,933,384 |  |            | 43,917,425 |  |   | 36,079,233
|Net income per sharebasic                                           |  | $                               | 0.08       |                                 | $ | 0.05       |  | $          | 0.12       |  | $ | 0.08      
|Net income per sharediluted                                         |  | $                               | 0.07       |                                 | $ | 0.05       |  | $          | 0.11       |  | $ | 0.07      



Antidilutive potential
shares of common stock, which have been excluded from the calculation of diluted net income per share, represent stock options with an exercise price greater than the average market price for the three month or nine month period ended September 30,
2004. For the three months and nine months ended September 30, 2004 there were 1,399,338 and 2,496,555 antidilutive potential shares of common stock, respectively. For the three months and nine months ended September 30, 2003 there were 661,863 and
1,774,868 antidilutive potential shares of common stock, respectively.



Stock-Based Compensation



As permitted under
SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amended SFAS No. 123, Accounting for Stock-Based Compensation, Autobytel has elected to continue to account for its stock-based
compensation using the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Under APB 25, compensation expense is recognized over the
vesting period based on the excess of the closing price over the exercise price on the grant date.



15



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##### Table of Contents

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



For disclosure purposes, stock compensation expense has been estimated using the Black-Scholes
option-pricing model on the date of grant and assumptions related to dividend yield, stock price volatility, weighted-average risk free interest rate and expected life of the stock options, which is a fair value based method. Had the provisions of
SFAS No. 123 been applied to Autobytels stock option grants for its stock-based compensation plans, Autobytels net income and net income per share for the three months and nine months ended September 30, 2004 and 2003, would approximate
the pro forma amounts below:



|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |            |   |  |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ---------- | - |  | - | ------ | -
|                                                                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                            |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003       |  
|                                                                            |  |                                 |        |   | (Restated)                     |   |        |      |  |   | (Restated) |  
|Net income (loss):                                                          |  |                                 |        |   |                                |   |        |      |  |   |            |   |  |   |        |  
|As reported                                                                 |  | $                               | 3,209  |   |                                | $ | 1,843  |      |  | $ | 4,871      |   |  | $ | 2,606  |  
|Add: Stock-based compensation included in reported net Income               |  |                                 |       |   |                                |   |       |      |  |   |           |   |  |   | 51     |  
|Less: Stock-based compensation determined under the fair value based method |  |                                 | (1,476 | ) |                                |   | (1,182 | )    |  |   | (4,248     | ) |  |   | (3,152 | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |            |   |  |   |        |  
|Pro forma                                                                   |  | $                               | 1,733  |   |                                | $ | 661    |      |  | $ | 623        |   |  | $ | (495   | )
|                                                                            |  |                                 |        |   |                                |   |        |      |  |   |            |   |  |   |        |  
|Net income (loss) per sharebasic:                                          |  |                                 |        |   |                                |   |        |      |  |   |            |   |  |   |        |  
|As reported                                                                 |  | $                               | 0.08   |   |                                | $ | 0.05   |      |  | $ | 0.12       |   |  | $ | 0.08   |  
|Pro forma                                                                   |  | $                               | 0.04   |   |                                | $ | 0.02   |      |  | $ | 0.02       |   |  | $ | (0.01  | )
|Net income (loss) per sharediluted:                                        |  |                                 |        |   |                                |   |        |      |  |   |            |   |  |   |        |  
|As reported                                                                 |  | $                               | 0.07   |   |                                | $ | 0.05   |      |  | $ | 0.11       |   |  | $ | 0.07   |  
|Pro forma                                                                   |  | $                               | 0.04   |   |                                | $ | 0.02   |      |  | $ | 0.01       |   |  | $ | (0.01  | )



The effects of
applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.



During the nine months ended September 30, 2004 and 2003, Autobytel granted 1,793,000 and 2,620,500 stock options, respectively. The options granted were estimated to have a weighted average fair value per share of
$5.51 and $2.83 for the nine months ended September 30, 2004 and 2003 respectively based on the Black-Scholes option-pricing model on the date of grant and the following assumptions:



|                                         |  |                                |   |  |           |  
|---------------------------------------- |  | ------------------------------ | - |  | --------- | -
|                                         |  | Nine Months EndedSeptember 30, |  
|                                         |  | 2004                           |   |  | 2003      |  
|Dividend yield                           |  |                               | % |  |          | %
|Volatility                               |  | 68.08                          | % |  | 81.94     | %
|Weighted-average risk-free interest rate |  | 2.544                          | % |  | 2.087     | %
|Weighted-average expected life           |  | 3.5 years                      |   |  | 3.7 years |  



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



Awards issued under the employee stock purchase plan were estimated to have a weighted average fair
value per award of $2.33 and $3.31 for the nine months ended September 30, 2004 and 2003, respectively based on the Black-Scholes option-pricing model and the following assumptions:



|                        |  |                                 |  |                
|----------------------- |  | ------------------------------- |  | ---------------
|                        |  | Nine Months Ended September 30,
|                        |  | 2004                            |  | 2003           
|Dividend yield          |  |   %                            |  |   %           
|Volatility              |  | 66.06% - 73.86%                 |  | 66.06% - 75.44%
|Risk-free interest rate |  | 1.03% - 1.05%                   |  | 1.05% - 1.66%  
|Expected life           |  | 6 months                        |  | 6 months       



As of September 30,
2004, Autobytel had a total of 8,026,367 stock options outstanding, of which 6,170,868 stock options had exercise prices below the closing price per share of Autobytels common stock on that date.



Business Segment



Autobytel conducts its business within one business segment which is defined
as providing automotive marketing services.



New Accounting
Pronouncements



In March 2004, the FASBs Emerging
Issues Task Force (EITF) reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments (EITF 03-1).EITF 03-1 provides accounting guidance regarding
the determination of when an impairment (i.e., fair value is less than amortized cost) of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in earnings.
EITF 03-1 also requires annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities classified as available-for-sale or held-to-maturity that are in an unrealized loss position at the balance sheet
date, but for which an other-than-temporary impairment has not been recognized. Autobytel adopted the disclosure requirements of EITF 03-1 on December 31, 2003.



The accounting guidance of EITF 03-1 was initially effective on July 1, 2004. However, on September 30, 2004, the FASB issued a FASB Staff Position
(FSP) that delayed the effective date of the measurement and recognition guidance included in EITF 03-1 (the annual disclosure requirements have not been deferred). The effective date has been delayed so that the FASB can consider
providing additional implementation guidance.



In December
2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123R (revised 2004), Share-Based Payment, which revised SFAS No. 123, Accounting for Stock-Based Compensation. This statement supercedes
APB Opinion No. 25, Accounting for Stock Issued to Employees. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based
compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. The revised statement is effective as of the first annual period beginning after
June 15, 2005. In accordance with the revised statement, Autobytel will be required to recognize the expense attributable to stock options granted or vested subsequent to December 31, 2005. Autobytel expects the adoption of SFAS 123R, will result in
amounts that are similar to the current pro forma disclosures in Note 2 of the Notes to Consolidated Financial Statements.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, or FAS 109-1, Application
of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The American Jobs Creation Act, or AJCA, introduces a special 9%
tax deduction on qualified production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. Pursuant to the AJCA, Autobytel will not be entitled to this special
deduction in 2005, as the deduction is applied to taxable income after taking into account net operating loss carryforwards, and Autobytel has significant net operating loss carryforwards that will fully offset taxable income. Autobytel does not
expect the adoption of these new tax provisions to have a material impact on its consolidated financial position, results of operations or cash flows.



In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, or FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creations Act of 2004. The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided
certain criteria are met. FAS No. 109-2 provides accounting and disclosure guidance for the repatriation provision. Although FAS 109-2 is effective immediately, Autobytel does not expect the adoption of these new tax provisions to have a material
impact on its consolidated financial position, results of operations or cash flows.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, (SFAS 153). SFAS 153 addresses the measurement of exchanges of non-monetary
assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of
SFAS 153 is not expected to have a material effect on Autobytels consolidated financial position or results of operations.



On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R
and certain SEC rules and regulations and provides the SECs views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with
non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based
payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting
for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R and disclosures in Managements Discussion and Analysis of Financial
Condition and Results of Operations subsequent to adoption of SFAS No. 123R. Autobytel does not expect the impact SAB 107, which became effective on March 29, 2005, to have a material impact on its consolidated financial position, results of
operations or cash flows.



Reclassification



Effective January 1, 2004, Autobytel modified its revenue presentation to
better align reported amounts and metrics with internal operational measures and to provide increased understanding and transparency for investors. Revenues are now classified as lead fees, advertising, customer relationship management (CRM)
services and data, applications and other. Prior to January 1, 2004, Autobytel had reported revenues as program fees, enterprise sales, advertising and other products and services. Amounts for 2003 have been reclassified to conform to the 2004
presentation. There was no impact on total revenues as a result of the reclassification.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



Lead fees consist of fees paid by retail dealers, enterprise dealers and automotive manufacturers who
participate in the Autobytel.com, Autoweb.com, CarSmart.com and Car.com online car buying referral networks and fees paid by retail dealers, finance request intermediaries, and automotive finance companies who participate in the Car.com online
finance referral network. Advertising revenues represent fees received from automotive manufacturers and other advertisers who target car-buyers during the research, consideration and decision making process on the Web sites. CRM services consist of
fees paid by customers who use Autobytels lead management products, customer loyalty and retention marketing programs, and data extraction services. Revenues from data, applications and other include fees from automotive marketing data and
technology, classified listings for used cars, international licensing agreements, internet sales training and other products and services.



Also, certain other reclassifications have been made to prior year financial information to conform with the current year presentation. (See Note 3.)



3. Restatement



On November 15, 2004, Autobytel announced that Autobytel expected to restate
its consolidated financial statements for the second, third and fourth fiscal quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters of 2004, relating to credits issued to customers that were inappropriately reversed
and recognized as revenue during the four fiscal quarters ended March 31, 2004, and outstanding checks issued by Autobytel that were voided and the corresponding obligations inappropriately reversed and recorded as an increase in revenue or a
reduction of expenses primarily in the second fiscal quarter of 2003. In the course of preparing these consolidated financial statements to properly reflect the credits issued to customers and the outstanding checks issued, Autobytel identified
other items and errors for which accounting adjustments were necessary, which resulted in further restatement adjustments to its consolidated financial statements for 2003 and 2002 and subsequent periods.



The revenue restatement adjustments recorded in this restatement primarily
result in revenue being deferred and recognized in subsequent periods, although certain adjustments result in permanent reductions in revenue. These adjustments include (i) reversal of credits issued to certain customers that were inappropriately
recognized as revenue, (ii) errors previously made in the application of the revenue recognition principles under EITF 00-21, (iii) errors previously made in the application of the revenue recognition principles under SAB 104, and (iv) errors due to
misclassifications between revenue and expense. The net effect of these revenue adjustments is to decrease total revenue by $267 and $570 for the three months and nine months ended September 30, 2003, respectively. Autobytel also made certain
deferrals and other adjustments to its expenses and other accounts in connection with these revenue adjustments and has made certain other adjustments to its expenses. These expense adjustments include errors previously made in the application of
SFAS No. 5, Accounting for Contingencies and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities related to the recognition and derecognition of accrued expenses. The
net effect of these expense adjustments is to decrease total expenses by $444 and increase total expenses by $480 for the three months and nine months ended September 30, 2003, respectively.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



The following table is a reconciliation of revenue as previously reported to amounts as restated for
the periods indicated:



|                                       |  |                                 |        |   |             |   |        |  
|-------------------------------------- |  | ------------------------------- | ------ | - | ----------- | - | ------ | -
|                                       |  | Period Ended September 30, 2003 |       
|                                       |  | Three months                    |        |   | Nine months |  
|Total revenue, as previously reported  |  | $                               | 23,039 |   |             | $ | 65,013 |  
|Total revenue restatement adjustments: |  |                                 |        |   |             |   |        |  
|Unapplied credits                      |  |                                 | (142   | ) |             |   | (275   | )
|Stale dated checks                     |  |                                 |       |   |             |   | (17    | )
|Multiple element arrangements          |  |                                 | 25     |   |             |   | 35     |  
|Delivery of purchase requests          |  |                                 |       |   |             |   | (24    | )
|Advertising                            |  |                                 | (68    | ) |             |   | (220   | )
|Other                                  |  |                                 | (82    | ) |             |   | (69    | )
|                                       |  |                                 |        |   |             |   |        |  
|Total revenue restatement adjustments  |  |                                 | (267   | ) |             |   | (570   | )
|                                       |  |                                 |        |   |             |   |        |  
|Total revenue, as restated             |  | $                               | 22,772 |   |             | $ | 64,443 |  
|                                       |  |                                 |        |   |             |   |        |  



The following table is
a reconciliation of net income as previously reported to amounts as restated for the periods indicated:



|                                               |  |                                 |       |   |             |   |        |  
|---------------------------------------------- |  | ------------------------------- | ----- | - | ----------- | - | ------ | -
|                                               |  | Period Ended September 30, 2003 |      
|                                               |  | Three months                    |       |   | Nine months |  
|Net income, as previously reported             |  | $                               | 1,666 |   |             | $ | 3,656  |  
|Restatement adjustments to revenue (see above) |  |                                 | (267  | ) |             |   | (570   | )
|Expense adjustments:                           |  |                                 |       |   |             |   |        |  
|Stale dated checks                             |  |                                 | (1    | ) |             |   | (110   | )
|Accrued expenses                               |  |                                 | 389   |   |             |   | (139   | )
|Commission expenses                            |  |                                 | (194  | ) |             |   | 146    |  
|Accrued bonus                                  |  |                                 | 250   |   |             |   |       |  
|Equity investment                              |  |                                 |      |   |             |   | (291   | )
|Other                                          |  |                                 |      |   |             |   | (86    | )
|                                               |  |                                 |       |   |             |   |        |  
|Total restatement expense adjustments          |  |                                 | 444   |   |             |   | (480   | )
|                                               |  |                                 |       |   |             |   |        |  
|Net restatement adjustments                    |  |                                 | 177   |   |             |   | (1,050 | )
|                                               |  |                                 |       |   |             |   |        |  
|Restated net income                            |  | $                               | 1,843 |   |             | $ | 2,606  |  
|                                               |  |                                 |       |   |             |   |        |  



Classifications



Effective with the filing of this Quarterly Report on
10-Q, Autobytel modified its consolidated statement of operations presentation to better align reported results with internal operational measures and to provide increased understanding and transparency. Operating expenses are now classified as cost
of revenues, sales and marketing, product and technology development, general and administrative, and amortization of acquired intangible assets. Amounts which have been reclassified as a result of the new presentation are indicated below in the
column titled Reclassifications. Cost of revenues contain costs previously classified as sales and marketing including traffic acquisition and related compensation costs, printing, production and postage for its customer loyalty and
retention program, and fees paid to third parties for data and content included on Autobytels properties. Cost of revenues also contain costs previously classified as product and technology development including connectivity



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



costs, technology license fees, amortization of acquired technology, amortization of internally developed technology, fees paid to third parties for data and
content included on Autobytels properties, and server equipment depreciation. Other costs which have been reclassified are: (1) bad debt expense which was previously classified as sales and marketing expense, is now classified as general and
administrative expense, and (2) credit balances of customers which were previously classified as accounts receivable are now classified as other current liabilities.



See Note 2 for discussion of reclassification of auction rate securities.



The following table sets forth selected consolidated balance sheet data for
Autobytel, showing previously reported amounts and restated amounts as of December 31, 2003:



Consolidated Balance Sheet



|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|------------------------------------------ |  | ---------------------- | -------- | - | ----------------- | - | ------ | ----------- |  | - | ----------- | - |  | - | -------- | -
|                                           |  | December 31, 2003      |         
|                                           |  | As Previously Reported |          |   | Reclassifications |   |        | Adjustments |  |   | As Restated |  
|Current assets:                            |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Domestic cash and cash equivalents         |  | $                      | 51,643   |   |                   | $ | (6,000 | )           |  | $ |            |   |  | $ | 45,643   |  
|Short-term investments                     |  |                        | 3,991    |   |                   |   | 6,000  |             |  |   |            |   |  |   | 9,991    |  
|Accounts Receivable, net of allowances     |  |                        | 10,889   |   |                   |   | 476    |             |  |   | (30         | ) |  |   | 11,335   |  
|Prepaid expenses and other current assets  |  |                        | 833      |   |                   |   |       |             |  |   | 307         |   |  |   | 1,140    |  
|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Total current assets                       |  |                        | 67,356   |   |                   |   | 476    |             |  |   | 277         |   |  |   | 68,109   |  
|Long-term investments                      |  |                        | 6,000    |   |                   |   |       |             |  |   |            |   |  |   | 6,000    |  
|Property and equipment, net                |  |                        | 2,138    |   |                   |   |       |             |  |   |            |   |  |   | 2,138    |  
|Capitalized internal use software, net     |  |                        | 1,024    |   |                   |   |       |             |  |   |            |   |  |   | 1,024    |  
|Investment in equity investee              |  |                        | 2,810    |   |                   |   |       |             |  |   | 1,128       |   |  |   | 3,938    |  
|Goodwill                                   |  |                        | 16,830   |   |                   |   |       |             |  |   |            |   |  |   | 16,830   |  
|Acquired intangible assets, net            |  |                        | 315      |   |                   |   |       |             |  |   |            |   |  |   | 315      |  
|Other assets                               |  |                        | 155      |   |                   |   |       |             |  |   |            |   |  |   | 155      |  
|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Total assets                               |  | $                      | 96,628   |   |                   | $ | 476    |             |  | $ | 1,405       |   |  | $ | 98,509   |  
|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Current liabilities:                       |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Accounts payable                           |  | $                      | 4,063    |   |                   | $ |       |             |  | $ | (322        | ) |  | $ | 3,741    |  
|Accrued expenses                           |  |                        | 5,034    |   |                   |   |       |             |  |   | (439        | ) |  |   | 4,595    |  
|Current portion of deferred revenues       |  |                        | 4,022    |   |                   |   | (178   | )           |  |   | 372         |   |  |   | 4,216    |  
|Accrued domestic restructuring             |  |                        | 258      |   |                   |   |       |             |  |   |            |   |  |   | 258      |  
|Other current liabilities                  |  |                        | 441      |   |                   |   | 476    |             |  |   | 600         |   |  |   | 1,517    |  
|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Total current liabilities                  |  |                        | 13,818   |   |                   |   | 298    |             |  |   | 211         |   |  |   | 14,327   |  
|Long-term deferred revenue                 |  |                        |         |   |                   |   | 178    |             |  |   |            |   |  |   | 178      |  
|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Total liabilities                          |  |                        | 13,818   |   |                   |   | 476    |             |  |   | 211         |   |  |   | 14,505   |  
|Stockholders equity:                      |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Common stock                               |  |                        | 38       |   |                   |   |       |             |  |   |            |   |  |   | 38       |  
|Additional paid-in capital                 |  |                        | 236,544  |   |                   |   |       |             |  |   |            |   |  |   | 236,544  |  
|Accumulated other comprehensive income     |  |                        |         |   |                   |   |       |             |  |   | 1,620       |   |  |   | 1,620    |  
|Accumulated deficit                        |  |                        | (153,772 | ) |                   |   |       |             |  |   | (426        | ) |  |   | (154,198 | )
|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Total stockholders equity                 |  |                        | 82,810   |   |                   |   |       |             |  |   | 1,194       |   |  |   | 84,004   |  
|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|Total liabilities and stockholders equity |  | $                      | 96,628   |   |                   | $ | 476    |             |  | $ | 1,405       |   |  | $ | 98,509   |  
|                                           |  |                        |          |   |                   |   |        |             |  |   |             |   |  |   |          |  



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



The following table sets forth selected consolidated statement of operations data for Autobytel,
showing previously reported amounts and restated amounts for the three and nine months ended September 30, 2003:



Consolidated Statement of Operations



|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|---------------------------------------------- |  | ------------------------------------- | ---------- | - | ----------------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                               |  | Three Months Ended September 30, 2003 |           
|                                               |  | As PreviouslyReported                 |            |   | Reclassifications |   |        | Adjustments |  |   | As Restated |  
|Revenues                                       |  | $                                     | 23,039     |   |                   | $ |       |             |  | $ | (267        | ) |  | $ | 22,772     |  
|                                               |  |                                       |            |  
|Costs and expenses:                            |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Cost of revenues                               |  |                                       |           |   |                   |   | 8,703  |             |  |   |            |   |  |   | 8,703      |  
|Sales and marketing                            |  |                                       | 13,303     |   |                   |   | (7,795 | )           |  |   | (285        | ) |  |   | 5,223      |  
|Product and technology development             |  |                                       | 5,435      |   |                   |   | (942   | )           |  |   | (125        | ) |  |   | 4,368      |  
|General and administrative                     |  |                                       | 2,747      |   |                   |   | 8      |             |  |   | (34         | ) |  |   | 2,721      |  
|Amortization of acquired intangible assets     |  |                                       |           |   |                   |   | 26     |             |  |   |            |   |  |   | 26         |  
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Total costs and expenses                       |  |                                       | 21,485     |   |                   |   |       |             |  |   | (444        | ) |  |   | 21,041     |  
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Income from operations                         |  |                                       | 1,554      |   |                   |   |       |             |  |   | 177         |   |  |   | 1,731      |  
|Interest income                                |  |                                       | 74         |   |                   |   |       |             |  |   |            |   |  |   | 74         |  
|Income in equity investee                      |  |                                       | 29         |   |                   |   |       |             |  |   |            |   |  |   | 29         |  
|Foreign currency exchange gain                 |  |                                       | 10         |   |                   |   |       |             |  |   |            |   |  |   | 10         |  
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Income before income taxes                     |  |                                       | 1,667      |   |                   |   |       |             |  |   | 177         |   |  |   | 1,844      |  
|Provision for income taxes                     |  |                                       | (1         | ) |                   |   |       |             |  |   |            |   |  |   | (1         | )
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                                     | 1,666      |   |                   | $ |       |             |  | $ | 177         |   |  | $ | 1,843      |  
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Net income per share:                          |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Basic                                          |  | $                                     | 0.04       |   |                   | $ |       |             |  | $ | 0.01        |   |  | $ | 0.05       |  
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Diluted                                        |  | $                                     | 0.04       |   |                   | $ |       |             |  | $ | 0.01        |   |  | $ | 0.05       |  
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Shares used in computing net income per share: |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Basic                                          |  |                                       | 37,212,616 |   |                   |   |       |             |  |   |            |   |  |   | 37,212,616 |  
|Diluted                                        |  |                                       | 40,929,053 |   |                   |   |       |             |  |   | 4,331       |   |  |   | 40,933,384 |  
|Comprehensive income:                          |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                                     | 1,666      |   |                   | $ |       |             |  | $ | 177         |   |  | $ | 1,843      |  
|Translation adjustment                         |  |                                       | (23        | ) |                   |   |       |             |  |   | (417        | ) |  |   | (440       | )
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Comprehensive income                           |  | $                                     | 1,643      |   |                   | $ |       |             |  | $ | (240        | ) |  | $ | 1,403      |  
|                                               |  |                                       |            |   |                   |   |        |             |  |   |             |   |  |   |            |  



