UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2010

or

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

For the transition period from to .

Commission file number 0-22239

Autobytel Inc.

(Exact name of registrant as specified in its charter)

Delaware	33-0711569
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer identification number)
18872 MacArthur Boulevard, Suite 200, Irvine, California	92612
(Address of principal executive offices)	(Zip Code)

(949) 225-4500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨   No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller reporting company  x
		(Do not check if a smaller reporting company)

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

As of July 31, 2010, there were 45,389,431 shares of the Registrant’s Common Stock outstanding.

	INDEX
		Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Unaudited Consolidated Condensed Balance Sheets as of June 30, 2010 and December 31, 2009	3
	Unaudited Consolidated Condensed Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2010 and the Three and Six Months Ended June 30, 2009	4
	Unaudited Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2010 and the Six Months Ended June 30, 2009	5
	Notes to Unaudited Consolidated Condensed Financial Statements	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	18
ITEM 4T.	Controls and Procedures	18
	PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	19
ITEM 1A.	Risk Factors	19
ITEM 6.	Exhibits	21
Signatures		22

2

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

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

	June 30,			December 31,
	2010			2009
Assets
Current assets:
Cash and cash equivalents	$	23,877		$	25,097
Accounts receivable, (net of allowances for bad debts and customer credits of $659 and $1,107 at June 30, 2010 and December 31, 2009, respectively)		7,438			8,573
Prepaid expenses and other current assets		987			594
Total current assets		32,302			34,264
Property and equipment, net		863			1,003
Other assets		149			123
Total assets	$	33,314		$	35,390
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,922		$	2,539
Accrued expenses and other current liabilities		3,196			4,028
Deferred revenues		540			603
Total current liabilities		6,658			7,170
Non-current liabilities		45			79
Total liabilities		6,703			7,249
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 11,445,187 shares authorized; none outstanding		—			—
Common stock, $0.001 par value; 200,000,000 shares authorized and 45,382,729 and 45,168,706 shares issued and outstanding at June 30, 2010 and 2009, respectively		45			45
Additional paid-in capital		302,505			301,831
Accumulated deficit		(275,939	)		(273,735	)
Total stockholders’ equity		26,611			28,141
Total liabilities and stockholders’ equity	$	33,314		$	35,390

See accompanying notes.

3

AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(Amounts in thousands, except per-share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net revenues:
Lead fees	$	11,245		$	11,583		$	21,979		$	23,735
Advertising		869			1,786			1,922			3,473
Other revenues		17			75			42			107
Total net revenues		12,131			13,444			23,943			27,315
Cost of revenues (excludes depreciation of $321 and $197 for the three months ended June 30, 2010 and 2009, respectively and $643 and $450 for the six months ended June 30, 2010 and 2009, respectively)		7,889			9,022			14,953			17,908
Gross profit		4,242			4,422			8,990			9,407
Operating expenses:
Sales and marketing		2,904			2,542			5,671			5,245
Technology support		1,583			1,226			2,980			2,687
General and administrative		3,077			3,032			5,791			7,023
Patent litigation settlement		(43	)		(179	)		(2,806	)		(2,846	)
Total operating expenses		7,521			6,621			11,636			12,109
Operating loss		(3,279	)		(2,199	)		(2,646	)		(2,702	)
Interest and other income		313			675			490			821
Loss before income tax expense		(2,966	)		(1,524	)		(2,156	)		(1,881	)
Income tax expense (benefit)		35			(495	)		48			(495	)
Loss from continuing operations		(3,001	)		(1,029	)		(2,204	)		(1,386	)
Discontinued operations		—			778			—			778
Net loss and comprehensive loss	$	(3,001	)	$	(251	)	$	(2,204	)	$	(608	)
Basic and diluted loss per common share:
Loss from continuing operations	$	(0.07	)	$	(0.02	)	$	(0.05	)	$	(0.03	)
Discontinued operations, net		—			0.02			—			0.02
Basic and diluted loss per common share	$	(0.07	)	$	(0.01	)	$	(0.05	)	$	(0.01	)

See accompanying notes.

4

AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Six Months Ended June 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(2,204	)	$	(608	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		643			900
Provision for bad debts		82			607
Provision for customer credits		287			567
Gain on sale of AVV business		—			(1,273	)
Share-based compensation		572			525
Changes in assets and liabilities:
Accounts receivable		766			689
Prepaid expenses and other current assets		(393	)		676
Other non-current assets		(40	)		(569	)
Accounts payable		383			217
Accrued expenses and other liabilities		(832	)		(3,151	)
Deferred revenues		(63	)		(895	)
Non-current liabilities		(34	)		(44	)
Net cash used in operating activities		(833	)		(2,359	)
Cash flows from investing activities:
Purchases of property and equipment		(489	)		(119	)
Proceeds from sale of AVV business		—			1,273
Proceeds from available-for-sale investments		—			580
Net cash (used in) provided by investing activities		(489	)		1,734
Cash flows from financing activities:
Proceeds from exercise of stock options and awards issued under the employee stock purchase plan		102			—
Net cash provided by financing activities		102			—
Net decrease in cash and cash equivalents		(1,220	)		(625	)
Cash and cash equivalents, beginning of period		25,097			27,393
Cash and cash equivalents, end of period	$	23,877		$	26,768

See accompanying notes.

5

AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Organization and Operations of Autobytel

Autobytel Inc. (“Autobytel” or the “Company”) is an automotive marketing services company that helps automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles through its internet lead referral and online advertising programs.  Internet lead referrals (“Leads”) are consumer internet requests for pricing and availability of new or used vehicles or for vehicle financing.  Leads originate from the Company’s websites or are purchased from third parties (“Network Websites”), and are sold primarily to Dealers and Manufacturers.   The Company’s consumer-facing automotive websites, including Autobytel.com®, Autoweb.com®, AutoSite.com®, Car.comsm, CarSmart.com®, CarTV.com®, and MyRide.com® provide consumers with information and tools to aid them with their automotive purchase decisions and the opportunity to submit Lead requests.  Manufacturers direct consumers to their messages and their respective websites by purchasing advertising on the Company’s websites.

The Company was incorporated in Delaware on May 17, 1996. Its principal corporate offices are located in Irvine, California. The Company’s common stock is listed on The NASDAQ Global Market under the symbol ABTL.

