Cautionary Statement

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent reports on Forms 10-Q and 8-K, which discuss our business in greater detail. The section entitled "Risk Factors" set forth below, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

Overview

We are a leading online provider of aftermarket auto parts, including body parts, engine parts and performance parts and accessories. Our user-friendly websites provide customers with a broad selection of automotive parts, with detailed product descriptions and photographs. Our proprietary product database maps our SKUs to product applications based on vehicle makes, models and years. We principally sell our products to individual consumers through our network of websites and online marketplaces. Our flagship websites are located at www.partstrain.com and www.autopartswarehouse.com. We believe our strategy of disintermediating the traditional auto parts supply channels and selling products directly to customers over the Internet allows us to more efficiently deliver products to our customers while generating higher margins.

Our History. We were formed in 1995 as a distributor of aftermarket auto parts and launched our first website in 2000. We rapidly expanded our online operations, increasing the number of SKUs sold through our e-commerce network, adding additional websites, improving our Internet marketing proficiency and commencing sales in online marketplaces. As a result, our business has grown consistently since 2000, generating net sales of $161.0 million for the year ended December 31, 2007.

Partsbin Acquisition. In May 2006, we completed the acquisition of Partsbin. As a result of this acquisition, we expanded our product offering and product catalog to include performance parts and accessories and additional engine parts, enhanced our ability to reach more customers, significantly increased our net sales and added a complementary, drop-ship order fulfillment method. Partsbin also expanded our international operations by adding a call center in the Philippines and an outsourced call center in India, as well as a Canadian subsidiary to facilitate sales in Canada. We also augmented our technology platform and expanded our management team. We may pursue additional acquisition opportunities in the future to increase our share of the aftermarket auto parts market or expand our product offerings.

International Operations. Since 2003, we have maintained operations in the Philippines. As our ability to manage offshore operations has improved, we have increased our offshore capacity. In the Philippines, we operate in a call center, information systems, application and web development, category management, and internet marketing, all supported by Philippine based accounting and human resources. In addition to our Philippines operations, we have outsourced call center operations in India and own a Canadian subsidiary to facilitate sales of our products in Canada. We believe that the cost advantages of our offshore operations provide us with the ability to grow our business in a cost-effective manner, and we expect to continue to add headcount and infrastructure to our offshore operations.

New Management. Following the appointment of Shane Evangelist, our new Chief Executive Officer in October 2007, we have added several new members to our management team. These additions include a new Chief Information Officer and Chief Technology Officer focused on improving our technology platform. We have also added leadership in our distribution center operations, product sourcing, business analytics, category management and marketing.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, uncollectible receivables, intangible and other long-lived assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes to our critical accounting policies during the three and six months ended June 30, 2008, as compared to those policies disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2007 except as noted below.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No. 159 permits companies to choose to measure at fair value certain financial instruments and other items that are not currently required to be measured at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008 and elected not to measure any additional financial instruments or other items at fair value.

The Company recorded, in accordance with SFAS No. 142, "Goodwill and Intangible Assets" ("SFAS 142") and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), an impairment charge totaling $18.4 million on intangible assets associated with the Partsbin business, which we acquired in May 2006. The impairment charge related to its websites, software, vendor agreements and domain name intangible assets. The interim impairment charge was primarily the result of: i) the recent deterioration in the economic environment and the Company's stock price, ii) lower sales and profitability which generated losses from certain Partsbin websites, iii) deficiencies in the software platform also acquired from Partsbin, and iii) the termination of volume discounts and marketing co-ops from certain vendor agreements. Given the indicators of impairment and the excess of the carrying value over the undiscounted cash flows associated with these intangibles, the Company utilized a discounted cash flow approach in determining fair value for both the websites and vendor agreement intangible assets. The decrease in future cash flows from certain acquired websites and vendor agreements resulted in the long-lived assets being impaired, as the carrying value of the website assets and vendor agreement assets exceeded the fair value of those assets determined as the net present value of future projected cash flows. The software and domain name assets' fair value was determined using a relief from royalty approach which also resulted in a lower fair value than the carrying value of the assets.