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##### Table of Contents

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



Consolidated Statement of Operations



|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|---------------------------------------------- |  | ------------------------------------ | ---------- | - | ----------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                               |  | Nine Months Ended September 30, 2003 |           
|                                               |  | As Previously Reported               |            |   | Reclassifications |   |         | Adjustments |  |   | As Restated |  
|Revenues                                       |  | $                                    | 65,013     |   |                   | $ |        |             |  | $ | (570        | ) |  | $ | 64,443     |  
|                                               |  |                                      |            |  
|Costs and expenses:                            |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Cost of revenues                               |  |                                      |           |   |                   |   | 26,618  |             |  |   |            |   |  |   | 26,618     |  
|Sales and marketing                            |  |                                      | 39,270     |   |                   |   | (24,413 | )           |  |   | (21         | ) |  |   | 14,836     |  
|Product and technology development             |  |                                      | 13,751     |   |                   |   | (2,553  | )           |  |   | 2           |   |  |   | 11,200     |  
|General and administrative                     |  |                                      | 8,638      |   |                   |   | 313     |             |  |   | 208         |   |  |   | 9,159      |  
|Amortization of acquired intangible assets     |  |                                      |           |   |                   |   | 35      |             |  |   |            |   |  |   | 35         |  
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Total costs and expenses                       |  |                                      | 61,659     |   |                   |   |        |             |  |   | 189         |   |  |   | 61,848     |  
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Income from operations                         |  |                                      | 3,354      |   |                   |   |        |             |  |   | (759        | ) |  |   | 2,595      |  
|Interest income                                |  |                                      | 204        |   |                   |   |        |             |  |   |            |   |  |   | 204        |  
|Income in equity investee                      |  |                                      | 96         |   |                   |   |        |             |  |   | (291        | ) |  |   | (195       | )
|Foreign currency exchange gain                 |  |                                      | 10         |   |                   |   |        |             |  |   |            |   |  |   | 10         |  
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Income before income taxes                     |  |                                      | 3,664      |   |                   |   |        |             |  |   | (1,050      | ) |  |   | 2,614      |  
|Provision for income taxes                     |  |                                      | (8         | ) |                   |   |        |             |  |   |            |   |  |   | (8         | )
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                                    | 3,656      |   |                   | $ |        |             |  | $ | (1,050      | ) |  | $ | 2,606      |  
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income per share:                          |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Basic                                          |  | $                                    | 0.11       |   |                   | $ |        |             |  | $ | (0.03       | ) |  | $ | 0.08       |  
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Diluted                                        |  | $                                    | 0.10       |   |                   | $ |        |             |  | $ | (0.03       | ) |  | $ | 0.07       |  
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Shares used in computing net income per share: |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Basic                                          |  |                                      | 33,442,305 |   |                   |   |        |             |  |   |            |   |  |   | 33,442,305 |  
|Diluted                                        |  |                                      | 36,074,902 |   |                   |   |        |             |  |   | 4,331       |   |  |   | 36,079,233 |  
|Comprehensive income:                          |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                                    | 3,656      |   |                   | $ |        |             |  | $ | (1,050      | ) |  | $ | 2,606      |  
|Translation adjustment                         |  |                                      | 40         |   |                   |   |        |             |  |   | 180         |   |  |   | 220        |  
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Comprehensive income                           |  | $                                    | 3,696      |   |                   | $ |        |             |  | $ | (870        | ) |  | $ | 2,826      |  
|                                               |  |                                      |            |   |                   |   |         |             |  |   |             |   |  |   |            |  



23



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##### Table of Contents

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



The following table sets forth selected consolidated statement of cash flows data for Autobytel,
showing previously reported amounts and restated amounts for the nine months ended September 30, 2003:



Consolidated Statement of Cash Flows



|                                                                                  |  |                                     |        |   |             |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ----------- | - | ------ | -
|                                                                                  |  | Nine Months endedSeptember 30, 2003 |       
|                                                                                  |  | As PreviouslyReported               |        |   | As Restated |  
|Cash flows from operating activities:                                             |  |                                     |        |   |             |   |        |  
|Net income                                                                        |  | $                                   | 3,656  |   |             | $ | 2,606  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                     |        |   |             |   |        |  
|Non-cash charges:                                                                 |  |                                     |        |   |             |   |        |  
|Depreciation and amortization                                                     |  |                                     | 1,900  |   |             |   | 1,029  |  
|Amortization of capitalized internal use software                                 |  |                                     |       |   |             |   | 811    |  
|Amortization of acquired intangible assets                                        |  |                                     |       |   |             |   | 60     |  
|Provision for bad debt                                                            |  |                                     | 349    |   |             |   | 349    |  
|Provision for customer credits                                                    |  |                                     |       |   |             |   | 1,273  |  
|Stock-based compensation                                                          |  |                                     | 51     |   |             |   | 51     |  
|Income (loss) in equity investee                                                  |  |                                     | (96    | ) |             |   | 195    |  
|Changes in assets and liabilities, excluding effect of acquisitions:              |  |                                     |        |   |             |   |        |  
|Accounts receivable                                                               |  |                                     | (1,044 | ) |             |   | (1,984 | )
|Prepaid expenses and other current assets                                         |  |                                     | 2,070  |   |             |   | 2,382  |  
|Other assets                                                                      |  |                                     | 23     |   |             |   | 23     |  
|Accounts payable                                                                  |  |                                     | 778    |   |             |   | 771    |  
|Accrued expenses                                                                  |  |                                     | (381   | ) |             |   | (607   | )
|Deferred revenues                                                                 |  |                                     | (332   | ) |             |   | (147   | )
|Customer deposits                                                                 |  |                                     | (76    | ) |             |   |       |  
|Accrued domestic restructuringcurrent                                            |  |                                     | (45    | ) |             |   | (173   | )
|Other current liabilities                                                         |  |                                     | (27    | ) |             |   | 59     |  
|Accrued domestic restructuringnon-current                                        |  |                                     | (128   | ) |             |   |       |  
|                                                                                  |  |                                     |        |   |             |   |        |  
|Net cash provided by operating activities                                         |  |                                     | 6,698  |   |             |   | 6,698  |  
|                                                                                  |  |                                     |        |   |             |   |        |  
|Cashflows from investing activities:                                              |  |                                     |        |   |             |   |        |  
|Acquisitions of businesses, net of cash acquired                                  |  |                                     | (4,952 | ) |             |   | (4,952 | )
|Changes in restricted cash and cash equivalents                                   |  |                                     | 28     |   |             |   | 28     |  
|Return of investment in Autobytel.Europe                                          |  |                                     | 2,152  |   |             |   | 2,152  |  
|Purchases of property and equipment                                               |  |                                     | (703   | ) |             |   | (703   | )
|                                                                                  |  |                                     |        |   |             |   |        |  
|Net cash used in investing activities                                             |  |                                     | (3,475 | ) |             |   | (3,475 | )
|                                                                                  |  |                                     |        |   |             |   |        |  
|Cashflows from financing activities:                                              |  |                                     |        |   |             |   |        |  
|Payments of capital lease obligations                                             |  |                                     | (32    | ) |             |   | (32    | )
|Net proceeds from sale of common stock                                            |  |                                     | 28,150 |   |             |   | 28,150 |  
|                                                                                  |  |                                     |        |   |             |   |        |  
|Net cash provided by financing activities                                         |  |                                     | 28,118 |   |             |   | 28,118 |  
|                                                                                  |  |                                     |        |   |             |   |        |  
|Effect of exchange rates on cash                                                  |  |                                     | 40     |   |             |   | 40     |  
|                                                                                  |  |                                     |        |   |             |   |        |  
|Net increase in cash and cash equivalents                                         |  |                                     | 31,381 |   |             |   | 31,381 |  
|Cash and cash equivalents, beginning of period                                    |  |                                     | 27,543 |   |             |   | 27,543 |  
|                                                                                  |  |                                     |        |   |             |   |        |  
|Cash and cash equivalents, end of period                                          |  | $                                   | 58,924 |   |             | $ | 58,924 |  
|                                                                                  |  |                                     |        |   |             |   |        |  
|Supplemental disclosure of cash flow information:                                 |  |                                     |        |   |             |   |        |  
|Cash paid during the period for income taxes                                      |  | $                                   | 8      |   |             | $ | 8      |  
|                                                                                  |  |                                     |        |   |             |   |        |  
|Cash paid during the period for interest                                          |  | $                                   | 5      |   |             | $ | 5      |  
|                                                                                  |  |                                     |        |   |             |   |        |  



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##### Table of Contents

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



The following describes restatement items which affects the consolidated financial statements for the
three months and nine months ended September 30, 2003.



Unapplied credits



| |  |  | Credits issued to certain inactive customers were inappropriately recognized as revenue during the four fiscal quarters ended March 31, 2004. As a result, Autobytel decreased lead
fees revenue for the three months and nine months ended September 30, 2003. Other current liabilities increased at December 31, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credits issued to customers were inappropriately reversed and recognized as a reduction of operating expenses during 2002 and the fourth fiscal quarter of 2003 in connection with
the cessation of operations of certain subsidiaries. As a result, Autobytel increased other current liabilities at December 31, 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Stale dated checks



| |  |  | Certain checks issued by Autobytel and its subsidiaries that were outstanding longer than 180 days were voided. The corresponding obligations were inappropriately derecognized and
recorded as an increase in revenue or a reduction in expenses primarily during 2003. As a result, Autobytel decreased lead fees for the nine months ended September 30, 2003. Other current liabilities increased at December 31, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Multiple element arrangements



| |  |  | Certain revenue from a multiple element arrangement was inappropriately recognized upon completion of the services in 2002, the first, second, third and fourth fiscal quarters of
2003 and the first and second fiscal quarters of 2004. Autobytel determined that such revenue should be recognized over the period of the license agreement. As a result, Autobytel increased data applications and other revenue for the three months
and nine months ended September 30, 2003, respectively. Additionally, deferred revenue increased at December 31, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Delivery of purchase requests



| |  |  | Certain revenue generated from the delivery of purchase requests for vehicles were inappropriately recognized. Autobytel determined that these revenues should not be recognized
because collectibility cannot be reasonably assured and the amount is not fixed or determinable and that such revenue should be recorded when Autobytel receives payment. As a result, Autobytel decreased lead fee revenue for the nine months ended
September 30, 2003. Additionally, accounts receivable decreased at December 31, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Advertising



| |  |  | Advertising credits earned by Autobytels customers were not recorded as a reduction of advertising revenue in the period earned by the customer and delivery or payment of
these credits in subsequent periods were inappropriately recorded as a decrease in advertising revenue. As a result, Autobytel increased deferred revenue at December 31, 2003. Additionally, advertising revenue decreased for the three and nine months
ended September 30, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Reclassification



| |  |  | Autobytel recognized CRM services revenue for a CRM product that was combined with the sale of purchase requests. Autobytel cannot determine the fair value of the
CRM product in a reliable, verifiable
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



| | and objective manner and determined that the CRM service revenue should be reclassified as lead fees. As a result, Autobytel decreased CRM services revenue
and increased lead fees revenue for the three months and nine months ended September 30, 2003, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Accrued expenses



| |  |  | Expense provisions for our participation at an annual trade show were inappropriately recorded throughout annual fiscal periods preceding Autobytels attendance at the trade
show in the first fiscal quarter of the following annual fiscal period. As a result, Autobytel decreased sales and marketing expense for the three months ended September 30, 2003 and increased it for the nine months ended September 30, 2003.
Additionally, prepaid expenses and other current assets increased and accrued expenses decreased at December 31, 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Autobytel recorded an accrual for advertising costs in 2002 that was subsequently derecognized and recorded as a reduction of expenses in the first fiscal quarter of 2004. Autobytel
determined that the liability should not have been recorded, and no amounts have been paid. As a result, Autobytel decreased accounts payable at December 31, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Franchise tax expense was under-estimated in the first, second, third and fourth fiscal quarters of 2003 and over-estimated in the first and second fiscal quarters of 2004. As a
result, Autobytel increased general and administrative expenses for the three months and nine months ended September 30, 2003, respectively. Additionally, accrued expenses increased at December 31, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Autobytel recorded accruals for subscription costs during the first, second and third fiscal quarters of 2003 that were subsequently derecognized and recorded as a reduction of
expense in the first fiscal quarter of 2004. Autobytel determined that the liability should not have been recorded, and no amounts have been paid. As a result, Autobytel decreased sales and marketing expense for the three months and nine months
ended September 30, 2003, respectively. Additionally, accounts payable at December 31, 2003 decreased.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the second fiscal quarter of 2002, there was an excess accrual for medical costs that was inappropriately derecognized with a corresponding reduction of online advertising costs
in the third fiscal quarter of 2003 and a reduction of compensation costs in first fiscal quarter of 2004. As a result, Autobytel decreased general and administrative expenses for the nine months ended September 30, 2003 and sales and marketing
expense increased for both the three months and nine months ended September 30, 2003. Additionally, accounts payable at December 31, 2003 decreased.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the second fiscal quarter of 2003, there was a lack of provision for certain services rendered by purchase request providers that were recorded in the third fiscal quarter of
2003. As a result, Autobytel decreased sales and marketing expense for the three months ended September 30, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Commission expense



| |  |  | Autobytel recorded an accrual for commission expense in 2002. Autobytel determined that the liability should not have been recorded, and no amounts have been paid. As a result,
Autobytel decreased accrued expenses at December 31, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The accrual for commissions expense was incorrectly calculated during the six fiscal quarters ended June 30, 2004. As a result, Autobytel increased sales and marketing expense for
the three months ended September 30, 2003 and decreased sales and marketing expense for the nine months ended September 30, 2003. Additionally, accrued expenses decreased at December 31, 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



Accrued bonus



| |  |  | In the second fiscal quarter of 2003, there was a lack of provision for annual employee cash bonus compensation that was recorded in the third fiscal quarter of 2003. As a result,
Autobytel decreased sales and marketing, product and technology development and general and administrative expenses for the three months and nine months ended September 30, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Equity investment



| |  |  | Autobytel.Europe recognized certain licensing revenue from 2003 through the second fiscal quarter of 2004. In November 2004, Autobytel.Europe determined that the licensee did not
have to pay the license fee and derecognized the revenues. Autobytel determined that this revenue was inappropriately recognized when collectibility could not be reasonably assured. As a result, Autobytel decreased data, application and other
revenue and minority interest for the nine months ended September 30, 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A series of loans made by Autobytel.Europe in 2003 was inappropriately recorded at cost instead of net realizable value. As a result, Autobytel increased the loss from equity
investee for the three months and nine months ended September 30, 2003 and decreased the investment in equity investee at December 31, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Autobytel inappropriately applied the equity method in accounting for its investment in Autobytel.Europe. As a result, the investment in equity investee and foreign currency
translation adjustment in stockholders equity increased in 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other



| |  |  | In the second fiscal quarter of 2003, an excess accrual for lease abandonment was inappropriately derecognized with a corresponding reduction of miscellaneous expense. As a result,
Autobytel increased general and administrative expenses for the nine months ended September 30, 2003. The cumulative impact of this adjustment decreased beginning accumulated deficit at January 1, 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lead fees were not recognized in the period when earned. As a result, Autobytel increased lead fees revenue for the three months ended June 30, 2003 and decreased it for the three
months ended September 30, 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Autobytel inappropriately recognized as revenue certain purchase requests delivered to customers during the four fiscal quarters ended June 30, 2004. As a result, Autobytel
decreased lead fees revenue for the three months and nine months ended September 30, 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The estimation of customer relationship intangible assets related to the acquisition of Stoneage Corporation incorrectly included revenues from Autobytel in estimating future cash
flows for major customers. As a result, customer relationship intangible assets were overstated and goodwill was understated at the date of the Stoneage acquisition.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The shares used in computing diluted net income per share inappropriately excluded the weighted average effect of awards to be issued under the employee stock purchase plan for the
three months and nine months ended September 30, 2003. As a result, Autobytel increased the number of shares used in computing diluted net income per share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4. Autobytel.Europe LLC



Autobytel.Europe was organized in August 1997 and began operations in the fourth quarter of 1999. Autobytel.Europe was formed to expand the Autobytel
business model and operations throughout Europe.



On March 28,
2002, Autobytel.Europe completed a recapitalization, which reduced Autobytels ownership of Autobytel.Europe from 76.5% to 49%. As a result of the reduction in Autobytels ownership interest, Autobytel accounted for its investment in
Autobytel.Europe under the equity method subsequent to March 28, 2002.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



On March 31, 2004, Autobytel adopted the provisions of FIN 46R and determined it was the primary
beneficiary of Autobytel.Europe. As a result of adopting FIN46R, Autobytel consolidated Autobytel.Europe. As of September 30, 2004 the assets and liabilities of Autobytel.Europe were as follows:



|                                           |  |                        |        |  
|------------------------------------------ |  | ---------------------- | ------ | -
|                                           |  | As ofSeptember 30,2004 |       
|Restricted cash and cash equivalents       |  | $                      | 8,131  |  
|Other current assets                       |  |                        | 89     |  
|Non-current assets                         |  |                        | 1      |  
|Current liabilities                        |  |                        | (214   | )
|Minority interest                          |  |                        | (4,084 | )
|                                           |  |                        |        |  
|Autobytels investment in Autobytel.Europe |  | $                      | 3,923  |  
|                                           |  |                        |        |  



Autobytel.Europes results of operations are included on a consolidated basis in Autobytels consolidated results of operations beginning April 1, 2004.



5. Acquisitions



Acquisition of Stoneage Corporation



On April 15, 2004, Autobytel acquired all of the outstanding common stock of Stoneage Corporation (Stoneage), now Car.com, Inc., a provider of Internet
automotive buying services and owner of the Car.com Web site. The acquisition expanded Autobytels market share of new car buyers, increased the number of purchase requests processed through Autobytel, and added retail and enterprise dealer
relationships to Autobytel. The acquisition also added the Car.com finance request business to Autobytel. The acquisition also added the Car.com finance request business to Autobytel. Autobytel believes that the combined assets will further position
it as a leader in the internet automotive business services sector. These factors contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired from Stoneage Corporation, and as a result, Autobytel
has recorded goodwill in connection with this transaction.



Under the terms of the agreement, former Stoneage shareholders received 2,257,733 shares of Autobytel common stock and $15,251 in cash, subject to a post closing purchase price adjustment. In June 2004, the final purchase price adjustment
was determined and resulted in Autobytels obligation to issue 47,511 additional shares of common stock, which were issued in July 2004. The acquisition has been accounted for using the purchase method of accounting.



28



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



The aggregate purchase price was $50,767 and consisted of $15,251 in cash and 2,305,244 shares of
common stock valued at $34,480 and transaction costs of $1,036. The value of the stock issued was determined based on the average market price of Autobytels common stock for the two days before and the date of the announcement/consummation of
the acquisition. The final purchase price was allocated to the net tangible and intangible assets based on their respective estimated fair values on the acquisition date as follows:



|                                                    |  |   |        |  
|--------------------------------------------------- |  | - | ------ | -
|Purchase price:                                     |  |   |        |  
|Cash                                                |  | $ | 15,251 |  
|Common stock (2,305,244 shares at $14.97 per share) |  |   | 34,480 |  
|Transaction costs incurred by Autobytel             |  |   | 1,036  |  
|                                                    |  |   |        |  
|Total purchase price                                |  | $ | 50,767 |  
|                                                    |  |   |        |  
|Allocation of purchase price:                       |  |   |        |  
|Assets:                                             |  |   |        |  
|Cash                                                |  | $ | 599    |  
|Accounts receivable                                 |  |   | 4,584  |  
|Other current assets                                |  |   | 923    |  
|Non-current assets                                  |  |   | 888    |  
|Goodwill                                            |  |   | 42,845 |  
|Intangible assets                                   |  |   | 4,475  |  
|Liabilities:                                        |  |   |        |  
|Current liabilities                                 |  |   | (3,321 | )
|Non-current liabilities                             |  |   | (226   | )
|                                                    |  |   |        |  
|Total purchase price                                |  | $ | 50,767 |  
|                                                    |  |   |        |  



The excess of the
purchase price over the estimated fair value of the net tangible and intangible assets acquired was initially recorded as goodwill in the amount of $42,834. During the three months ended September 30, 2004, the amount of goodwill increased by $11
due to additional accruals of $89 and a decrease in the estimated realization of the tax receivable of $122, offset by the allocation of the purchase price to acquired technology of $200. Goodwill is not amortized, rather it is evaluated on at least
an annual basis for impairment. Goodwill is not deductible for income tax purposes. Intangible assets acquired consist of acquired technology at $200 which is amortized over an estimated useful life of 30 months, customer relationships at $3,575
which are amortized over an estimated useful life of three years and the Car.com domain name at $700 which is amortized over an estimated useful life of five years. To estimate the fair value of the customer relationships, an income approach was
used with a discount rate of 27% which included an analysis of future cash flows and risks associated with achieving such cash flows. To estimate the fair value of the Car.com domain name, a market approach was used utilizing historical costs to
acquire in 2002 and an adjustment factor of 70%. To estimate the fair value of acquired technology, a cost approach was used which involves estimating the programming hours required to construct a software application with equivalent functionality
multiplied by the cost per hour for engineers and programmers.



Stoneages financial position and results of operations from the date of acquisition on April 15, 2004 have been included in the accompanying consolidated financial statements.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



Acquisition of iDriveonline, Inc.



On April 9, 2004, Autobytel acquired all of the outstanding common stock of
iDriveonline, Inc. (iDriveonline), now Retention Performance Marketing, Inc., a provider of customer loyalty and retention marketing programs for the automotive industry, in exchange for cash and common stock. The acquisition combines
iDriveonlines leading applications, including an online prospecting and retention tool, enhanced data and segmentation tools, and improved dealer reporting capabilities with Autobytels existing customer retention program. Through this
acquisition, Autobytel gained a meaningful presence in the automotive CRM marketplace. This is consistent with Autobytels strategy of diversifying its revenue streams. These factors contributed to a purchase price in excess of fair market
value of iDriveonlines net tangible and intangible assets acquired, and as a result, Autobytel has recorded goodwill in connection with the transaction. The acquisition has been accounted for using the purchase method of accounting.