The Company has historically experienced negative cash flow and at June 30, 2010 had an accumulated deficit of $276 million.  The Company continues to face many risks and uncertainties related to the general economic conditions and the automotive industry in particular, however, the Company believes current cash and cash equivalents are sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

2. Basis of Presentation, Unaudited Interim Financial Statements

The unaudited consolidated condensed financial statements of Autobytel presented herein are presented on the same basis as the Company’s 2009 Annual Report on Form 10-K.  Autobytel has made its disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, but condensed or omitted certain information and disclosures normally included in notes to consolidated financial statements in accordance with the Securities and Exchange Commission’s rules and regulations. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in Autobytel’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2009.

In the opinion of Autobytel’s management, the accompanying unaudited interim consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present Autobytel’s consolidated condensed financial position as of June 30, 2010 and the consolidated condensed statements of operations for the three and six months ended June 30, 2010 and 2009 and cash flows for the six months ended June 30, 2010 and 2009, as applicable. The statements of operations and comprehensive loss and cash flows for the periods ended June 30, 2010 and 2009 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.

Certain reclassifications have been made to prior periods’ consolidated condensed financial statements to conform to the current year presentation.  These reclassifications include presenting bad debt expense in Sales and Marketing and presenting rental expense in General and Administrative expense.

6

AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

3.  Computation of Basic and Diluted Net Loss Per Share

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock. Diluted net loss per share is computed using the weighted average number of common shares, and if dilutive, potential common shares outstanding, as determined under the treasury stock method, during the period. Potential common shares consist of unvested restricted stock and the common shares issuable upon the exercise of stock options.  The following are the share amounts utilized to compute the basic and diluted net loss per share for the three and six months ended June 30, 2010 and 2009:

	Three Months Ended June 30,		Six Months Ended June 30,
	2010	2009	2010	2009
Basic shares:
Weighted average common shares outstanding	45,256,231	45,184,679	45,212,710	45,184,679
Weighted average unvested restricted stock	(296,456)	(685,000)	(330,977)	(685,000)
Basic shares	44,959,775	44,499,679	44,881,733	44,499,679
Diluted Shares:
Basic Shares	44,959,775	44,499,679	44,881,733	44,499,679
Weighted average dilutive securities	1,161,684	—	1,143,867	—
Dilutive Shares	46,121,459	44,499,679	46,025,600	44,499,679

For both the three and six months ended June 30, 2010, 3.8 million anti-dilutive potential shares of common stock have been excluded from the calculation of diluted earnings per share, respectively.  For the three and six months ended June 30, 2009, 7.9 million and 7.5 million anti-dilutive potential shares of common stock have been excluded from the calculation of diluted earnings per share, respectively.

4. Share-Based Compensation

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
	(in thousands)				(in thousands)
Cost of revenues	$	9	$	6	$	18	$	12
Sales and marketing		55		108		114		192
Technology support		33		2		65		24
General and administrative(a)		233		141		375		297
Total share-based compensation costs	$	330	$	257	$	572	$	525

(a)  Approximately $96,000 of accelerated stock compensation is included in the six months ended June 30, 2010 amount.  Approximately $46,000 of accelerated stock compensation expense is included in the six months ended June 30, 2009 amount. Vesting of these awards accelerated in accordance with the original award agreements.

 Service-Based Options.  During the three months ended June 30, 2010, the Company granted 648,710 service-based stock options with weighted average grant date fair values of $0.63.  During the six months ended June 30, 2010, the Company granted 871,210 service-based stock options with weighted average grant date fair values of $0.64.    During the three months ended June 30, 2009, the Company granted 1,000,000 service-based stock options with weighted average grant date fair values of $0.14.  During the six months ended June 30, 2009, the Company granted 1,200,000 service-based stock options, with weighted average grant date fair values of $0.16.  These options generally vest one-third on the first anniversary

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

of the grant date and ratably over twenty-four months thereafter.  The vesting of these awards is contingent upon the employee rendering service to the Company during the vesting period.

The Company’s President and Chief Executive Officer was granted the 1,000,000 service based options during the three months ended June 30, 2009 (“CEO Awards”).  The CEO Awards vest on the first anniversary of the grant date and have an exercise price of $0.35, which was higher than the closing price of the Company’s common stock on the grant date.  The shares that are issuable upon exercise of the CEO Awards are subject to restrictions on resale that lapse over time (as to one-third on the first anniversary of the grant date and thereafter will lapse as to the remaining two-thirds of the shares in equal one-twelfth (1/12) installments of the original number of shares subject to the options each quarter until all resale restrictions have lapsed).  The vesting of these options and lapse of the resale restrictions will accelerate upon involuntary termination of employment by the Company without cause or for voluntary termination by the CEO for good reason.

  Market Condition Options.  During the six months ended June 30, 2009 the Company granted 1,068,250 stock options to substantially all employees with a fair market value per option granted of $0.35, using a Black-Scholes option pricing model.  One-third of these options cliff vest on the first anniversary following the grant date and the remaining two-thirds vest ratably over twenty-four months thereafter.  In addition, the remaining two-thirds of the awards must meet additional conditions in order to be exercised.  One-third of the remaining options must also satisfy the condition that the closing price of Autobytel’s common stock over any 30 consecutive trading days is at least two times the option exercise price to be exercised (“Market Condition A”).  The final one-third of the remaining options must also satisfy the condition that the closing price of Autobytel’s common stock over any 30 consecutive trading days is at least three times the option exercise price to be exercised (“Market Condition B”). Certain of these options will accelerate vesting upon a change in control.  Market Condition A was achieved during 2009 and Market Condition B was achieved in July 2010.

