---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



Form 10-Q/A



(Amendment No. 1)



---



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



For the quarterly period ended June 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 22239



---



Autobytel Inc.

(Exact name of registrant as specified in its charter)



---



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



(949) 225-4500

(Registrants telephone number, including area code)



---



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 July 31, 2004, there were 41,766,376 shares of the Registrants Common Stock outstanding.



---



---

EXPLANATORY NOTE



This Amendment No. 1 on Form 10-Q/A amends our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004, as
initially filed with the Securities and Exchange Commission (the SEC) on August 6, 2004, and is being filed to reflect the restatement of our consolidated financial statements for the six-month periods ended June 30, 2003 and June 30,
2004, as discussed in Note 3 thereto.



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 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.



2



---

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 restatements of
the consolidated financial statements for the second fiscal quarter of 2003 and the second fiscal quarter of 2004 are reflected in this Amendment on Form 10-Q/A, 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3



---

| | 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;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate classification of revenue between lead fees and customer relationship management services revenue in the 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;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate recognition of revenue in the second fiscal quarter of 2004, when collectibility cannot be reasonably assured; 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;
| | - |  | -----------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4



---

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



| |  |  | 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 that 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 common stock value for the shares issued for the two acquisitions in 2004 was inappropriately calculated.
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | 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 Form 10-Q for the fiscal quarter ended March 31, 2005, and the restatement of the consolidated financial statements for the third fiscal quarter of 2003 isreflected in our Form 10-Q for the fiscal quarter ended September 30, 2004 (the
Form 10-Qs).



Changes have been made to the following items in this
Amendment as a result of the restatement:



Part I



| |  |  | Item 1, Consolidated Financial Statements (unaudited)
| | - |  | -----------------------------------------------------



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



| |  |  | Item 4, Controls and Procedures
| | - |  | -------------------------------



This Amendment does not reflect events, other than those relating to the restatement, that have occurred after August 6, 2004, the date the Quarterly
Report on Form 10-Q was originally filed, except that (i) the first Risk Factor has been amended and five Risk Factors that specifically relate to the restatement have been added to the information set forth herein in Part I, Item 2,
Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors, and (ii) the information and disclosure contained in Part I, Item 4 Controls and Procedures has been brought to the
current date of this filing. Information with respect to events occurring after August 6, 2004 has been or will be set forth, as appropriate, in our subsequent periodic filings, including our Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K. Any reference to facts and circumstances at a current date refer to such facts and circumstances as of such original filing date.



Concurrently with the filing of this Amendment on Form 10-Q/A, we are filing with the SEC the Form 10-K and the Form 10-Qs to reflect changes required as
a result of the restatements described above. 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 Amendment, the Form 10-Qs, 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.



5



---

INDEX



|           |  |                                                                                                                   |  |     
|---------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                   |  | Page
|           |  | PART I. FINANCIAL INFORMATION                                                                                     |  |     
|           |  |                                                                                                                  
|ITEM 1.    |  | Consolidated Financial Statements (unaudited):                                                                    |  |     
|           |  |                                                                                                                  
|           |  | Consolidated Balance Sheets (Restated) as of June 30, 2004 and December 31, 2003                                  |  | 7   
|           |  |                                                                                                                  
|           |  | Consolidated Statements of Operations (Restated) for the Three Months and Six Months Ended June 30, 2004 and 2003 |  | 8   
|           |  |                                                                                                                  
|           |  | Consolidated Statements of Cash Flows (Restated) for the Six Months Ended June 30, 2004 and 2003                  |  | 9   
|           |  |                                                                                                                  
|           |  | Notes to Consolidated Financial Statements                                                                        |  | 11  
|           |  |                                                                                                                  
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 39  
|           |  |                                                                                                                  
|ITEM 4.    |  | Controls and Procedures                                                                                           |  | 68  
|           |  |                                                                                                                  
|           |  | PART II. OTHER INFORMATION                                                                                        |  |     
|           |  |                                                                                                                  
|ITEM 1.    |  | Legal Proceedings                                                                                                 |  | 70  
|           |  |                                                                                                                  
|ITEM 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                       |  | 71  
|           |  |                                                                                                                  
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                               |  | 71  
|           |  |                                                                                                                  
|ITEM 6.    |  | Exhibits and Reports on Form 8-K                                                                                  |  | 72  
|           | 
|Signatures |  | 73                                                                                                               



6



---

PART I. FINANCIAL INFORMATION



Item 1.Consolidated Financial Statements



AUTOBYTEL INC.



CONSOLIDATED
BALANCE SHEETS

(Amounts in thousands, except per share data)

(Unaudited)



|                                                                                                                                     |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                     |  | Restated     |         
|                                                                                                                                     |  | June 30,2004 |          |   | December 31,2003 |  
|ASSETS                                                                                                                               |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                      |  |              |          |   |                  |   |          |  
|Domestic cash and cash equivalents                                                                                                   |  | $            | 17,740   |   |                  | $ | 45,643   |  
|Restricted international cash and cash equivalents (Note 4.)                                                                         |  |              | 8,225    |   |                  |   |         |  
|Short-term investments                                                                                                               |  |              | 16,500   |   |                  |   | 9,991    |  
|Accounts receivable, net of allowance for bad debts and customer credits of $850 and $1,764, respectively                            |  |              | 17,363   |   |                  |   | 11,335   |  
|Prepaid expenses and other current assets                                                                                            |  |              | 2,685    |   |                  |   | 1,140    |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                 |  |              | 62,513   |   |                  |   | 68,109   |  
|Long-term investments                                                                                                                |  |              | 12,000   |   |                  |   | 6,000    |  
|Property and equipment, net                                                                                                          |  |              | 3,141    |   |                  |   | 2,138    |  
|Capitalized internal use software, net                                                                                               |  |              | 484      |   |                  |   | 1,024    |  
|Investment in equity investee (Note 4.)                                                                                              |  |              |         |   |                  |   | 3,938    |  
|Goodwill                                                                                                                             |  |              | 71,086   |   |                  |   | 16,830   |  
|Acquired intangible assets, net                                                                                                      |  |              | 4,772    |   |                  |   | 315      |  
|Other assets                                                                                                                         |  |              | 121      |   |                  |   | 155      |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                         |  | $            | 154,117  |   |                  | $ | 98,509   |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITY                                                                              |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                 |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                     |  | $            | 7,139    |   |                  | $ | 3,741    |  
|Accrued expenses                                                                                                                     |  |              | 5,980    |   |                  |   | 4,595    |  
|Current portion of deferred revenues                                                                                                 |  |              | 4,092    |   |                  |   | 4,216    |  
|Accrued domestic restructuring                                                                                                       |  |              | 168      |   |                  |   | 258      |  
|Other current liabilities                                                                                                            |  |              | 1,910    |   |                  |   | 1,517    |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                            |  |              | 19,289   |   |                  |   | 14,327   |  
|Long-term deferred revenue                                                                                                           |  |              | 59       |   |                  |   | 178      |  
|Common stock due to former Stoneage shareholders                                                                                     |  |              | 711      |   |                  |   |         |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total liabilities                                                                                                                    |  |              | 20,059   |   |                  |   | 14,505   |  
|Minority interest (Note 4.)                                                                                                          |  |              | 4,123    |   |                  |   |         |  
|                                                                                                                                     |  |             
|Commitments and contingencies (Note 7.)                                                                                              |  |              |          |   |                  |   |          |  
|                                                                                                                                     |  |             
|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; 41,642,176 and 37,786,767 shares issued and outstanding,
respectively |  |              | 42       |   |                  |   | 38       |  
|Additional paid-in capital                                                                                                           |  |              | 280,742  |   |                  |   | 236,544  |  
|Accumulated other comprehensive income                                                                                               |  |              | 1,687    |   |                  |   | 1,620    |  
|Accumulated deficit                                                                                                                  |  |              | (152,536 | ) |                  |   | (154,198 | )
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                           |  |              | 129,935  |   |                  |   | 84,004   |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total liabilities, minority interest and stockholders equity                                                                        |  | $            | 154,117  |   |                  | $ | 98,509   |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  



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



7



---

AUTOBYTEL INC.



CONSOLIDATED
STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(unaudited)



|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|---------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------ | - | ---------- | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                               |  | Three Months EndedJune 30, |            |   | Six Months EndedJune 30, |  
|                                               |  | 2004                       |            |   | 2003                     |   |            | 2004       |  |   | 2003       |  
|                                               |  | (Restated)                 |            |   | (Restated)               |   |            | (Restated) |  |   | (Restated) |  
|Revenues                                       |  | $                          | 31,122     |   |                          | $ | 21,529     |            |  | $ | 55,740     |   |  | $ | 41,671     |  
|                                               |  |                            |            |  
|Costs and expenses:                            |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Cost of revenues                               |  |                            | 12,891     |   |                          |   | 9,252      |            |  |   | 23,416     |   |  |   | 17,915     |  
|Sales and marketing                            |  |                            | 6,998      |   |                          |   | 4,756      |            |  |   | 13,083     |   |  |   | 9,613      |  
|Product and technology development             |  |                            | 5,450      |   |                          |   | 3,742      |            |  |   | 9,810      |   |  |   | 6,832      |  
|General and administrative                     |  |                            | 4,514      |   |                          |   | 3,383      |            |  |   | 7,533      |   |  |   | 6,438      |  
|Amortization of acquired intangible assets     |  |                            | 304        |   |                          |   | 9          |            |  |   | 331        |   |  |   | 9          |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Total costs and expenses                       |  |                            | 30,157     |   |                          |   | 21,142     |            |  |   | 54,173     |   |  |   | 40,807     |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Income from operations                         |  |                            | 965        |   |                          |   | 387        |            |  |   | 1,567      |   |  |   | 864        |  
|Interest income                                |  |                            | 219        |   |                          |   | 61         |            |  |   | 405        |   |  |   | 130        |  
|Loss in equity investee                        |  |                            |           |   |                          |   | (219       | )          |  |   | (84        | ) |  |   | (224       | )
|Foreign currency exchange gain                 |  |                            | 20         |   |                          |   |           |            |  |   | 20         |   |  |   |           |  
|Other income                                   |  |                            |           |   |                          |   |           |            |  |   | 1          |   |  |   |           |  
|Minority interest                              |  |                            | (47        | ) |                          |   |           |            |  |   | (47        | ) |  |   |           |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Income before income taxes                     |  |                            | 1,157      |   |                          |   | 229        |            |  |   | 1,862      |   |  |   | 770        |  
|Provision for income taxes                     |  |                            | (171       | ) |                          |   | (5         | )          |  |   | (200       | ) |  |   | (7         | )
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Net income                                     |  | $                          | 986        |   |                          | $ | 224        |            |  | $ | 1,662      |   |  | $ | 763        |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Net income per share:                          |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Basic                                          |  | $                          | 0.02       |   |                          | $ | 0.01       |            |  | $ | 0.04       |   |  | $ | 0.02       |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Diluted                                        |  | $                          | 0.02       |   |                          | $ | 0.01       |            |  | $ | 0.04       |   |  | $ | 0.02       |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Shares used in computing net income per share: |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Basic                                          |  |                            | 41,123,593 |   |                          |   | 31,814,364 |            |  |   | 39,733,775 |   |  |   | 31,525,905 |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Diluted                                        |  |                            | 44,708,634 |   |                          |   | 33,968,519 |            |  |   | 43,656,782 |   |  |   | 33,156,542 |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Comprehensive income:                          |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Net income                                     |  | $                          | 986        |   |                          | $ | 224        |            |  | $ | 1,662      |   |  | $ | 763        |  
|Translation adjustment                         |  |                            | (77        | ) |                          |   | 524        |            |  |   | 67         |   |  |   | 660        |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  
|Comprehensive income                           |  | $                          | 909        |   |                          | $ | 748        |            |  | $ | 1,729      |   |  | $ | 1,423      |  
|                                               |  |                            |            |   |                          |   |            |            |  |   |            |   |  |   |            |  



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



8



---

AUTOBYTEL INC.