The aggregate purchase price was $12,168 and consisted of
$5,021 in cash, 474,501 shares of common stock valued at $6,775 and transaction costs of $372. The value of the stock issued was determined based on the average market price of Autobytels common stock for the two days before through the day
after the date of the announcement of the acquisition. The final purchase price was allocated to the underlying net tangible and intangible assets based on their respective estimated fair values on the acquisition date as follows:



|                                                  |  |   |        |  
|------------------------------------------------- |  | - | ------ | -
|Purchase price:                                   |  |   |        |  
|Cash                                              |  | $ | 5,021  |  
|Common stock (474,501 shares at $14.28 per share) |  |   | 6,775  |  
|Transaction costs incurred by Autobytel           |  |   | 372    |  
|                                                  |  |   |        |  
|Total purchase price                              |  | $ | 12,168 |  
|                                                  |  |   |        |  
|Allocation of purchase price:                     |  |   |        |  
|Assets:                                           |  |   |        |  
|Cash                                              |  | $ | 266    |  
|Accounts receivable                               |  |   | 542    |  
|Other current assets                              |  |   | 48     |  
|Non-current assets                                |  |   | 60     |  
|Goodwill                                          |  |   | 11,022 |  
|Intangible assets                                 |  |   | 1,000  |  
|Liabilities:                                      |  |   |        |  
|Current liabilities                               |  |   | (770   | )
|                                                  |  |   |        |  
|Total purchase price                              |  | $ | 12,168 |  
|                                                  |  |   |        |  



The excess of the
purchase price over the estimated fair value of the net tangible and intangible assets acquired was initially recorded as goodwill in the amount of $11,422. During the three months ended September 30, 2004, the amount of goodwill decreased by $400
due to the allocation of the purchase price to acquired technology of $400. Goodwill is not amortized, rather it is evaluated on at least an annual basis for impairment. Goodwill is not deductible for income tax purposes. Intangible assets acquired
consist of acquired technology at $400 which is amortized over an estimated useful life of 18 months and customer relationships at $600 which are amortized over an estimated useful life of three years. The intangible asset amounts were determined
through the utilization of established valuation techniques, in particular the Income and Market approach. To estimate the fair value of the customer relationships, an income approach was used with a discount rate of 28%, which included an analysis
of future cash flows and risks associated with achieving such cash flows. To estimate the fair value of



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



acquired technology, a cost approach was used which involves estimating the programming hours required to construct a software application with equivalent
functionality multiplied by the cost per hour for engineers and programmers.



iDriveonlines financial position and results of operations from the date of acquisition on April 9, 2004 have been included in the accompanying consolidated financial statements.



Acquisition of Applied Virtual Vision, Inc.



On June 4, 2003, Autobytel acquired all of the outstanding common stock of
Applied Virtual Vision, Inc., now AVV, Inc., a provider of CRM and sales management products and dealer management system data extraction services, in exchange for cash and common stock. The acquisition of AVV complements Autobytels core
business with its automotive customer relations management solutions and data extraction services. The acquisition has been accounted for using the purchase method of accounting.



AVVs financial position and results of operations from the date of acquisition on June 4, 2003 have been included in
the accompanying consolidated financial statements.



Proforma Consolidated Results of Operations



The following summarized unaudited pro forma consolidated results of operations are presented as if the acquisitions of AVV, iDriveonline and Stoneage had occurred on January 1, 2003. The unaudited pro forma results are not necessarily
indicative of future earnings or earnings that would have been reported had the acquisitions been completed as presented.



|                      |  |                                 |        |                                |   |             |  |             |        |  |   |       
|--------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ----------- |  | ----------- | ------ |  | - | ------
|                      |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                      |  | 2004                            |        | 2003                           |   | 2004        |  | 2003       
|                      |  |                                 |        | (Restated)                     |   |             |  | (Restated) 
|                      |  |                                 |        | (Pro Forma)                    |   | (Pro Forma) |  | (Pro Forma)
|Revenue               |  | $                               | 32,453 |                                | $ | 28,757      |  | $           | 97,582 |  | $ | 83,673
|Net income            |  | $                               | 3,209  |                                | $ | 2,113       |  | $           | 6,130  |  | $ | 3,359 
|Net income per share: |  |                                 |        |                                |   |             |  |             |        |  |   |       
|Basic                 |  | $                               | 0.08   |                                | $ | 0.05        |  | $           | 0.15   |  | $ | 0.09  
|Diluted               |  | $                               | 0.07   |                                | $ | 0.05        |  | $           | 0.14   |  | $ | 0.09  



6. Acquired Intangible Assets



Acquired intangible assets recorded as a part of the AVV,
iDriveonline and Stoneage acquisitions are amortized over their estimated useful lives and consist of the following:



|                       |  |                              |  |                      |       |                         |   |        |                  |  |   |            |   |  |   |      
|---------------------- |  | ---------------------------- |  | -------------------- | ----- | ----------------------- | - | ------ | ---------------- |  | - | ---------- | - |  | - | -----
|                       |  | As of September 30, 2004    
|                       |  | AverageEstimatedUseful Lives |  | Gross CarryingAmount |       | AccumulatedAmortization |   |        | ImpairmentCharge |  |   | Net Amount
|Developed technology   |  | 2 years                      |  | $                    | 820   |                         | $ | (185   | )                |  | $ |           |   |  | $ | 635  
|Customer relationships |  | 3 years                      |  |                      | 4,375 |                         |   | (779   | )                |  |   | (173       | ) |  |   | 3,423
|Domain name            |  | 5 years                      |  |                      | 700   |                         |   | (64    | )                |  |   |           |   |  |   | 636  
|                       |  |                              |  |                      |       |                         |   |        |                  |  |   |            |   |  |   |      
|Total                  |  |                              |  | $                    | 5,895 |                         | $ | (1,028 | )                |  | $ | (173       | ) |  | $ | 4,694
|                       |  |                              |  |                      |       |                         |   |        |                  |  |   |            |   |  |   |      



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



|                       |  |                         |  |                      |     |                         |   |      |            |  |   |    
|---------------------- |  | ----------------------- |  | -------------------- | --- | ----------------------- | - | ---- | ---------- |  | - | ---
|                       |  | As of December 31, 2003
|                       |  | EstimatedUseful Lives   |  | Gross CarryingAmount |     | AccumulatedAmortization |   |      | Net Amount
|Developed technology   |  | 3 years                 |  | $                    | 220 |                         | $ | (43  | )          |  | $ | 177
|Customer relationships |  | 2 years                 |  |                      | 200 |                         |   | (62  | )          |  |   | 138
|                       |  |                         |  |                      |     |                         |   |      |            |  |   |    
|Total                  |  |                         |  | $                    | 420 |                         | $ | (105 | )          |  | $ | 315
|                       |  |                         |  |                      |     |                         |   |      |            |  |   |    



During the third
fiscal quarter of 2004, a decline in business with certain key customers of Car.com, triggered an interim assessment by Autobytel to determine whether the fair values of intangible assets were less than their carrying values as of September 30,
2004. Autobytel estimated the undiscounted future net cash flows to be generated by these intangible assets to be less than their carrying amount of $200. The cash flow projections related to these intangible assets as of September 30, 2004
reflected the decline in business from these key customers. Autobytel then estimated the fair value of these intangible assets at $27. This resulted in an impairment loss of $173.



Amortization expense related to intangible assets was $505 and $923 for the three months and nine months ended September 30,
2004, respectively, and $45 and $60 for the three months and nine months ended September 30, 2003, respectively. Amortization expense for the remaining lives of the intangible assets is estimated to be as follows:



|                                      |  |                      |      
|------------------------------------- |  | -------------------- | -----
|                                      |  | Amortization Expense
|Three months ending December 31, 2004 |  | $                    | 508  
|2005                                  |  | $                    | 1,912
|2006                                  |  | $                    | 1,579
|2007                                  |  | $                    | 514  
|2008                                  |  | $                    | 140  
|2009                                  |  | $                    | 41   



7. Goodwill



In accordance with SFAS No. 142, goodwill is not amortized, rather it is
evaluated on at least an annual basis for impairment. In June 2004, Autobytel performed an annual impairment test of goodwill and concluded that goodwill was not impaired. In April 2004, Autobytel acquired Stoneage and iDriveonline and recorded
goodwill of $42,845 and $11,022, respectively.



In future
periods, if goodwill is determined to be impaired, Autobytel will recognize a non-cash charge equal to the excess of the carrying value over the fair value. There can be no assurance that future evaluations of goodwill will not result in impairment
and a charge to earnings. The following summarizes the balance of goodwill:



|             |  |                    |        |                   |   |       
|------------ |  | ------------------ | ------ | ----------------- | - | ------
|             |  | As of             
|             |  | September 30, 2004 |        | December 31, 2003
|Autoweb      |  | $                  | 8,367  |                   | $ | 8,367 
|AVV          |  |                    | 8,463  |                   |   | 8,463 
|Stoneage     |  |                    | 42,845 |                   |   |      
|IDriveonline |  |                    | 11,022 |                   |   |      
|             |  |                    |        |                   |   |       
|             |  | $                  | 70,697 |                   | $ | 16,830
|             |  |                    |        |                   |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



8. Commitments and Contingencies



Litigation



In August 2001, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York against Autobytel
and certain of Autobytels current and former directors and officers (the Autobytel Individual Defendants) and underwriters involved in Autobytels initial public offering (the Autobytel IPO Litigation). The
complaints against Autobytel have been consolidated with two other complaints that relate to its initial public offering but do not name it as a defendant, and a Consolidated Amended Complaint, which is now the operative complaint, was filed on
April 19, 2002. This action purports to allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autobytels initial public offering
to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for
Autobytels initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with
approximately 300 other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. On October 9, 2002, the
Court dismissed the Autobytel Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Autobytel Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss
the complaint against Autobytel. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class
certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Autobytel case. Autobytel has approved a settlement agreement and related agreements which set forth the terms of a settlement between Autobytel, the
plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of Autobytel and the Autobytel Individual Defendants for the conduct alleged in the action to be
wrongful. Autobytel would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Autobytel may have against its underwriters. The settlement agreement also provides a
guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the
issuers settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of Autobytel to
plaintiffs pursuant to the terms of the settlement agreement and related agreements will be directly covered and paid by its insurance carriers. Autobytel currently is not aware of any material limitations on the expected recovery of any potential
financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and Autobytel is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore,
Autobytel does not expect that the settlement will involve any payment by Autobytel. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from Autobytels insurance carriers should arise,
Autobytels maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court hearing the Autobytel IPO Litigation granted preliminary approval of the settlement
agreement, subject to certain modifications consistent with its opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all contribution claims by the
settling and non-settling parties and does not bar the parties from pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the Courts opinion and are in the process of obtaining
approval from those



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



issuer defendants that are not in bankruptcy. At this point, all but one of the issuer defendants that are not in bankruptcy have approved the revised
settlement agreement, which has been submitted to the Court. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the Court will grant final approval to the settlement. If the
settlement agreement is not approved and Autobytel is found liable, Autobytel is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than its insurance coverage, or whether such damages
would have a material impact on its results of operations, financial condition or cash flows in any future period.



Between April and June 2001, eight separate purported class actions virtually identical to the one filed against Autobytel were filed against Autoweb.com,
Inc. (Autoweb), certain of Autowebs current and former directors and officers (the Autoweb Individual Defendants) and underwriters involved in Autowebs initial public offering (the Autoweb IPO
Litigation). The complaints against Autoweb have been consolidated into a single action, and a Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. The foregoing action purports to allege
violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autowebs initial public offering to certain investors in exchange for excessive and
undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autowebs initial public offering was false and misleading in
violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies.
A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. On October 9, 2002, the Court dismissed the Autoweb Individual Defendants from the case without prejudice
based upon Stipulations of Dismissal filed by the plaintiffs and the Autoweb Individual Defendants. On February 19, 2003, the Court dismissed the Section 10(b) claim without prejudice and with leave to replead but denied the motion to dismiss the
claim under Section 11 of the Securities Act of 1933 against Autoweb. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance
to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Autoweb case. Autoweb has approved a settlement agreement and related agreements which set forth the terms of a settlement
between Autoweb, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of Autoweb and the Autoweb Individual Defendants for the conduct alleged in
the action to be wrongful. Autoweb would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Autoweb may have against its underwriters. The settlement agreement also
provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required
under the issuers settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of Autoweb to
plaintiffs pursuant to the terms of the settlement agreement and related agreements will be directly covered and paid by its insurance carriers. Autoweb currently is not aware of any material limitations on the expected recovery of any potential
financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and Autoweb is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore,
Autobytel does not expect that the settlement will involve any payment by Autoweb. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from Autowebs insurance carriers should arise,
Autowebs maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court hearing the Autoweb IPO Litigation granted preliminary approval of the settlement
agreement, subject to certain modifications consistent with its



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all
contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the Courts opinion and are in the
process of obtaining approval from those issuer defendants that are not in bankruptcy. At this point, all but one of the issuer defendants that are not in bankruptcy have approved the revised settlement agreement, which has been submitted to the
Court. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the Court will grant final approval to the settlement. If the settlement agreement is not approved and Autoweb is
found liable, Autobytel is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than Autowebs insurance coverage, or whether such damages would have a material impact on
Autobytels results of operations, financial condition or cash flows in any future period.



Autobytel has reviewed the above class action matters and does not believe that it is probable that a loss contingency has occurred, therefore, no amounts
have been recorded in the accompanying consolidated financial statements.



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



9. Accrued Domestic Restructuring Liability



In 2002, Autobytel recorded a total of $769 for charges related to the
restructuring of Autobytels operations to reduce costs and enhance efficiencies. The charges included severance costs affecting approximately 15% of Autobytels employees in sales, marketing and information technology, and
Autobytels lease obligation on the vacant portion of office facilities in Westborough, Massachusetts.



As of September 30, 2004, the remaining accrued domestic restructuring liabilities related to the 2002 restructuring charges for Autobytels lease
obligation on the vacant portion of office facilities in Westborough, Massachusetts were $121. Autobytel expects the remaining charges to be paid in 2005. The remaining accrued domestic restructuring liabilities related to the 2002 charges as of
September 30, 2004 were as follows:



|                 |  |                         |     |               |   |      |                          |  |   |    
|---------------- |  | ----------------------- | --- | ------------- | - | ---- | ------------------------ |  | - | ---
|                 |  | As of December 31, 2003 |     | Cash Payments |   |      | As of September 30, 2004
|Lease obligation |  | $                       | 258 |               | $ | (137 | )                        |  | $ | 121
|                 |  |                         |     |               |   |      |                          |  |   |    



10. Preferred Shares Purchase
Rights Plan



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



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



will be entitled to receive at the then exercise price of a right that number of shares of common stock of the acquiring company which at the time will have
a market value of two times the exercise price of the right. The initial exercise price of a right is sixty-five dollars.



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



11. Related Party Transactions



Consulting Agreement



Autobytel and Robert Grimes, a current director and a former Executive Vice
President of Autobytel, are parties to a consulting services agreement dated April 1, 2000. The agreement was extended through September 30, 2004 and then on a month to month basis until notice of termination by either party. During the term of the
consulting agreement, Mr. Grimes will receive $50 per year payable on a monthly basis and a $2.5 monthly office expense allowance. These costs are included in product and technology development expenses in the consolidated statements of operations.]
Mr. Grimes will make himself available to the executive officers of Autobytel for up to 16 hours a month for consultation and other activities related to formulating and implementing business strategies and relationships. Autobytel may terminate the
agreement upon Mr. Grimes breach of contract. If Mr. Grimes agreement is terminated without breach, Mr. Grimes is entitled to either a pro rated or a lump sum payment equal to the amount that would have been received by Mr. Grimes if he
had remained a consultant for the remaining balance of the term. In the event of death or disability, Autobytel will pay to Mr. Grimes or his successors and assignees the amount that Mr. Grimes would have received for the remainder of the term of
the agreement. Through April 30, 2003, Mr. Grimes was entitled to participate in all of Autobytels employee welfare benefit plans at Autobytels expense which amounted to $2 for the nine months ended September 30, 2003.



12. Subsequent Events



Patent Lawsuit



On September 24, 2004, Autobytel filed a lawsuit in the United States District Court for the Eastern District of Texas against Dealix Corporation. In that
lawsuit, Autobytel asserted infringement of U.S. Patent No. 6,282,517, entitled Real Time Communication of Purchase Requests, against Dealix Corporation, asserted that Dealix Corporation is infringing Autobytels patent by virtue of
Dealix Corporations software system for the distribution of purchase requests, asserted damages, and sought a preliminary injunction. Dealix Corporation filed answers to this lawsuit on January 28, 2005 and February 1, 2005, in which it
asserts typical defensive counterclaims denying infringement and challenging the validity of the patent. Dealix Corporation also seeks attorneys fees and costs. Autobytel expects to incur attorneys fees and costs in this matter as are
customary in the prosecution of patent litigation, and could be liable for Dealix Corporations attorneys fees and costs if Dealix Corporation is successful in its counterclaims.



Securities Litigation



Between October and December 2004, five separate purported class actions
were filed in the United States District Court for the Central District of California against Autobytel and certain of its current directors and current and former officers. The claims were brought on behalf of stockholders who purchased shares
during the period July 24, 2003 through October 21, 2004. The claims alleged in all of these purported class actions are virtually identical, and purport to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of



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(Amounts in thousands, except per share data)

(unaudited)



1934 and Rule 10b-5, promulgated thereunder. In this regard, the plaintiffs allege that Autobytel misrepresented and omitted material facts with respect to
its financial results and operations during the time period between July 24, 2003 and October 20, 2004. The complaint seeks unspecified compensatory damages, and attorneys fees and costs as well as accountants and experts fees.



On January 28, 2005, the court ordered the consolidation of
the currently pending class actions into a single case pursuant to a stipulation for consolidation signed by all parties. On March 14, 2005, the court appointed a lead plaintiff and approved the selection of lead counsel and liaison counsel.
Additional lawsuits asserting the same or similar claims may be filed as well. Autobytel intends to defend the claims vigorously. However, Autobytel cannot currently predict the impact or outcome of this litigation, which could be material, and the
initiation, continuation and outcome of these lawsuits may have a material impact on Autobytels results of operations, financial condition, and cash flows.



In addition, Autobytels directors and a former officer are defendants in a derivative suit pending in the Superior
Court of Orange County, California, and Autobytel is named as a nominal defendant in this suit. This suit purports to allege that the defendants breached numerous duties to Autobytel, including breach of fiduciary duty and misappropriation of
information, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment, as well as violations of California Corporations Code 25402 (trading with material non-public information), and that these breaches and violations
caused losses to Autobytel, including damages to its reputation and goodwill. Plaintiffs claims are based on allegations that the defendants disseminated false and misleading statements concerning Autobytels results of operations and
that these results were inflated at all relevant times due to violations of generally accepted accounting principals and Securities and Exchange Commission rules. The complaint seeks unspecified compensatory damages, treble damages, equitable and/or
injunctive relief, restitution, and attorneys fees and costs, as well as accountants and experts fees.



Autobytel intends to defend this suit vigorously. However, Autobytel cannot currently predict the impact or outcome of this litigation, which could be
material, and the continuation and outcome of this lawsuit, as well as the initiation of similar suits may have a material impact on its results of operations, financial condition, and cash flows.



Resignation of Chief Financial Officer



Effective November 15, 2004, Mr. Hoshi Printer resigned as Autobytels
Executive Vice President and Chief Financial Officer. On January 7, 2005, Mr. Printer and Autobytel entered into a severance agreement and general release. Under that agreement, Mr. Printer remains an at-will employee and is entitled to continue to
receive a monthly base salary and benefits, other than bonuses, similar to those he received prior to his resignation. In consideration of an additional payment equal to one months base salary of $22,073.33, Mr. Printer rescinded and
waived all rights he may have had under any agreements with Autobytel, other than rights to indemnity and insurance and stock option agreements. In consideration of an additional one months base salary, Mr. Printer irrevocably tendered his
resignation as an employee of Autobytel, which may be accepted by Autobytel upon 24 hours notice. Mr. Printers resignation was accepted in May 2005. Under the agreement, Autobytel and Mr. Printer also agreed to release one another from certain
liabilities, as more fully described in the severance agreement and general release.



Mr. Michael F. Schmidt, Senior Vice President, Finance of Autobytel, assumed the functions of Autobytels Chief Financial Officer, pending Autobytels appointing a Chief Financial Officer. Mr. Schmidt was
appointed as Autobytels Chief Financial Officer effective May 30, 2005.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



Resignation of Principal Accounting Officer



Effective April 1, 2005, Matthew McDowell, Autobytels Vice President
and Controller and principal accounting officer, resigned as an employee of Autobytel. Michael F. Schmidt, Autobytels then Chief Financial Officer, assumed the functions of principal accounting officer, pending appointment of a Controller.



Resignation of Chief Executive Officer; Appointment of New
Chief Executive Officer



Effective April 27, 2005, Jeffrey
Schwartz resigned as Autobytels Chief Executive Officer and President (but remains an employee in the role of Vice Chairman). Effective April 27, 2005, Richard A. Post, a director, was appointed as Autobytels Chief Executive Officer and
President.



Appointment of Chief Operating Officer



Effective April 27, 2005, Richard G. Walker, formerly
Autobytels Executive Vice President, Corporate Development and Strategy, was appointed as Autobytels Executive Vice President and Chief Operating Officer.



Appointment of Chief Financial Officer



Effective May 30, 2005, Michael F. Schmidt, formerly Autobytels Senior Vice President, Finance, was appointed as
Autobytels Executive Vice President and Chief Financial Officer.



Employment Agreements



In connection with the
management changes described above, Autobytel entered into an employment agreement with Mr. Post and amended and restated employment agreements with each of Mr. Schwartz and Mr. Walker. The agreement with Mr. Post is for a one year term and may
be terminated by Autobytel with thirty days prior written notice, or by Mr. Post with sixty days prior written notice. Autobytel may renew the agreement by delivering written notice to Mr. Post at least sixty days prior to the expiration
of the agreement, in which case, the term of the agreement shall extend for additional one month terms until the second anniversary thereof, unless Autobytel delivers thirty days written notice or Mr. Post delivers sixty (60) days
written notice of its or his intention not to renew. The agreement with Mr. Schwartz is for a one year term and may be terminated by Autobytel at any time, or by Mr. Schwartz, with thirty days prior written notice. Autobytel may renew the agreement
by delivering written notice to Mr. Schwartz at least ninety days prior to the expiration of the agreement, in which case, the term of the agreement shall extend for an additional one year term. If the agreement is not renewed, Autobytel is required
to pay Mr. Schwartz his base salary for three months after the expiration of the agreement and to continue his benefits during such period. If the Company terminates Mr. Schwartz employment during the term, he is entitled to continue to
receive his base salary and benefits until ninety days following the date on which the agreement would have expired by its terms. The agreement with Mr. Walker is for a one year term and automatically renews for an additional one year period unless
either party notifies the other of its intent not to renew no later than sixty days prior to the expiration of the one year term. If Autobytel does not renew or terminates Mr. Walkers employment during the term, Mr. Walker is entitled to
twelve months of base salary plus a bonus of 50% of his annual base salary, and to receive benefits for twelve months after such expiration.