During the three and six months ended June 30, 2010, 226,108 stock options were exercised, with an aggregate weighted average exercise price of $0.45.  There were no options exercised during the three and six months ended June 30, 2009.  The grant date fair value of stock options granted during these periods was estimated using the Black-Scholes option-pricing model using the following weighted average assumptions:

	Three Months Ended June 30,		Six Months Ended June 30,
	2010	2009	2010	2009
Dividend yield	—	—	—	—
Volatility	83%	75%	83%	73%
Risk-free interest rate	1.7%	1.6%	1.8%	1.6%
Expected life (years)	4.1	4.1	4.1	4.1

5. Selected Balance Sheet Accounts

Property and Equipment.  Property and equipment consists of the following:

	June 30,			December 31,
	2010			2009
	(in thousands)
Computer software and hardware	$	9,634		$	9,183
Furniture and equipment		1,431			1,432
Leasehold improvements		949			949
Capitalized internal use software		912			912
		12,926			12,476
Less – Accumulated depreciation and amortization		(12,063	)		(11,473	)
Property and equipment, net	$	863		$	1,003

8

AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

At both June 30, 2010 and December 31, 2009, capitalized internal use software, net of amortization, and development in process was $0.1 million.

The Company periodically reviews long-lived assets to determine if there are any impairment indicators.  The Company assesses the impairment of these assets, or the need to accelerate amortization, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our long-lived assets. If such indicators exist, the Company evaluates the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. Should the carrying amount of an asset exceed its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. Fair value is generally determined based on a valuation process that provides an estimate of a fair value of these assets using a discounted cash flow model, which includes assumptions and estimates.

Concentration of Credit Risk and Risks Due to Significant Customers.  Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are primarily maintained with three financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. These deposits may be redeemed upon demand. Accounts receivable are primarily derived from fees billed to automotive dealers and automotive manufacturers.  The Company generally requires no collateral to support its accounts receivables and maintains an allowance for bad debts for potential credit losses.

The Company has a concentration of credit risk with its automotive industry related accounts receivable balances, and in particular with the three largest U.S. automobile manufacturers (General Motors, Chrysler LLC, and Ford) (“Detroit Three”). During the first six months of 2010 approximately 12% of the Company’s total revenues was derived from the Detroit Three, and approximately 12% or $1.0 million of gross accounts receivable related to the Detroit Three at June 30, 2010.

Accrued Expenses and Other Current Liabilities.  Accrued expenses and other current liabilities consisted of the following:

	June 30,		December 31,
	2010		2009
	(in thousands)
Compensation and related costs	$	1,782	$	2,629
Professional fees and other accrued expenses		895		667
Amounts due to customers		380		468
Other current liabilities		139		264
Total accrued expenses and other current liabilities	$	3,196	$	4,028

6. Patent Litigation Settlements

Dealix Patent Litigation Settlement.  In 2004, the Company brought a lawsuit for patent infringement against Dealix Corporation (“Dealix”). In December 2006, the Company entered into a settlement agreement with Dealix (“Settlement Agreement”). The Settlement Agreement required Dealix to pay the Company a total of $20.0 million in settlement payments for a mutual release of claims and a license from the Company to Dealix and its parent company, the Cobalt Group, of certain of the Company’s patent and patent applications. On March 13, 2007, the Company received the initial $12.0 million settlement payment with the remainder to be paid out in installments of $2.7 million on the next three anniversary dates of the initial payment.

9

AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

The Company did not have reasonable assurance that it would receive the remaining payment on its due date and therefore had not recorded any amounts receivable related to the Settlement Agreement as of December 31, 2009.  As of June 30, 2010, the Company had received the final annual installment payment of $2.7 million.  The Company recorded the payment as patent litigation settlement in the period payment was received, as a reduction to operating expenses.

Texas and California Patent Litigation Settlements. The Company entered into a settlement agreement with Insweb Corporation (“Insweb”), Leadpoint, Inc. (“Leadpoint”), and Internet Brands, Inc. (“Internet Brands”) settling and dismissing with prejudice various patent-related and other claims by and against the Company. Under the settlement terms, Autobytel granted to Insweb, Leadpoint and Internet Brands, and Insweb, Leadpoint and Internet Brands each granted to Autobytel, a non-exclusive perpetual license to their respective patents as well as long-term covenants not to sue any of the parties for infringement of current or future patents; and mutual releases of claims. In connection with the settlement, (i) Autobytel and Autodata Solutions, Inc. (“Autodata”), a wholly owned subsidiary of Internet Brands, entered into a Master License and Services Agreement pursuant to which the Company will have the right to publish certain editorial content, images, shopping tools and vehicle data provided by Autodata for a term of five years; and (ii) shares of Internet Brands’ common stock previously issued to one of the Company’s subsidiaries but held by Internet Brands was released to the Company. In addition, InsWeb and Autobytel entered into a Content License Agreement pursuant to which Autobytel will receive specific auto insurance editorial content, data and interactive tools from InsWeb. The content and tools will contain links to one of InsWeb’s insurance websites, and Autobytel and InsWeb will share the revenue associated with consumer activity generated by the links. LeadPoint agreed to pay Autobytel $200,000, $100,000 of which was paid in connection with the signing of the settlement, to be followed by $50,000 installments payable on or before March 31, 2010 and September 30, 2010, respectively. In connection with the settlement, all claims brought by Insweb, Internet Brands and Leadpoint against Dominion Enterprises (“Dominion”), the purchaser of the Company’s AVV business, and Retention Performance Marketing, Inc. (“RPM”), and OneCommand, Inc. (“OneCommand”), the purchaser of the Company’s RPM business, were also dismissed with prejudice, with Internet Brands, Leadpoint, and Insweb each providing Dominion, OneCommand, and RPM covenants not to sue for infringement of the Insweb patent at issue in the litigation, and Dominion, OneCommand, and RPM each granting to Insweb, Internet Brands, and Leadpoint, and Insweb, Internet Brands and Leadpoint each granting to Dominion, OneCommand, and RPM, mutual releases of claims.

Edmunds Declaratory Relief Action Settlement. On March 13, 2008, Edmunds Holding Company and Edmunds.com (collectively “Edmunds”) filed a lawsuit against the Company in the United States District Court for the District of Delaware relating to the Company’s U.S. Patent Number 6,282,517 for lead technology (“517 Patent”). In the lawsuit, Edmunds sought a declaration that its business activities, some of which include generating automotive leads, did not infringe the ‘517 Patent and that such patent was invalid. On February 20, 2009, this declaratory relief action was dismissed by the court. In March 2009, the Company entered into a settlement resolving the issues presented in Edmunds’ declaratory judgment action.  Under this settlement, Autobytel granted to Edmunds a limited license to the ‘517 Patent and other existing Autobytel leads-related patents in exchange for the right to publish on Autobytel’s family of websites a select assortment of Edmunds.com’s multi-media automotive content, including photos, editorial reviews, and articles. The settlement agreement also provided for mutual releases of claims.  This settlement did not have a material impact on the Company’s financial statements.