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)



|                                                                                                               |  |                          |         |   |            |   |        |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---------- | - | ------ | -
|                                                                                                               |  | Six Months EndedJune 30, |        
|                                                                                                               |  | 2004                     |         |   | 2003       |  
|                                                                                                               |  | (Restated)               |         |   | (Restated) |  
|Cash flows from operating activities:                                                                          |  |                          |         |   |            |   |        |  
|Net income                                                                                                     |  | $                        | 1,662   |   |            | $ | 763    |  
|Adjustments to reconcile net income to net cash provided by operating activities:                              |  |                          |         |   |            |   |        |  
|Non-cash charges:                                                                                              |  |                          |         |   |            |   |        |  
|Depreciation and amortization                                                                                  |  |                          | 801     |   |            |   | 672    |  
|Amortization of capitalized internal use software                                                              |  |                          | 540     |   |            |   | 541    |  
|Amortization of acquired intangible assets                                                                     |  |                          | 418     |   |            |   | 15     |  
|Provision for (recovery of) bad debt                                                                           |  |                          | (240    | ) |            |   | 314    |  
|Provision for customer credits                                                                                 |  |                          | 584     |   |            |   | 1,294  |  
|Loss on disposal of property and equipment                                                                     |  |                          | 20      |   |            |   |       |  
|Stock based compensation                                                                                       |  |                          |        |   |            |   | 51     |  
|Loss in equity investee                                                                                        |  |                          | 84      |   |            |   | 224    |  
|Minority interest                                                                                              |  |                          | 47      |   |            |   |       |  
|Changes in assets and liabilities, excluding the effect of acquisitions and consolidation of Autobytel.Europe: |  |                          |         |   |            |   |        |  
|Accounts receivable                                                                                            |  |                          | (1,243  | ) |            |   | (2,148 | )
|Prepaid expenses and other current assets                                                                      |  |                          | (423    | ) |            |   | 1,895  |  
|Other assets                                                                                                   |  |                          | 13      |   |            |   | 23     |  
|Accounts payable                                                                                               |  |                          | 1,637   |   |            |   | 639    |  
|Accrued expenses                                                                                               |  |                          | (1,362  | ) |            |   | (1,047 | )
|Deferred revenues                                                                                              |  |                          | (524    | ) |            |   | 208    |  
|Customer deposits                                                                                              |  |                          |        |   |            |   | (76    | )
|Accrued domestic restructuring                                                                                 |  |                          | (90     | ) |            |   | (126   | )
|Accrued international licensee liabilities                                                                     |  |                          | (1,541  | ) |            |   |       |  
|Other current liabilities                                                                                      |  |                          | 307     |   |            |   | 153    |  
|                                                                                                               |  |                          |         |   |            |   |        |  
|Net cash provided by operating activities                                                                      |  |                          | 690     |   |            |   | 3,395  |  
|                                                                                                               |  |                          |         |   |            |   |        |  
|Cash flows from investing activities:                                                                          |  |                          |         |   |            |   |        |  
|Acquisitions of businesses, net of cash acquired                                                               |  |                          | (20,631 | ) |            |   | (4,952 | )
|Sales and maturities of short-term and long-term investments                                                   |  |                          | 17,991  |   |            |   |       |  
|Purchases of short-term and long-term investments                                                              |  |                          | (39,500 | ) |            |   |       |  
|Redemptions of long-term investments                                                                           |  |                          | 9,000   |   |            |   |       |  
|Restricted cash                                                                                                |  |                          | 2,038   |   |            |   | 28     |  
|Purchases of property and equipment                                                                            |  |                          | (923    | ) |            |   | (145   | )
|                                                                                                               |  |                          |         |   |            |   |        |  
|Net cash used in investing activities                                                                          |  |                          | (32,025 | ) |            |   | (5,069 | )
|                                                                                                               |  |                          |         |   |            |   |        |  
|Cash flows from financing activities:                                                                          |  |                          |         |   |            |   |        |  
|Payments of capital lease obligations                                                                          |  |                          | (225    | ) |            |   | (8     | )
|Net proceeds from sale of common stock                                                                         |  |                          | 3,657   |   |            |   | 25,809 |  
|                                                                                                               |  |                          |         |   |            |   |        |  
|Net cash provided by financing activities                                                                      |  |                          | 3,432   |   |            |   | 25,801 |  
|                                                                                                               |  |                          |         |   |            |   |        |  
|Effect of exchange rates on cash                                                                               |  |                          |        |   |            |   | 63     |  
|                                                                                                               |  |                          |         |   |            |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                           |  |                          | (27,903 | ) |            |   | 24,190 |  
|Cash and cash equivalents, beginning of period                                                                 |  |                          | 45,643  |   |            |   | 27,543 |  
|                                                                                                               |  |                          |         |   |            |   |        |  
|Cash and cash equivalents, end of period                                                                       |  | $                        | 17,740  |   |            | $ | 51,733 |  
|                                                                                                               |  |                          |         |   |            |   |        |  
|Supplemental disclosure of cash flow information:                                                              |  |                          |         |   |            |   |        |  
|Cash paid during the period for income taxes                                                                   |  | $                        | 69      |   |            | $ | 7      |  
|                                                                                                               |  |                          |         |   |            |   |        |  
|Cash paid (refunded) during the period for interest                                                            |  | $                        | (1      | ) |            | $ | 2      |  
|                                                                                                               |  |                          |         |   |            |   |        |  



9



---

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 in assets (including $10,425 of
restricted international cash and cash equivalents), $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 $53,626 were acquired (including $149 of property and equipment
acquired under capital leases), liabilities of $3,458 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.



10



---

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, consisting 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 ABTL.



2. Summary of Significant Accounting Policies



Unaudited Interim Financial Statements



The accompanying interim consolidated financial statements as of June 30, 2004, and for the three months and six months ended June 30, 2004 and 2003, are
unaudited and have been restated (see Note 3). The accompanying consolidated balance sheet as of December 31, 2003 has also 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 in 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 this adoption,
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



11



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except share and 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 a 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 for Autobytel.Europes current operations use as directed by Autobytel.Europe. Restricted cash and cash equivalents 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 six months ended June 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 six months ended June 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. At June 30, 2004, Autobytel did not record any unrealized losses on its debt securities related to an impairment determined to be
temporary.



12



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



As of June 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
|June 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           |  |                     | 3,000  |                     |   | 2,995           |  |                  |   |  |   | 5  
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |    
|                                            |  |                     | 16,500 |                     |   | 16,495          |  |                  |   |  |   | 5  
|Long-term investments, held-to-maturity:    |  |                     |        |                     |   |                 |  |                  |    |  |   |    
|Government sponsored agency bonds           |  | $                   | 12,000 |                     | $ | 11,901          |  | $                |   |  | $ | 99 
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |    
|Total as of June 30, 2004                   |  | $                   | 28,500 |                     | $ | 28,396          |  | $                |   |  | $ | 104
|                                            |  |                     |        |                     |   |                 |  |                  |    |  |   |    
|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 June 30, 2004:



|                                      |  |                     |       
|------------------------------------- |  | ------------------- | ------
|                                      |  | AmortizedCost Basis
|Due within one year                   |  | $                   | 3,000 
|Due after one year through five years |  |                     | 12,000
|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.



13



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except share and 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 reclassification from cash and cash equivalents to short-term investments of $13,500 as of June 30, 2004 and from cash and cash equivalents to short-term investments of $6,000 at December 31, 2003,
respectively.



In addition, purchases of short-term and
long-term investments included in the accompanying consolidated statements of cash flows have been revised to reflect the purchase of auction rate securities during the periods presented. This resulted in an increase in sales and maturities of
short-term and long-term investments and purchases of short-term and long-term investments of $14,000 and $21,500, respectively for the six months ended June 30, 2004.



The reclassification of auction rate securities has no impact on total assets at June 30, 2004 and 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 six months ended June 30, 2004 and 2003, respectively (all amounts in thousands):



|                             |  |                             |        |                           |   |            |  |            |        |  |   |       
|---------------------------- |  | --------------------------- | ------ | ------------------------- | - | ---------- |  | ---------- | ------ |  | - | ------
|                             |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                             |  | 2004                        |        | 2003                      |   | 2004       |  | 2003      
|                             |  | (Restated)                  |        | (Restated)                |   | (Restated) |  | (Restated)
|Lead fees                    |  | $                           | 21,772 |                           | $ | 16,128     |  | $          | 38,964 |  | $ | 31,538
|Advertising                  |  |                             | 3,165  |                           |   | 2,944      |  |            | 6,267  |  |   | 5,711 
|CRM services                 |  |                             | 4,951  |                           |   | 1,307      |  |            | 7,960  |  |   | 1,952 
|Data, applications and other |  |                             | 1,234  |                           |   | 1,150      |  |            | 2,549  |  |   | 2,470 
|                             |  |                             |        |                           |   |            |  |            |        |  |   |       
|Total revenues               |  | $                           | 31,122 |                           | $ | 21,529     |  | $          | 55,740 |  | $ | 41,671
|                             |  |                             |        |                           |   |            |  |            |        |  |   |       



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



14



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



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.



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



|                                                                     |  |                             |            |                           |   |            |  |            |            |  |   |           
|-------------------------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | ---------- | ---------- |  | - | ----------
|                                                                     |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                                     |  | 2004                        |            | 2003                      |   | 2004       |  | 2003      
|                                                                     |  | (Restated)                  |            | (Restated)                |   | (Restated) |  | (Restated)
|Numerator:                                                           |  |                             |            |                           |   |            |  |            |            |  |   |           
|Net income                                                           |  | $                           | 986        |                           | $ | 224        |  | $          | 1,662      |  | $ | 763       
|                                                                     |  |                             |            |                          
|Denominator:                                                         |  |                             |            |                           |   |            |  |            |            |  |   |           
|Weighted average common shares and denominator for basic calculation |  |                             | 41,123,593 |                           |   | 31,814,364 |  |            | 39,733,775 |  |   | 31,525,905
|Weighted average effect of dilutive securities:                      |  |                             |            |                           |   |            |  |            |            |  |   |           
|Employee stock options                                               |  |                             | 3,571,555  |                           |   | 2,136,143  |  |            | 3,909,521  |  |   | 1,612,625 
|Employee stock purchase plan                                         |  |                             | 13,486     |                           |   | 18,012     |  |            | 13,486     |  |   | 18,012    
|                                                                     |  |                             |            |                           |   |            |  |            |            |  |   |           
|Denominator for diluted calculation                                  |  |                             | 44,708,634 |                           |   | 33,968,519 |  |            | 43,656,782 |  |   | 33,156,542
|Net income per sharebasic                                           |  | $                           | 0.02       |                           | $ | 0.01       |  | $          | 0.04       |  | $ | 0.02      
|Net income per sharediluted                                         |  | $                           | 0.02       |                           | $ | 0.01       |  | $          | 0.04       |  | $ | 0.02      



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 six month period ended June 30, 2004.
For the three months and six months ended June 30, 2004, there were 1,548,368 and 1,131,432 antidilutive potential shares of common stock, respectively. For the three and six months ended June 30, 2003, there were 1,451,218 and 1,824,305
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



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except share and 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 six months ended June 30, 2004 and 2003, would approximate the
pro forma amounts below:



|                                                                                     |  |                             |        |   |                           |   |       |            |  |   |            |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ------------------------- | - | ----- | ---------- |  | - | ---------- | - |  | - | ------ | -
|                                                                                     |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                                                     |  | 2004                        |        |   | 2003                      |   |       | 2004       |  |   | 2003       |  
|                                                                                     |  | (Restated)                  |        |   | (Restated)                |   |       | (Restated) |  |   | (Restated) |  
|Net income (loss):                                                                   |  |                             |        |   |                           |   |       |            |  |   |            |   |  |   |        |  
|As reported                                                                          |  | $                           | 986    |   |                           | $ | 224   |            |  | $ | 1,662      |   |  | $ | 763    |  
|Add: Employee stock-based compensation included in reported net income               |  |                             |       |   |                           |   | 51    |            |  |   |           |   |  |   | 51     |  
|Less: Employee stock-based compensation determined under the fair value based method |  |                             | (1,501 | ) |                           |   | (932  | )          |  |   | (2,772     | ) |  |   | (1,970 | )
|                                                                                     |  |                             |        |   |                           |   |       |            |  |   |            |   |  |   |        |  
|Pro forma                                                                            |  | $                           | (515   | ) |                           | $ | (657  | )          |  | $ | (1,110     | ) |  | $ | (1,156 | )
|                                                                                     |  |                             |        |   |                           |   |       |            |  |   |            |   |  |   |        |  
|Net income (loss) per sharebasic:                                                   |  |                             |        |   |                           |   |       |            |  |   |            |   |  |   |        |  
|As reported                                                                          |  | $                           | 0.02   |   |                           | $ | 0.01  |            |  | $ | 0.04       |   |  | $ | 0.02   |  
|Pro forma                                                                            |  | $                           | (0.01  | ) |                           | $ | (0.02 | )          |  | $ | (0.03      | ) |  | $ | (0.04  | )
|Net income (loss) per sharediluted:                                                 |  |                             |        |   |                           |   |       |            |  |   |            |   |  |   |        |  
|As reported                                                                          |  | $                           | 0.02   |   |                           | $ | 0.01  |            |  | $ | 0.04       |   |  | $ | 0.02   |  
|Pro forma                                                                            |  | $                           | (0.01  | ) |                           | $ | (0.02 | )          |  | $ | (0.03      | ) |  | $ | (0.04  | )



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



During the six months ended June 30, 2004 and 2003, Autobytel granted 988,000 and 1,264,000 stock options, respectively. The options granted were estimated to have a weighted average fair value per share of $6.38 and
$1.95 for the six months ended June 30, 2004 and 2003, respectively, based on the Black-Scholes option-pricing model on the date of grant and the following assumptions:



|                                         |  |                           |   |  |           |  
|---------------------------------------- |  | ------------------------- | - |  | --------- | -
|                                         |  | Six Months Ended June 30, |  
|                                         |  | 2004                      |   |  | 2003      |  
|Dividend yield                           |  |                          | % |  |          | %
|Volatility                               |  | 66.16                     | % |  | 86.65     | %
|Weighted-average risk-free interest rate |  | 2.342                     | % |  | 1.985     | %
|Weighted-average expected life           |  | 3.5 years                 |   |  | 3.7 years |  



16



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



Awards issued under the employee stock purchase plan were estimated to have a weighted average fair
value per award of $2.40 and $3.08 for the six months ended June 30, 2004 and 2003, respectively, based on the Black-Scholes option-pricing model and the following assumptions:



|                        |  |                           |  |                
|----------------------- |  | ------------------------- |  | ---------------
|                        |  | Six Months Ended June 30,
|                        |  | 2004                      |  | 2003           
|Dividend yield          |  |   %                      |  |   %           
|Volatility              |  | 66.06% - 73.86%           |  | 64.73% - 75.44%
|Risk-free interest rate |  | 1.03% - 1.05%             |  | 1.21% - 1.66%  
|Expected life           |  | 6 months                  |  | 6 months       



As of June 30, 2004,
Autobytel had a total of 7,363,341 stock options outstanding, of which 5,469,719 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 December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, which replaced the previously issued FIN 46. FIN 46R requires certain
variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity (i) do not have sufficient equity at risk, (ii) do not have the characteristics of a controlling financial interest, or
(iii) have voting rights that are disproportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.