If, during the one year following the termination of employment (and in the case of Mr. Schwartz, the longer of such period and July 2006), each
individual complies with the non-competition and non-solicitation provisions of the agreement, any unvested stock options (i) that were granted after the date of the agreement, with respect to Mr. Post and Mr. Walker, or (ii) held as of the date of
termination, with respect to Mr. Schwartz, will be deemed to have vested during such period as if he was an employee during that time.



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



In the event of a change of control during the term of employment or at any time during the six month
period following such term, each individual is entitled to a lump sum payment equal to two times the sum of his annual base salary plus a bonus of 65% of annual base salary in the case of Mr. Post and 50% of annual base salary in the case of each of
Mr. Schwartz and Mr. Walker. In the case of Mr. Walker, such payment is conditioned on Mr. Walker agreeing, if requested, to continue with Autobytel or any successor for no longer than ninety days after the change of control. In addition, if
employment was terminated prior to a change of control that occurs during the six month period following such termination, any unvested stock options (i) that were granted after the date of the agreement, with respect to Mr. Post and Mr. Walker, or
(ii) held as of the date of termination, with respect to Mr. Schwartz, shall vest in full immediately prior to such change of control, assuming the individual complies with the non-compete and non-solicitation provisions of the agreement. Each
agreement provides that if compensation is deemed to be parachute payments under the Internal Revenue Code, then Autobytel will make additional payments to compensate for additional tax obligations. The agreement also requires Autobytel to indemnify
Mr. Schwartz under certain circumstances.



In connection with
the appointment of Michael Schmidt to the position of Executive Vice President and Chief Financial Officer, on May 30, 2005, Autobytel and Mr. Schmidt amended and restated the March 9, 2004 letter agreement between them in an Employment Agreement
(as amended and restated, the Schmidt Employment Agreement).



The Schmidt Employment Agreement is for a one year term and automatically renews for an additional one year period unless either party notifies the other of its intent not to renew no later than sixty days prior to
the expiration of the one year term. Mr. Schmidt is entitled to an annual base salary of $250,000 during the term, and is eligible for a bonus of 50% of his annual base salary in the boards discretion. In addition, Mr. Schmidt may participate
in any benefit plans generally afforded to executive officers. If Mr. Schmidts employment is terminated without cause, is not renewed or if Mr. Schmidt terminates his employment with good reason (each as defined in the
Schmidt Employment Agreement), Mr. Schmidt is entitled to a lump sum payment equal to his annual base salary plus bonus, as well as benefits for one year following such termination.



In the event of a change of control during the term of his employment or at any time during the six month period following
such term, Mr. Schmidt is entitled to a lump sum payment equal to two times the sum of his annual base salary plus a bonus of 50% of annual base salary, so long as Mr. Schmidt agrees, if requested, to continue with Autobytel or any successor for no
longer than six months after the change of control. If Mr. Schmidts compensation is deemed to be parachute payments under the Internal Revenue Code, then Autobytel has agreed to make additional payments to him to compensate for his
additional tax obligations.



Mr. Schmidt will also be granted
stock options to purchase 150,000 shares of Autobytels common stock, which shall vest, as to 50,000 of the options, on the one year anniversary of the date of grant, and thereafter 4,166 of the options shall vest on each monthly anniversary of
the date of grant, provided that the vesting of such options shall accelerate upon a change of control.



Costs Associated with Closing of Facility



On April 19, 2005, Autobytel committed to integrate the business operations of its customer loyalty and retention marketing program, Retention Performance
Marketing, with its customer lead management product, WebControl, (the  Integration). Autobytel determined to proceed with the Integration in order to increase efficiency and respond to market demand for integrated customer relationship
management solutions. As part of the Integration, Autobytel intends to close its Houston office and to move the operations of such office to its offices in Irvine, California and/or Westerville, Ohio. Certain employees in the Houston office may
relocate to the offices in Irvine, California and/or Westerville, Ohio. Autobytel expects to complete the Integration by



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AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except per share data)

(unaudited)



December 31, 2005. Autobytel estimates that the total expenses relating to the Integration, primarily consisting of retention, severance and relocation
costs, will be between $175 and $300.



Resolution of
Contract Dispute



In May 2005, Autobytel incurred $1,100
in expense relating to the resolution of a contract dispute whereby parties to a certain contract alleged that Autobytel breached certain representations and warranties in connection with a contract entered into by Autobytel. The alleged breach was
triggered by Autobytels announcement on November 15, 2004 that it expected to restate its consolidated financial statements for the second, third, and fourth quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters
2004, relating to credits issued to customers there were inappropriately reversed and recognized as revenue during the four fiscal quarters ended March 31, 2004, and outstanding checks issued by Autobytel that were voided and the corresponding
obligations inappropriately reversed and recorded as an increase in revenue or a reduction of expenses primarily in the second fiscal quarter of 2003. For more details on the Autobytels restatement, see Note 3. Although the settlement for the
contract dispute was reached in May 2005, Autobytel is required to accrue and incur the settlement expense in the three months ended December 31, 2004 as (1) the underlying cause of the event occurred during the three months ended December 31, 2004
and (2) the financials statements for that period were not yet issued at the time the settlement was reached.



Nasdaq



As a result of Autobytels failure to timely file its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004, its Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005, and certain required restatements of its financial statements for prior periods (Required
Filings), from November 2004 to May 2005 Autobytel was not in full compliance with Nasdaq Marketplace Rule 4310(c)(14), which requires Autobytel to make, on a timely basis, all filings with the Securities and Exchange Commission required by
the Securities Exchange Act of 1934, as amended. Autobytel is required to comply with Nasdaq Marketplace Rule 4310(c)(14) as a condition for its common stock to continue to be listed on The Nasdaq National Market.



Autobytel requested and received from a Nasdaq Listing Qualifications Panel
(the Panel) several extensions within which to comply with Nasdaq Marketplace Rule 4310(c)(14). On April 7, 2005, Autobytel received an extension to the deadline to come into full compliance with Nasdaq Marketplace Rule 4310(c)(14) to
May 15, 2005, which deadline was subsequently extended by the Panel to May 31, 2005. The Panels decision to continue the listing of Autobytels shares on The Nasdaq National Market was subject to the condition that Autobytel files the
Required Filings on or before May 31, 2005. Autobytel has now complied with this condition. In addition, Autobytels continued listing is conditioned on timely filing all periodic reports with the Securities and Exchange Commission and The
Nasdaq Stock Market for all reporting periods ending on or before December 31, 2006. The filing of a Form 12b-25 extension request will not result in an automatic extension of these filing deadlines.



On May 20, 2005, Autobytel received notice from The Nasdaq Stock Market that
the Nasdaq Listing and Hearing Review Council (the Listing Council) has called for a review of the Panels April 7, 2005 decision. Autobytel has until June 20, 2005 to submit information for the Listing Councils consideration.
Autobytel cannot give any assurances as to what actions the Listing Council may take, but such actions could include delisting its shares from The Nasdaq National Market. In addition, if Autobytel is unable to comply with the conditions for
continued listing required by the Panel, then its shares of common stock are subject to immediate delisting from The Nasdaq National Market. If its shares of common stock are delisted from The Nasdaq National Market, they may not be eligible to
trade on any national securities exchange or the over-the-counter market. If its common stock is no longer traded through a market system, it may not be liquid, which could affect its price.



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Item 2.Managements Discussion And Analysis Of Financial Condition And Results Of Operations



You should read the following discussion of our results of operations and financial condition in conjunction with our consolidated financial statements
and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may
differ significantly from those projected in such forward-looking statements due to a number of factors, including those discussed in the section entitled Risk Factors below in this Quarterly Report on Form 10-Q.



The following discussion and analysis gives effect to the restatement
described above in the Explanatory Note to this Form 10-Q and in Note 3 to our consolidated financial statements. Accordingly, some of the data set forth in this section is not comparable to discussions and data in our previously filed annual and
quarterly reports for the corresponding periods.



Overview



We are an automotive marketing services company that helps dealers sell
cars and manufacturers build brands through efficient marketing and advertising primarily through the Internet. We own and operate the automotive Web sites Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com, AICAutoSite.com,
Autoahorros.com, and CarTV.com. We are also a leading provider of customer relationship management (CRM) products and programs, consisting of lead management products, customer loyalty and retention marketing programs, data extraction services and
automotive marketing data and technology.



We recently restated
our consolidated financial statements for the full 2002 fiscal year, the first, second and third fiscal quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters of 2004. In connection with those restatements, there are
currently pending against us and certain of our current directors and current and former officers certain purported class action and derivative lawsuits, as more fully described in Part II. Item 1. Legal Proceedings.



In September 2004, we filed a lawsuit for patent infringement against Dealix
Corporation in order to protect certain of our intellectual property, as more fully described in Part II. Item 1. Legal Proceedings.



We expect our results of operations and financial condition during 2005 to be adversely affected by higher than expected operating costs, including an
increase in customer acquisition costs and costs relating to compliance with the Sarbanes-Oxley Act of 2002, as well as costs associated with the restatements of our consolidated financial statements, the internal review, and the remediation of
material weaknesses in our internal controls identified in our internal review. In addition, costs associated with defending purported class action and derivative lawsuits filed against us and certain current directors and current and former
officers relating to the restatements of our consolidated financial statements, and costs associated with enforcing our intellectual property rights, including the lawsuit filed against Dealix Corporation for patent infringement, are also expected
to increase our operating costs and adversely affect our results of operations and financial condition.



As we previously announced on November 15, 2004, Hoshi Printer resigned as our Executive Vice President and Chief Financial Officer effective November 15,
2004. Michael F. Schmidt, our Senior Vice President, Finance, assumed the functions of Chief Financial Officer pending our appointment of a Chief Financial Officer. On May 30, 2005, Mr. Schmidt was appointed as our Chief Financial Officer.



As previously announced, on April 1, 2005, Matthew McDowell,
our Vice President and Controller and principal accounting officer, resigned as an employee of Autobytel. Michael F. Schmidt, our Chief Financial Officer, assumed the functions of principal accounting officer, pending our appointment of a
Controller.



As we previously announced, on April 27, 2005, (i)
Jeffrey Schwartz resigned as our Chief Executive Officer and President (but remains an employee in the role of Vice Chairman), (ii) Richard Post, a director, was



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elected as Chief Executive Officer and President, and (iii) Richard Walker, former Executive Vice President, Corporate Development and Strategy, was elected
as Executive Vice President and Chief Operating Officer.



On
April 9, 2004, we acquired iDriveonline, Inc. (iDriveonline), now Retention Performance Marketing, Inc., a provider of customer loyalty and retention marketing programs for the automotive industry. On April 15, 2004, we acquired Stoneage Corporation
(Stoneage), now Car.com, Inc., a provider of Internet automotive buying services and owner of the Car.com Web site.



We expect revenue from our business to continue growing in 2005. In addition, we have been able to better diversify our revenue mix. We reduced the
percentage of revenue from lead fees and increased the percentage of revenue from CRM services.



We incurred approximately $0.5 million and $1.0 million in costs related to the integration of the iDriveonline and Stoneage acquisitions primarily for
transition salaries, severance, retention bonuses and travel in the third and second quarter of 2004, respectively. We incurred an additional $0.1 million in integration related costs in the fourth quarter of 2004, most of which were related to the
integration of technology. These costs are included in sales and marketing expenses, product and technology development expenses, and general and administrative expenses in the consolidated statements of operations.



As of September 30, 2004, we had $48.6 million in domestic cash, cash
equivalents, and short-term and long-term investments.



We
generated $2.6 million in cash from operations in the third quarter of 2004. For the nine months ended September 30, 2004, we generated $3.3 million in cash from operations. We may not be able to generate cash from operations in 2005.



In the third quarter of 2004, retail dealer relationships (including
suspended dealers) declined by approximately 90. The decline was primarily attributable to the transition of approximately 100 retail dealer relationships to our enterprise dealer category and a decline of approximately 60 Car.com retail dealer
relationships. In the third quarter of 2004, CRM customer relationships increased by approximately 80. During the first quarter of 2005, we experienced a net reduction of retail dealer relationships. Although management is taking actions to reverse
this trend, there can be no assurance that it will not continue.



As of September 30, 2004, our lead referral dealer relationships consisted of approximately 6,400 retail dealer relationships (including approximately 170 suspended dealers), relationships with major dealer groups representing approximately
700 enterprise dealer relationships, and six direct relationships encompassing 16 brands with automotive manufacturers or their automotive buying service affiliates representing up to approximately 17,100 enterprise dealer relationships. As of June
30, 2004, our lead referral dealer relationships consisted of approximately 6,500 retail dealer relationships (including 109 suspended dealers), relationships with major dealer groups representing approximately 600 enterprise dealer relationships,
and six direct relationships encompassing 17 brands with automotive manufacturers or their automotive buying service affiliates representing up to approximately 22,800 enterprise dealer relationships. As of September 30, 2004, the CRM customer
relationships consisted of approximately 2,700 WebControl and approximately 730 RPM customer relationships. As of June 30, 2004, the CRM customer relationships consisted of approximately 2,690 WebControl and approximately 680 RPM customer
relationships. As an example of how we calculate these relationships, a dealer that subscribes to the Autobytel.com new car program and the Autoweb.com new car program accounts for two retail dealer relationships, and a dealer that subscribes to our
WebControl product and RPM program accounts for two CRM customer relationships. As a further example, a dealer group that owns three different franchises and that subscribes to the Autoweb.com new car program for all such franchises accounts for
three retail dealer relationships. WebControl customer relationships are accounted for based on the number of customers using WebControl, rather than the number of franchises owned by a given customer. We no longer include iManager product
relationships within CRM customer relationships, as we are offering dealers who use iManager the opportunity to migrate to WebControl. Suspended dealer relationships are relationships with dealers to whom the delivery of purchase requests or
performance of services has been suspended. The



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number of dealer and customer relationships as of September 30, 2004 and June 30, 2004 referred to above was determined in conformity with the methodology
described above.



On March 31, 2004, we adopted the provisions
of FIN 46R and determined we were the primary beneficiary of Autobytel.Europe. As a result of adopting FIN46R, we consolidated in our consolidated financial statements at September 30, 2004, approximately $8.1 million in cash and cash equivalents,
$0.1 million in other assets, $0.2 million in liabilities and $4.1 million representing the 51% ownership in Autobytel.Europe belonging to Autobytel.Europes other shareholder.



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



We classify our revenues as lead fees, advertising, customer
relationship management (CRM) services, and data, applications and other. Prior to January 1, 2004, we had classified our revenues as program fees, enterprise sales, advertising and other products and services. Amounts for 2003 have been
reclassified to conform to the 2004 presentation. There was no impact on total revenue as a result of the reclassification.



Lead fees consist of car buying purchase request fees for new and used cars, and finance request fees.



Fees for car buying purchase requests are paid by retail dealers, enterprise
dealers and automotive manufacturers or their buying service affiliates who participate in our online car buying referral networks. Beginning on April 15, 2004, lead fees include fees paid by retail dealers, enterprise dealers and automotive
manufacturers who participate in our Car.com online car buying referral network. Enterprise dealers consist of (i) dealers that are part of major dealer groups with more than 25 dealerships with whom we have a single agreement and (ii) dealers
that are eligible to receive purchase requests from us as part of a single agreement with an automotive manufacturer or its automotive buying service affiliate. Major dealer groups include AutoNation and automotive manufacturers include
manufacturers such as General Motors, Ford and Mazda. Fees paid by customers participating in our car buying referral networks are comprised of monthly subscription and transaction fees for consumer leads, or purchase requests, which are directed to
participating dealers. These monthly subscription and transaction fees are recognized in the period service is provided. Ongoing fixed monthly subscription fees are based, among other things, on the size of territory, demographics and, indirectly,
the transmittal of purchase requests to customers participating in our car buying referral networks. Transaction fees are based on the number of purchase requests provided to retail and enterprise dealers and automotive manufacturers each month.



Generally, our dealer contracts are terminable on 30
days notice by either party. As of September 30, 2004, a major manufacturer in our program accounted for up to approximately 8,600 enterprise dealer relationships. This program with a major manufacturer automatically extends in one month
increments until terminated by us or the manufacturer. From time to time, a major dealer group or automotive manufacturer may significantly increase or decrease the number of enterprise dealers participating in our dealer networks or the number of
purchase requests accepted from us. We intend to strengthen the size and quality of our relationships with major dealer groups and automotive manufacturers.



Beginning April 15, 2004, lead fees also include fees paid by retail dealers, finance request intermediaries, and automotive finance companies who
participate in our Car.com finance referral network. Customers participating in our Car.com finance referral network pay ongoing monthly subscription fees or transaction fees based on the number of finance requests provided to them each month. The
fees are recognized in the period service is provided.



For the
three months ended September 30, 2004 and 2003, lead fees were $22.4 million and $16.1 million, or 69% and 71% of total revenues in the third quarter of 2004 and 2003, respectively. We expect to derive a majority of our revenues in the foreseeable
future from retail dealers, enterprise dealers and automotive manufacturers that participate in our online car buying referral networks and dealers, finance request intermediaries, and automotive finance companies that participate in our Car.com
finance referral network.



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Advertising revenues represent fees from automotive manufacturers and other advertisers who target car
buyers during the research, consideration and decision making process on our Web sites, as well as through direct marketing offerings. Using the targeted nature of Internet advertising, manufacturers can advertise their brands effectively on any of
our Web sites by targeting advertisements to consumers who are researching vehicles, thereby increasing the likelihood of influencing their purchase decisions. Beginning April 15, 2004, advertising revenues include fees paid by automotive
manufacturers who advertise on our Car.com Web site.



Revenues
from advertising were $3.6 million and $2.7 million in the third quarter of 2004 and 2003, or 11% and 12% of total revenues, in the third quarter of 2004 and 2003, respectively. With further selling of additional advertising inventory, an increase
in Internet advertising spending by automotive manufacturers, the acquisition of Stoneage in April 2004 and the addition of new and higher priced products, such as rich media and direct marketing offerings, we anticipate that our advertising
revenues in 2005 will increase compared to 2004.



CRM services
consist of fees paid by customers who use our customer retention and lead management products. Customer retention and lead management products consist of WebControl System (WebControl), our customer lead management product, Retention Performance
Marketing (RPM) and iDriveonline, our customer loyalty and retention marketing programs, and Automotive Download Services (ADS), our data extraction service. CRM services include fees from WebControl and ADS beginning on June 4, 2003, and fees from
dealers using the iDriveonline program beginning on April 9, 2004. Customers using our CRM services pay transaction fees based on the specified service, or ongoing monthly subscription fees based on the level of functionality selected from our suite
of lead management products. Revenues from CRM services were $5.4 million and $2.5 million, or 17% and 11% of total revenues, in the third quarter of 2004 and 2003, respectively. We expect revenues from our CRM services to increase in 2005
compared to 2004 due to an increase in WebControl and RPM revenues, and the addition of iDriveonline dealers in April 2004.



Revenues from data, applications and other include fees from automotive marketing data and technology, classified listings for used cars, international
licensing agreements, internet sales training and other products and services. Revenues from data, applications and other were $1.1 million and $1.5 million, or 3% and 6% of total revenues, in the third quarter of 2004 and 2003, respectively. We
develop our own data for use on our Web sites, and also make it available to third parties, such as automotive manufacturers and internet portals. We continue to focus our efforts on offering marketing services to dealers and automotive
manufacturers. We expect revenues from data, applications and other to decline in 2005 compared to 2004.



Effective with the filing of this Quarterly Report on Form 10-Q, we modified our statement of operations presentation to better align reported results
with internal operational measures and to provide increased understanding and transparency for investors. Operating expenses are now classified as cost of revenues, sales and marketing, product and technology development, general and administrative,
and amortization of acquired intangible assets. Cost of revenues contain costs previously classified as sales and marketing, including traffic acquisition and related compensation costs, printing, production and postage for our customer loyalty and
retention program, and fees paid to third parties for data and content included on our properties. Cost of revenues also contain costs previously classified as product and technology development including connectivity costs, technology license fees,
amortization of acquired technology, amortization of internally developed technology, fees paid to third parties for data and content included on our properties, and server equipment depreciation. Other costs which have been reclassified are: (1)
bad debt expense, which was previously classified as sales and marketing expense, is now classified as general and administrative expense, and (2) credit balances of customers, which were previously classified as accounts receivable, are now
classified as other current liabilities. Additionally, we have reclassified auction rate securities as short-term investments that were previously classified as cash equivalents.



To enhance the quality of purchase requests, each purchase request is passed through our Quality Verification System
(QVS)SMwhich uses filters and validation processes to identify consumers with valid purchase intent before
delivering the purchase request to our retail and enterprise dealers. We believe the implementation of these quality enhancing processes allows us to deliver high quality purchase requests to our



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retail and enterprise dealers. High quality purchase requests are those that result in high closing ratios. Closing ratio is the ratio of the number of
vehicles purchased at a dealer generated from purchase requests to the total number of purchase requests sent to that dealer.



We delivered approximately 1.1 million and 0.8 million purchase requests through our online systems to retail and enterprise dealers in the third quarter
of 2004 and 2003, respectively, including 0.3 million purchase requests delivered by Car.com in the third quarter of 2004. Of these, approximately 0.7 million and 0.6 million were delivered to retail dealers and approximately 0.4 million and 0.2
million were delivered to enterprise dealers in the third quarter of 2004 and 2003, respectively. Purchase requests delivered to retail dealers in the third quarter of 2004 increased by 0.1 million, or 17%, compared to the third quarter of 2003, due
to the addition of new retail dealer relationships, including Car.com relationships. Purchase requests delivered to enterprise dealers in the third quarter of 2004 increased by 0.2 million, or 100%, compared to the third quarter of 2003, due to the
addition of new enterprise relationships, the expansion of our existing relationships and the addition of Car.com relationships. The number of purchase requests we delivered to our retail and enterprise dealers declined in the first quarter of 2005
compared to the fourth quarter of 2004. Management is taking actions to reverse this trend. However, we cannot assure that this trend will not continue.



Additionally, we delivered approximately 0.2 million finance requests in the third quarter of 2004 to retail dealers, finance request intermediaries, and
automotive finance companies as a result of the Car.com acquisition. We expect that the number of finance requests we deliver to retail dealers, finance request intermediaries, and automotive finance companies will increase in 2005 compared to 2004.



To enhance our retail dealers ability to sell cars using
our programs, we developed and implemented various products and processes that allow us to provide high quality dealer support. We contact all retail dealers new to our programs to confirm their initiation on our programs and train their designated
personnel on the use of our programs and products. We also contact our retail dealers on a regular basis to identify retail dealers who are not using our programs effectively, develop relationships with retail dealer principals and their personnel
responsible for calling consumers and to inform our retail dealers about their effectiveness using surveys completed by purchase-intending consumers.