7. Discontinued Operations

On January 23, 2008, the Company completed the sale of certain assets and liabilities of its AVV, Inc. data extraction and customer relationship management software business to Dominion Enterprises (“Dominion”) for approximately $22.75 million in cash, plus a working capital payment of approximately $1.0 million. The Company recorded a gain on sale of approximately $4.2 million in connection with the transaction in the three months ended March 31, 2008. The parties also agreed to a $1.9 million escrow in connection with the transaction.  During the three months ended June 30, 2009, the Company received approximately $1.3 million of the escrow proceeds, classifying this amount as a gain on sale, discontinued operations.

10

AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

For the three and six months ended June 30, 2009, the results of operations of AVV are reported as discontinued operations, net of income taxes, as follows:

	Three Months Ended June 30,			Six Months Ended June 30,
	2009			2009
	(in thousands)
Total net revenues:	$	—		$	—
Cost of revenues		—			—
Gross profit
Operating expenses:
Sales and marketing		—			—
Technology support		—			—
General and administrative		—			—
Total operating costs		—			—
Gain on sale		1,273			1,273
Benefit from income taxes		(495	)		(495	)
Discontinued operations, net	$	778		$	778

8. Commitments and Contingencies

Employment Agreements

The Company has employment agreements and retention agreements with certain key employees. A number of these agreements require severance payments, continuation of certain insurance benefits and acceleration of vesting of stock options and restricted stock units in the event of a termination of employment without cause or for good reason. In addition, these employees were also granted stock options and awarded restricted stock, the agreements for which provide for acceleration of vesting upon a change of control.

Litigation

 In August 2001, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York against Autobytel and certain of the Company’s current and former directors and officers (“Autobytel Individual Defendants”) and underwriters involved in the Company’s initial public offering. A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. This action purports to allege violations of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at predetermined prices. Plaintiffs allege that the prospectus for the Company’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies.  The parties in the approximately 300 coordinated cases, including the parties in the Autobytel case, reached a settlement.  The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Autobytel.  On October 6, 2009, the Court granted final approval of the settlement.  A group of three objectors filed a petition to the Second Circuit seeking permission to appeal the District Court’s final approval order on the basis that the settlement class is broader than the class previously rejected by the Second Circuit in its December  2006 order reversing the District Court’s order certifying classes in six of the coordinated cases.  The six cases, which do not include Autobytel’s case, are intended to serve as test cases.  Plaintiffs filed an opposition to the petition.  Objectors, including the objectors that filed the petition seeking permission to appeal, filed six notices of appeal of the Court’s order finally approving the settlement.  Subject to court approval, the objectors to the settlement will file their briefs in the Second Circuit no later than October 6, 2010, and answering briefs will be due no later than February 3, 2011.  Due to the inherent uncertainties of

11

AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

litigation, the Company cannot accurately predict the ultimate outcome of this matter. If the settlement does not survive appeal, and Autobytel is found liable, it is possible that damages could be greater than Autobytel’s insurance coverage and the impact on Autobytel’s financial statements could be material.

Between April and September 2001, eight separate purported class actions virtually identical to the one filed against Autobytel were filed against Autoweb.com, Inc. (“Autoweb”), certain of Autoweb’s former directors and officers (“Autoweb Individual Defendants”), and underwriters involved in Autoweb’s initial public offering. A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. It purports to allege violations of the Securities Act and the Exchange Act. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autoweb’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at predetermined prices. Plaintiffs also allege that the prospectus for Autoweb’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies.  The parties in the approximately 300 coordinated cases, including Autoweb’s case, reached a settlement.  The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Autoweb.  On October 6, 2009, the Court granted final approval of the settlement.  A group of three objectors filed a petition to the Second Circuit seeking permission to appeal the District Court’s final approval order on the basis that the settlement class is broader than the class previously rejected by the Second Circuit in its December 2006 order reversing the District Court’s order certifying classes in six of the coordinated cases.  The six cases, which do not include Autoweb’s case, are intended to serve as test cases.  Plaintiffs filed an opposition to the petition.  Objectors, including objectors that filed the petition seeking permission to appeal, filed six notices of appeal of the Court’s order finally approving the settlement.  Subject to court approval, the objectors to the settlement will file their briefs in the Second Circuit no later than October 6, 2010, and answering briefs will be due no later than February 3, 2011.  Due to inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of this matter. If the settlement does not survive that appeal, and Autoweb is found liable, it is possible that damages could be greater than Autoweb’s insurance coverage and the impact on Autobytel’s financial statements could be material.

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

9. Related Party Transaction

The Compensation Committee approved a payment of $70,000 to Maverick Associates LLC, a Delaware limited liability company, for consulting services rendered to the Company by Jeffrey H. Coats during 2008 in connection with the Company’s evaluation of strategic alternatives and development and implementation of cost reduction initiatives by the Company. Mr. Coats is the sole member of Maverick Associates.  The $70,000 was recorded as an expense in the six month period ended June 30, 2009.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2 and under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2009. Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.

You should read the following discussion of our results of operations and financial condition in conjunction with our consolidated condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and the notes thereto in Autobytel’s Annual Report on Form 10-K for the year ended December 31, 2009.

Our corporate website is located at www.autobytel.com. Information on our website is not incorporated by reference in this Quarterly Report. At or through the Investor Relations section of our website we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as practicable after that material is electronically filed with or furnished to the SEC. Our Code of Conduct and Ethics for Employees, Officers and Directors is available at the Corporate Governance link of the Investor Relations section of our website.

Basis of Presentation

The unaudited consolidated condensed financial statements presented herein are presented on the same basis as the Company’s 2009 Annual Report on Form 10-K.  We have made the disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, but condensed or omitted certain information and disclosures normally included in notes to consolidated financial statements in accordance with the SEC’s rules and regulations. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2009.

Certain reclassifications have been made to prior periods’ consolidated financial statements to conform to the current year presentation.  These reclassifications include presenting bad debt expense in Sales and Marketing and presenting rental expense in General and Administrative expense.