As a result of the adoption of FIN 46R, Autobytel was determined to be the
primary beneficiary of Autobytel.Europe and consolidated Autobytel.Europe in its financial statements effective March 31, 2004. Autobytel has an ownership interest in Autobytel.Europe of 49%. (See Note 3.)



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 will be effective on July 1, 2004. Autobytel does not expect the adoption
of EITF 03-1 to have a material effect on Autobytels financial position or results of operations.



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



17



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



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.



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 $393 and $532 for the three and six months ended June 30, 2004, and to decrease total revenue by $192 and $303 for the three
and six months ended June 30, 2003. 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 $114 and to increase total expenses by $1,136 for the three months and six months ended June 30, 2004,
respectively, and increase total expenses by $706 and $924 for the six months ended June 30, 2003, respectively.



18



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



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



|                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                       |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                       |  | 2004                       |        |   | 2003                     |   |        | 2004 |  |   | 2003   |  
|Total revenue, as previously reported  |  | $                          | 31,515 |   |                          | $ | 21,721 |      |  | $ | 56,272 |   |  | $ | 41,974 |  
|Total revenue restatement adjustments: |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Unapplied credits                      |  |                            |       |   |                          |   | (133   | )    |  |   | (43    | ) |  |   | (133   | )
|Stale dated checks                     |  |                            |        |   |                          |   | (17    | )    |  |   |       |   |  |   | (17    | )
|Multiple element arrangements          |  |                            | (21    | ) |                          |   | 29     |      |  |   | (31    | ) |  |   | 10     |  
|Delivery of purchase requests          |  |                            | (21    | ) |                          |   | (4     | )    |  |   | (46    | ) |  |   | (24    | )
|Advertising                            |  |                            | (276   | ) |                          |   | (80    | )    |  |   | (296   | ) |  |   | (152   | )
|Other                                  |  |                            | (75    | ) |                          |   | 13     |      |  |   | (116   | ) |  |   | 13     |  
|                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total revenue restatement adjustments  |  |                            | (393   | ) |                          |   | (192   | )    |  |   | (532   | ) |  |   | (303   | )
|                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total revenue, as restated             |  | $                          | 31,122 |   |                          | $ | 21,529 |      |  | $ | 55,740 |   |  | $ | 41,671 |  
|                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



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



|                                               |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|---------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                               |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                               |  | 2004                       |       |   | 2003                     |   |       | 2004 |  |   | 2003   |  
|Net income (loss), as previously reported      |  | $                          | 1,265 |   |                          | $ | 1,122 |      |  | $ | 3,330  |   |  | $ | 1,990  |  
|Restatement adjustments to revenue (see above) |  |                            | (393  | ) |                          |   | (192  | )    |  |   | (532   | ) |  |   | (303   | )
|Expense adjustments:                           |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Stale dated checks                             |  |                            | (1    | ) |                          |   | (109  | )    |  |   | (1     | ) |  |   | (109   | )
|Accrued expenses                               |  |                            | 113   |   |                          |   | (101  | )    |  |   | (828   | ) |  |   | (528   | )
|Commission expense                             |  |                            | 78    |   |                          |   | 73    |      |  |   | (171   | ) |  |   | 340    |  
|Accrued bonus                                  |  |                            |      |   |                          |   | (250  | )    |  |   |       |   |  |   | (250   | )
|Equity investment                              |  |                            | (3    | ) |                          |   | (233  | )    |  |   | (34    | ) |  |   | (291   | )
|Other                                          |  |                            | (73   | ) |                          |   | (86   | )    |  |   | (102   | ) |  |   | (86    | )
|                                               |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Total restatement expense adjustments          |  |                            | 114   |   |                          |   | (706  | )    |  |   | (1,136 | ) |  |   | (924   | )
|                                               |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Net restatement adjustments                    |  |                            | (279  | ) |                          |   | (898  | )    |  |   | (1,668 | ) |  |   | (1,227 | )
|                                               |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Restated net income (loss)                     |  | $                          | 986   |   |                          | $ | 224   |      |  | $ | 1,662  |   |  | $ | 763    |  
|                                               |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  



Classifications



Effective with the filing of this Amendment on Form
10-Q/A, Autobytel has modified its 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. 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 Autobytels 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



19



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



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 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 June 30, 2004 and December 31, 2003:



Consolidated Balance Sheet



|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|-------------------------------------------------- |  | --------------------- | -------- | - | ----------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | -------- | -
|                                                   |  | June 30, 2004         |         
|                                                   |  | As PreviouslyReported |          |   | Reclassifications |   |         | Adjustments |  |   | As Restated |  
|Current assets:                                    |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Domestic cash and cash equivalents                 |  | $                     | 31,240   |   |                   | $ | (13,500 | )           |  | $ |            |   |  | $ | 17,740   |  
|Restricted international cash and cash equivalents |  |                       | 8,225    |   |                   |   |        |             |  |   |            |   |  |   | 8,225    |  
|Short-term investments                             |  |                       |         |   |                   |   | 13,500  |             |  |   | 3,000       |   |  |   | 16,500   |  
|Accounts receivable, net of allowances             |  |                       | 17,213   |   |                   |   | 591     |             |  |   | (441        | ) |  |   | 17,363   |  
|Prepaid expenses and other current assets          |  |                       | 2,677    |   |                   |   |        |             |  |   | 8           |   |  |   | 2,685    |  
|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Total current assets                               |  |                       | 59,355   |   |                   |   | 3,591   |             |  |   | (433        | ) |  |   | 62,513   |  
|Long-term investments                              |  |                       | 15,000   |   |                   |   |        |             |  |   | (3,000      | ) |  |   | 12,000   |  
|Property and equipment, net                        |  |                       | 3,141    |   |                   |   |        |             |  |   |            |   |  |   | 3,141    |  
|Capitalized internal use software, net             |  |                       | 484      |   |                   |   |        |             |  |   |            |   |  |   | 484      |  
|Investment in equity investee                      |  |                       | 827      |   |                   |   |        |             |  |   | (827        | ) |  |   |         |  
|Goodwill                                           |  |                       | 69,477   |   |                   |   |        |             |  |   | 1,609       |   |  |   | 71,086   |  
|Acquired intangible assets, net                    |  |                       | 5,168    |   |                   |   |        |             |  |   | (396        | ) |  |   | 4,772    |  
|Other assets                                       |  |                       | 121      |   |                   |   |        |             |  |   |            |   |  |   | 121      |  
|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Total assets                                       |  | $                     | 153,573  |   |                   | $ | 591     |             |  | $ | (47         | ) |  | $ | 154,117  |  
|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Current liabilities:                               |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Accounts payable                                   |  | $                     | 6,906    |   |                   | $ |        |             |  | $ | 233         |   |  | $ | 7,139    |  
|Accrued expenses                                   |  |                       | 6,143    |   |                   |   |        |             |  |   | (163        | ) |  |   | 5,980    |  
|Current portion of deferred revenues               |  |                       | 3,709    |   |                   |   | (59     | )           |  |   | 442         |   |  |   | 4,092    |  
|Accrued domestic restructuring                     |  |                       | 168      |   |                   |   |        |             |  |   |            |   |  |   | 168      |  
|Other current liabilities                          |  |                       | 587      |   |                   |   | 591     |             |  |   | 732         |   |  |   | 1,910    |  
|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Total current liabilities                          |  |                       | 17,513   |   |                   |   | 532     |             |  |   | 1,244       |   |  |   | 19,289   |  
|Long-term deferred revenues                        |  |                       |         |   |                   |   | 59      |             |  |   |            |   |  |   | 59       |  
|Common stock due to former Stoneage shareholders   |  |                       | 685      |   |                   |   |        |             |  |   | 26          |   |  |   | 711      |  
|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Total liabilities                                  |  |                       | 18,198   |   |                   |   | 591     |             |  |   | 1,270       |   |  |   | 20,059   |  
|Minority interest                                  |  |                       | 4,594    |   |                   |   |        |             |  |   | (471        | ) |  |   | 4,123    |  
|                                                   |  |                       |          |  
|Stockholders equity:                              |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Common stock                                       |  |                       | 42       |   |                   |   |        |             |  |   |            |   |  |   | 42       |  
|Additional paid-in capital                         |  |                       | 279,584  |   |                   |   |        |             |  |   | 1,158       |   |  |   | 280,742  |  
|Accumulated other comprehensive loss               |  |                       | 1,597    |   |                   |   |        |             |  |   | 90          |   |  |   | 1,687    |  
|Accumulated deficit                                |  |                       | (150,442 | ) |                   |   |        |             |  |   | (2,094      | ) |  |   | (152,536 | )
|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Total stockholders equity                         |  |                       | 130,781  |   |                   |   |        |             |  |   | (846        | ) |  |   | 129,935  |  
|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  
|Total liabilities and stockholders equity         |  | $                     | 153,573  |   |                   | $ | 591     |             |  | $ | (47         | ) |  | $ | 154,117  |  
|                                                   |  |                       |          |   |                   |   |         |             |  |   |             |   |  |   |          |  



20



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



Consolidated Balance Sheet



|                                           |  |                       |          |   |                   |   |        |             |  |   |             |   |  |   |          |  
|------------------------------------------ |  | --------------------- | -------- | - | ----------------- | - | ------ | ----------- |  | - | ----------- | - |  | - | -------- | -
|                                           |  | December 31, 2003     |         
|                                           |  | As PreviouslyReported |          |   | 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 revenues                |  |                       |         |   |                   |   | 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 loss       |  |                       |         |   |                   |   |       |             |  |   | 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   |  
|                                           |  |                       |          |   |                   |   |        |             |  |   |             |   |  |   |          |  



21



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except share and 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 six months ended June 30, 2004 and 2003:



Consolidated Statement of Operations



|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|---------------------------------------------- |  | -------------------------------- | ---------- | - | ----------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                               |  | Three Months Ended June 30, 2004 |           
|                                               |  | As PreviouslyReported            |            |   | Reclassifications |   |         | Adjustments |  |   | As Restated |  
|Revenues                                       |  | $                                | 31,515     |   |                   | $ |        |             |  | $ | (393        | ) |  | $ | 31,122     |  
|                                               |  |                                  |            |  
|Costs and expenses:                            |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Cost of revenues                               |  |                                  |           |   |                   |   | 12,891  |             |  |   |            |   |  |   | 12,891     |  
|Sales and marketing                            |  |                                  | 18,773     |   |                   |   | (11,593 | )           |  |   | (182        | ) |  |   | 6,998      |  
|Product and technology development             |  |                                  | 6,431      |   |                   |   | (981    | )           |  |   |            |   |  |   | 5,450      |  
|General and administrative                     |  |                                  | 5,172      |   |                   |   | (650    | )           |  |   | (8          | ) |  |   | 4,514      |  
|Amortization of acquired intangible assets     |  |                                  |           |   |                   |   | 333     |             |  |   | (29         | ) |  |   | 304        |  
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Total costs and expenses                       |  |                                  | 30,376     |   |                   |   |        |             |  |   | (219        | ) |  |   | 30,157     |  
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Income from operations                         |  |                                  | 1,139      |   |                   |   |        |             |  |   | (174        | ) |  |   | 965        |  
|Interest income                                |  |                                  | 219        |   |                   |   |        |             |  |   |            |   |  |   | 219        |  
|Income (loss) in equity investees              |  |                                  | 18         |   |                   |   |        |             |  |   | (18         | ) |  |   |           |  
|Foreign currency exchange gain                 |  |                                  | 20         |   |                   |   |        |             |  |   |            |   |  |   | 20         |  
|Minority interest                              |  |                                  | (62        | ) |                   |   |        |             |  |   | 15          |   |  |   | (47        | )
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Income before income taxes                     |  |                                  | 1,334      |   |                   |   |        |             |  |   | (177        | ) |  |   | 1,157      |  
|Provision for income taxes                     |  |                                  | (69        | ) |                   |   |        |             |  |   | (102        | ) |  |   | (171       | )
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                                | 1,265      |   |                   | $ |        |             |  | $ | (279        | ) |  | $ | 986        |  
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income per share:                          |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Basic                                          |  | $                                | 0.03       |   |                   | $ |        |             |  | $ | (0.01       | ) |  | $ | 0.02       |  
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Diluted                                        |  | $                                | 0.03       |   |                   | $ |        |             |  | $ | (0.01       | ) |  | $ | 0.02       |  
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|                                               |  |                                  |            |  
|Shares used in computing net income per share: |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Basic                                          |  |                                  | 41,123,593 |   |                   |   |        |             |  |   |            |   |  |   | 41,123,593 |  
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Diluted                                        |  |                                  | 44,695,148 |   |                   |   |        |             |  |   | 13,486      |   |  |   | 44,708,634 |  
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|                                               |  |                                  |            |  
|Comprehensive income:                          |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                                | 1,265      |   |                   | $ |        |             |  | $ | (279        | ) |  | $ | 986        |  
|Translation adjustment                         |  |                                  | (88        | ) |                   |   |        |             |  |   | 11          |   |  |   | (77        | )
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Comprehensive income                           |  | $                                | 1,177      |   |                   | $ |        |             |  | $ | (268        | ) |  | $ | 909        |  
|                                               |  |                                  |            |   |                   |   |         |             |  |   |             |   |  |   |            |  