Our relationship with retail dealers may terminate for various reasons including:



| |  |  | termination by the dealer due to issues with purchase request volume, purchase request quality, fee increases or lack of dedicated personnel to manage the program effectively,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | termination by us due to the dealer providing poor customer service to consumers or for nonpayment of fees by the dealer,
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | termination by us of dealers that cannot provide us with a reasonable profit,
| | - |  | -----------------------------------------------------------------------------



| |  |  | extinction of the manufacturer brand, or
| | - |  | ----------------------------------------



| |  |  | selling or termination of the dealer franchise.
| | - |  | -----------------------------------------------



In the third quarter of 2004, we experienced a net reduction in our number of dealer relationships, primarily due to the cancellation of an enterprise
relationship with Car.com by an automotive manufacturer. We cannot assure that we will be able to reduce dealer turnover. Our inability or failure to reduce dealer turnover could have a material adverse effect on our business, results of operations
and financial condition.



Because our primary revenue source is
from lead fees, our business model is different from many other Internet commerce sites. The automobiles requested through our Web sites are sold by dealers; therefore, we derive no direct revenues from the sale of a vehicle and have no significant
cost of goods sold, no procurement, carrying or shipping costs and no inventory risk.



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Results of Operations



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



|                                           |  |                                 |   |  |                                |   |  |      |   |  |          |  
|------------------------------------------ |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | -------- | -
|                                           |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                           |  | 2004                            |   |  | 2003                           |   |  | 2004 |   |  | 2003     |  
|                                           |  |                                 |   |  | Restated                       |   |  |      |   |  | Restated |  
|Total revenues                             |  | 100                             | % |  | 100                            | % |  | 100  | % |  | 100      | %
|                                           |  |                                 |   | 
|Costs and expenses:                        |  |                                 |   |  |                                |   |  |      |   |  |          |  
|Cost of revenues                           |  | 40                              |   |  | 38                             |   |  | 41   |   |  | 41       |  
|Sales and marketing                        |  | 19                              |   |  | 23                             |   |  | 22   |   |  | 23       |  
|Product and technology development         |  | 16                              |   |  | 19                             |   |  | 17   |   |  | 18       |  
|General and administrative                 |  | 14                              |   |  | 12                             |   |  | 14   |   |  | 14       |  
|Amortization of acquired intangible assets |  |                                |   |  |                               |   |  | 1    |   |  |         |  
|                                           |  |                                 |   |  |                                |   |  |      |   |  |          |  
|Total costs and expenses                   |  | 89                              |   |  | 92                             |   |  | 95   |   |  | 96       |  
|                                           |  |                                 |   |  |                                |   |  |      |   |  |          |  
|Income from operations                     |  | 11                              |   |  | 8                              |   |  | 5    |   |  | 4        |  
|Other income                               |  |                                |   |  |                               |   |  | 1    |   |  |         |  
|                                           |  |                                 |   |  |                                |   |  |      |   |  |          |  
|Income before income taxes                 |  | 11                              |   |  | 8                              |   |  | 6    |   |  | 4        |  
|Provision for income taxes                 |  |                                |   |  |                               |   |  |     |   |  |         |  
|                                           |  |                                 |   |  |                                |   |  |      |   |  |          |  
|Net income                                 |  | 11                              | % |  | 8                              | % |  | 6    | % |  | 4        | %
|                                           |  |                                 |   |  |                                |   |  |      |   |  |          |  



Revenues by groups of
similar services are as follows (amounts in thousands):



|                                                |  |                                 |        |                                |   |        |  |            |        |  |   |       
|----------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---------- | ------ |  | - | ------
|                                                |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                |  | 2004                            |        | 2003                           |   | 2004   |  | 2003      
|                                                |  |                                 |        | (Restated)                     |   |        |  | (Restated)
|Revenues:                                       |  |                                 |        |                                |   |        |  |            |        |  |   |       
|Lead fees                                       |  | $                               | 22,414 |                                | $ | 16,094 |  | $          | 61,378 |  | $ | 47,632
|Advertising                                     |  |                                 | 3,551  |                                |   | 2,719  |  |            | 9,818  |  |   | 8,430 
|Customer relationship management (CRM) services |  |                                 | 5,382  |                                |   | 2,483  |  |            | 13,342 |  |   | 4,435 
|Data, applications and other                    |  |                                 | 1,106  |                                |   | 1,476  |  |            | 3,655  |  |   | 3,946 
|                                                |  |                                 |        |                                |   |        |  |            |        |  |   |       
|Total revenues                                  |  | $                               | 32,453 |                                | $ | 22,772 |  | $          | 88,193 |  | $ | 64,443
|                                                |  |                                 |        |                                |   |        |  |            |        |  |   |       



Three Months Ended September 30,
2004 Compared to Three Months Ended September 30, 2003



Revenues. Our revenues increased by $9.7 million, or 42%, to $32.5 million in the third quarter of 2004 compared to $22.8 million in the third quarter of 2003. The increase was due to growth in lead fees, CRM services and
advertising.As a result of the acquisitions of iDriveonline and Stoneage on April 9, 2004 and April 15, 2004, respectively, revenues include $1.6 million from dealers using iDriveonlines customer loyalty and retention marketing
programs and $5.2 million from customers using Stoneage services in the third quarter of 2004.



Lead Fees. Lead fees increased by $6.3 million, or 39%, to $22.4 million in the third quarter of 2004 compared to $16.1 million in the third quarter of 2003. The increase was due to the delivery of an
additional 0.3 million purchase requests to our retail and enterprise dealers and 0.2 million in finance requests delivered to dealers, finance request intermediaries, and automotive finance companies in the third quarter of 2004 when compared to
the third quarter of 2003. The increase in purchase requests was primarily due to purchase requests delivered to Car.com retail and enterprise dealers. Additionally, we increased our fees per purchase request for some dealers in the third quarter of
2004. Lead fees and the number of purchase requests we delivered to dealers declined in the first quarter of 2005 compared to the fourth quarter of 2004. Management is taking actions to reverse this trend. However, we cannot assure that this trend
will not continue.



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Advertising. Advertising revenue increased by $0.8 million, or 31%, to $3.6 million in the third
quarter of 2004 compared to $2.7 million in the third quarter of 2003. The increase was primarily due to higher spending by automotive manufacturers, additional Web site advertising sales to Car.com customers and the addition of new products, such
as rich media and direct marketing offerings. With further selling of additional available advertising inventory, an increase in Internet advertising spending by automotive manufacturers, the acquisition of Stoneage in April 2004, and the addition
of new and higher priced products, such as rich media and direct marketing offerings, we expect our advertising revenues to increase in 2005 compared to 2004.



CRM Services. CRM services increased by $2.9 million, or 117%, to $5.4 million in the third quarter of 2004 compared to $2.5 million in the
third quarter of 2003. The increase was due to an increase in RPM revenues, higher fees from iDriveonlines customer loyalty and retention marketing programs and fees from WebControl products and ADS services. We expect revenues from our CRM
services to increase in 2005 compared to 2004 due to an increase in WebControl and RPM revenues and the addition of iDriveonline dealers in April 2004.



Data, Applications and Other. Revenues from data, applications and other decreased by $0.4 million or 25%, to $1.1 million in the third quarter of
2004 compared to $1.5 million in the third quarter of 2003. The decrease is primarily due to a decrease in fees from customers who use our automotive marketing data and technology through our Automotive Information Center (AIC) division, classified
advertising service and training. We continue to focus our efforts on offering marketing services to dealers and automotive manufacturers. We expect data, applications and other to decline in 2005 compared to 2004.



Cost of Revenues. Costof revenues consists of traffic
acquisition costs (TAC) and other cost of revenues. TAC consists of payments made to our internet purchase providers, including internet portals and online automotive information providers. Other cost of revenues consists of printing,
production, and postage for our customer loyalty and retention programs, fees paid to third parties for data and content included on our properties, connectivity costs, technology license fees, server equipment depreciation and technology
amortization and compensation related expense.



Cost of
revenues increased by $4.3 million or 50% to $13.0 million in the third quarter of 2004 compared to $8.7 million in 2004. This represents 40% and 38% of total revenues for the third quarter of 2004 and 2003, respectively. The increase was due to a
$3.7 million increase in the costs of purchase and finance requests acquired from third parties and a $0.7 million increase in printing, production, and postage costs for our customer loyalty and retention program. This increase was offset by a $0.1
million decrease in amortization of capitalized internal use software due to certain costs that were fully amortized during the first half of 2004. The increase in purchase request and finance request costs was primarily due to the increased
delivery of purchase requests and finance requests, primarily as a result of the acquisition of Stoneage. The increase in printing, production and postage costs was due to the increase in our RPM business and the acquisition of Stoneage and
iDriveonline. We expect our costs of revenue to increase in 2005 compared to 2004.



Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, as well as personnel and other costs associated with dealer sales, CRM sales, Web site advertising sales, and
dealer training and support. Sales and marketing expense increased by $1.1 million, or 21%, to $6.3 million in the third quarter of 2004 compared to $5.2 million in the third quarter of 2003. This represents 19% and 23% of total revenues for the
third quarter of 2004 and 2003, respectively. The increase was due to a $1.0 million increase in costs associated with sales and customer relationship maintenance, a $0.3 million increase in traditional advertising expenses, offset by a $0.2 million
decrease in other marketing costs, including compensation costs. The increase in sales and customer relationship maintenance was due to higher personnel costs related to increased sales and headcount. The increase in traditional advertising
expenses, was partially a result of the acquisition of Stoneage and iDriveonline. We expect our sales and marketing expenses to increase in 2005 compared to 2004.



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Product and Technology Development. Product and technology development expense includes personnel
costs related to developing new products, enhancing the features, content and functionality of our Web sites and our Internet-based communications platform, costs associated with our telecommunications and computer infrastructure, costs related to
data and technology development and amortization of software development costs. Product and technology development expense increased by $0.7 million, or 17%, to $5.1 million in the third quarter of 2004 compared to $4.4 million in the third quarter
of 2003. This represents 16% and 19% of total revenues for the third quarter of 2004 and 2003, respectively. The increase was due to higher personnel and related costs of $0.6 million and a $0.1 million increase in other expenses. The higher
personnel and related costs are associated with the increase in headcount, largely from the acquisitions of iDriveonline and Stoneage. Also included in this increase are integration related expenses, such as transition salaries and retention
bonuses, and costs associated with our efforts to comply with Sarbanes-Oxley. We expect our product and technology development expenses to increase in 2005 compared to 2004.



General and Administrative. General and administrative expense consists of executive, financial and legal personnel
expenses and costs related to being a public company. General and administrative expense increased by $1.7 million, or 62%, to $4.4 million in the third quarter of 2004 compared to $2.7 million in the third quarter of 2003. This represents 14% and
12% of total revenues for the third quarter of 2004 and 2003, respectively. The increase was primarily due to a $0.7 million increase in public company expenses primarily related to compliance with the Sarbanes-Oxley Act, a $0.5 million increase in
legal and recruiting fees, a $0.3 million increase in the estimate of bad debt expense that could result from the inability or failure of our customers to pay for our services and a $0.2 million impairment charge of intangible assets related to
certain Car.com customer relationships. We expect our general and administrative expenses to increase in 2005 compared to 2004 due to costs relating to compliance with the Sarbanes-Oxley Act of 2002, costs associated with the restatements of our
consolidated financial statements, costs associated with remediation of material weaknesses in our internal controls identified in our internal review, costs associated with defending purported class action and derivative lawsuits filed against us
and certain current directors and current and former officers relating to the restatements of our consolidated financial statements, and costs associated with enforcing our intellectual property rights, including the lawsuit filed against Dealix
Corporation for patent infringement.



Amortization of
Acquired Intangible Assets. Amortization of acquired intangible assets represents the amortization of customer relationships and domain name recorded as part of the AVV, iDriveonline and Stoneage acquisitions. Amortization of acquired intangible
assets increased by $0.5 million during the nine months ended September 30, 2004 compared to the same period in 2003. The increase was due to the acquisitions of iDriveonline and Stoneage.



Interest Income. In the third quarter of 2004, interest income
increased by $0.1 million, to $0.2 million compared to $0.1 million in the third quarter of 2003. The increase in interest income was due to the investment of our cash in accounts yielding higher interest rates.



Income in Equity Investee. Income in equity investee in the third
quarter of 2003 represents our share of income in Autobytel.Europe.



Minority Interest.Minority interest represents the portion of Autobytel.Europes net income allocable to Autobytel.Europes other shareholder.



Income Taxes. In the third quarter of 2004, a $0.1 million provision for state income taxes has been recorded
compared to a nominal amount in the third quarter of 2003. The increase in provision for state income taxes is primarily due to the acquisitions of Stoneage and AVV in April 2004 and June 2003, respectively, which generated taxable income in their
jurisdictions. In the preparation of our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate, including estimating both our actual current tax exposure and assessing
temporary differences resulting from differing treatment of items for tax and accounting purposes. We have net operating loss carryforwards that expire in various years through



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2023. We also have federal and state research tax credit carryforwards. The federal research tax credits expire in various years through 2022. The state
research tax credits do not expire. Utilization of these carryforwards is subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in
the expiration of the carryforwards before utilization. To the extent that we have deferred tax assets, we must assess the likelihood that our deferred tax assets will be recovered from taxable temporary differences, tax strategies or future taxable
income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. At the end of each reporting period, we evaluate whether it is more likely than not that our deferred tax assets are not realizable. While
we believe that such deferred tax assets were not realizable at September 30, 2004, our assessment may change in future periods if we generate positive operating results and such adjustment would impact our provision for income taxes in the period
of such change.



Nine Months Ended September 30, 2004 Compared to Nine
Months Ended September 30, 2003



Revenues. Our
revenues increased by $23.8 million, or 37%, to $88.2 million in the nine months ended September 30, 2004 compared to $64.4 million for the same period in 2003. The increase was due to growth in lead fees, advertising, and CRM services coupled with
the benefit of WebControl and ADS for a full nine months. As a result of the acquisitions of iDriveonline and Stoneage, revenues include $3.0 million from dealers using iDriveonlines customer loyalty and retention marketing programs and $10.4
million from dealers using Stoneage services in the nine months ended September 30, 2004.



Lead Fees. Lead fees increased by $13.7 million, or 29%, to $61.4 million in the nine months ended September 30, 2004 compared to $47.6 million for the same period in 2003. The increase was due to the delivery
of an additional 0.7 million purchase requests to our retail and enterprise dealers and 0.3 million finance requests delivered to dealers, finance request intermediaries, and automotive finance companies in the nine months ended September 30, 2004
when compared to the same period in 2003. The increase in purchase requests was primarily due to purchase requests delivered to Car.com retail and enterprise dealers. Additionally, we increased our fees per purchase request for some dealers in the
third quarter of 2004. Lead fees and the number of purchase requests we delivered to dealers declined in the first quarter of 2005 compared to the fourth quarter of 2004. Management is taking actions to reverse this trend. However, we cannot assure
that this trend will not continue.



Advertising.
Advertising revenue increased by $1.4 million, or 16%, to $9.8 million in the nine months ended September 30, 2004 compared to $8.4 million for the same period in 2003. The increase was primarily due to higher spending by automotive manufacturers,
the additional Web site advertising sales to Car.com customers and the addition of new products, such as rich media and email offerings. With further selling of additional available advertising inventory, an increase in Internet advertising spending
by automotive manufacturers, the acquisition of Stoneage in April 2004, and the addition of new and higher priced products, such as rich media and direct marketing offerings, we expect our advertising revenues to increase in 2005 compared to 2004.



CRM Services. CRM services increased by $8.9 million to
$13.3 million in the nine months ended September 30, 2004 compared to $4.4 million for the same period in 2003. The increase was due to an increase in RPM revenues, higher fees from iDriveonlines customer loyalty and retention marketing
programs and fees from WebControl products and ADS services. We expect revenues from our CRM services to increase in 2005 compared to 2004 due to an increase in WebControl and RPM revenues and the addition of iDriveonline dealers in April 2004.



Data, Applications and Other. Revenues from data,
applications and other decreased by $0.3 million or 7%, to $3.7 million in the nine months ended September 30, 2004 compared to $3.9 million for the same period in 2003. The decrease is primarily due to a decrease in fees from customers who use our
automotive marketing data and technology through our Automotive Information Center (AIC) division, classified advertising service and training, partially offset by the consolidation of Autobytel.Europe beginning April 1, 2004. We continue to focus
our efforts on offering marketing services to dealers and automotive manufacturers. We expect data, applications and other to decline in 2005 compared to 2004.



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Cost of Revenues.Cost of revenues increased by $9.8 million or 37% to $36.5 million in the nine
months ended September 30, 2004 compared to $26.6 million for the same period in 2003. This represents a 41% of total revenues for both the nine months ended September 30, 2004 and 2003. The increase was due to a $7.4 million increase in the costs
of purchase and finance requests acquired from third parties, a $1.6 million increase in printing, production, and postage costs for our customer loyalty and retention program, a $0.3 million increase in compensation costs, a $0.4 million increase
in data content and license fees and a $0.1 million increase in hosting and internet connectivity charges. The increase in purchase request and finance request costs was primarily due to the increased delivery of purchase requests and finance
requests, primarily as a result of the acquisition of Stoneage. The increase in printing, production and postage costs and data content and license fees were due to the increase in our RPM business and the acquisition of and iDriveonline. We expect
our costs of revenue to increase in 2005 compared to 2004.



Sales and Marketing. Sales and marketing expense increased by $4.6 million, or 31%, to $19.4 million in the nine months ended September 30, 2004 compared to $14.8 million for the same period in 2003. This represents 22% and 23% of
total revenues for the nine months ended September 30, 2004 and 2003, respectively. The increase was due to a $3.7 million increase in costs associated with sales and customer relationship maintenance, a $1.0 million increase in traditional
advertising expenses, offset by a $0.1 million decrease in compensation costs. The increase in sales and customer relationship maintenance was due to higher personnel costs related to increase sales and headcount. The increase in traditional
advertising expenses and sales personnel and compensation costs was partially a result of the acquisition of Stoneage and iDriveonline. We expect our sales and marketing expenses to increase in 2005 compared to 2004.



Product and Technology Development. Product and technology development
expense increased by $3.7 million, or 33%, to $14.9 million in the nine months ended September 30, 2004 compared to $11.2 million for the same period in 2003. This represents 17% and 18% of total revenues for the nine months ended September 30,
2004 and 2003, respectively. The increase was due to higher personnel and related costs of $3.2 million, a $0.3 million increase in telephone costs related to our voice communications and a $0.2 million increase in other expenses. The higher
personnel and related costs is associated with the increase in headcount, largely from the acquisition of iDriveonline and Stoneage. Also included in this increase are integration related expenses, such as transition salaries and retention bonuses,
and costs associated with our efforts to comply with Sarbanes-Oxley. We expect our product and technology development expenses to increase in 2005 compared to 2004.



General and Administrative. General and administrative expense increased by $2.8 million, or 30%, to $11.9 million in
the nine months ended September 30, 2004 compared to $9.2 million for the same period in 2003. This represents 14% of total revenues for both the nine months ended September 30, 2004 and 2003. The increase was due to $1.1 million in higher
compensation and related costs and an increase in headcount, $0.1 million in severance costs associated with the separation of an employee from us, a $1.1 million increase in public company expenses primarily related to compliance with the
Sarbanes-Oxley Act, a $0.5 million increase in legal and recruiting fees, a $0.3 million related to an abandoned acquisition and a $0.2 million impairment charge of intangible assets related to certain Car.com customer relationships offset by a $0.2
million reduction in the estimated provision for bad debt and a $0.3 million decrease in insurance costs and other expenses. We expect our general and administrative expenses to increase in 2005 compared to 2004 due to costs relating to compliance
with the Sarbanes-Oxley Act of 2002, costs associated with the restatements of our consolidated financial statements, costs associated with remediation of material weaknesses in our internal controls identified in our internal review, costs
associated with defending purported class action and derivative lawsuits filed against us and certain current directors and current and former officers relating to the restatements of our consolidated financial statements, and costs associated with
enforcing our intellectual property rights, including the lawsuit filed against Dealix Corporation for patent infringement.



Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets represents the amortization of customer relationships and
domain name recorded as part of the AVV, iDriveonline and



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Stoneage acquisitions. Amortization of acquired intangible assets increased by $0.7 million during the nine months ended September 30, 2004 compared to the
same period in 2004. The increase was due to the acquisitions of iDriveonline and Stoneage.



Interest Income. In the nine months ended September 30, 2004, interest income increased by $0.4 million, to $0.6 million compared to $0.2 million for the same period in 2003. The increase in interest income was
due to higher cash balances as a result of the sale of five million shares of common stock in a private placement for net proceeds of $25.6 million in June 2003 and the investment of our cash in accounts yielding higher interest rates.



Loss in Equity Investee. Loss in equity investee in the nine months
ended September 30, 2004 represents our share of income in Autobytel.Europe prior to April 1, 2004.



Minority Interest.Minority interest represents the portion of Autobytel.Europes net income allocable to Autobytel.Europes other
shareholder.



Stock Options Granted in 2004



From January 1, 2004 through September 30, 2004, we granted stock options to
purchase 1,793,000 shares of common stock under our 1996 Stock Incentive Plan, 1999 Employee and Acquisition Related Stock Option Plan, the Amended and Restated 2001 Restricted Stock and Option Plan and the 2004 Restricted Stock and Option Plan. The
stock options were granted at our common stock closing price on the date of grant. As of September 30, 2004, we had approximately 8.0 million outstanding stock options.



Employees



As of September 30, 2004, we had a total of 405 employees. We also utilize independent contractors as required. None of our employees are represented by a
labor union. We have not experienced any work stoppages and consider our employee relations to be good.



Liquidity and Capital Resources



Our domestic cash, cash equivalents, and short-term and long-term investments totaled $48.6 million as of September 30, 2004, an increase of $2.4 million in the third quarter of 2004. As of September 30, 2004, we had $20.1 million in
domestic cash and cash equivalents. As of September 30, 2004, restricted international cash and cash equivalents held by Autobytel.Europe were $8.1 million for use as directed by Autobytel.Europe. Restricted international cash and cash equivalents
are not available to us.



Net cash provided by operating
activities was $3.3 million for the nine months ended September 30, 2004 compared to $6.7 million for the same period in 2003. Net cash provided by operating activities for the nine months ended September 30, 2004 resulted from net income for the
period before non-cash charges, partially offset by an increase in accounts receivable, prepaid expenses and other current assets coupled with a decrease in accounts payable, accrued expenses, deferred revenues and accrued international licensee
liabilities. A $2.2 million increase in accounts receivable was due to higher billing as a result of increased revenues. A $0.5 million increase in prepaid expenses and other current assets was primarily due to the payment of insurance
premiums during the first half of 2004, prepaid postage and other prepaid expenses, offset by the amortization of the insurance premiums. A $0.4 million decrease in accounts payable was primarily due to the payout of the liabilities assumed from the
acquisition of Stoneage and iDriveonline. A $1.0 million decrease in accrued expenses was primarily due to the payout of accrued compensation costs. A $0.6 million decrease in deferred revenue is primarily due to revenue recognized for our services
provided to iDriveonline dealers that were billed prior to the acquisition of iDriveonline, and a decline in deferred revenue related to Web site advertising, automotive data and technology license fees, international license fees and dealers paying
ongoing fixed monthly subscription fees for the nine months ended September 30, 2004 that were billed in 2003. A $1.5 million decrease



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in accrued international licensee liabilities was due to payments made in April 2004 by Autobytel.Europe to Autobytel.Europe licensees for amounts due under
agreements entered into in March 2002.