Overview

We are an automotive marketing services company that helps automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles through our internet lead referral and online advertising programs.  Internet lead referrals (“Leads”) are consumer internet requests for pricing and availability of new or used vehicles or for vehicle financing.  Leads originate from our websites or are purchased from third parties (“Network Websites”), and are sold primarily to Dealers and Manufacturers.   Our consumer-facing automotive websites, including Autobytel.com®, Autoweb.com®, AutoSite.com®, Car.comsm, CarSmart.com®, CarTV.com®, and MyRide.com® provide consumers with information and tools to aid them with their automotive purchase decisions and the opportunity to submit Lead requests.  Manufacturers direct consumers to their messages and their respective websites by purchasing advertising on our websites.  Our websites are the source of an increasing percentage of our Leads and provide a significant portion of the page views for the advertising component of our business.

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For the three and six months ended June 30, 2010 our results of operations were affected and may continue to be affected in the future, by market and economic factors, including, but not limited to, the following:

·   General economic conditions, specifically including the adverse effect of high unemployment on the number of vehicle purchasers and the lack of available consumer credit to finance vehicle purchases.  These adverse economic conditions have affected the automotive industry, which is currently enduring what is considered to be the most challenging environment of the past several decades:

·   North American vehicle sales remain highly volatile and are expected to track at relatively low levels in 2010, and

·   Dealer consolidations, closings, and bankruptcies continue.

·   The market for Leads, including:

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

·   A declining Dealer base.

·   The market for advertising services, including:

·   Continued volatility in spending by Manufacturers and others in marketing allocations,

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

·   The cost of acquiring traffic to our websites, and

·   The rates attainable from our advertisers.

Results of Operations

Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009

	2010			% of total net revenues			2009			% of total net revenues			$ Change			% Change
	(Dollar amounts in thousands)
Net revenues:
Lead fees	$	11,245			93	%	$	11,583			86	%	$	(338	)		(3	)%
Advertising		869			7			1,786			13			(917	)		(51	)
Other		17			—			75			1			(58	)		(77	)
Total net revenues		12,131			100			13,444			100			(1,313	)		(10	)
Cost of revenues (excludes depreciation of $321 and $197 for the three months ended June 30, 2010 and 2009, respectively)		7,889			65			9,022			67			(1,133	)		(13	)
Gross profit		4,242			35			4,422			33			(180	)		(4	)
Operating expenses:
Sales and marketing		2,904			24			2,542			19			362			14
Technology support		1,583			13			1,226			9			357			29
General and administrative		3,077			25			3,032			23			45			1
Patent litigation settlement		(43	)		—			(179	)		(1	)		136			(76	)
Total operating expenses		7,521			62			6,621			50			900			14
Operating loss		(3,279	)		(27	)		(2,199	)		(17	)		(1,080	)		49
Interest and other income		313			3			675			5			(362	)		(54	)
Loss before income tax expense		(2,966	)		(24	)		(1,524	)		(12	)		(1,442	)		95
Income tax expense (benefit)		35			—			(495	)		(4	)		530			(107	)
Loss from continuing operations		(3,001	)		(24	)		(1,029	)		(8	)		(1,972	)		192
Discontinued operations		—			—			778			6			(778	)		(100	)
Net loss	$	(3,001	)		(24	)%	$	(251	)		(2	)%	$	(2,750	)		1,096	%

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Lead Fees. Lead fees decreased $0.3 million or 3% in second quarter 2010 compared to second quarter 2009 primarily due to a shift in mix from new and used retail Leads to Manufacturer Leads, which has a lower average sales price per lead.  The use of incentives to drive incremental Dealer sign-ups also had a negative impact during the second quarter 2010.  The volume of new and used retail Leads delivered decreased 19%, which was partially offset by an increase in the volume of Leads delivered to Manufacturers and finance Leads delivered of 14% and 34%, respectively, as the automotive consumer credit environment showed signs of recovery in the second quarter 2010.

Advertising. Advertising revenues decreased $0.9 million or 51% in second quarter 2010 compared to second quarter 2009 due primarily to unsold advertising, as ad budgets for our Manufacturer customers have remained conservative and a 23% decline in page views, which was due to the elimination of a large traffic partner in the fourth quarter of 2009.

Cost of Revenues. Cost of revenues consists of Lead and traffic acquisition costs, and other cost of revenues. Lead and traffic acquisition costs consist of payments made to our Lead suppliers, including internet portals and online automotive information providers. Other cost of revenues consists of search engine marketing and fees paid to third parties for data and content included on our properties, connectivity costs, technology license fees, development and maintenance costs related to our websites, server equipment depreciation and technology amortization and compensation related expense. Search engine marketing (“SEM”), sometimes referred to as paid search marketing, is the practice of bidding on keywords on search engines to drive traffic to a website.  Our SEM also provides a source of Leads generated from our websites.

The $1.1 million or 13% decrease in the cost of revenues in second quarter 2010 compared to second quarter 2009 was due primarily to a decrease of $0.8 million in Lead acquisition costs directly related to the change in mix of Leads delivered and a $0.4 million decrease in other traffic acquisition costs.

Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, internal personnel costs, and other costs associated with dealer sales, website advertising, dealer support, and bad debt expense. Sales and marketing expense in second quarter 2010 increased by $0.4 million or 14% compared to second quarter 2009 due principally to higher advertising and strategic new hire personnel costs.

Technology Support. Technology support expense includes personnel costs related to enhancing the features, content and functionality of our websites and our Internet-based communications platform, costs associated with our telecommunications and computer infrastructure, and costs related to data and technology development. Technology support expenses in second quarter 2010 increased by $0.4 million or 29% compared to second quarter 2009 due to increased strategic new hire personnel costs.

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 in second quarter 2010 was consistent with second quarter 2009.

Interest and other income.  Interest and other income was $0.3 million in second quarter 2010 and consisted primarily of patent licensing fees received in the quarter.  Interest and other income was $0.7 million in second quarter 2009 and primarily represented a gain recognized on the sale of available-for-sale securities.

Income taxes. Income tax expense was $35,000 in the second quarter of 2010.  For the second quarter of 2009, the Company recorded an income tax benefit of $495,000. The current quarter tax expense was primarily related to state taxes in Texas and Michigan.  The prior year tax benefit was due to realization of losses from continuing operations as the operating losses offset gains and taxes attributable to discontinued operations.