22



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



Consolidated Statement of Operations



|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|---------------------------------------------- |  | -------------------------------- | ---------- | - | ----------------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                               |  | Three Months Ended June 30, 2003 |           
|                                               |  | As PreviouslyReported            |            |   | Reclassifications |   |        | Adjustments |  |   | As Restated |  
|Revenues                                       |  | $                                | 21,721     |   |                   | $ |       |             |  | $ | (192        | ) |  | $ | 21,529     |  
|                                               |  |                                  |            |  
|Costs and expenses:                            |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Cost of revenues                               |  |                                  |           |   |                   |   | 9,252  |             |  |   |            |   |  |   | 9,252      |  
|Sales and marketing                            |  |                                  | 13,109     |   |                   |   | (8,484 | )           |  |   | 131         |   |  |   | 4,756      |  
|Product and technology development             |  |                                  | 4,454      |   |                   |   | (840   | )           |  |   | 128         |   |  |   | 3,742      |  
|General and administrative                     |  |                                  | 3,106      |   |                   |   | 63     |             |  |   | 214         |   |  |   | 3,383      |  
|Amortization of acquired intangible assets     |  |                                  |           |   |                   |   | 9      |             |  |   |            |   |  |   | 9          |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Total costs and expenses                       |  |                                  | 20,669     |   |                   |   |       |             |  |   | 473         |   |  |   | 21,142     |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Income from operations                         |  |                                  | 1,052      |   |                   |   |       |             |  |   | (665        | ) |  |   | 387        |  
|Interest income                                |  |                                  | 61         |   |                   |   |       |             |  |   |            |   |  |   | 61         |  
|Income (loss) in equity investees              |  |                                  | 14         |   |                   |   |       |             |  |   | (233        | ) |  |   | (219       | )
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Income before income taxes                     |  |                                  | 1,127      |   |                   |   |       |             |  |   | (898        | ) |  |   | 229        |  
|Provision for income taxes                     |  |                                  | (5         | ) |                   |   |       |             |  |   |            |   |  |   | (5         | )
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                                | 1,122      |   |                   | $ |       |             |  | $ | (898        | ) |  | $ | 224        |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Net income per share:                          |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Basic                                          |  | $                                | 0.04       |   |                   | $ |       |             |  | $ | (0.03       | ) |  | $ | 0.01       |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Diluted                                        |  | $                                | 0.03       |   |                   | $ |       |             |  | $ | (0.02       | ) |  | $ | 0.01       |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|                                               |  |                                  |            |  
|Shares used in computing net income per share: |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Basic                                          |  |                                  | 31,814,364 |   |                   |   |       |             |  |   |            |   |  |   | 31,814,364 |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Diluted                                        |  |                                  | 33,950,507 |   |                   |   |       |             |  |   | 18,012      |   |  |   | 33,968,519 |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|                                               |  |                                  |            |  
|Comprehensive income:                          |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                                | 1,122      |   |                   | $ |       |             |  | $ | (898        | ) |  | $ | 224        |  
|Translation adjustment                         |  |                                  | 36         |   |                   |   |       |             |  |   | 488         |   |  |   | 524        |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  
|Comprehensive income                           |  | $                                | 1,158      |   |                   | $ |       |             |  | $ | (410        | ) |  | $ | 748        |  
|                                               |  |                                  |            |   |                   |   |        |             |  |   |             |   |  |   |            |  



23



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



Consolidated Statement of Operations



|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|---------------------------------------------- |  | ------------------------------ | ---------- | - | ----------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                               |  | Six Months Ended June 30, 2004 |           
|                                               |  | As PreviouslyReported          |            |   | Reclassifications |   |         | Adjustments |  |   | As Restated |  
|Revenues                                       |  | $                              | 56,272     |   |                   | $ |        |             |  | $ | (532        | ) |  | $ | 55,740     |  
|                                               |  |                                |            |  
|Costs and expenses:                            |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Cost of revenues                               |  |                                |           |   |                   |   | 23,416  |             |  |   |            |   |  |   | 23,416     |  
|Sales and marketing                            |  |                                | 33,582     |   |                   |   | (21,299 | )           |  |   | 800         |   |  |   | 13,083     |  
|Product and technology development             |  |                                | 11,519     |   |                   |   | (1,877  | )           |  |   | 168         |   |  |   | 9,810      |  
|General and administrative                     |  |                                | 8,101      |   |                   |   | (600    | )           |  |   | 32          |   |  |   | 7,533      |  
|Amortization of acquired intangible assets     |  |                                |           |   |                   |   | 360     |             |  |   | (29         | ) |  |   | 331        |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Total costs and expenses                       |  |                                | 53,202     |   |                   |   |        |             |  |   | 971         |   |  |   | 54,173     |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Income from operations                         |  |                                | 3,070      |   |                   |   |        |             |  |   | (1,503      | ) |  |   | 1,567      |  
|Interest income                                |  |                                | 405        |   |                   |   |        |             |  |   |            |   |  |   | 405        |  
|Loss in equity investees                       |  |                                | (35        | ) |                   |   |        |             |  |   | (49         | ) |  |   | (84        | )
|Foreign currency exchange gain                 |  |                                | 20         |   |                   |   |        |             |  |   |            |   |  |   | 20         |  
|Other income                                   |  |                                | 1          |   |                   |   |        |             |  |   |            |   |  |   | 1          |  
|Minority interest                              |  |                                | (62        | ) |                   |   |        |             |  |   | 15          |   |  |   | (47        | )
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Income before income taxes                     |  |                                | 3,399      |   |                   |   |        |             |  |   | (1,537      | ) |  |   | 1,862      |  
|Provision for income taxes                     |  |                                | (69        | ) |                   |   |        |             |  |   | (131        | ) |  |   | (200       | )
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                              | 3,330      |   |                   | $ |        |             |  | $ | (1,668      | ) |  | $ | 1,662      |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income per share:                          |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Basic                                          |  | $                              | 0.08       |   |                   | $ |        |             |  | $ | (0.04       | ) |  | $ | 0.04       |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Diluted                                        |  | $                              | 0.08       |   |                   | $ |        |             |  | $ | (0.04       | ) |  | $ | 0.04       |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|                                               |  |                                |            |  
|Shares used in computing net income per share: |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Basic                                          |  |                                | 39,733,775 |   |                   |   |        |             |  |   |            |   |  |   | 39,733,775 |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Diluted                                        |  |                                | 43,643,296 |   |                   |   |        |             |  |   | 13,486      |   |  |   | 43,656,782 |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|                                               |  |                                |            |  
|Comprehensive income:                          |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                              | 3,330      |   |                   | $ |        |             |  | $ | (1,668      | ) |  | $ | 1,662      |  
|Translation adjustment                         |  |                                | (88        | ) |                   |   |        |             |  |   | 155         |   |  |   | 67         |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Comprehensive income                           |  | $                              | 3,242      |   |                   | $ |        |             |  | $ | (1,513      | ) |  | $ | 1,729      |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  



24



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



Consolidated Statement of Operations



|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|---------------------------------------------- |  | ------------------------------ | ---------- | - | ----------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                               |  | Six Months Ended June 30, 2003 |           
|                                               |  | As PreviouslyReported          |            |   | Reclassifications |   |         | Adjustments |  |   | As Restated |  
|Revenues                                       |  | $                              | 41,974     |   |                   | $ |        |             |  | $ | (303        | ) |  | $ | 41,671     |  
|                                               |  |                                |            |  
|Costs and expenses:                            |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Cost of revenues                               |  |                                |           |   |                   |   | 17,915  |             |  |   |            |   |  |   | 17,915     |  
|Sales and marketing                            |  |                                | 25,967     |   |                   |   | (16,617 | )           |  |   | 263         |   |  |   | 9,613      |  
|Product and technology development             |  |                                | 8,316      |   |                   |   | (1,612  | )           |  |   | 128         |   |  |   | 6,832      |  
|General and administrative                     |  |                                | 5,891      |   |                   |   | 305     |             |  |   | 242         |   |  |   | 6,438      |  
|Amortization of acquired intangible assets     |  |                                |           |   |                   |   | 9       |             |  |   |            |   |  |   | 9          |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Total costs and expenses                       |  |                                | 40,174     |   |                   |   |        |             |  |   | 633         |   |  |   | 40,807     |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Income from operations                         |  |                                | 1,800      |   |                   |   |        |             |  |   | (936        | ) |  |   | 864        |  
|Interest income                                |  |                                | 130        |   |                   |   |        |             |  |   |            |   |  |   | 130        |  
|Income (loss) in equity investees              |  |                                | 67         |   |                   |   |        |             |  |   | (291        | ) |  |   | (224       | )
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Income before income taxes                     |  |                                | 1,997      |   |                   |   |        |             |  |   | (1,227      | ) |  |   | 770        |  
|Provision for income taxes                     |  |                                | (7         | ) |                   |   |        |             |  |   |            |   |  |   | (7         | )
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                              | 1,990      |   |                   | $ |        |             |  | $ | (1,227      | ) |  | $ | 763        |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income per share:                          |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Basic                                          |  | $                              | 0.06       |   |                   | $ |        |             |  | $ | (0.04       | ) |  | $ | 0.02       |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Diluted                                        |  | $                              | 0.06       |   |                   | $ |        |             |  | $ | (0.04       | ) |  | $ | 0.02       |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Shares used in computing net income per share: |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Basic                                          |  |                                | 31,525,905 |   |                   |   |        |             |  |   |            |   |  |   | 31,525,905 |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Diluted                                        |  |                                | 33,138,530 |   |                   |   |        |             |  |   | 18,012      |   |  |   | 33,156,542 |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Comprehensive income:                          |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Net income                                     |  | $                              | 1,990      |   |                   | $ |        |             |  | $ | (1,227      | ) |  | $ | 763        |  
|Translation adjustment                         |  |                                | 63         |   |                   |   |        |             |  |   | 597         |   |  |   | 660        |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  
|Comprehensive income                           |  | $                              | 2,053      |   |                   | $ |        |             |  | $ | (630        | ) |  | $ | 1,423      |  
|                                               |  |                                |            |   |                   |   |         |             |  |   |             |   |  |   |            |  



25



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except share and 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 six months ended June 30, 2004:



Consolidated Statements of Cash Flows



|                                                                                  |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ----------- | - | ------- | --------------------- |  | - | ----------- | - |  | - | ------ | -
|                                                                                  |  | Six Months Ended June 30, |        
|                                                                                  |  | 2004                      |         |   | 2003        |  
|                                                                                  |  | As PreviouslyReported     |         |   | As Restated |   |         | As PreviouslyReported |  |   | As Restated |  
|Cash flows from operating activities:                                             |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Net income                                                                        |  | $                         | 3,330   |   |             | $ | 1,662   |                       |  | $ | 1,990       |   |  | $ | 763    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Non-cash charges:                                                                 |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Depreciation and amortization                                                     |  |                           | 1,788   |   |             |   | 801     |                       |  |   | 1,228       |   |  |   | 672    |  
|Amortization of capitalized internal use software                                 |  |                           |        |   |             |   | 540     |                       |  |   |            |   |  |   | 541    |  
|Amortization of acquired intangible assets                                        |  |                           |        |   |             |   | 418     |                       |  |   |            |   |  |   | 15     |  
|Provision for (recovery of) bad debt                                              |  |                           | (240    | ) |             |   | (240    | )                     |  |   | 314         |   |  |   | 314    |  
|Provision for customer credits                                                    |  |                           | 584     |   |             |   | 584     |                       |  |   | 1,294       |   |  |   | 1,294  |  
|Loss on disposal of property and equipment                                        |  |                           | 20      |   |             |   | 20      |                       |  |   |             |   |  |   |       |  
|Stock-based compensation                                                          |  |                           |        |   |             |   |        |                       |  |   | 51          |   |  |   | 51     |  
|(Income) loss in equity investees                                                 |  |                           | 35      |   |             |   | 84      |                       |  |   | (67         | ) |  |   | 224    |  
|Minority interest                                                                 |  |                           | 62      |   |             |   | 47      |                       |  |   |            |   |  |   |       |  
|Changes in assets and liabilities, excluding effect of acquisitions:              |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Accounts Receivable                                                               |  |                           | (1,457  | ) |             |   | (1,243  | )                     |  |   | (2,289      | ) |  |   | (2,148 | )
|Prepaid expenses and other current assets                                         |  |                           | (722    | ) |             |   | (423    | )                     |  |   | 1,536       |   |  |   | 1,895  |  
|Other assets                                                                      |  |                           | 13      |   |             |   | 13      |                       |  |   | 23          |   |  |   | 23     |  
|Accounts payable                                                                  |  |                           | 1,082   |   |             |   | 1,637   |                       |  |   | 449         |   |  |   | 639    |  
|Accrued expenses                                                                  |  |                           | (1,639  | ) |             |   | (1,362  | )                     |  |   | (1,022      | ) |  |   | (1,047 | )
|Deferred revenues                                                                 |  |                           | (594    | ) |             |   | (524    | )                     |  |   | 66          |   |  |   | 208    |  
|Customer deposits                                                                 |  |                           |        |   |             |   |        |                       |  |   | (76         | ) |  |   | (76    | )
|Accrued domestic restructuring                                                    |  |                           | (90     | ) |             |   | (90     | )                     |  |   | (126        | ) |  |   | (126   | )
|Accrued international licensee liabilities                                        |  |                           | (1,541  | ) |             |   | (1,541  | )                     |  |   |            |   |  |   |       |  
|Other current liabilities                                                         |  |                           | 60      |   |             |   | 307     |                       |  |   | 24          |   |  |   | 153    |  
|                                                                                  |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Net cash provided by operating activities                                         |  |                           | 691     |   |             |   | 690     |                       |  |   | 3,395       |   |  |   | 3,395  |  
|                                                                                  |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Cashflows from investing activities:                                              |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Acquisitions of businesses, net of cash acquired                                  |  |                           | (20,630 | ) |             |   | (20,631 | )                     |  |   | (4,952      | ) |  |   | (4,952 | )
|Sales and maturities of short-term and long-term investments                      |  |                           | 3,991   |   |             |   | 17,991  |                       |  |   |            |   |  |   |       |  
|Purchases of short-term and long-term investments                                 |  |                           | (18,000 | ) |             |   | (39,500 | )                     |  |   |            |   |  |   |       |  
|Redemption of long-term investments                                               |  |                           | 9,000   |   |             |   | 9,000   |                       |  |   |            |   |  |   |       |  
|Consolidation of Autobytel.Europe cash balance                                    |  |                           | 10,425  |   |             |   |        |                       |  |   |            |   |  |   |       |  
|Restricted cash                                                                   |  |                           |        |   |             |   | 2,038   |                       |  |   |            |   |  |   | 28     |  
|Purchases of property and equipment                                               |  |                           | (923    | ) |             |   | (923    | )                     |  |   | (145        | ) |  |   | (145   | )
|                                                                                  |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Net cash used in investing activities                                             |  |                           | (16,137 | ) |             |   | (32,025 | )                     |  |   | (5,097      | ) |  |   | (5,069 | )
|                                                                                  |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  