Net cash provided by
operating activities for the nine months ended September 30, 2003 primarily resulted from the net income for the period before non-cash charges, a decrease in prepaid expenses and other current assets, partially offset by an increase in accounts
receivable. The $2.4 million decrease in prepaid expenses and other current assets was primarily due to the amortization of prepaid fees related to a marketing agreement, our participation at an annual trade show held in the first quarter of 2003
and the settlement of escrow funds. The $2.0 million increase in accounts receivable was due to higher billing as a result of increased revenues.



Net cash used in investing activities was $32.6 million for the nine months ended September 30, 2004 and $3.5 million for the same period in 2003. Cash
used in investing activities in the nine months ended September 30, 2004 was related to the acquisitions of Stoneage and iDriveonline, net purchases of short-term and long-term investments in government sponsored agency bonds and auction rate
securities and purchases of property and equipment, offset by the increase in restricted cash. Cash used in investing activities in 2003 was related to the acquisition of AVV, Inc. and the purchase of property and equipment, offset by $2.2 million
received as a partial return of our investment in Autobytel.Europe.



Net cash provided by financing activities was $3.8 million for the nine months ended September 30, 2004 and $28.1 million for the same period in 2003. Cash provided by financing activities in the nine months ended September 30, 2004 was due
to proceeds received from the sale of common stock through our employee stock purchase plan and the exercise of stock options, offset by payments of capital lease obligations assumed in the Stoneage acquisition. Cash provided by financing activities
in 2003 was due to proceeds received from the sale of common stock in a private placement, through our employee stock purchase plan and the exercise of stock options.



Our cash requirements depend on several factors, including:



| |  |  | the level of expenditures on marketing and advertising, including the cost of contractual arrangements with Internet portals, online information providers and other referral
sources,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of expenditures on product and technology development,
| | - |  | ----------------------------------------------------------------



| |  |  | the level of expenditures for general and administrative matters,
| | - |  | -----------------------------------------------------------------



| |  |  | the ability to increase the volume of purchase requests and finance requests and transactions related to our Web sites,
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the amount and timing of cash collection and disbursements,
| | - |  | -----------------------------------------------------------



| |  |  | the cash portion of acquisition transactions and joint ventures, and
| | - |  | --------------------------------------------------------------------



| |  |  | costs of ongoing litigation and any adverse judgments resulting from such litigation.
| | - |  | -------------------------------------------------------------------------------------



We estimate and record allowances for potential bad debts and customer credits based on our historical bad debt and customer
credit experience, which is consistent with our past practice.



The allowance for bad debts is our estimate of bad debt expense that could result from the inability or refusal of our customers to pay for our services. Additions to the estimated allowance for bad debts are recorded as an increase in
sales and marketing expenses. Reductions in the estimated allowance for bad debts are recorded as a decrease in sales and marketing expenses. As specific bad debts are identified, they are written-off against the previously established estimated
allowance for bad debts and have no impact on operating expenses.



The allowance for customer credits is our estimate of adjustments for services that do not meet our customers perceived expectations. Additions to the estimated allowance for customer credits are recorded as a reduction in revenues.
Reductions in the estimated allowance for customer credits are recorded as an increase in



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revenues. As specific customer credits are identified, they are written-off against the previously established estimated allowance for customer credits and
have no impact on revenues.



During the three months and nine
months ended September 30, 2004, we added $1.0 million and $1.3 million, respectively, to our domestic allowances for bad debts and customer credits. Also during the three months and nine months ended September 30, 2004, we wrote-off $0.9
million and $2.1 million, respectively, from our previously established allowances for bad debts and customer credits. The write-offs had no impact on our revenues or operating expenses. As of September 30, 2004, our estimated allowances for
domestic bad debts and customer credits have increased to $1.0 million, or 6% of gross accounts receivable from $0.8 million, or 5%, of gross accounts receivable, as of June 30, 2004 and declined from $1.8 million, or 13%, of gross accounts
receivable as of December 31, 2003.



With the adoption of FIN
46R on March 31, 2004, we consolidated Autobytel.Europe into our consolidated financial statements. As of March 31, 2004, Autobytel.Europe had an estimated reserve for bad debt of $0.8 million. In the second quarter of 2004, Autobytel.Europe
wrote-off the majority of the estimated bad debt reserve balance which had no impact on Autobytel.Europes or our operating expenses.



If there is a decline in the general economic environment that negatively affects the financial condition of our customers or an increase in the number of
customers that are dissatisfied with our services, additional estimated reserves for bad debts and customer credits may be required and the impact on our business, results of operations or financial condition could be material.



We do not have debt. We believe our current cash and cash equivalents are
sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.



Although we forecast and budget cash requirements, assumptions underlying the estimates may change and could have a material impact on our cash
requirements. If our capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. We have no commitments for any additional financing, and there can be no assurance that any such
commitments can be obtained on favorable terms, if at all.



Car.coms contractual obligations include an operating lease for its facility. As of September 30, 2004, the aggregate minimum lease payments were $0.2 million expiring on various dates through June 2005.



Recent Accounting Pronouncements



In March 2004, the FASBs Emerging Issues Task Force (EITF)
reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments (EITF 03-1).EITF 03-1 provides accounting guidance regarding the determination of when an
impairment (i.e., fair value is less than amortized cost) of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in earnings. EITF 03-1 also requires
annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities classified as available-for-sale or held-to-maturity that are in an unrealized loss position at the balance sheet date, but for which an
other-than-temporary impairment has not been recognized. We adopted the disclosure requirements of EITF 03-1 on December 31, 2003.



The accounting guidance of EITF 03-1 was initially effective on July 1, 2004. However, on September 30, 2004, the FASB issued a FASB Staff
Position (FSP) that delayed the effective date of the measurement and recognition guidance included in EITF 03-1 (the annual disclosure requirements have not been deferred). The effective date has been delayed so that the FASB can
consider providing additional implementation guidance.



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In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123R
(revised 2004), Share-Based Payment, which revised SFAS No. 123, Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The revised
statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs
relating to such transactions be recognized in the consolidated statement of operations. The revised statement is effective as of the first annual period beginning after June 15, 2005. In accordance with the revised statement, we will be required to
recognize the expense attributable to stock options granted or vested subsequent to December 31, 2005. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result
in amounts that are similar to the current pro forma disclosures in Note 2 of the Notes to Consolidated Financial Statements.



In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, or FAS 109-1, Application of FASB Statement No. 109, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The American Jobs Creation Act, or AJCA, introduces a special 9% tax deduction on qualified production activities.
FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. Pursuant to the AJCA, we will not be entitled to this special deduction in 2005, as the deduction is applied to taxable
income after taking into account net operating loss carryforwards, and we have significant net operating loss carryforwards that will fully offset taxable income. We do not expect the adoption of these new tax provisions to have a material impact on
our consolidated financial position, results of operations or cash flows.



In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, or FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of
2004. The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS No. 109-2 provides accounting and
disclosure guidance for the repatriation provision. Although FAS 109-2 is effective immediately, we have not begun its analysis and do not expect to be able to complete our evaluation of the repatriation provision until after Congress or the
Treasury Department provides additional clarifying language on key elements of the provision.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, (SFAS 153). SFAS 153 addresses the measurement of exchanges of non-monetary
assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of
SFAS 153 is not expected to have a material effect on our consolidated financial position or results of operations.



On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R
and certain SEC rules and regulations and provides the SECs views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with
non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based
payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting
for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R and disclosures in Managements Discussion and Analysis of Financial
Condition and Results of Operations subsequent to adoption of SFAS No. 123R. We do not expect the impact SAB 107, which became effective on March 29, 2005, to have a material impact on our consolidated financial position, results of operations or
cash flows.



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Risk Factors



In addition to the factors discussed in the Overview and Liquidity and Capital Resources sections of Managements
Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q, the following additional factors may affect our future results.



We have only been profitable from the fourth quarter of 2002 through the fourth quarter of 2004 and otherwise have a history of net
losses. We incurred a loss in the first quarter of 2005 and cannot assure that we will be profitable in the future. If we are unable to achieve profitability in the future and we lose money, our operations will not be financially viable.



Because of the relatively recent emergence of the
Internet-based vehicle information and purchasing industry, none of our senior executives has long-term experience in the industry. This limited operating history contributes to our difficulty in predicting future operating results.



We have incurred losses every quarter through the third quarter of 2002 and
have achieved profitability from the fourth quarter of 2002 through the fourth quarter of 2004. We incurred a loss in the first quarter of 2005, primarily because of the costs related to the restatements of our financial statements and the internal
review related to those restatements. We cannot assure that we will be profitable in the future. We had an accumulated deficit of $149.3 million as of September 30, 2004 and $154.2 million as of December 31, 2003.



Our potential for future profitability must be considered in light of the
risks, uncertainties, expenses and difficulties frequently encountered by companies in emerging and rapidly evolving markets, such as the market for Internet commerce. We believe that to achieve and sustain profitability, we must, among other
things:



| |  |  | generate increased vehicle buyer traffic to our Web sites,
| | - |  | ----------------------------------------------------------



| |  |  | successfully introduce new products and services,
| | - |  | -------------------------------------------------



| |  |  | continue to send new and used vehicle purchase requests to dealers that result in sufficient dealer transactions to justify our fees,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expand the number of dealers in our networks and enhance the quality of dealers,
| | - |  | --------------------------------------------------------------------------------



| |  |  | sustain and expand our relationships with automotive manufacturers,
| | - |  | -------------------------------------------------------------------



| |  |  | identify and successfully consummate and integrate acquisitions,
| | - |  | ----------------------------------------------------------------



| |  |  | respond to competitive developments,
| | - |  | ------------------------------------



| |  |  | maintain a high degree of customer satisfaction,
| | - |  | ------------------------------------------------



| |  |  | provide secure and easy to use Web sites for customers,
| | - |  | -------------------------------------------------------



| |  |  | increase visibility of our brand names,
| | - |  | ---------------------------------------



| |  |  | defend and enforce our intellectual property rights,
| | - |  | ----------------------------------------------------



| |  |  | design and implement effective internal controls systems,
| | - |  | ---------------------------------------------------------



| |  |  | continue to attract, retain and motivate qualified personnel and
| | - |  | ----------------------------------------------------------------



| |  |  | continue to upgrade and enhance our technologies to accommodate expanded service offerings and increased consumer traffic.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



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



Our internal controls and procedures need to be improved.



Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance



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regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. In making its assessment of internal control over financial reporting as of December 31, 2004, management used the criteria described in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements
will not be prevented or detected.



Management determined that
we had material weaknesses in our internal control over financial reporting as of December 31, 2004, and these material weaknesses led to the restatement of our consolidated financial statements for the full 2002 fiscal year, the first, second, and
third fiscal quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters of 2004. The material weaknesses relate to the lack of (1) effective controls over the financial reporting process due to an insufficient complement of
personnel with a level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements, and (2) an effective control environment based on criteria
established in the Internal ControlIntegrated Framework. Because of these material weaknesses, management was unable to conclude that we maintained effective internal control over financial reporting as of December 31, 2004 based on the
criteria in the Internal ControlIntegrated Framework. Further, the material weaknesses identified resulted in an adverse opinion by our independent registered public accounting firm on the effectiveness of our internal control over financial
reporting.



If we are unable to substantially improve our
internal controls, our ability to report our financial results on a timely and accurate basis will continue to be adversely affected, which could have a material adverse affect on our ability to operate our business. Please see Item 9A of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2004 for more information regarding the measures we have commenced to implement, and which we intend to implement during the course of 2005, which are designed to remediate the deficiencies
in our internal controls described in our Managements Report On Internal Control Over Financial Reporting set forth on page F-2 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The costs of remediating such
deficiencies in our internal controls will adversely affect our financial condition and results of operations. In addition, even after the remedial measures discussed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December
31, 2004 are fully implemented, our internal controls will not prevent all potential error and fraud, because any control system, no matter how well designed, can only provide reasonable and not absolute assurance that the objectives of the control
system will be achieved.



The impact of ongoing purported class action
and derivative litigation may be material. We are also subject to the risk of additional litigation and regulatory action in connection with the restatement of our consolidated financial statements and the potential liability from any such
litigation or regulatory action could harm our business.



We recently restated our consolidated financial statements for the full 2002 fiscal year, the full 2003 fiscal year, the first, second and third fiscal quarters of 2003, and the first and second fiscal quarters of 2004. We, and certain of
our present directors and present and former officers, are defendants in certain purported class action litigations pending in the United States District Court for the Central District of California, as described more fully in Part II. Item 1.
Legal Proceedings. The claims were brought on behalf of our stockholders who purchased shares during the period July 24, 2003 through October 21, 2004. The claims in all of these purported class actions are virtually identical, and purport to
allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In this regard, the plaintiffs allege that we misrepresented and omitted material facts with respect to our financial results
and operations during the time period between July 24, 2003 and October 20, 2004. The complaint seeks unspecified compensatory damages, and attorneys fees and costs, as well as accountants and experts fees.



On January 28, 2005, the court ordered the consolidation of the currently
pending class actions into a single case pursuant to a stipulation for consolidation signed by all parties. On March 14, 2005, the court appointed a



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lead plaintiff and approved the selection of lead counsel and liaison counsel. Additional lawsuits asserting the same or similar claims may be filed as well.
We intend to defend the claims vigorously. However, we cannot currently predict the impact or outcome of this litigation, which could be material, and the initiation, continuation and outcome of these lawsuits may have a material impact on our
results of operations and financial condition.



In addition,
our directors and a former officer are defendants in a derivative suit pending in the Superior Court of Orange County, California, and we are named as a nominal defendant in this suit. This suit purports to allege that the defendants breached
numerous duties to us, including breach of fiduciary duty and misappropriation of information, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment, as well as violations of California Corporations Code 25402
(trading with material non-public information), and that these breaches and violations caused losses to us, including damages to our reputation and goodwill. Plaintiffs claims are based on allegations that the defendants disseminated false and
misleading statements concerning our results of operations and that these results were inflated at all relevant times due to violations of generally accepted accounting principals and Securities and Exchange Commission rules. The complaint seeks
unspecified compensatory damages, treble damages, equitable and/or injunctive relief, restitution, and attorneys fees and costs, as well as accountants and experts fees.



We intend to defend this suit vigorously. However, we cannot currently predict the impact or outcome of this litigation,
which could be material, and the continuation and outcome of this lawsuit, as well as the initiation of similar suits may have a material impact on our results of operations and financial condition.



As a result of the restatement of our consolidated financial statements
described above, we could become subject to additional purported class action, derivative, or other securities litigation. In addition, regulatory agencies, such as the Securities and Exchange Commission, could commence an investigation relating to
the restatement of our consolidated financial statements. As of the date hereof, we are not aware of any additional litigation or investigation having been commenced against us related to these matters, but we cannot predict whether any such
litigation or regulatory investigation will be commenced or, if it is, the outcome of any such litigation or investigation. If any such investigation were to result in a regulatory proceeding or action against us, our business and financial
condition could be harmed. The initiation of any additional securities litigation, together with the lawsuits described above, may also harm our business and financial condition.



Until the existing purported class action and derivative litigation or any additional litigation or regulatory investigation
is resolved, it may be more difficult for us to raise additional capital or incur indebtedness or other obligations. If an unfavorable result occurred in any such action, our business and financial condition could be further harmed.



We will incur substantial expenses in connection with ongoing purported class action
and derivative litigation and possible related regulatory investigations which will materially and adversely affect our financial condition, results of operations, and cash flows.



We will incur substantial expenses in connection with purported class action
and derivative litigation and possible related regulatory investigations in connection with the restatement of our consolidated financial statements, including substantial fees for attorneys and other professional advisors. We are also obligated to
indemnify our current and former officers and current directors named as defendants in such actions. These expenses, to the extent not covered by available insurance, will materially and adversely affect our financial condition, results of
operations, and cash flows.



We will incur substantial expenses relating
to remediation of material weaknesses in our internal controls identified in our internal review, which will materially and adversely affect our financial condition, results of operations, and cash flows.



We will incur substantial expenses relating to the remediation of material
weaknesses in our internal controls identified in our internal review. These expenses will materially and adversely affect our financial condition, results of operations, and cash flows.



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Our failure to comply with certain conditions required for our common stock to be listed on The Nasdaq National
Market could result in the delisting of our common stock from The Nasdaq National Market.



As a result of our failure to timely file our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004, our Annual Report on Form
10-K for the fiscal year ended December 31, 2004, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005, and certain required restatements of our financial statements for prior periods, from November 2004 to May 2005 we were
not in full compliance with Nasdaq Marketplace Rule 4310(c)(14), which requires us to make, on a timely basis, all filings with the Securities and Exchange Commission required by the Securities Exchange Act of 1934, as amended. We are required to
comply with Nasdaq Marketplace Rule 4310(c)(14) as a condition for our common stock to continue to be listed on The Nasdaq National Market.



We have requested and received from a Nasdaq Listing Qualifications Panel (the Panel) several extensions within which to comply with Nasdaq
Marketplace Rule 4310(c)(14). Recently, on April 7, 2005, we received an extension to the deadline to come into full compliance with Nasdaq Marketplace Rule 4310(c)(14) to May 15, 2005, which deadline was subsequently extended by the Panel to May
31, 2005. The Panels decision to continue the listing of our shares on The Nasdaq National Market was subject to the condition that we file, on or before May 31, 2005, our Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 2004, our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005, and certain required restatements of our financial statements for prior periods. We
have now complied with this condition. In addition, our continued listing is conditioned on us timely filing all periodic reports with the Securities and Exchange Commission and The Nasdaq Stock Market for all reporting periods ending on or before
December 31, 2006. The filing of a Form 12b-25 extension request will not result in an automatic extension of these filing deadlines.



On May 20, 2005, we received notice from The Nasdaq Stock Market that the Nasdaq Listing and Hearing Review Council (the Listing Council) has
called for a review of the Panels April 7, 2005 decision. We have until June 20, 2005 to submit information for the Listing Councils consideration. We cannot give any assurances as to what actions the Listing Council may take, but such
actions could include delisting our shares from The Nasdaq National Market. We cannot provide any assurance that our shares will not be delisted as a result of the Listing Council review process. In addition, if we are unable to comply with the
conditions for continued listing required by the Panel, then our shares of common stock are subject to immediate delisting from The Nasdaq National Market. If our shares of common stock are delisted from The Nasdaq National Market, they may not be
eligible to trade on any national securities exchange or the over-the-counter market. If our common stock is no longer traded through a market system, it may not be liquid, which could affect its price. In addition, we may be unable to obtain future
equity financing, or use our common stock as consideration for mergers or other business combinations. We intend to appeal any decision to delist our shares from The Nasdaq National Market, but cannot provide any assurance that our appeal will be
successful. Any such appeal will not stay the decision to delist our shares.



If our dealer attrition increases, our dealer networks and revenues derived from these networks may decrease.



The majority of our revenues are derived from fees paid by our networks of participating retail and enterprise dealers. A few agreements account for
substantially all of our enterprise dealer relationships. From time to time, a major dealer group or automotive manufacturer may significantly increase or decrease the number of enterprise dealers participating in our dealer networks or the number
of purchase requests accepted from us. If dealer attrition increases or the number of purchase requests accepted from us decreases and we are unable to add new dealers to mitigate the attrition or decrease in number of accepted requests, our
revenues will decrease. A material factor affecting dealer attrition is our ability to provide dealers with high quality purchase requests at prices acceptable to dealers. High quality purchase requests are those that result in high closing ratios.
Closing ratio is the ratio of the number of vehicles purchased at a dealer generated from purchase requests to the total number of purchase requests sent to that dealer. If the number of dealers in our networks declines, our revenues will decrease
and our business, results of operations and financial condition will be materially and adversely



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affected. In addition, if automotive manufacturers or major dealer groups force us to decrease the fees we charge for our services, our revenues will decline
which could have a material adverse effect on our business, results of operations and financial condition.



Generally, our retail dealer agreements are cancelable by either party upon 30 days notice. Participating retail dealers may terminate their relationship
with us for any reason, including an unwillingness to accept our subscription terms or as a result of joining alternative marketing programs. We cannot assure that retail dealers will not terminate their agreements with us. Our business is dependent
upon our ability to attract and retain qualified new and used vehicle retail dealers, major dealer groups and automotive manufacturers. In order for us to grow or maintain our dealer networks, we need to reduce our dealer attrition. We cannot assure
that we will be able to reduce the level of dealer attrition, and our failure to do so could materially and adversely affect our business, results of operations and financial condition.



We may lose participating retail dealers because of the reconfiguration or elimination of exclusive dealer territories. We will lose
the revenues associated with any reductions in participating retail dealers resulting from such changes.



We may reduce, reconfigure or eliminate exclusive territories currently assigned to Autobytel, CarSmart or Car.com retail dealers. If a retail dealer is
unwilling to accept a reduction, reconfiguration or elimination of its exclusive territory, it may terminate its relationship with us. A retail dealer also could sue to prevent such reduction, reconfiguration or elimination, or collect damages from
us. We have experienced one such lawsuit. A material decrease in the number of retail dealers participating in our networks or litigation with retail dealers could have a material adverse effect on our business, results of operations and financial
condition.



We send some individual purchase requests to multiple retail
dealers. As a result, we may lose participating retail dealers and may be subject to pressure on the fees we charge such dealers for such purchase requests. We will lose the revenues associated with any reductions in participating retail dealers or
fees.



We send some individual purchase requests to
multiple retail dealers to enhance consumer satisfaction and experience. If a retail dealer perceives such requests as having less value, it may request that fees be reduced or may terminate its relationship with us. A material decrease in the
number of retail dealers participating in our networks or the fees such dealers pay us could have a material adverse effect on our business, results of operations and financial condition.



We rely heavily on our participating dealers to promote our brand value by providing high quality services to our consumers. If
dealers do not provide our consumers high quality services, our brand value will diminish and the number of consumers who use our services may decline causing a decrease in our revenues.



Promotion of our brand value depends on our ability to provide consumers a
high quality experience for purchasing vehicles throughout the purchasing process. If our dealers do not provide consumers with high quality service, the value of our brands could be damaged and the number of consumers using our services may
decrease. We devote significant efforts to train participating retail dealers in practices that are intended to increase consumer satisfaction. Our inability to train retail dealers effectively, or the failure by participating dealers to adopt
recommended practices, respond rapidly and professionally to vehicle inquiries, or sell and lease vehicles in accordance with our marketing strategies, could result in low consumer satisfaction, damage our brand names and materially and adversely
affect our business, results of operations and financial condition.



Competition could reduce our market share and harm our financial performance. Our market is competitive not only because the Internet has minimal technical barriers to entry, but also because we compete directly with other companies
in the offline environment.