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Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

	2010			% of total net revenues			2009			% of total net revenues			$ Change			% Change
	(Dollar amounts in thousands)
Net revenues:
Lead fees	$	21,979			92	%	$	23,735			87	%	$	(1,756	)		(7	)%
Advertising		1,922			8			3,473			13			(1,551	)		(45	)
Other		42			—			107			—			(65	)		(61	)
Total net revenues		23,943			100			27,315			100			(3,372	)		(12	)
Cost of revenues (excludes depreciation of $643 and $450 for the six months ended June 30, 2010 and 2009, respectively,)		14,953			62			17,908			66			(2,955	)		(17	)
Gross profit		8,990			38			9,407			34			(417	)		(4	)
Operating expenses:
Sales and marketing		5,671			24			5,245			19			426			8
Technology support		2,980			13			2,687			10			293			11
General and administrative		5,791			24			7,023			26			(1,232	)		(18	)
Patent litigation settlement		(2,806	)		(12	)		(2,846	)		(11	)		40			(1	)
Total operating expenses		11,636			49			12,109			44			(473	)		(4	)
Operating loss		(2,646	)		(11	)		(2,702	)		(10	)		56			(2	)
Interest and other income		490			2			821			3			(331	)		(40	)
Loss before income tax expense		(2,156	)		(9	)		(1,881	)		(7	)		(275	)		15
Income tax expense (benefit)		48			—			(495	)		(2	)		543			(110	)
Loss from continuing operations		(2,204	)		(9	)		(1,386	)		(5	)		(818	)		59
Discontinued operations		—			—			778			3			(778	)		(100	)
Net loss	$	(2,204	)		(9	)%	$	(608	)		(2	)%	$	(1,596	)		263	%

Lead Fees. Lead fees decreased $1.8 million or 7% in first half 2010 compared to first half 2009 and was primarily  due to a shift in mix from new and used retail Leads to Manufacturer Leads, which has a lower average sales price per lead.  The use of incentives to drive incremental Dealer sign-ups also had a negative impact during the first half 2010.  The volume of new and used retail Leads delivered decreased 21%, which was partially offset by an increase in the volume of Leads delivered to Manufacturers and finance Leads delivered of 12% and 23%, respectively, as the automotive consumer credit environment showed signs of recovery in the first half 2010.

    Advertising. The $1.6 million or 45% decrease in advertising revenues for first half 2010 compared to first half 2009 was due primarily to the elimination of a large traffic partner in the fourth quarter of 2009 and a decrease in page views.

    Cost of Revenues. The $3.0 million or 17% decrease in the cost of revenues in first half 2010 compared to first half 2009 was primarily due to a decrease of $2.3 million in Lead acquisition costs directly related to reduced volume and the change in mix of Leads delivered and a $0.8 million decrease in traffic acquisition costs.

Sales and Marketing.  Sales and marketing expense in first half 2010 increased by $0.4 million or 8% compared to first half of 2009 principally due to increased advertising and personnel costs.

Technology Support. Technology support expense in first half 2010 increased by $0.3 million or 11% compared to first half of 2009 due to increased personnel costs.

General and Administrative. General and administrative expense in first half 2010 decreased $1.2 million or 18% compared to first half of 2009 due to the following:

·   a decrease in professional fees of $0.7 million, primarily as a result of cost containment initiatives, and

·   a decrease in facility costs of approximately $0.2 million.

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Dealix Patent Litigation Settlement.  In 2004, the Company brought a lawsuit for patent infringement against Dealix Corporation (“Dealix”). In December 2006, the Company entered into a settlement agreement with Dealix (“Settlement Agreement”). The Settlement Agreement provided for Dealix to pay the Company a total of $20.0 million in settlement payments for a mutual release of claims and a license from the Company to Dealix and its parent company, the Cobalt Group, of certain of the Company’s patent and patent applications. On March 13, 2007, the Company received the initial $12.0 million settlement payment with the remainder to be paid out in installments of $2.7 million on the next three anniversary dates of the initial payment. As of June 30, 2010 the Company had received the final annual installment payment of $2.7 million.  The Company recorded the payment as patent litigation settlement in the period payment was received, as a reduction to operating expenses. The Company did not have reasonable assurance that it would receive the remaining payment on its due date and therefore had not recorded any amounts receivable related to the Settlement Agreement as of December 31, 2009.

Interest and other income.  Interest and other income was $0.5 million in first half 2010 and consisted primarily of patent and international licensing fees recognized through June 30, 2010.  Interest and other income was $0.8 million in first half 2009 and primarily represented a gain on the sale of available-for-sale securities and international licensing fees recognized through June 30, 2009.

Income taxes. Income tax expense through June 30, 2010 was $48,000.  Through June 30, 2009, the Company recorded an income tax benefit of $495,000. The current year tax expense was primarily related to state taxes in Texas and Michigan.  The prior year benefit was due to realization of losses from continuing operations as the operating losses offset gains and taxes attributable to discontinued operations.

 Employees

As of July 15, 2010, we had 135 employees. We also use independent contractors as required. None of our employees are represented by labor unions. We have not experienced any work stoppages and consider our employee relations to be generally good.

Liquidity and Capital Resources

The table below sets forth a summary of our cash flows for the six months ended June 30, 2010 and 2009:

	Six Months Ended June 30,
	2010			2009
	(in thousands)
Net cash used in operating activities	$	(833	)	$	(2,359	)
Net cash (used in) provided by investing activities		(489	)		1,734
Net cash provided by financing activities		102			—

Our principal sources of liquidity are our cash and cash equivalents balances and litigation settlement proceeds.  We entered into the Settlement Agreement with Dealix, which among other things, provided for settlement payments. As of June 30, 2010 we received the final annual installment payment of $2.7 million from Dealix.  We continue to have no debt. Our cash and cash equivalents totaled $23.9 million as of June 30, 2010 compared to cash and cash equivalents of $25.1 million as of December 31, 2009.