26



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



|                                                     |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|---------------------------------------------------- |  | ------------------------- | ------- | - | ----------- | - | ------- | --------------------- |  | - | ----------- | - |  | - | ------ | -
|                                                     |  | Six Months Ended June 30, |        
|                                                     |  | 2004                      |         |   | 2003        |  
|                                                     |  | As PreviouslyReported     |         |   | As Restated |   |         | As PreviouslyReported |  |   | As Restated |  
|Cashflows from financing activities:                 |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Payments of capital lease obligations                |  | $                         | (225    | ) |             | $ | (225    | )                     |  | $ | (8          | ) |  | $ | (8     | )
|Net proceeds from sale of common stock               |  |                           | 3,657   |   |             |   | 3,657   |                       |  |   | 25,809      |   |  |   | 25,809 |  
|                                                     |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Net cash provided by financing activities            |  |                           | 3,432   |   |             |   | 3,432   |                       |  |   | 25,801      |   |  |   | 25,801 |  
|                                                     |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Effect of exchange rates on cash                     |  |                           | (164    | ) |             |   |        |                       |  |   | 63          |   |  |   | 63     |  
|                                                     |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Net increase (decrease) in cash and cash equivalents |  |                           | (12,178 | ) |             |   | (27,903 | )                     |  |   | 24,162      |   |  |   | 24,190 |  
|Cash and cash equivalents, beginning of period       |  |                           | 51,643  |   |             |   | 45,643  |                       |  |   | 27,571      |   |  |   | 27,543 |  
|                                                     |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Cash and cash equivalents, end of period             |  | $                         | 39,465  |   |             | $ | 17,740  |                       |  | $ | 51,733      |   |  | $ | 51,733 |  
|                                                     |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Supplemental disclosure of cash flow information:    |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Cash paid during the period for income taxes         |  | $                         | 69      |   |             | $ | 69      |                       |  | $ | 7           |   |  | $ | 7      |  
|                                                     |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  
|Cash paid (refunded) during the period for interest  |  | $                         | (1      | ) |             | $ | (1      | )                     |  | $ | 2           |   |  | $ | 2      |  
|                                                     |  |                           |         |   |             |   |         |                       |  |   |             |   |  |   |        |  



The following
describes restatement items which affects the consolidated financial statements for the three and six months ended June 30, 2004 and 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 for the six months ended June 30, 2004 and for the three months and six months ended June 30, 2003. Other current liabilities increased at June 30, 2004 and December 31, 2003, respectively.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credits issued to customers were inappropriately reversed and recognized as 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 June 30, 2004 and 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 the three months ended June 30, 2003. As a result, Autobytel increased other current liabilities at June 30, 2004 and 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 deferred revenue at June 30, 2004 and December 31,
2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



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 accounts receivable at June 30, 2004 and
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 June 30, 2004 and December 31, 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advertising revenue was not recognized in the period when earned and as a result deferred website advertising revenue was overstated at June 30, 2004. As a result, Autobytel
increased advertising revenue for the three months and six months ended June 30, 2004. Additionally, deferred revenue decreased at June 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inappropriate recognition of revenue in the second fiscal quarter of 2004 for advertising services. Autobytel determined that these revenues should not be recognized due to
insufficient evidence that an arrangement exists and collectibility cannot be reasonably assured. As a result, Autobytel decreased advertising revenue for the three months and six months ended June 30, 2004 and decreased accounts receivable at June
30, 2004
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 increased prepaid expenses and other current assets and decreased accrued expenses at June 30, 2004 and 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 increased sales and marketing expense for the six months ended June 30, 2004. Additionally, accounts payable decreased 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 six months ended June 30, 2003, and decreased them for the three months and six months ended June 30, 2004. Additionally, accrued expenses increased at June 30,
2004 and 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 six months ended
June 30, 2003 and increased it for the six months ended June 30, 2004. Additionally, accounts payable at December 31, 2003 decreased.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



| |  |  | 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 three months and six months ended June 30, 2003 and sales and
marketing, product and technology development and general and administrative expenses increased for the six months ended June 30, 2004. 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 increased sales and marketing expense for the three months and six months ended June 30, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accrued liabilities associated with two inactive vendors were prematurely derecognized and recorded as a reduction of expenses in the first fiscal quarter of 2004. As a result,
Autobytel increased sales and marketing, product and technology development and general and administrative expenses for the six months ended June 30, 2004. Additionally, accounts payable at June 30, 2004 increased.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 decreased accrued expenses at June 30, 2004
and December 31, 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 increased sales and marketing, product and technology development and general and administrative expenses for the three months and six months ended June 30, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Equity investment



| |  |  | Autobytel.Europe recognized certain licensing revenue in 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 cannot be reasonably assured. As a result, Autobytel decreased data, application and other revenue and minority
interest for the three months and six months ended June 30, 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A series of loans made by Autobytel.Europe was inappropriately recorded at cost instead of net realizable value. As a result, Autobytel increased the loss in equity investee and
comprehensive income for the six months ended June 30, 2004 and decreased investment in equity investee, minority interest and accumulated other comprehensive income at June 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



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 three months and six months ended June 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 fee revenue for the three months and six months ended June 30, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Autobytel inappropriately recognized as revenue certain delivery of purchase requests to two customers during the four fiscal quarters ended June 30, 2004. As a result, Autobytel
decreased lead fees for the three months and six months ended June 30, 2004, respectively. Additionally, other current liabilities increased at June 30, 2004 and December 31, 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lead fees earned in 1999, 2000, and 2001 were inappropriately recognized in the second quarter of 2003. As a result, Autobytel decreased lead fees for the three and six months ended
June 30, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Autobytel recognized CRM services revenue for iManager, 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 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 cannot be reasonably assured. As a result, Autobytel decreased data, application and other revenue
and minority interest. 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 three months and six months ended June 30, 2003. The cumulative impact of this adjustment increased beginning accumulated deficit at January 1, 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | State income tax expense was under-estimated in the first and second fiscal quarters of 2004. As a result, Autobytel increased the provision for income taxes for the three months
and six months ended June 30, 2004. Additionally, accrued expenses at June 30, 2004 increased.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. Additionally, the amortization of acquired intangible assets was overstated for the
three months and six months ended June 30, 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The common stock value for the shares issued for the acquisitions of iDriveonline, Inc. and Stoneage Corporation was inappropriately calculated. As a result, Autobytel increased
goodwill and additional paid-in capital as of June 30, 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 six months ended June 30, 2004 and 2003. As a result, Autobytel increased the number of shares used in computing diluted net income per share.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



| |  |  | Certain held-to-maturity investments were inappropriately classified as long-term investments when the contractual maturity is to occur within the next fiscal year. As a result,
Autobytel increased short-term investments and decreased long-term investments as of June 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



On March 31, 2004, Autobytel adopted the provisions of FIN 46R and determined it was the primary beneficiary of Autobytel.Europe. As a result, beginning March 2004, Autobytel consolidated in its financial statements. As of June 30, 2004,
the assets and liabilities of Autobytel.Europe were as follows:



|                                           |  |                   |        |  
|------------------------------------------ |  | ----------------- | ------ | -
|                                           |  | As ofJune 30,2004 |       
|Cash and cash equivalents                  |  | $                 | 8,225  |  
|Other current assets                       |  |                   | 93     |  
|Non-current assets                         |  |                   | 1      |  
|Current liabilities                        |  |                   | (235   | )
|Minority Interest                          |  |                   | (4,123 | )
|                                           |  |                   |        |  
|Autobytels investment in Autobytel.Europe |  | $                 | 3,961  |  
|                                           |  |                   |        |  



Autobytel.Europes revenue and expenses are included in Autobytels consolidated results of operations beginning April 1, 2004.



5. Acquisitions



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.



31



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Amounts in thousands, except share and 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 product. 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 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                                          |  |   | 11,422 |  
|Intangible assets                                 |  |   | 600    |  
|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 recorded as goodwill in the amount of $11,422. The amount of goodwill is subject to adjustment as additional information regarding the estimated fair
value of the net tangible and intangible assets becomes available. 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 customer relationships and are amortized over an estimated useful life of three years. 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.



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.



32



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



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 is anticipated to expand Autobytels market share of new car buyers, increase the number of
purchase requests processed through Autobytel in 2004, and add retail and enterprise dealer relationships to Autobytel. The acquisition will also add the Car.com finance request business to Autobytel. These factors contributed to a purchase price in
excess of 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. The acquisition may modestly benefit Autobytels
advertising business by adding the Car.com automotive portal to Autobytels advertising network of sites.



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. As of June 30, 2004, a $711 liability was recorded to
reflect this obligation, using the value described below. The acquisition has been accounted for using the purchase method of accounting.



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                                |  |   | 1,045  |  
|Non-current assets                                  |  |   | 888    |  
|Goodwill                                            |  |   | 42,834 |  
|Intangible assets                                   |  |   | 4,275  |  
|Liabilities:                                        |  |   |        |  
|Current liabilities                                 |  |   | (3,232 | )
|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 recorded as goodwill in the amount of $42,834. The amount of goodwill is subject to adjustment as additional information regarding the estimated fair
value of the net tangible and intangible assets becomes



33



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



available. 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 customer relationships which are amortized over an estimated useful life of three years and the Car.com domain name 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%.



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.