Our vehicle purchasing
services compete against a variety of Internet and traditional vehicle purchasing services, automotive brokers and classified advertisement providers. Therefore, we are affected by the



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competitive factors faced by both Internet commerce companies as well as traditional, offline companies within the automotive and automotive-related
industries. The market for Internet-based commercial services is relatively new, and competition among commercial Web sites may increase significantly in the future. Our business is characterized by minimal technical barriers to entry, and new
competitors can launch a competitive service at relatively low cost. To compete successfully, we must significantly increase awareness of our services and brand names and deliver satisfactory value to our customers. Failure to compete successfully
will cause our revenues to decline and would have a material adverse effect on our business, results of operations and financial condition.



We compete with other entities which maintain similar commercial Web sites including AutoNations AutoUSA, Microsoft Corporations MSN Autos,
CarsDirect.com, Cars.com, eBayMotors.com, Dealix.com, and AutoTrader.com. We also compete with vehicle dealers that are not part of our networks. Such companies may already maintain or may introduce Web sites which compete with ours. We also compete
indirectly against vehicle brokerage firms and affinity programs offered by several companies, including Costco Wholesale Corporation and Wal-Mart Stores, Inc. In addition, all major automotive manufacturers have their own Web sites and many have
launched online buying services, such as General Motors Corporations BuyPower and Ford Motor Company in its partnership with its dealers through FordDirect.com. The WebControl product competes with products from companies such as Reynolds and
Reynolds and Cobalt Systems Corporation. Our customer relationship management product, RPM, competes with companies that provide marketing services to automotive manufacturers and dealers, including Reynolds and Reynolds, TVI Inc., Minacs, Online
Administrators and Teletech.



We believe that the principal
competitive factors in the online market are:



| |  |  | brand recognition,
| | - |  | ------------------



| |  |  | dealer return on investment,
| | - |  | ----------------------------



| |  |  | speed and quality of fulfillment,
| | - |  | ---------------------------------



| |  |  | dealer territorial coverage,
| | - |  | ----------------------------



| |  |  | relationships with automotive manufacturers,
| | - |  | --------------------------------------------



| |  |  | variety of integrated products and services,
| | - |  | --------------------------------------------



| |  |  | ease of use,
| | - |  | ------------



| |  |  | customer satisfaction,
| | - |  | ----------------------



| |  |  | quality of Web site content,
| | - |  | ----------------------------



| |  |  | quality of service, and
| | - |  | -----------------------



| |  |  | technical expertise.
| | - |  | --------------------



We cannot assure that we can compete successfully against current or future competitors, many of which have substantially more capital, existing brand
recognition, resources and access to additional financing. In addition, competitive pressures may result in increased marketing costs, decreased Web site traffic or loss of market share or otherwise may materially and adversely affect our business,
results of operations and financial condition.



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



Our quarterly operating results have fluctuated in the past and may fluctuate in the future due to many factors. Our expense levels are based in part on
our expectations of future revenues which may vary significantly. If revenues do not increase faster than expenses, our business, results of operations and financial condition will be materially and adversely affected. Other factors that may
adversely affect our quarterly operating results include:



| |  |  | our ability to retain existing dealers, attract new dealers and maintain dealer and customer satisfaction,
| | - |  | ----------------------------------------------------------------------------------------------------------



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| |  |  | the announcement or introduction of new or enhanced sites, services and products by us or our competitors,
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions and economic conditions specific to the Internet, online commerce or the automotive industry,
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | a decline in the usage levels of online services and consumer acceptance of the Internet and commercial online services for the purchase of consumer products and services such as
those offered by us,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to upgrade and develop our systems and infrastructure and to attract new personnel in a timely and effective manner,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of traffic on our Web sites and other sites that refer traffic to our Web sites,
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | technical difficulties, system downtime, Internet brownouts or electricity blackouts,
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure, and our participation in an annual trade
show,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs relating to remediation of material weaknesses in internal controls identified in our internal review,
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | costs of defending and enforcing our intellectual property rights,
| | - |  | ------------------------------------------------------------------



| |  |  | governmental regulation, and
| | - |  | ----------------------------



| |  |  | unforeseen events affecting the industry.
| | - |  | -----------------------------------------



Seasonality is likely to cause fluctuations in our operating results. Investors may not be able to predict our annual operating results based on a quarter to
quarter comparison of our operating results.



The
seasonal patterns of Internet usage and vehicle purchasing do not completely overlap. Historically, Internet usage typically declines during summer and certain holiday periods, while vehicle purchasing in the United States is strongest in the spring
and summer months. In addition, purchase request volume usually declines in the summer because of the model year change over, as some consumers defer purchases until information regarding the new model year is available, and many manufacturers do
not make their data available for publication until later in the year. As seasonality occurs, investors may not be able to predict our annual operating results based on a quarter to quarter comparison of our operating results. Seasonality in the
automotive industry, Internet and commercial online service usage and advertising expenditures is likely to cause fluctuations in our operating results and could have a material adverse effect on our business, results of operations and financial
condition.



We may be particularly affected by general economic
conditions due to the nature of the automotive industry.



The economic strength of the automotive industry significantly impacts the revenues we derive from dealers, automotive manufacturers and other strategic partners, advertising revenues and consumer traffic to our Web sites. The automotive
industry is cyclical, with vehicle sales fluctuating due to changes in national and global economic forces. Purchases of vehicles are typically discretionary for consumers and may be particularly affected by negative trends in the general economy.
The success of our operations depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions (and perceptions of such conditions by consumers) affecting disposable consumer income
(such as employment, wages and salaries, business conditions and interest rates in regional and local markets). In addition, because the purchase of a vehicle is a significant investment and is relatively discretionary, any reduction in disposable
income in general or a general increase in interest rates or a general tightening of lending may affect us more significantly than companies in other industries.



Zero percent financing offered by manufacturers in 2002 and 2003 may negatively affect vehicle sales in 2004. Consumers may
have accelerated their planned vehicle purchases from 2004 to 2003 and 2002. At some



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point in the future, manufacturers may decrease current levels of incentive spending on new vehicles, which has served to drive sales volume in the past.
Such a reduction in incentives could lead to a decline in demand for new vehicles. A decline in vehicle purchases may result in a decline in demand for our services which could adversely affect our business, financial condition and results of
operations.



Threatened terrorist acts and the ongoing military
action have created uncertainties in the automotive industry and domestic and international economies in general. These events may have an adverse impact on general economic conditions, which may reduce demand for vehicles and consequently our
services and products which could have an adverse effect on our business, financial condition and results of operations. At this time, however, we are not able to predict the nature, extent and duration of these effects on overall economic
conditions on our business, financial condition and results of operations.



We cannot assure that our business will not be materially adversely affected as a result of an industry or general economic downturn.



If any of our relationships with Internet search engines or online automotive information providers terminates, our purchase request
volume or quality could decline. If our purchase request volume or quality declines, our participating dealers may not be satisfied with our services and may terminate their relationships with us or force us to decrease the fees we charge for our
services. If this occurs, our revenues would decrease.



We depend on a number of strategic relationships to direct a substantial amount of purchase requests and traffic to our Web sites. The termination of any of these relationships or any significant reduction in traffic to Web sites on which
our services are advertised or offered, or the failure to develop additional referral sources, could cause our purchase request volume or quality to decline. If this occurs, dealers may no longer be satisfied with our services and may terminate
their relationships with us or force us to decrease the fees we charge for our services. If our dealers terminate their relationships with us or force us to decrease the fees we charge for our services, our revenues will decline which could have a
material adverse effect on our business, results of operations and financial condition. We receive a significant number of purchase requests through a limited number of Internet search engines, online automotive information providers, and other auto
related Internet sites. We periodically negotiate revisions to existing agreements and these revisions could increase our costs in future periods. A number of our agreements with online service providers may be terminated without cause. We may not
be able to maintain our relationship with our online service providers or find alternative, comparable marketing sponsorships and alliances capable of originating significant numbers of purchase requests on terms satisfactory to us. If we cannot
maintain or replace our relationships with online service providers, our revenues may decline which could have a material adverse effect on our business, results of operations and financial condition.



If any of our relationships with advertising manufacturers terminates, our revenues
would decrease.



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



If we cannot build and maintain strong brand loyalty our business may suffer.



We believe that the importance of brand recognition will increase as more
companies engage in commerce over the Internet. Development and awareness of the Autobytel.com, Autoweb.com, Car.com, CarSmart.com,



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and other brands will depend largely on our ability to obtain a leadership position in Internet commerce. If dealers and manufacturers do not perceive us as
an effective channel for increasing vehicle sales, or consumers do not perceive us as offering reliable information concerning new and used vehicles, as well as referrals to high quality dealers, in a user-friendly manner that reduces the time spent
for vehicle purchases, we will be unsuccessful in promoting and maintaining our brands. Our brands may not be able to gain widespread acceptance among consumers or dealers. Our failure to develop our brands sufficiently would have a material adverse
effect on our business, results of operations and financial condition.



If we lose our key personnel or are unable to attract, train and retain additional highly qualified sales, marketing, managerial and technical personnel, our business may suffer.



Our future success depends on our ability to identify, hire, train and
retain highly qualified sales, marketing, managerial and technical personnel. In addition, as we introduce new services we may need to hire additional personnel. We may not be able to attract, assimilate or retain such personnel in the future. The
inability to attract and retain the necessary managerial, technical, sales and marketing personnel could have a material adverse effect on our business, results of operations and financial condition.



Our business and operations are substantially dependent on the performance of
our executive officers and key employees. The loss of the services of one or more of our executive officers or key employees could have a material adverse effect on our business, results of operations and financial condition.



We are a relatively new business in an emerging industry and need to manage our growth
and our entry into new business areas in order to avoid increased expenses without corresponding revenues.



We have been introducing new services to consumers and dealers in order to establish ourselves as a leader in the evolving market for automotive marketing
services. The growth of our operations requires us to increase expenditures before we generate revenues. For example, we may need to hire personnel to oversee the introduction of new services before we generate revenues from these services. Our
inability to generate satisfactory revenues from such expanded services to offset costs could have a material adverse effect on our business, results of operations and financial condition.



We must also:



| |  |  | test, introduce and develop new services and products, including enhancing our Web sites,
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | expand the breadth of products and services offered,
| | - |  | ----------------------------------------------------



| |  |  | expand our market presence through relationships with third parties, and
| | - |  | ------------------------------------------------------------------------



| |  |  | acquire new or complementary businesses, products or technologies.
| | - |  | ------------------------------------------------------------------



We cannot assure that we can successfully achieve these objectives.



If federal or state franchise laws apply to us we may be required to modify or eliminate our marketing programs. If we are unable to
market our services in the manner we currently do, our revenues may decrease and our business may suffer.



We believe that neither our relationship with our dealers nor our dealer subscription agreements constitute franchises under federal or state
franchise laws. A federal court of appeals in Michigan has ruled that our dealer subscription agreement is not a franchise under Michigan law. However, if any states regulatory requirements relating to franchises or our method of
business impose additional requirements on us or include us within an industry-specific regulatory scheme, we may be required to modify our marketing programs in such states in a manner which undermines the programs attractiveness to consumers
or dealers. If our relationship or written agreement with our dealers were found to be a franchise under federal or state franchise laws, we could be subject to other regulations, such as franchise disclosure and registration
requirements and limitations on our ability to effect changes in our relationships with our dealers, which may negatively impact our ability to



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compete and cause our revenues to decrease and our business to suffer. If we become subject to fines or other penalties or if we determine that the franchise
and related requirements are overly burdensome, we may elect to terminate operations in such state. In each case, our revenues may decline and our business, results of operations and financial condition could be materially and adversely affected.



We also believe that our dealer marketing service generally
does not qualify as an automobile brokerage activity and, therefore, state motor vehicle dealer or broker licensing requirements do not apply to us. Through a subsidiary, we are licensed as a motor vehicle dealer and broker. In response to Texas
Department of Transportation concerns, we modified our marketing program in that state to make our program open to all dealers who wish to apply. In addition, we modified the program to include a pricing model under which all participating dealers,
regardless of brand, in a given zip code in Texas are charged uniform fees. If other states regulatory requirements relating to motor vehicle dealers or brokers are deemed applicable to us, we may become subject to fines, penalties or other
requirements and may be required to modify our marketing programs in such states in a manner that undermines the attractiveness of the program to consumers or dealers. If we determine that the licensing or other requirements, in a given state are
overly burdensome, we may elect to terminate operations in such state. In each case, our revenues may decline and our business, results of operations and financial condition could be materially and adversely affected.



If financial broker and insurance licensing requirements apply to us in states where we
are not currently licensed, we will be required to obtain additional licenses and our business may suffer.



If we are required to be licensed as a financial broker, it may result in an expensive and time-consuming process that could divert the effort of
management away from day-to-day operations. In the event states require us to be licensed and we are unable to do so, or are otherwise unable to comply with regulations required by changes in current operations or the introduction of new services,
we could be subject to fines or other penalties or be compelled to discontinue operations in such states, and our business, results of operations and financial condition could be materially and adversely affected.



We provide links on our Web sites so consumers can receive real time quotes
for insurance coverage from third parties and submit quote applications online through such parties Web sites. We receive fees from such participants in connection with this advertising activity. We do not believe that such activities require
us to be licensed under state insurance laws. The use of the Internet in the marketing of insurance products, however, is a relatively new practice. It is not clear whether or to what extent state insurance licensing laws apply to activities similar
to ours. Given these uncertainties, we currently hold, through a wholly-owned subsidiary, insurance agent licenses or are otherwise authorized to transact insurance in numerous states.



If we are unable to be licensed to comply with additional regulations, or are otherwise unable to comply with regulations
required by changes in current operations or the introduction of new services, we could be subject to fines or other penalties or be compelled to discontinue operations in such states, and our business, results of operations and financial condition
could be materially and adversely affected.



There are many risks
associated with consummated and potential acquisitions.



We may evaluate potential acquisitions which we believe will complement or enhance our existing business. However, currently we do not expect to consummate acquisitions in the near future as we focus on our business and remedial actions
necessary to address material weaknesses in our internal controls identified in our internal review. If we acquire other companies in the future, it may dilute the value of existing stockholders ownership. The impact of dilution may restrict
our ability or otherwise not allow us to consummate acquisitions. Issuance of equity securities may restrict utilization of net operating loss carryforwards because of an annual limitation due to ownership change limitations under the Internal
Revenue Code. We may also incur debt and losses related to the impairment of goodwill and other acquired intangible assets if we acquire another company, and this could negatively impact our results of operations. We currently do not have any
definitive agreements to acquire any company or business, and we may not be able to identify or complete any acquisition in the future.



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We recently acquired iDriveonline, Inc., which we renamed Retention Performance Marketing, Inc., and
Stoneage Corporation, which we renamed Car.com, Inc. Acquisitions involve numerous risks. For example:



| |  |  | It may be difficult to assimilate the operations and personnel of an acquired business into our own business,
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Management information and accounting systems of an acquired business must be integrated into our current systems,
| | - |  | ------------------------------------------------------------------------------------------------------------------



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



| |  |  | Our management must devote its attention to assimilating the acquired business which diverts attention from other business concerns,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may enter markets in which we have limited prior experience, and
| | - |  | -------------------------------------------------------------------



| |  |  | We may lose key employees of an acquired business.
| | - |  | --------------------------------------------------



Internet commerce has yet to attract significant regulation. Government regulations may result in increased costs that may reduce our future earnings.



There are currently few laws or regulations that
apply directly to the Internet. Because our business is dependent on the Internet, the adoption of new local, state or national laws or regulations may decrease the growth of Internet usage or the acceptance of Internet commerce which could, in
turn, decrease the demand for our services and increase our costs or otherwise have a material adverse effect on our business, results of operations and financial condition.



Tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in Internet
commerce. New state tax regulations may subject us to additional state sales, use and income taxes.



Evolving government regulations may require future licensing which could increase administrative costs or adversely affect our revenues.



In a regulatory climate that is uncertain, our operations may be subject to direct and indirect adoption, expansion or
reinterpretation of various laws and regulations. Compliance with these future laws and regulations may require us to obtain appropriate licenses at an undeterminable and possibly significant initial monetary and annual expense. These additional
monetary expenditures may increase future overhead, thereby potentially reducing our future results of operations.



We have identified what we believe are the areas of domestic government regulation, which if changed, would be costly to us. These laws and regulations
include franchise laws, motor vehicle brokerage licensing laws, motor vehicle dealer licensing laws, insurance licensing laws and financial services laws, which are or may be applicable to aspects of our business. There could be laws and regulations
applicable to our business which we have not identified or which, if changed, may be costly to us.



Our success is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenues will decrease. If we are
required to invest substantial amounts in technology, our results of operations will suffer.



The Internet and electronic commerce markets are characterized by rapid technological change, changes in user and customer requirements, frequent new
service and product introductions embodying new technologies and the emergence of new industry standards and practices that could render our existing Web sites and technology obsolete. These market characteristics are exacerbated by the emerging
nature of the market and the fact that many companies are expected to introduce new Internet products and services in the near future. If we are unable to adapt to changing technologies, our business, results of operations and financial condition
could be



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materially and adversely affected. Our performance will depend, in part, on our ability to continue to enhance our existing services, develop new technology
that addresses the increasingly sophisticated and varied needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The
development of our Web sites and CRM systems and other proprietary technology entails significant technical and business risks. We may not be successful in using new technologies effectively or adapting our Web sites and CRM systems, or other
proprietary technology to customer requirements or to emerging industry standards. In addition, if we are required to invest substantial amounts in technology in order to keep pace with technological advances, our results of operations will suffer.



We are vulnerable to electricity blackouts and communications system
interruptions. The majority of our primary servers are located in a single location. If electricity or communications to that location or to our headquarters were interrupted, our operations would be adversely affected.



With the exception of the Car.com Web site and certain related systems, our
production Web sites and certain systems, including Autobytel.com, Autoweb.com, CarSmart.com, AutoSite.com, AVV.com, iDriveonline and RPM are currently hosted at secure third-party hosting facilities. We host the Car.com Web site and certain related
systems at Car.coms facilities. Although backup servers are available, our primary servers are vulnerable to interruption by damage from fire, earthquake, flood, power loss, telecommunications failure, break-ins and other events beyond our
control. In the event that we experience significant system disruptions, our business, results of operations and financial condition would be materially and adversely affected. We have, from time to time, experienced periodic systems interruptions
and anticipate that such interruptions will occur in the future.



Our main production systems and our accounting, finance and contract management systems are hosted in a secure facility with generators and other alternate power supplies in case of a power outage. However, our corporate offices, where we
have the users and limited applications for our accounting, finance and contract management systems, are vulnerable to wide-scale power outages. To date, we have not been significantly affected by blackouts or other interruptions in service. In the
event we are affected by interruptions in service, our business, results of operations and financial condition could be materially and adversely affected.



We maintain business interruption insurance which pays up to $8.6 million for the actual loss of business income sustained due to the suspension of
operations as a result of direct physical loss of or damage to property at our offices. However, in the event of a prolonged interruption, this business interruption insurance may not be sufficient to fully compensate us for the resulting losses.



Internet commerce is relatively new and evolving with few profitable
business models. We cannot assure that our business model will be profitable in the future.



The market for Internet-based purchasing services has only recently begun to develop and is rapidly evolving. While many Internet commerce companies have
grown in terms of revenues, few are profitable. We cannot assure that we will be profitable in the future. As is typical for a new and rapidly evolving industry, demand and market acceptance for recently introduced services and products over the
Internet are subject to a high level of uncertainty and there are few proven services and products. Moreover, since the market for our services is new and evolving, it is difficult to predict the future growth rate, if any, and size of this market.



If consumers do not continue to adopt Internet commerce as a mainstream
medium of commerce or if automotive industry participants do not continue to accept the role of third-party online services, our revenues may not grow and our earnings may suffer.



The success of our services will continue to depend upon the adoption of the
Internet by consumers and dealers as a mainstream medium for commerce and/or the willingness of automotive manufacturers to cooperate with third-party services. While we believe that our services offer significant advantages to consumers and
dealers, there can be no assurance of continued acceptance of our services by consumers, dealers or automotive



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companies. Our success assumes that consumers and dealers who have historically relied upon traditional means of commerce to purchase or lease vehicles, and
to procure vehicle financing and insurance, will continue to accept new methods of conducting business and exchanging information and that automotive manufacturers will continue to accept a role for all make, all model third-party sites such as ours
that allow for comparisons. In addition, dealers must continue to adopt new selling models and be trained to use and invest in developing technologies. If the market for Internet-based vehicle marketing services fails to develop, develops slower
than expected, faces opposition or becomes saturated with competitors, or if our services do not continue to be accepted, our business, results of operations and financial condition may be materially and adversely affected.



Internet-related issues may reduce or slow the growth in the use of our services in the
future.



Critical issues concerning the commercial use
of the Internet, such as ease of access, security, privacy, reliability, cost, and quality of service, remain unresolved and may impact the growth of Internet use. If Internet usage continues to increase rapidly, the Internet infrastructure may not
be able to support the demands placed on it by this growth, and its performance and reliability may decline. The recent growth in Internet traffic has caused frequent periods of decreased performance, outages and delays. Our ability to increase the
speed with which we provide services to consumers and to increase the scope and quality of such services is limited by and dependent upon the speed and reliability of the Internet, which is beyond our control. If periods of decreased performance,
outages or delays on the Internet occur frequently or other critical issues concerning the Internet are not resolved, overall Internet usage or usage of our Web sites could increase more slowly or decline, which would cause our business, results of
operations and financial condition to be materially and adversely affected.



The public market for our common stock may continue to be volatile, especially since market prices for Internet-related and technology stocks have often been unrelated to operating performance.



Prior to the initial public offering of our common stock in March 1999,
there was no public market for our common stock. We cannot assure that an active trading market will be sustained or that the market price of the common stock will not decline. Recently, the stock market in general and the shares of emerging
companies in particular have experienced significant price fluctuations. The market price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to factors such as:



| |  |  | actual or anticipated variations in our quarterly operating results,
| | - |  | --------------------------------------------------------------------



| |  |  | historical and anticipated operating metrics such as the number of participating dealers, the visitors to our Web sites and the frequency with which they transact,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements of new product or service offerings,
| | - |  | --------------------------------------------------



| |  |  | technological innovations,
| | - |  | --------------------------



| |  |  | competitive developments, including actions by automotive manufacturers,
| | - |  | ------------------------------------------------------------------------



| |  |  | changes in financial estimates by securities analysts or our failure to meet such estimates,
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | conditions and trends in the Internet, electronic commerce and automotive industries,
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to comply with the conditions to continued listing of our stock on The Nasdaq National Market,
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | adoption of new accounting standards affecting the technology or automotive industry and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | general market conditions and other factors.
| | - |  | --------------------------------------------



Further, the stock markets, and in particular the Nasdaq National Market, have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies and have often been unrelated or disproportionate to the operating performance of such companies. These broad market factors have and may adversely affect the market price
of our common stock. In addition, general economic, political and market conditions, such as recessions, interest rates, international currency fluctuations, terrorist acts, military actions or wars, may adversely affect the market price of the
common stock.