Net Cash Used in Operating Activities.  Net cash used in operating activities in the six months ended June 30, 2010 of $0.8 million resulted primarily from net losses, as adjusted for non-cash charges to earnings, $0.8 million of cash received related to our accounts receivable, partially offset by cash used to reduce accrued liabilities of $1.0 million primarily related to the payment of annual bonus amounts accrued in 2009 and paid in the first half of 2010.  Net cash used in operating activities in the six months ended June 30, 2009 was $2.4 million and resulted primarily from net losses and an increase in cash used to reduce accrued expenses and other liabilities of $3.2 million primarily related to severance costs that were accrued as of December 31, 2008 and paid in the first half of 2009, partially offset by cash received related to our accounts receivable of $0.7 million.

Net Cash (Used in)Provided by Investing Activities.  Net cash used in investing activities was $0.5 million in the six months ended 2010 and is related to the investment in upgrading our internal information technology (“IT”) infrastructure.  Net cash provided by investing activities was $1.7 million in the six months ended June 30, 2009.  The Company received approximately $1.3 million of the $1.9 million AVV asset sale proceeds held in escrow, that was not recorded on the balance

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sheet.  Subsequent to the June 30, 2009 balance sheet date, we received a further $0.4 million of the escrow amounts, with the remaining $0.2 million subject to certain contingencies.  In addition, we sold all of our available-for-sale investments for cash proceeds of $0.6 million in the six months ended June 30, 2009.

Net Cash Provided by Financing Activities.  Our primary source of cash from financing activities is from the exercise of stock options.  226,108 options were exercised for the six months ended June 30, 2010 resulting in $0.1 million of cash inflow.  There were no financing activities for the six months ended June 30, 2009.  Our future cash flows from employee stock options will depend on the future timing, stock price and amount of stock option exercises, if any.

Off-Balance Sheet Arrangements

At June 30, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For the three and six months ended June 30, 2010 there were no material changes in the information required to be provided under Item 305 of Regulation S-K from the information disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Item 4T. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer believe that, as of the end of the period covered by this Quarterly Report on Form  10-Q, our disclosure controls and procedures were effective at ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or were reasonably likely to materially affect, our internal control over financial reporting.

The internal controls over the provision for income taxes as of June 30 and September 30, 2009 did not contain specific procedures to address the classification of income taxes, when a loss from continuing operations was present, and other sources of income were also present from discontinued operations and or other comprehensive income (“Specific Procedures”).  The lack of these specific procedures was a deficiency in our internal controls during the June 30 and September 30, 2009 quarterly periods.  The Specific Procedures were included in the control procedures performed as of December 31, 2009, which is what led to the discovery of errors to the quarterly periods ended June 30 and September 30, 2009.  We believe that the internal control deficiency had been remediated as of December 31, 2009.  The Specific Procedures were included in the quarterly income tax provision review procedures beginning with the first quarter of 2010.

The classification error did not impact our pre-tax losses, net losses, our consolidated balance sheets, or our consolidated statements of cash flows.  As such, we do not believe that the errors had a direct impact on our disclosure controls and procedures.

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future

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conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

See discussion at Part I, Item 1, Note 8, “Commitments and Contingencies – Litigation,” to the unaudited consolidated condensed financial statements, which is incorporated by reference herein.

Item 1A.Risk Factors

 The following factors, which supplement or update the risk factors set forth in Part I, Item 1A, “Risk Factors” of our 2009 Annual Report on Form 10-K, may affect our future results.  The risks described below are not the only risks we face.  In addition to the risks set forth in the 2009 Annual Report on Form 10-K, as supplemented or superseded below, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.

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

General economic conditions, specifically including the adverse effect of high unemployment on the number of vehicle purchasers and the lack of available consumer credit to finance vehicle purchases have affected the automotive industry, which is currently experiencing what is considered to be the most challenging environment of the past several decades:

·   North American vehicle sales remain highly volatile and are expected to track at relatively low levels in 2010,

·   Dealer consolidations, closings, and bankruptcies continue, and

·   General Motors and Chrysler continue efforts to stabilize their businesses.

If any of our advertising relationships with Manufacturers terminate or decline due to negative marketing conditions redirecting consumer demand (page views) or our advertising rates decline, our revenues will decrease.

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

Our common stock could be delisted from the NASDAQ Global Market if we are not able to satisfy continued listing requirements, and if this were to occur, the price of our common stock and our ability to raise additional capital may be adversely affected and the ability to buy and sell our stock may be less orderly and efficient.

Our common stock is currently listed on the NASDAQ Global Market. Continued listing ofa security on the NASDAQ Global Market is conditioned upon compliance with various continued listing standards. There can be no assurancethat we will continue to satisfy the requirements for maintaining a NASDAQ Global Market listing.  The standards for continued listing require, among other things, that the closing minimum bid price for the listed securities be at least $1.00 per share for 30 consecutive trading days. Our common stock has traded below $1.00 per share in 2010, and there can be no assurances made that we will satisfy the $1.00 minimum bid price required for continued listing of our common stock on the NASDAQ Global Market.  If our common stock trades below the minimum closing bid requirement for any 30 consecutive trading days, NASDAQ will send us a Deficiency Notice and we will be afforded a 180 day compliance period to regain compliance.  If we are unable regain compliance, we will be delisted.  If our common stock were to be delisted from the NASDAQ Global Market, the price of our common stock, the ability of holders to sell our stock, and our ability to raise additional capital will likely be adversely affected. If our common stock is delisted and thereafter traded over-the-counter, trading in our stock could

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be less efficient. If we sought to re-list our stock on the NASDAQ Global Market, we would be required to comply with all of the initial listing requirements to be re-listed on the NASDAQ Global Market, which in some instances are more stringent than the continued listing requirements.

Our certificate of incorporation and bylaws, tax benefit preservation 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 tax benefit preservation plan (“Tax Benefit Preservation Plan”) could make it difficult for a third party to acquire us, and could discourage a third party from attempting to acquire control of us. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.