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.



|                      |  |                            |        |                          |   |        |  |            |        |  |   |       
|--------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---------- | ------ |  | - | ------
|                      |  | (Restated)                 |        | (Restated)              
|                      |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                      |  | 2004                       |        | 2003                     |   | 2004   |  | 2003      
|                      |  |                            |        | (Restated)               |   |        |  | (Restated)
|Revenue               |  | $                          | 32,541 |                          | $ | 27,846 |  | $          | 65,129 |  | $ | 54,916
|Net income            |  | $                          | 1,844  |                          | $ | 267    |  | $          | 2,921  |  | $ | 1,246 
|Net income per share: |  |                            |        |                          |   |        |  |            |        |  |   |       
|Basic                 |  | $                          | 0.04   |                          | $ | 0.01   |  | $          | 0.07   |  | $ | 0.04  
|Diluted               |  | $                          | 0.04   |                          | $ | 0.01   |  | $          | 0.06   |  | $ | 0.03  



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 June 30, 2004         
|                                  |  | AverageEstimatedUseful Lives |  | Gross CarryingAmount |       | AccumulatedAmortization |   |      | Net Amount
|Developed technology              |  | 2 years                      |  | $                    | 220   |                         | $ | (80  | )          |  | $ | 140  
|Customer relationships (restated) |  | 3 years                      |  |                      | 4,375 |                         |   | (414 | )          |  |   | 3,961
|Domain name                       |  | 5 years                      |  |                      | 700   |                         |   | (29  | )          |  |   | 671  
|                                  |  |                              |  |                      |       |                         |   |      |            |  |   |      
|Total (restated)                  |  |                              |  | $                    | 5,295 |                         | $ | (523 | )          |  | $ | 4,772
|                                  |  |                              |  |                      |       |                         |   |      |            |  |   |      



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



34



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



Amortization expense related to intangible assets was $373 and $418 for the three months and six
months ended June 30, 2004, respectively, and $15 for the three months and six months ended June 30, 2003. Amortization expense for the remaining lives of the intangible assets is estimated to be as follows:



|                                    |  |                     |      
|----------------------------------- |  | ------------------- | -----
|                                    |  | AmortizationExpense
|Six months ending December 31, 2004 |  | $                   | 830  
|2005                                |  | $                   | 1,645
|2006                                |  | $                   | 1,579
|2007                                |  | $                   | 537  
|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 $42,834 and $11,422, 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        
|             |  | June 30, 2004 |        | December 31,2003
|             |  | (Restated)    |        |                 
|Autoweb      |  | $             | 8,367  |                  | $ | 8,367 
|AVV          |  |               | 8,463  |                  |   | 8,463 
|Stoneage     |  |               | 42,834 |                  |   |      
|iDriveonline |  |               | 11,422 |                  |   |      
|             |  |               |        |                  |   |       
|             |  | $             | 71,086 |                  | $ | 16,830
|             |  |               |        |                  |   |       



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 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



35



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



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. 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 and for Autobytel to undertake certain responsibilities,
including agreeing to assign away, not assert, or release certain potential claims Autobytel may have against its underwriters. 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. Therefore, Autobytel does not expect that the settlement will involve any payment by Autobytel. The settlement agreement has not yet been
executed. The settlement agreement is subject to approval by the court, which cannot be assured. Autobytel cannot determine whether or when a settlement will occur or be finalized and whether the outcome of the litigation will have a material impact
on Autobytels 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 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. 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 and for Autoweb to undertake certain responsibilities, including agreeing to assign away, not
assert, or release certain potential claims Autoweb may have against its underwriters. 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. Therefore, Autoweb does not expect that the settlement will involve any payment by



36



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



Autoweb. The settlement agreement has not yet been executed. The settlement agreement is subject to approval by the court, which cannot be assured. Autobytel
cannot determine whether or when a settlement will occur or be finalized and whether the outcome of the litigation will 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 financial statements.



From time to time, Autobytel is involved in other litigation matters relating to claims arising out of the ordinary course of business. Autobytel believes
that there are no claims or actions pending or threatened against it, the ultimate disposition of which would have a material adverse effect on 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 June 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 $168. As of the original filing, Autobytel expected the remaining charges to be paid in 2004. Autobytel expects the remaining charges to be paid in 2005. The
remaining accrued domestic restructuring liabilities related to the 2002 charges as of June 30, 2004 were as follows:



|                 |  |                       |     |              |   |     |                     |  |   |    
|---------------- |  | --------------------- | --- | ------------ | - | --- | ------------------- |  | - | ---
|                 |  | As ofDecember 31,2003 |     | CashPayments |   |     | As of June 30, 2004
|Lease obligation |  | $                     | 258 |              | $ | (90 | )                   |  | $ | 168
|                 |  |                       |     |              |   |     |                     |  |   |    



10. 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 salary 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 assigns 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.



37



---

AUTOBYTEL INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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

(unaudited)



11. Subsequent Event



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 will receive rights to purchase shares of Series A Junior Participating Preferred Stock. The rights will be 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, 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 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.



38



---

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/A. 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/A.



The following discussion and analysis gives effect to the restatements
described above in the Explanatory Note to this Form 10-Q/A 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 and AutoSite.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.



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 continue experiencing growth in revenue from acquisitions. Revenues from our existing business were relatively flat in the second quarter of 2004 compared to the first quarter of 2004 and included a decline in lead fee revenues from our
enterprise relationships due to a reduction in the number of purchase requests accepted by an automotive manufacturer and an increase in revenues from our CRM services business. We expect revenues from our existing business to grow in the second
half of 2004. In addition, in the past several quarters 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 other revenue categories, in particular,
CRM services. Our current business strategy is to grow our existing business and make acquisitions.



In the second quarter of 2004, we incurred approximately $1.0 million in costs related to the integration of the iDriveonline and Stoneage acquisitions
primarily for transition salaries, severance, retention bonuses and travel. We expect to incur an additional $1.0 million in integration related costs in the second half of 2004, a majority of which is anticipated to be incurred in the third quarter
of 2004. 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. We expect most of the remaining costs to be related
to the integration of technology.



As of June 30, 2004, we had
$46.2 million in domestic cash, cash equivalents, and short-term and long-term investments.



We generated $0.1 million in cash from operations in the second quarter of 2004. Autobytel.Europe used $2.0 million of cash in operations in the second quarter of 2004. Cash used in operations by Autobytel.Europe was
for $1.5 million in payments to Autobytel.Europe licensees, $0.3 million in payments to former shareholders for amounts due under agreements entered into in March 2002 and $0.2 million in other operating costs. For the six months ended June 30,
2004, we generated $0.7 million in cash from operations. We expect to continue generating cash from operations for the remainder of 2004.



39



---

In the second quarter of 2004, we added approximately 1,000 retail dealer relationships, of which,
approximately 900 were Car.com dealer relationships. We also added approximately 400 CRM customer relationships, of which, approximately 200 were iDriveonline CRM customer relationships. We expect to continue to add retail dealer and CRM customer
relationships for the remainder of 2004.



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 March 31, 2004, our lead referral dealer
relationships consisted of approximately 5,500 retail dealer relationships (including 104 suspended dealers), relationships with major dealer groups representing approximately 580 enterprise dealer relationships, and four direct relationships
encompassing 15 brands with automotive manufacturers or their automotive buying service affiliates representing up to approximately 18,200 enterprise dealer relationships As of June 30, 2004, the CRM customer relationships consisted of approximately
2,690 WebControl and approximately 680 RPM customer relationships. As of March 31, 2004, the CRM customer relationships consisted of approximately 2,540 WebControl and approximately 450 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 number of
dealer and customer relationships as of June 30, 2004 and March 31, 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 this adoption, we consolidated in our financial statements at June 30, 2004, approximately $8.2 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 classified our revenue presentation to better align reported numbers and metrics with internal operational measures and to provide increased
understanding and transparency for investors. Prior to January 1, 2004, we 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 revenue as a result of the reclassification.



Lead fees consist of car buying purchase request fees and finance request fees.



Fees for purchase requests are paid by retail dealers, enterprise dealers and automotive manufacturers 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



40



---

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 customers participating in our
car buying referral networks each month.



Generally, our dealer
contracts have terms ranging from 90 days to one year and are terminable on 30 days notice by either party. As of June 30, 2004, a major manufacturer in our program accounted for up to approximately 9,800 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 June 30, 2004 and 2003, lead fees were $21.8 million and $16.1 million, or 70% and 75% of total revenues, respectively. We
expect to derive a majority of our revenues in the foreseeable future from retail dealers, enterprise dealers and automotive manufacturers who participate in our online car buying referral networks.



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. Using the targeted nature of Internet advertising, manufacturers can advertise their brands effectively on any of our five Web sites
by targeting advertisements to consumers who are researching vehicles, thereby increasing the likelihood of influencing their purchase decisions. Beginning on April 15, 2004, advertising revenues include fees paid by automotive manufacturers who
advertise on our Car.com Web site.



Revenues from advertising
were $3.2 million and $2.9 million in the second quarter of 2004 and 2003, or 10% and 14% of total revenues, respectively. With further selling of our advertising inventory, an increase in Internet advertising spending by automotive manufacturers
and the acquisition of Stoneage in April 2004, we anticipate that our advertising revenues in 2004 will increase compared to 2003.



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 Retention Performance Marketing (RPM) and iDriveonline, our customer loyalty and retention marketing programs, WebControl System (WebControl), our customer lead management product, 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 $5.0 million and $1.3 million, or 16% and 6% of total revenues, in the
second quarter of 2004 and 2003, respectively. We expect to develop new RPM product technology in 2005.



41



---

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 $1.2 million for both the second quarters of 2004 and 2003, or 4% and 5%
of total revenues, in the second quarters of 2004 and 2003, respectively. 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
2004 compared to 2003.



Effective with the filing of this
Amendment on Form 10-Q/A, 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.



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. The implementation of these quality enhancing processes allows us to deliver high quality purchase requests to our 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 expect to apply QVS and custom
filters and validation processes to Car.com purchase requests by the end of 2004.



We delivered approximately 1.1 million and 0.8 million purchase requests through our online systems to retail and enterprise dealers in the second quarter of 2004 and 2003, respectively, including 0.3 million purchase
requests delivered by Car.com in the second 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 second
quarter of 2004 and 2003, respectively. Purchase requests delivered to retail dealers in the second quarter of 2004 increased by 0.1 million, or 24%, compared to the second quarter of 2003, due to the addition of new retail dealer relationships,
including Car.com relationships. Purchase requests delivered to enterprise dealers in the second quarter of 2004 increased by 0.2 million, or 84%, compared to the second quarter of 2003, due to the addition of new enterprise relationships, the
expansion of our existing relationships and the addition of Car.com relationships. We expect the number of purchase requests we deliver to our retail and enterprise dealers to increase in 2004 when compared to 2003.



We also delivered approximately 0.1 million finance requests in the second
quarter of 2004 as a result of the Car.com acquisition.



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 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 our customers and to inform our retail dealers about their effectiveness using surveys completed by our purchase-intending customers.



42



---

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 second quarter of 2004, we continued to achieve net additions to our number of dealer relationships. However, we cannot assure that we will be able
to continue to reduce our 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.



Results of Operations



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



|                                           |  |                                       |   |  |                                    |   |  |      |   |  |      |  
|------------------------------------------ |  | ------------------------------------- | - |  | ---------------------------------- | - |  | ---- | - |  | ---- | -
|                                           |  | Three Months EndedJune 30, (Restated) |   |  | Six Months EndedJune 30,(Restated) |  
|                                           |  | 2004                                  |   |  | 2003                               |   |  | 2004 |   |  | 2003 |  
|Revenues                                   |  | 100                                   | % |  | 100                                | % |  | 100  | % |  | 100  | %
|                                           |  |                                       |   | 
|Costs and expenses:                        |  |                                       |   |  |                                    |   |  |      |   |  |      |  
|Cost of revenues                           |  | 41                                    |   |  | 43                                 |   |  | 42   |   |  | 43   |  
|Sales and marketing                        |  | 23                                    |   |  | 22                                 |   |  | 23   |   |  | 23   |  
|Product and technology development         |  | 18                                    |   |  | 17                                 |   |  | 18   |   |  | 17   |  
|General and administrative                 |  | 15                                    |   |  | 16                                 |   |  | 14   |   |  | 15   |  
|Amortization of acquired intangible assets |  |                                      |   |  |                                   |   |  |     |   |  |     |  
|                                           |  |                                       |   |  |                                    |   |  |      |   |  |      |  
|Total costs and expenses                   |  | 97                                    |   |  | 98                                 |   |  | 97   |   |  | 98   |  
|                                           |  |                                       |   |  |                                    |   |  |      |   |  |      |  
|Income from operations                     |  | 3                                     |   |  | 2                                  |   |  | 3    |   |  | 2    |  
|Other income (expense)                     |  | 1                                     |   |  | (1                                 | ) |  |     |   |  |     |  
|                                           |  |                                       |   |  |                                    |   |  |      |   |  |      |  
|Income before income taxes                 |  | 4                                     |   |  | 1                                  |   |  | 3    |   |  | 2    |  
|Provision for income taxes                 |  |                                      |   |  |                                   |   |  |     |   |  |     |  
|                                           |  |                                       |   |  |                                    |   |  |      |   |  |      |  
|Net income                                 |  | 4                                     | % |  | 1                                  | % |  | 3    | % |  | 2    | %
|                                           |  |                                       |   |  |                                    |   |  |      |   |  |      |  



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



|                             |  |                            |        |                           |   |          |  |          |        |  |   |       
|---------------------------- |  | -------------------------- | ------ | ------------------------- | - | -------- |  | -------- | ------ |  | - | ------
|                             |  | Three Months EndedJune 30, |        | Six Months Ended June 30,
|                             |  | 2004                       |        | 2003                      |   | 2004     |  | 2003    
|                             |  | Restated                   |        | Restated                  |   | Restated |  | Restated
|Lead fees                    |  | $                          | 21,772 |                           | $ | 16,128   |  | $        | 38,964 |  | $ | 31,538
|Advertising                  |  |                            | 3,165  |                           |   | 2,944    |  |          | 6,267  |  |   | 5,711 
|CRM services                 |  |                            | 4,951  |                           |   | 1,307    |  |          | 7,960  |  |   | 1,952 
|Data, applications and other |  |                            | 1,234  |                           |   | 1,150    |  |          | 2,549  |  |   | 2,470 
|                             |  |                            |        |                           |   |          |  |          |        |  |   |       
|Total revenues               |  | $                          | 31,122 |                           | $ | 21,529   |  | $        | 55,740 |  | $ | 41,671
|                             |  |                            |        |                           |   |          |  |          |        |  |   |       



43



---

Three Months Ended June 30, 2004 (Restated) Compared to Three Months Ended June 30, 2003 (Restated)



Revenues. Our revenues increased by $9.6 million, or 45%, to $31.1
million in the second quarter of 2004 compared to $21.5 million in the second quarter of 2003. The increase was due to growth in lead fees, CRM services and advertising, coupled with the benefit of WebControl and ADS for a full quarter.As a
result of the acquisitions of iDriveonline and Stoneage on April 9, 2004 and April 15, 2004, respectively, revenues include $1.4 million from dealers using iDriveonlines customer loyalty and retention marketing programs and $5.2 million from
dealers using Stoneage services in the second quarter of 2004.