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In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been instituted
against companies with publicly traded securities. Such litigation could result in substantial costs and a diversion of managements attention and resources, which would have a material adverse effect on our business, results of operations and
financial condition.



Changing legislation affecting the automotive
industry could require increased regulatory and lobbying costs and may harm our business.



Our services may result in changing the way vehicles are sold which may be viewed as threatening by new and used vehicle dealers who do not subscribe to
our programs. Such businesses are often represented by influential lobbying organizations, and such organizations or other persons may propose legislation which could impact the evolving marketing and distribution model which our services promote.
Should current laws be changed or new laws passed, our business, results of operations and financial condition could be materially and adversely affected. As we introduce new services, we may need to comply with additional licensing regulations and
regulatory requirements.



To date, we have not spent
significant resources on lobbying or related government affairs issues but we may need to do so in the future. A significant increase in the amount we spend on lobbying or related activities could have a material adverse effect on our results of
operations and financial condition.



International activities may
adversely affect our results of operations and financial condition.



Our licensees currently have Web sites in the United Kingdom, Sweden, The Netherlands and Japan. Revenue from our licensees may be adversely affected by risks in conducting business in their markets, such as
regulatory requirements, changes in political conditions, potentially weaker intellectual property protections and educating consumers and dealers who may be unfamiliar with the benefits of online marketing and commerce. In addition, our investment
in licensees may be impaired. We may expand our brand into other foreign markets primarily through licensing our trade names. In the past we incurred losses in our international activities. We cannot be certain that we will be successful in
introducing or marketing our services abroad. Our results of operations and financial condition may be adversely affected by our international activities.



Our computer infrastructure may be vulnerable to security breaches. Any such problems could jeopardize confidential information transmitted over the Internet, cause
interruptions in our operations or cause us to have liability to third persons.



Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems and security breaches. Any such problems or security breaches could cause us
to have liability to one or more third parties and disrupt all or part of our operations. A party able to circumvent our security measures could misappropriate proprietary information, customer information or consumer information, jeopardize the
confidential nature of information transmitted over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions and the privacy of users could also inhibit the growth of the Internet in general,
particularly as a means of conducting commercial transactions. To the extent that our activities or those of third-party contractors involve the storage and transmission of proprietary information such as personal financial information, security
breaches could expose us to a risk of financial loss, litigation and other liabilities. Our current insurance program may protect us against some, but not all, of such losses. Any of these events could have a material adverse effect on our business,
results of operations and financial condition.



We depend on continued
technological improvements in our systems and in the Internet overall. If we are unable to handle an unexpectedly large increase in volume of consumers using our Web sites, we cannot assure our consumers or dealers that purchase requests will be
efficiently processed and our business may suffer.



If
the Internet continues to experience significant growth in the number of users and the level of use, then the Internet infrastructure may not be able to continue to support the demands placed on it by such potential



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growth. The Internet may not continue to be a viable commercial medium because of inadequate development of the necessary infrastructure, timely development
of complementary products, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or increased government regulation.



An unexpectedly large increase in the volume or pace of traffic on our Web
sites or the number of orders placed by customers may require us to expand and further upgrade our technology, transaction-processing systems and network infrastructure. We may not be able to accurately project the rate or timing of increases, if
any, in the use of our Web sites or expand and upgrade our systems and infrastructure to accommodate such increases. In addition, we cannot assure that our dealers will efficiently process purchase requests.



Any of such failures regarding the Internet in general or our Web sites,
technology systems and infrastructure in particular, or with respect to our dealers, would have a material and adverse affect on our business, results of operations and financial condition.



Misappropriation of our intellectual property and proprietary rights could impair our
competitive position.



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



We face risk of claims from third parties relating to intellectual property. In addition, we may incur liability for retrieving and
transmitting information over the Internet. Such claims and liabilities could harm our business.



As part of our business, we make Internet services and content available to our customers. This creates the potential for claims to be made against us,
either directly or through contractual indemnification provisions with third parties. We could face liability for information retrieved from or transmitted over the Internet and liability for products sold over the Internet. We could be exposed to
liability with respect to third-party information that may be accessible through our Web sites, links or car review services. Such claims might, for example, be made for defamation, negligence, patent, copyright or trademark infringement, personal
injury, breach of contract, unfair competition, false advertising, invasion of privacy or other legal theories based on the nature, content or copying of these materials. Such claims might assert, among other things, that, by directly or indirectly
providing links to Web sites operated by third parties, we should be liable for copyright or trademark infringement or other wrongful actions by such third parties through such Web sites. It is also possible that, if any third-party content
information provided on our Web sites contains errors, consumers could make claims against us for losses incurred in reliance on such information. Any claims could result in costly litigation, divert managements attention and resources, cause
delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements.



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We also enter into agreements with other companies under which any revenue that results from the purchase
of services through direct links to or from our Web sites is shared. Such arrangements may expose us to additional legal risks and uncertainties, including disputes with such parties regarding revenue sharing, local, state and federal government
regulation and potential liabilities to consumers of these services, even if we do not provide the services ourselves. We cannot assure that any indemnification provided to us in our agreements with these parties, if available, will be adequate.



Even to the extent such claims do not result in liability to
us, we could incur significant costs in investigating and defending against such claims. The imposition upon us of potential liability for information carried on or disseminated through our system could require us to implement measures to reduce our
exposure to such liability, which might require the expenditure of substantial resources or limit the attractiveness of our services to consumers, dealers and others.



Litigation regarding intellectual property rights is common in the Internet and software industries. We expect that Internet
technologies and software products and services may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps.
There can be no assurance that our services do not infringe on the intellectual property rights of third parties.



In the past, plaintiffs have brought these types of claims and sometimes successfully litigated them against online services. Our general liability
insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance
coverage could have a material adverse effect on our business, results of operations and financial condition.



We could be adversely affected by litigation. If we were subject to a significant adverse litigation outcome, our financial condition could be materially adversely affected.



We are a defendant in certain proceedings which are described in Part
II. Item 1. Legal Proceedings herein.



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



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



We currently
anticipate that our cash, cash equivalents and short-term and long-term investments will be sufficient to meet our anticipated needs for working capital and other cash requirements at least for the next 12 months. We may need to raise additional
funds sooner, however, in order to develop new or enhance existing services or products, or to respond to competitive pressures. There can be no assurance that additional financing will be available on terms favorable to us, or at all. If adequate
funds are not available or are not available on acceptable terms, our ability to develop or enhance services or products or respond to competitive pressures would be significantly limited. In addition, our ability to continue to operate our business
may also be materially adversely affected in the event additional financing is not available when required. Such limitation could have a material adverse effect on our business, results of operations, financial condition and prospects.



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



Provisions of our amended and restated certificate of incorporation and bylaws relating to our corporate governance and provisions in our stockholder
rights plan could make it difficult for a third party to acquire us,



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and could discourage a third party from attempting to acquire control of us. These provisions allow us to issue preferred stock with rights senior to those
of the common stock without any further vote or action by the stockholders. These provisions provide that the board of directors is divided into three classes, which may have the effect of delaying or preventing changes in control or change in our
management because less than a majority of the board of directors are up for election at each annual meeting. In addition, these provisions impose various procedural and other requirements which could make it more difficult for stockholders to
effect corporate actions such as a merger, asset sale or other change of control of us. Under the stockholder rights plan, if a person or group acquires 15% or more of the common stock, all rightsholders, except the acquiror, will be entitled to
acquire at the then exercise price of a right that number of shares of Autobytels common stock which at the time will have a market value of two times the exercise price of the right. In addition, under certain circumstances, all rightholders,
other than the acquiror, will be entitled to receive at the then exercise price of a right that number of shares of common stock of the acquiring company which at the time will have a market value of two times the exercise price of the right. The
initial exercise price of a right is $65. Such charter and rights provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change
in control. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of
the common stock.



We are also subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of
three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a business combination includes a
merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an interested stockholder is a person who, together with affiliates and associates, owns or did own 15% or more of the
corporations voting stock.



Our actual results could differ from
forward-looking statements in this report.



This
report contains forward-looking statements based on current expectations which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors,
including the risk factors set forth above and elsewhere in this Quarterly Report on Form 10-Q. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this Quarterly
Report on Form 10-Q.



Item 4.Controls and Procedures



As more fully described in the Explanatory Note to this Quarterly Report on Form 10-Q and in Note 3 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, we have restated our financial statements for the full 2002 fiscal year, the first, second, and third fiscal quarters of 2003, the full 2003 fiscal year, and the first and second fiscal quarters of 2004.



As described more fully in our Managements Report On Internal Control
Over Financial Reporting set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004, and this assessment
identified internal control deficiencies that individually or collectively are indicative of a material weakness in our internal control over financial reporting.Management currently is implementing certain remedial measures identified in
Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2004, and intends to implement the remaining remedial measures during the course of 2005. While this implementation is underway, we are relying on extensive manual procedures
and the utilization of outside accounting professionals to assist us with meeting the objectives otherwise fulfilled by an effective controls environment. While we are implementing changes to our controls environment, there remains a risk that the
transitional procedures on which we are currently relying will fail to be sufficiently effective to address the internal control deficiencies identified in



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Managements Report On Internal Control Over Financial Reporting. Please see Part I, Item 2. Managements Discussion and AnalysisRisk
FactorsOur internal controls and procedures need to be improved.



As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. In light of the internal control deficiencies referenced in the Managements Report On Internal Control
Over Financial Reporting, our Chief Executive Officer and our Chief Financial Officer believe that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective in alerting our management, including
our principal executive officer and principal financial officer, to material information required to be included in our periodic reports filed with the Securities and Exchange Commission. However, our Chief Executive Officer and our Chief Financial
Officer, believe that the remedial measures described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2004, when implemented, will be designed to address the internal control deficiencies described in the
Managements Report On Internal Control Over Financial Reporting and should allow us to conclude that our disclosure controls and procedures are effective at a reasonable level of assurance at future filing dates.



As of the end of the period covered by this report there were no changes in
internal control over financial reporting that occurred during the last fiscal quarter of such period that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1.Legal Proceedings



In August 2001, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York against Autobytel and certain of Autobytels current and former directors and
officers (the Autobytel Individual Defendants) and underwriters involved in Autobytels initial public offering. The complaints against Autobytel have been consolidated with two other complaints that relate to its initial public
offering but do not name it as a defendant, and a Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. This action purports to allege violations of the Securities Act of 1933 and the Securities Exchange
Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autobytels initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make
additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autobytels initial public offering was false and misleading in violation of the securities laws because it did not disclose
these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies
and individuals who have been sued in these actions was filed on July 15, 2002. On October 9, 2002, the Court dismissed the Autobytel Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs
and the Autobytel Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against Autobytel. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions
and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Autobytel case. Autobytel has approved a settlement
agreement and related agreements which set forth the terms of a settlement between Autobytel, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release
of Autobytel and the Autobytel Individual Defendants for the conduct alleged in the action to be wrongful. Autobytel would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential
claims Autobytel may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter
defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up
the difference. It is anticipated that any potential financial obligation of Autobytel to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be directly covered and paid by its insurance carriers. Autobytel
currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and Autobytel is not aware of any uncertainties as to the legal
sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by Autobytel. If material limitations on the expected recovery of any potential financial
obligation to the plaintiffs from Autobytels insurance carriers should arise, Autobytels maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court
granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a
mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the Courts
opinion and are in the process of obtaining approval from those issuer defendants that are not in bankruptcy. At this point, all but one of the issuer defendants that are not in bankruptcy have approved the revised settlement agreement, which has
been submitted to the Court. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the Court will grant final approval to the settlement. If the settlement agreement is not
approved and Autobytel is found liable, we are unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than our insurance coverage, or whether such damages would have a material impact on our
results of operations, financial condition or cash flows in any future period.



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Between April and June 2001, eight separate purported class actions virtually identical to the one filed
against Autobytel were filed against Autoweb.com, Inc. (Autoweb), certain of Autowebs current and former directors and officers (the Autoweb Individual Defendants) and underwriters involved in Autowebs initial
public offering. The complaints against Autoweb have been consolidated into a single action, and a Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. The foregoing action purports to allege violations
of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autowebs initial public offering to certain investors in exchange for excessive and
undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autowebs initial public offering was false and misleading in
violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies.
A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. On October 9, 2002, the Court dismissed the Autoweb Individual Defendants from the case without prejudice
based upon Stipulations of Dismissal filed by the plaintiffs and the Autoweb Individual Defendants. On February 19, 2003, the Court dismissed the Section 10(b) claim without prejudice and with leave to replead but denied the motion to dismiss the
claim under Section 11 of the Securities Act of 1933 against Autoweb. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance
to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Autoweb case. Autoweb has approved a settlement agreement and related agreements which set forth the terms of a settlement
between Autoweb, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of Autoweb and the Autoweb Individual Defendants for the conduct alleged in
the action to be wrongful. Autoweb would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Autoweb may have against its underwriters. The settlement agreement also
provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required
under the issuers settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of Autoweb to
plaintiffs pursuant to the terms of the settlement agreement and related agreements will be directly covered and paid by its insurance carriers. Autoweb currently is not aware of any material limitations on the expected recovery of any potential
financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and Autoweb is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do
not expect that the settlement will involve any payment by Autoweb. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from Autowebs insurance carriers should arise, Autowebs maximum
financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its
opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from
pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the Courts opinion and are in the process of obtaining approval from those issuer defendants that are not in bankruptcy. At this
point, all but one of the issuer defendants that are not in bankruptcy have approved the revised settlement agreement, which has been submitted to the Court. The underwriter defendants will have an opportunity to object to the revised settlement
agreement. There is no assurance that the Court will grant final approval to the settlement. If the settlement agreement is not approved and Autoweb is found liable, we are unable to estimate or predict the potential damages that might be awarded,
whether such damages would be greater than Autowebs insurance coverage, or whether such damages would have a material impact on our results of operations, financial condition or cash flows in any future period.



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We have reviewed the above class action matters and do not believe that it is probable that a loss
contingency has occurred, therefore, no amounts have been recorded in our consolidated financial statements.



On September 24, 2004, we filed a lawsuit in the United States District Court for the Eastern District of Texas against Dealix Corporation. In that
lawsuit, we assert infringement of U.S. Patent No. 6,282,517, entitled Real Time Communication of Purchase Requests, against Dealix Corporation, assert that Dealix Corporation is infringing our patent by virtue of Dealix
Corporations software system for the distribution of purchase requests, assert damages, and seek a preliminary injunction. Dealix Corporation filed answers to this lawsuit on January 28, 2005 and February 1, 2005, in which it asserts typical
defensive counterclaims denying infringement and challenging the validity of the patent. Dealix Corporation also seeks attorneys fees and costs. We expect to incur attorneys fees and costs in this matter as are customary in the
prosecution of patent litigation, and could be liable for Dealix Corporations attorneys fees and costs if Dealix Corporation is successful in its counterclaims.



Between October and December 2004, five separate purported class actions were filed in the United States District Court for
the Central District of California against us and certain of our current directors and current and former officers. The claims were brought on behalf of stockholders who purchased shares during the period July 24, 2003 through October 21, 2004. The
claims alleged in all of these purported class actions are virtually identical, and purport to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In this regard, the plaintiffs
allege that we misrepresented and omitted material facts with respect to our financial results and operations during the time period between July 24, 2003 and October 20, 2004. The complaint seeks unspecified compensatory damages, and
attorneys fees and costs, as well as accountants and experts fees.



On January 28, 2005, the court ordered the consolidation of the currently pending class actions into a single case pursuant to a stipulation for consolidation signed by all parties. On March 14, 2005, the court
appointed a lead plaintiff and approved the selection of lead counsel and liaison counsel. Additional lawsuits asserting the same or similar claims may be filed as well. We intend to defend the claims vigorously. However, we cannot currently predict
the impact or outcome of this litigation, which could be material, and the initiation, continuation and outcome of these lawsuits may have a material impact on our results of operations, financial condition, and cash flows.



In addition, our directors and a former officer are defendants in a
derivative suit pending in the Superior Court of Orange County, California, and we are named as a nominal defendant in this suit. This suit purports to allege that the defendants breached numerous duties to us, including breach of fiduciary duty and
misappropriation of information, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment, as well as violations of California Corporations Code 25402 (trading with material non-public information), and that these
breaches and violations caused losses to us, including damages to our reputation and goodwill. Plaintiffs claims are based on allegations that the defendants disseminated false and misleading statements concerning our results of operations and
that these results were inflated at all relevant times due to violations of generally accepted accounting principals and Securities and Exchange Commission rules. The complaint seeks unspecified compensatory damages, treble damages, equitable and/or
injunctive relief, restitution, and attorneys fees and costs, as well as accountants and experts fees.



We intend to defend this suit vigorously. However, we cannot currently predict the impact or outcome of this litigation, which could be material, and the
continuation and outcome of this lawsuit, as well as the initiation of similar suits may have a material impact on our results of operations, financial condition, and cash flows.



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



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



On April 15, 2004, in connection with, and as partial consideration for, our acquisition of Stoneage Corporation., we issued 2,257,733 shares of common
stock to the then current and certain former shareholders of



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such entity. In addition, on July 6, 2004, in connection with certain post-closing adjustment provisions, we issued 47,511 shares of common stock to such
persons. All such offers and sales were exempt from registration pursuant to Regulation D under the Securities Act of 1933, as amended.



Item 5.Other Information



On September 21, 2004, each of Andrew Donchak, Executive Vice President and Chief Marketing Officer, Hoshi Printer, our then Executive Vice President and Chief Financial Officer, Ariel Amir, Executive Vice President
and General Counsel, and Richard Walker, Executive Vice President, Corporate Development and Strategy, received a grant of an option to purchase 75,000 shares of common stock pursuant to the Autobytel Inc. 2004 Restricted Stock and Option Plan.



The exercise price of each option was $8.80 per share, the
closing price on September 21, 2004.



A copy of the Stock
Option Agreements for each of Messrs. Donchak, Printer, Amir and Walker are attached to this Quarterly Report on Form 10-Q as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, and are incorporated herein by reference.



Effective November 15, 2004, Hoshi Printer resigned as our Executive Vice
President and Chief Financial Officer. On January 7, 2005, Mr. Printer entered into a severance agreement and general release with us. Under that agreement, Mr. Printer remains an at-will employee and is entitled to continue to receive a monthly
base salary and benefits, other than bonuses, similar to those he received prior to his resignation. In consideration of an additional payment equal to one months base salary of $22,073.33, Mr. Printer rescinded and waived all rights he may
have had under any agreements with us, other than rights to indemnity and insurance and stock option agreements. In consideration of an additional one months base salary, Mr. Printer irrevocably tendered his resignation as an employee of
Autobytel, which may be accepted by us upon 24 hours notice. Mr. Printers resignation was accepted in May 2005. Under the agreement, we and Mr. Printer also agreed to release one another from certain liabilities, as more fully described in the
severance agreement and general release.



Item 6.Exhibits



|     |  |                                                                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Rights Agreement, dated as of July 30, 2004, between Autobytel and U.S. Stock Transfer Corporation is incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 2, 2004.
|     | 
|4.2  |  | Form of Rights Certificate (included as Exhibit B to Exhibit 4.1) incorporated herein by reference to Exhibit 99.3 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 2, 2004.                                    
|     | 
|10.1 |  | Stock option agreement, dated September 21, 2004, between Autobytel and Andrew Donchak.                                                                                                                                                                      
|     | 
|10.2 |  | Stock option agreement, dated September 21, 2004, between Autobytel and Hoshi Printer.                                                                                                                                                                       
|     | 
|10.3 |  | Stock option agreement, dated September 21, 2004, between Autobytel and Ariel Amir.                                                                                                                                                                          
|     | 
|10.4 |  | Stock option agreement, dated September 21, 2004, between Autobytel and Richard Walker.                                                                                                                                                                      
|     | 
|10.5 |  | Severance Agreement and General Release, dated January 7, 2005, between Autobytel and Hoshi Printer.                                                                                                                                                         
|     | 
|10.6 |  | Letter Agreement, dated March 9, 2004, between Michael F. Schmidt and Autobytel.                                                                                                                                                                             
|     | 
|10.7 |  | Form of Stock Option Agreement under the Autobytel 2004 Restricted Stock and Option Plan.                                                                                                                                                                    
|     | 
|31.1 |  | Chief Executive Officer Section 302 Certification of Periodic Report, dated May 31, 2005.                                                                                                                                                                    
|     | 
|31.2 |  | Chief Financial Officer Section 302 Certification of Periodic Report, dated May 31, 2005.                                                                                                                                                                    
|     | 
|32.1 |  | Chief Executive Officer and Chief Financial Officer Section 906 Certification of Periodic Report, dated May 31, 2005.                                                                                                                                        



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



AUTOBYTEL INC.By:

/s/    MICHAEL F.
SCHMIDTMichael F. Schmidt Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer,
and Principal Accounting Officer)




Date: May 31, 2005



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EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Rights Agreement, dated as of July 30, 2004, between Autobytel and U.S. Stock Transfer Corporation is incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 2, 2004.
|     | 
|4.2  |  | Form of Rights Certificate (included as Exhibit B to Exhibit 4.1) incorporated herein by reference to Exhibit 99.3 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 2, 2004.                                    
|     | 
|10.1 |  | Stock option agreement, dated September 21, 2004, between Autobytel and Andrew Donchak.                                                                                                                                                                      
|     | 
|10.2 |  | Stock option agreement, dated September 21, 2004, between Autobytel and Hoshi Printer.                                                                                                                                                                       
|     | 
|10.3 |  | Stock option agreement, dated September 21, 2004, between Autobytel and Ariel Amir.                                                                                                                                                                          
|     | 
|10.4 |  | Stock option agreement, dated September 21, 2004, between Autobytel and Richard Walker.                                                                                                                                                                      
|     | 
|10.5 |  | Severance Agreement and General Release, dated January 7, 2005, between Autobytel and Hoshi Printer.                                                                                                                                                         
|     | 
|10.6 |  | Letter Agreement, dated March 9, 2004, between Michael F. Schmidt and Autobytel.                                                                                                                                                                             
|     | 
|10.7 |  | Form of Stock Option Agreement under the Autobytel 2004 Restricted Stock and Option Plan.                                                                                                                                                                    
|     | 
|31.1 |  | Chief Executive Officer Section 302 Certification of Periodic Report, dated May 31, 2005.                                                                                                                                                                    
|     | 
|31.2 |  | Chief Financial Officer Section 302 Certification of Periodic Report, dated May 31, 2005.                                                                                                                                                                    
|     | 
|32.1 |  | Chief Executive Officer and Chief Financial Officer Section 906 Certification of Periodic Report, dated May 31, 2005.                                                                                                                                        



78