Our amended and restated certificate of incorporation allow us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the stockholders. Our amended and restated certificate of incorporation also provides 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, provisions in our amended and restated certificate of incorporation and bylaws 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 our Tax Benefit Preservation Plan, rights to purchase capital stock of the Company (“Rights”) have been distributed as a dividend at the rate of one Right for each share of Common Stock.  Each Right entitles its holder, upon triggering of the Rights, to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at a price of $8.00 (as such price may be adjusted under the Tax Benefit Preservation Plan) or, in certain circumstances, to instead acquire shares of Common Stock. The Rights will convert into a right to acquire Common Stock or other capital stock of the Company in certain circumstances and subject to certain exceptions.  The Rights will be triggered upon the acquisition of 4.90% or more of the Company’s outstanding Common Stock or future acquisitions by any existing holders of 4.90% or more of the Company’s outstanding Common Stock. If a person or group acquires 4.90% or more of our common stock, all rights holders, except the acquirer, will be entitled to acquire at the then exercise price of a right that number of shares of our common stock which, at the time, has a market value of two times the exercise price of the right.

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

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Item 6.  Exhibits

3.1	Fifth Amended and Restated Certificate of Incorporation of Autobytel Inc. (formerly Autobytel.com Inc. (“Autobytel” or the “Company”)) certified by the Secretary of State of Delaware (filed December 14, 1998), as amended by Certificate of Amendment dated March 1, 1999, Second Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated July 22, 1999, Third Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated August 14, 2001, Certificate of Designation of Series A Junior Participating Preferred Stock dated July 30, 2004, and Amended Certificate of Designation of Series A Junior Participating Preferred Stock dated April 24, 2009, which is incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239)
3.2	Second Amended and Restated Bylaws of Autobytel dated August 1, 2009, which is incorporated herein by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 filed with the SEC on October 23, 2009 (SEC File No. 000-22239)
4.1	Form of Common Stock Certificate of Autobytel is incorporated herein by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 filed with the SEC on November 14, 2001 (SEC File No. 000-22239)
4.2	Amended and Restated Rights Agreement, dated as of April 24, 2009, between Autobytel and Computershare Trust Company, N.A., successor-in-interest to U.S. Stock Transfer Corporation (which includes the form of Amended Certificate of Designation of the Series A Junior Participating Preferred Stock of Autobytel as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C, which is incorporated herein by reference to Exhibit 4.2 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239)
4.3	First Amendment to Amended and Restated Rights Agreement, dated May 26, 2010 is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)
4.4	Tax Benefit Preservation Plan, dated as of May 26, 2010, between Autobytel Inc. and Computershare Trust Company, N.A., as rights agent, together with the following exhibits thereto: Exhibit A – Form of Right Certificate; Exhibit B – Summary of Rights to Purchase Shares of Preferred Stock of Autobytel Inc. is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)
10.1	Consulting Services Agreement, effective June 21, 2010, between Autobytel and Mark A. Garms is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 25, 2010 (SEC File No. 000-22239)
10.2	Autobytel Inc. 2010 Equity Incentive Plan is incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on June 25, 2010 (SEC File No. 000-22239)
10.3	Form of Amended and Restated Indemnification Agreement dated as of July 21, 2010 between Autobytel and its officers and directors is incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on July 22, 2010 (SEC File No. 000-22239)
10.4*	Form of Officer and Director Indemnification Agreement
31.1*	Chief Executive Officer Section 302 Certification of Periodic Report, dated August 13, 2010.
31.2*	Chief Financial Officer Section 302 Certification of Periodic Report, dated August 13, 2010.
32.1*	Chief Executive Officer and Chief Financial Officer Section 906 Certification of Periodic Report, dated August 13, 2010.

* Filed herewith

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SIGNATURES

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

AUTOBYTEL INC.
By:	/s/ Curtis E. DeWalt
	Curtis E. DeWalt
	Senior Vice President and Chief Financial Officer
	(Duly Authorized Officer and Principal Financial Officer)

Date: August 13, 2010
	By:	/s/ Wesley Ozima
		Wesley Ozima
		Vice President and Controller
		(Principal Accounting Officer)

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EXHIBIT INDEX

3.1	Fifth Amended and Restated Certificate of Incorporation of Autobytel Inc. (formerly Autobytel.com Inc. (“Autobytel” or the “Company”)) certified by the Secretary of State of Delaware (filed December 14, 1998), as amended by Certificate of Amendment dated March 1, 1999, Second Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated July 22, 1999, Third Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated August 14, 2001, Certificate of Designation of Series A Junior Participating Preferred Stock dated July 30, 2004, and Amended Certificate of Designation of Series A Junior Participating Preferred Stock dated April 24, 2009, which is incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239)
3.2	Second Amended and Restated Bylaws of Autobytel dated August 1, 2009, which is incorporated herein by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 filed with the SEC on October 23, 2009 (SEC File No. 000-22239)
4.1	Form of Common Stock Certificate of Autobytel is incorporated herein by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 filed with the SEC on November 14, 2001 (SEC File No. 000-22239)
4.2	Amended and Restated Rights Agreement, dated as of April 24, 2009, between Autobytel and Computershare Trust Company, N.A., successor-in-interest to U.S. Stock Transfer Corporation (which includes the form of Amended Certificate of Designation of the Series A Junior Participating Preferred Stock of Autobytel as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C, which is incorporated herein by reference to Exhibit 4.2 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239)
4.3	First Amendment to Amended and Restated Rights Agreement, dated May 26, 2010 is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)
4.4	Tax Benefit Preservation Plan, dated as of May 26, 2010, between Autobytel Inc. and Computershare Trust Company, N.A., as rights agent, together with the following exhibits thereto: Exhibit A – Form of Right Certificate; Exhibit B – Summary of Rights to Purchase Shares of Preferred Stock of Autobytel Inc. is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)
10.1	Consulting Services Agreement, effective June 21, 2010, between Autobytel and Mark A. Garms is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 25, 2010 (SEC File No. 000-22239)
10.2	Autobytel Inc. 2010 Equity Incentive Plan is incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on June 25, 2010 (SEC File No. 000-22239)
10.3	Form of Amended and Restated Indemnification Agreement dated as of July 21, 2010 between Autobytel and its officers and directors is incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on July 22, 2010 (SEC File No. 000-22239)
10.4*	Form of Officer and Director Indemnification Agreement
31.1*	Chief Executive Officer Section 302 Certification of Periodic Report, dated August 13, 2010.
31.2*	Chief Financial Officer Section 302 Certification of Periodic Report, dated August 13, 2010.
32.1*	Chief Executive Officer and Chief Financial Officer Section 906 Certification of Periodic Report, dated August 13, 2010.

* Filed herewith

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