Lead Fees. Lead fees increased by $5.6 million, or 35%, to $21.8 million in the second quarter of 2004 compared to $16.1 million in the second 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 0.1 million in finance requests delivered to dealers, finance request intermediaries, and automotive finance companies in the second quarter of 2004 when compared to the second quarter of
2003. The increase in purchase requests was primarily delivered to Car.com retail and enterprise dealers. We expect lead fees to increase in 2004 compared to 2003 as we have added retail and enterprise dealers, including Car.com retail and
enterprise dealers. We also expect to increase the number of purchase requests we send to our dealers. We also believe that we may be able to increase fees paid per purchase request.



Advertising. Advertising revenue increased by $0.2 million, or 8%, to $3.2 million in the second quarter of 2004
compared to $2.9 million in the second quarter of 2003. The increase was primarily due to higher spending by automotive manufacturers and additional web site advertising sales to Car.com customers. With further selling of our available advertising
inventory, an increase in Internet advertising spending by automotive manufacturers and the acquisition of Stoneage in April 2004, we expect our advertising revenues to increase in 2004 compared to 2003.



CRM Services. CRM services increased by $3.6 million, or 279%, to $5.0
million in the second quarter of 2004 compared to $1.3 million in the second 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 and ADS. We expect revenues from our CRM services to increase in 2004 compared to 2003 due to an increase in RPM revenues, the addition of iDriveonline dealers in April 2004 and the benefit of WebControl and ADS for a full year.



Data, Applications and Other. Revenues from data,
applications and other in the second quarter of 2004 were relatively flat when compared to the second quarter of 2003. We expect data, applications and other to decline in 2004 compared to 2003.



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 $3.6 million or 39% to $12.9 million in the three months ended June 30, 2004 compared to $9.3 million in the three months ended June 30, 2003. This represents 41% and 43% of total revenues for the second quarter of 2004 and
2003, respectively. The increase was due to a $2.6 million increase in the costs of purchase and finance requests acquired from third parties, a $0.6 million increase in printing, production, and postage costs for our customer loyalty and retention
program, a $0.2 million increase in data content and license fees, a $0.1 million increase in personnel and related costs and a $0.1 million increase in the amortization of acquired technology. The increase in purchase request and finance request
costs was primarily



44



---

due to the increased delivery of purchase requests and finance requests 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 acquisitions of Stoneage and iDriveonline. The increase in personnel and related costs and the amortization of acquired technology was partially a
result of the acquisitions of Stoneage and iDriveonline.



Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity and 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 $2.2 million, or 47%, to $7.0 million in the second quarter of 2004 compared to $4.8 million in the second quarter of 2003. This represents 23% and 22% of total revenues for the second quarter of 2004 and 2003,
respectively. The increase was due to a $1.7 million increase in costs associated with sales and customer relationship maintenance and a $0.5 million increase in traditional advertising expenses. The increase in sales and customer relationship
maintenance and traditional advertising expenses was partially a result of the acquisition of Stoneage and iDriveonline. We expect our sales and marketing expenses as a percentage of revenues to slightly decline in 2004 compared to 2003.



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 $1.7 million, or 46%, to $5.5 million in the second quarter of 2004
compared to $3.7 million in the second quarter of 2003. This represents 18% and 17% of total revenues for the second quarter of 2004 and 2003, respectively. The increase was due to higher personnel and related costs of $1.5 million and a $0.2
million increase in telephone and connectivity costs related to our voice and data communications. The higher personnel and related costs is 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, severance and retention bonuses. We expect our product and technology development expenses as a percentage of revenues to slightly decline in 2004 compared to
2003.



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 $1.1 million, or 33%, to $4.5 million in the second quarter of 2004
compared to $3.4 million in the second quarter of 2003. This represents 15% and 16% of total revenues for the second quarter of 2004 and 2003, respectively. The increase was primarily due to $0.9 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 $0.4 million increase in public company expenses related to compliance with the Sarbanes-Oxley Act, a $0.3 million increase in other
professional fees, and $0.3 million related to an abandoned acquisition. These increases were offset by $0.4 million charged to rent expense in the second quarter of 2003 related to the relocation of our AIC operations from Westborough,
Massachusetts to our corporate office, a $0.4 million reduction in the estimated provision for bad debt and a $0.1 million decrease in other expenses. We expect our general and administrative expenses as a percentage of revenues to remain flat in
2004 compared to 2003.



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
$0.3 million in the second quarter of 2004 compared to the second quarter of 2003. The increase was primarily due to the acquisitions of iDriveonline and Stoneage.



Interest Income. In the second quarter of 2004, interest income increased by $0.1 million, to $0.2 million compared
to $0.1 million in the second quarter of 2003. The increase in interest income was due to higher cash balances in 2004 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.



45



---

Loss in Equity Investee. Loss in equity investee in the second quarter of 2003 represents our
share of loss in Autobytel.Europe prior to the adoption of FIN 46R.



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



Income Taxes. In the preparation of our 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. A nominal provision for alternative
minimum federal income taxes has been recorded as we generated taxable losses through December 31, 2002 and had nominal taxable income for the year ended December 31, 2003, which will be partially offset by net operating loss carryforwards. Our net
operating loss carryforwards expire in various years through 2022. We also have federal and state research tax credit carryforwards that expire in various years through 2022. 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 are not realizable at June 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.



Six Months Ended June 30, 2004 (Restated) Compared to Six Months Ended June 30, 2003 (Restated)



Revenues. Our revenues increased by $14.1 million, or 34%, to $55.7 million in the six months ended June 30,
2004 compared to $41.7 million for the same period in 2003. The increase was due to growth in lead fees, CRM services and advertising, coupled with the benefit of WebControl and ADS for a full six months. As a result of the acquisitions of
iDriveonline and Stoneage, revenues include $1.4 million from dealers using iDriveonlines customer loyalty and retention marketing programs and $5.2 million from dealers using Stoneage services in the six months ended June 30, 2004.



Lead Fees. Lead fees increased by $7.4 million, or 24%,
to $39.0 million in the six months ended June 30, 2004 compared to $31.5 million for the same period in 2003. The increase was due to the delivery of an additional 0.4 million purchase requests to our retail and enterprise dealers and 0.1 million
finance requests delivered to dealers, finance request intermediaries, and automotive finance companies in the six months ended June 30, 2004 when compared to the same period in 2003. The increase in purchase requests was primarily delivered to
Car.com retail and enterprise dealers. We expect lead fees to increase in 2004 compared to 2003 as we have added retail and enterprise dealers, including Car.com retail and enterprise dealers. We also expect to increase the number of purchase
requests we send to our dealers. We believe that we may be able to increase fees paid per purchase request.



Advertising. Advertising revenue increased by $0.6 million, or 10%, to $6.3 million in the six months ended June 30, 2004 compared to $5.7 million
for the same period in 2003. The increase was primarily due to higher spending by automotive manufacturers and the additional web site advertising sales to Car.com customers. With further selling of our available advertising inventory, an increase
in Internet advertising spending by automotive manufacturers and the acquisition of Stoneage in April 2004, we expect our advertising revenues to increase in 2004 compared to 2003.



CRM Services. CRM services increased by $6.0 million, or 308%, to $8.0 million in the six months ended June 30, 2004
compared to $2.0 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



46



---

WebControl products and ADS services. We expect revenues from our CRM services to increase in 2004 compared to 2003 due to an increase in RPM revenues, the
addition of iDriveonline dealers in April 2004 and the benefit of WebControl and ADS for a full year.



Data, Applications and Other. Revenues from data, applications and other in the six months ended June 30, 2004 remained relatively flat when
compared to the same period in 2003. We expect data, applications and other to decline in 2004 compared to 2003.



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 $5.5 million or 31% to $23.4 million in the six
months ended June 30, 2004 compared to $17.9 million in the six months ended June 30, 2003. This represents 42% and 43% of total revenues for the six months ended June 30, 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, a $0.9 million increase in printing, production, and postage costs for our customer loyalty and retention program, a $0.3 million increase in data content and license fees, a
$0.2 million in hosting and internet connectivity charges, a $0.2 million in compensation costs, a $0.1 million increase in depreciation and a $0.1 million increase in the amortization of acquired technology. 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 acquisitions of Stoneage and iDriveonline. The increase in amortization of acquired technology was a result of the acquisitions of Stoneage and iDriveonline.



Sales and Marketing. Sales and marketing expense increased by $3.5
million, or 36%, to $13.1 million in the six months ended June 30, 2004 compared to $9.6 million for the same period in 2003. This represents 23% of total revenues for both the six months ended June 30, 2004 and 2003. The increase was due to a $2.7
million increase in costs associated with sales and customer relationship maintenance, a $0.7 million increase in traditional advertising expenses, and a $0.1 million increase in other marketing costs. The increase in sales and customer relationship
maintenance, traditional advertising expenses, and other marketing costs was partially a result of the acquisition of Stoneage and iDriveonline. We expect our sales and marketing expenses as a percentage of revenues to slightly decline in 2004
compared to 2003.



Product and Technology Development.
Product and technology development expense increased by $3.0 million, or 44%, to $9.8 million in the six months ended June 30, 2004 compared to $6.8 million for the same period in 2003. This represents 18% and 17% of total revenues for the six
months ended June 30, 2004 and 2003, respectively. The increase was due to higher personnel and related costs of $2.7 million and a $0.3 million increase in telephone costs related to our voice communications. 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, severance and retention bonuses. We expect our
product and technology development expenses as a percentage of revenues to slightly decline in 2004 compared to 2003.



General and Administrative. General and administrative expense increased by $1.1 million, or 17%, to $7.5 million in the six months ended June 30,
2004 compared to $6.4 million for the same period in 2003. This represents 14% and 15% of total revenues for the six months ended June 30, 2004 and 2003, respectively. The increase was due to $1.2 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 $0.5 million increase in



47



---

public company expenses primarily related to compliance with the Sarbanes-Oxley Act, a $0.2 million increase in other professional fees, and $0.3 million
related to an abandoned acquisition. These increases were offset by a $0.5 million reduction in the estimated provision for bad debt, a $0.4 million charged to rent expense in 2003 related to the relocation of our AIC operations from Westborough,
Massachusetts to our corporate office, a $0.2 million decrease in legal fees and a $0.1 million decrease in insurance costs. We expect our general and administrative expenses as a percentage of revenues to remain flat in 2004 compared to 2003.



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 $0.3
million for the six months ended June 30, 2004 compared to the same period in 2003. The increase was primarily due to the acquisitions of iDriveonline and Stoneage.



Interest Income. In the six months ended June 30, 2004, interest income increased by $0.3 million, to $0.4 million
compared to $0.1 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 six months ended June 30, 2004 and 2003 represents our share of income in Autobytel.Europe prior to the adoption of FIN 46R.



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 June 30, 2004, we granted stock options to purchase 988,000 shares of common stock under our 1996 Stock Incentive Plan, 1999 Employee and Acquisition Related Stock Option Plan and Amended and Restated 2001
Restricted Stock and Option Plan. The stock options were granted at our common stock closing price on the date of grant. As of June 30, 2004, we had approximately 7.4 million outstanding stock options.



Employees



As of June 30, 2004, we had a total of 402 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 $46.2 million as of June 30, 2004, a decrease of $18.0 million in the
second quarter of 2004 primarily due to the acquisitions of Stoneage and iDriveonline in April 2004. As of June 30, 2004, we had $17.7 million in domestic cash and cash equivalents. As of June 30, 2004, restricted international cash and cash
equivalents held by Autobytel.Europe were $8.2 million for use as directed by Autobytel.Europe. Restricted international cash and cash equivalents decreased by $2.2 million in the second quarter of 2004 primarily due to payments made in April 2004
by Autobytel.Europe aggregating $1.5 million to Autobytel.Europe licensees and $0.4 million to former shareholders for amounts due under agreements entered into in March 2002. Restricted international cash and cash equivalents are not available to
us.



Net cash provided by operating activities was $0.7 million
for the six months ended June 30, 2004 compared to $3.4 million for the same period in 2003. Net cash provided by operating activities for the six months ended



48



---

June 30, 2004 resulted from net income for the period before non-cash charges and an increase in accounts payable, partially offset by an increase in
accounts receivable, prepaid expenses and other current assets coupled with a decrease in accrued expenses, deferred revenues and accrued international licensee liabilities. A $1.2 million increase in accounts receivable was due to higher billing as
a result of increased revenues. A $0.4 million increase in prepaid expenses and other current assets was primarily due to the payment of insurance premiums during the first half of 2004, offset by the amortization of the insurance premiums. A $1.4
million decrease in accrued expenses was primarily due to the payout of accrued compensation costs in the first half of 2004. A $0.5 million decrease in deferred revenue is primarily due to revenue recognized for our services provided to Stoneage
dealers that were billed prior to the acquisition of Stoneage and international license fees for the first half of 2004 that were billed in December 31, 2003. A $1.5 million decrease 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 six months ended June 30, 2003 primarily resulted from the net income for the period before non-cash
charges, a decrease in prepaid expenses and other current assets and an increase in accounts payable, partially offset by a decrease in accrued expenses and an increase in accounts receivable. The $1.9 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. A $1.0 million decrease in accrued
expenses was primarily due to the payout of accrued compensation costs in the first quarter of 2003. The $2.1 million increase in accounts receivable was due to higher billing as a result of increased revenues and significant accounts with certain
customers which were collected subsequent to June 30, 2003.



Net cash used in investing activities was $32.0 million for the six months ended June 30, 2004 and $5.1 million for the same period in 2003. Cash used in investing activities in the six months ended June 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 change in
Autobytel.Europes cash balance. Cash used in investing activities in 2003 was related to the acquisition of AVV and the purchase of property and equipment.



Net cash provided by financing activities was $3.4 million for the six months ended June 30, 2004 and $25.8 million for the
same period in 2003. Cash provided by financing activities in the six months ended June 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 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, and
| | - |  | ---------------------------------------------------------------



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



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.



49



---

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 operating expenses. Reductions in the estimated allowance for bad debts are recorded as a decrease in operating
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 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 six months ended June 30, 2004, we added $0.2 million and $0.3 million, respectively, to our domestic allowances for bad debts
and customer credits. Also during the three months and six months ended June 30, 2004, we wrote-off $0.7 million and $1.3 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 June 30, 2004, our estimated allowances for domestic bad debts and customer credits have declined to $0.8 million, or 5% of gross accounts receivable from $1.3 million, or 11%, of gross accounts
receivable, as of March 31, 2004 and from $1.8 million, or 13%, of gross accounts receivable as of December 31, 2003. We have experienced improvement in the collectibility of our accounts receivable due to vigorous collection efforts and improved
quality of our products and services.



With the adoption of FIN
46R on March 31, 2004, we consolidated Autobytel.Europe into our financial statements. As of March 31, 2004, Autobytel.Europe had an estimated allowance for bad debt of $0.8 million. In the second quarter of 2004, Autobytel.Europe wrote-off the
majority of the estimated bad debt allowance 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 allowances for bad debts and customer credits may be required and the impact on our business, results of operations or financial condition could be material.



We 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.



While we forecast and budget cash requirements, assumptions underlying the estimates may change and could have a material impact on our cash requirements.
If our uses of funds 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.



Any additional equity
financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants with respect to dividends, raising capital and other financial and operational matters which could restrict our operations or
finances. If we are unable to obtain additional financing as needed or on terms favorable to us, we may be required to reduce the scope of or discontinue our operations or delay or discontinue any expansion, which could have a material adverse
effect on our business, results of operations and financial condition.



Car.coms contractual obligations include an operating lease for its facility. As of June 30, 2004, the aggregate minimum lease payments were $0.3 million expiring on various dates through June 2005.



50



---

Recent Accounting Pronouncements



In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, which replaced the previously issued FIN 46. FIN 46R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity (i) do not have sufficient equity at risk, (ii) do not have the characteristics of a controlling financial interest, or (iii) have voting rights that are disproportionate to their economic interests and the
activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.



Under FIN 46R, we determined we were the primary beneficiary of Autobytel.Europe and were required to consolidate Autobytel.Europe in our financial
statements effective March 31, 2004. We have an ownership interest in Autobytel.Europe of 49%.



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 will be effective on July 1, 2004. We do not expect the adoption of EITF 03-1 to have a material effect on our financial position or results of operations.



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/A, 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 $152.5 million as of June 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,
| | - |  | -------------------------------------------------



51



---

| |  |  | 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 regarding the reliability of financial reporting and the preparation of financial statements 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 the Autobytel Inc. Management Report On Internal
Control Over Financial Reporting set forth in our Annual Report on Form 10-K for the period ended December 31, 2004 for



52



---

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 the Autobytel Inc. Managements Report On Internal Control Over Financial Reporting. 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 the Autobytel Inc. Management Report On Internal Control Over Financial Reporting 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 first, second and third fiscal quarters of 2003, the full fiscal 2003 fiscal year 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. 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 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 restatements 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



53



---

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.



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



54



---

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 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. 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 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 have a stated term ranging from 90 days to one year, but such 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



55



---

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 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.
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 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 products, RPM and iDriveonline, compete with companies that provide marketing services to automotive manufacturers and dealers, including Reynolds and
Reynolds, TVI Inc., Minacs, Online Administrators and Teletech.



56



---

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 related 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,
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | 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,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



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



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



57



---

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 our 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 shifted their planned vehicle purchases from 2004 to 2003 and 2002. At some 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



58



---

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 and CarSmart.com 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.



59



---

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 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.



60



---

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 intend to continue to
evaluate potential acquisitions which we believe will complement or enhance our existing business. 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 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.



We recently acquired Retention Performance Marketing, Inc. and 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



61



---

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.



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 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.



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.



We presently host our production Web sites
and certain systems, including Autobytel.com, Autoweb.com, CarSmart.com, AutoSite.com, Car.com, AVV.com, iDriveonline and RPM, at secure hosting 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.



62



---

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 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 continue to be profitable.



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 continue to be profitable. 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. The extent to which other participants in the automotive industry will accept the role of third party all make, all model services like us is not yet
known.



If consumers do not continue to adopt Internet commerce as a
mainstream medium of commerce or if automotive industry participants resist 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 that
widespread acceptance of Internet commerce in general, or of our services in particular, will occur or that automotive companies will continue to accept a role for third party services such as ours. 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 accept new methods of conducting business and exchanging information and that automotive manufacturers
will accept, rather than resist, a role for all make, all model third party sites such as ours that allow for comparisons. In addition, dealers must be persuaded 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 achieve market acceptance, 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,



63



---

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,
| | - |  | ------------------------------------------------------



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



| |  |  | 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. 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.



64



---

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 who is able to circumvent our security measures could misappropriate proprietary 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 growth. The Internet may not prove to be a viable commercial medium because of inadequate development of
the necessary infrastructure, timely development of complementary products such as high speed modems, 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



65



---

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, 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 in the future
to enforce or protect our intellectual property rights or to defend against claims or infringement or invalidity. Misappropriation of our intellectual property or potential litigation could 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.



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.



66



---

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 fund more rapid expansion, to develop new or enhance existing services or products, to respond to
competitive pressures or to acquire complementary products, businesses or technologies. 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 fund our expansion, take advantage of potential acquisition opportunities, 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.



Sales or the perception of future
sales of our common stock may depress our stock price. Because the market prices for Internet related stocks are likely to remain volatile, our stock price may be more adversely affected than other companies by such future sales.



Sales of substantial numbers of shares of our common stock in the public
market, or the perception that significant sales are likely, could adversely affect the market price of our common stock. Other than 283,763 shares that are held in escrow until at least April 2005, all of the shares issued in connection with the
acquisitions of iDriveonline and Stoneage, subject to certain limitations, will be available for sale upon and during the effectiveness of a registration statement that we filed with the Securities and Exchange Commission in June 2004, and this
number of shares is greater than the average daily trading volume for our shares. Although no prediction can be made as to the effect, if any, that market sales of such shares will have on the market price of our common stock, sales of substantial
amounts of such shares in the public market could adversely affect the market price of our common stock.



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,



67



---

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/A. 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/A.



Item 4.Controls and Procedures



As more fully described in the Explanatory Note of this Amendment to Quarterly Report on Form 10-Q/A and in Note 3 to the Consolidated Financial Statements of 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



68



---

currently relying will fail to be sufficiently effective to address the internal control deficiencies identified in 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 then current Chief Executive Officer and our then current Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. At the time of the initial filing of the Quarterly Report on Form 10-Q for the fiscal period ended June 30, 2004, based upon that evaluation, our then current Chief Executive Officer and
our then current Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in the
periodic filings that we make with the Securities and Exchange Commission. In light of the internal control deficiencies referenced in the Managements Report On Internal Control Over Financial Reporting, our now current Chief Executive Officer
and our now current Chief Financial Officer believe that, as 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 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 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.



69



---

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. 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 and for Autobytel to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Autobytel may have against its underwriters. 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. Therefore, we do not expect that the settlement will
involve any payment by Autobytel. The settlement agreement has not yet been executed. The settlement agreement is subject to approval by the court, which cannot be assured. We cannot determine whether or when a settlement will occur or be finalized
and whether the outcome of the litigation will have a material impact on our results of operations or financial condition 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 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. 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



70



---

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 and for Autoweb to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Autoweb may have against its underwriters. 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. Therefore, we do not expect that the settlement will involve any payment by
Autoweb. The settlement agreement has not yet been executed. The settlement agreement is subject to approval by the court, which cannot be assured. We cannot determine whether or when a settlement will occur or be finalized and whether the outcome
of the litigation will have a material impact on our results of operations or financial condition in any future period.



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 financial statements.



From time to time,
we are involved in other litigation matters relating to claims arising out of the ordinary course of business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material
adverse effect on our business, results of operations and financial condition.



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



On April 9, 2004, in connection with, and as partial consideration for, our acquisition of iDriveonline, Inc., we issued 474,501 shares of common stock to
the then current shareholders of such entity. The offers and sales were exempt from registration pursuant to Regulation D under the Securities Act of 1933, as amended.



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 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 4.Submission of Matters to a Vote of Security Holders



Autobytel held its Annual Meeting of Stockholders on June 24, 2004. The following is a brief description of each matter voted upon at the meeting and the
number of votes cast for, withheld or against and, if applicable, the number of abstentions and broker non-votes with respect to each matter. Each director proposed by Autobytel was elected and the other three matters submitted for stockholder vote
were approved.



(a) The stockholders reelected the three
nominees for Autobytels board of directors:



|                 |  |            |  |                  
|---------------- |  | ---------- |  | -----------------
|Director         |  | For        |  | WithheldAuthority
|Jeffrey H. Coats |  | 32,746,628 |  | 1,542,283        
|Michael J. Fuchs |  | 32,732,751 |  | 1,556,160        
|Robert S. Grimes |  | 32,936,577 |  | 1,352,334        



The term of office as
director for Mark N. Kaplan, Richard A. Post, Mark R. Ross and Jeffrey A. Schwartz continued after the meeting.



(b) The stockholders approved the Autobytel Inc. 2004 Restricted Stock and Option Plan.



|           |  |           |  |         |  |                 
|---------- |  | --------- |  | ------- |  | ----------------
|For        |  | Against   |  | Abstain |  | Broker Non-Votes
|17,289,657 |  | 8,715,655 |  | 150,273 |  | 8,133,326       



71



---

(c) The stockholders approved the appointment of PricewaterhouseCoopers LLP as independent public
auditors for fiscal 2004.



|           |  |           |  |        
|---------- |  | --------- |  | -------
|For        |  | Against   |  | Abstain
|32,841,769 |  | 1,424,035 |  | 23,107 



Item 6.Exhibits and Reports on Form 8-K



(a) Exhibits:



|     |    |  |                                                                                                                                                                                                                                                                                                                                               
|---- | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 | ** |  | Acquisition Agreement, dated as of April 15, 2004, among Autobytel Inc., Autobytel Bedrock Corp., Stoneage Corporation and current and former shareholders of Stoneage Corporation is
incorporated herein by reference to Exhibit 2.1 of the Form 8-K/A filed with the Securities and Exchange Commission on June 28, 2004 (the Form 8-K/A).
|     |   
|10.2 | ** |  | Acquisition Agreement, dated as of April 7, 2004, among Autobytel Inc., Autobytel Lonestar Corp., iDriveonline, Inc. and shareholders of iDriveonline, Inc. is incorporated herein by reference
to Exhibit 2.2 of the Form 8-K/A.                                                                                                             
|     |   
|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.                                                                                                                                                                                                                         

---

|** | Previously filed with original report
|-- | -------------------------------------



(b) Reports on Form 8-K:



The following reports on Form 8-K were furnished or filed, as applicable, during the quarter covered by this Quarterly Report on Form 10-Q:



On April 20, 2004, we filed a Form 8-K under items 2 and 7
announcing our acquisitions of iDriveonline and Stoneage.



On April 27, 2004, we furnished a Form 8-K under Item 12 announcing our financial results for the quarter ended March 31, 2004.



On June 28, 2004, we filed a Form 8-K/A under item 7 providing financial statements and pro forma financial information relating to the
acquisition of Stoneage.



72



---

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
SCHMIDTMichael Schmidt Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer,
and Principal Accounting Officer)




Date: May 31, 2005



73



---

EXHIBIT INDEX



|              |    |  |                                                                                                                                                                                                                                                                                                                                               
|------------- | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |    |  |                                                                                                                                                                                                                                                                                                                                               
|10.1          | ** |  | Acquisition Agreement, dated as of April 15, 2004, among Autobytel Inc., Autobytel Bedrock Corp., Stoneage Corporation and current and former shareholders of Stoneage Corporation is
incorporated herein by reference to Exhibit 2.1 of the Form 8-K/A filed with the Securities and Exchange Commission on June 28, 2004 (the Form 8-K/A).
|              |   
|10.2          | ** |  | Acquisition Agreement, dated as of April 7, 2004, among Autobytel Inc., Autobytel Lonestar Corp., iDriveonline, Inc. and shareholders of iDriveonline, Inc. is incorporated herein by reference
to Exhibit 2.2 of the Form 8-K/A.                                                                                                             
|              |   
|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.                                                                                                                                                                                                                         

---

|** | Previously filed with original report
|-- | -------------------------------------



74