Results of Operations

The following table sets forth certain unaudited statements of operations data
for the periods indicated:
                                      Three Months Ended          Six Months Ended
                                           June 30,                   June 30,
                                      2008           2007         2008         2007
Net sales                               100.0 %       100.0 %      100.0 %      100.0 %
Cost of sales                            66.2          67.3         65.9         68.0
Gross profit                             33.8          32.7         34.1         32.0
Operating expenses:
General and administrative               10.6           8.6         11.0          7.6
Marketing                                15.4          11.7         15.2         12.6
Fulfillment                               5.5           4.4          5.4          4.2
Technology                                1.8           1.2          1.8          1.1
Amortization of intangibles              47.7           5.0         27.2          4.8
Total operating expenses                 81.0          30.9         60.6         30.3
Income (loss) from operations           (47.2 )         1.8        (26.5 )        1.7
Other income (expense):
Other income                              0.0           0.0          0.0          0.0
Interest income (expense), net            0.5           1.3          0.6          0.3
Other income (expense), net               0.5           1.3          0.6          0.3
Income (loss) before income taxes       (46.7 )         3.1        (25.9 )        2.0
Income tax provision (benefit)          (18.7 )         1.3        (10.3 )        0.8
Net income (loss)                       (28.0 )%        1.8 %      (15.6 )%       1.2 %

Net Sales and Gross Margin
                  Three Months Ended          Six Months Ended
                       June 30,                   June 30,
                   2008          2007         2008         2007
                                 (in thousands)
Net sales       $   43,105     $ 42,112     $ 83,114     $ 85,855
Cost of sales       28,518       28,327       54,777       58,401
Gross profit    $   14,587     $ 13,785     $ 28,337     $ 27,454
Gross margin         33.8%        32.7%        34.1%        32.0%

Net sales increased 2.4% to $43.1 million and decreased 3.2% to $83.1 million for the three and six months ended June 30, 2008, respectively, compared to the same periods in the previous year. The three month quarter over quarter increase was primarily due to a 4.2% increase in our online business, which consists of our e-commerce and online marketplaces channels. Our e-commerce channel includes a network of e-commerce websites, supported by our call-center sales agents who generate cross-sell and up-sell opportunities. We also sell our products through our online marketplaces, which primarily consist of auction and other third-party websites. The six month year over year decrease was primarily due to 3.1% decrease in our online business and a 3.8% decrease in our offline business, which consists of our wholesale operations.

E-commerce sales increased 1.9% from $32.6 million for the three months ended June 30, 2007 to $33.2 million for the three months ended June 30, 2008. The total number of placed orders in our e-commerce channel increased from 306,000 orders in the second quarter of 2007 to 334,000 orders in the second quarter of 2008 primarily due a higher conversion rate. For the six months ended June 30, 2007 and 2008, ecommerce sales were $65.9 million and $64.4 million, respectively. The 2.3% decrease for the six months ended June 30, 2008 compared to the six months ended 2007 was due to higher product pricing in the 2007 period.

Online marketplaces net sales increased 18.9% from $5.2 million for the three months ended June 30, 2007 to $6.2 million for the three months ended June 30, 2008. This increase was primarily due to the successful launch of a new channel strategy. For the six months ended June 30, 2007 and 2008, online marketplaces sales were $11.8 million and $10.9 million, respectively. The 7.6% decrease for the six months ended June 30, 2008 compared to the same period in the prior year was primarily due to the timing of the new strategy rollout in 2008.

Net sales from our Wholesale operations decreased 14.3% to $3.6 million and 3.8% to $7.9 million for the three and six months ended June 30, 2008, respectively, which reflects our previously announced focus on our online business.

We anticipate that sales from our wholesale operations will decline as a percentage of net sales in the future primarily due to focus on our online business. In addition, a significant customer decreased its purchases from us in the second quarter. We expect sales from this significant customer to continue to decline in the future.

We have historically experienced seasonality in our business which generally has resulted in higher sales in winter and summer months. We expect seasonality to continue in future years as automobile collisions during inclement weather create increased demand for body parts in winter months, and consumers often undertake projects to maintain and enhance the performance of their automobiles in the summer months. We anticipate that seasonality will continue to have a material impact on our financial condition and results of operations during any given year.

Gross profit increased during the three and six months ended June 30, 2008 due to an increase in sales from in stock products and higher prices on products from our e-commerce channel compared to the same periods in the prior year. Gross margins increased by 1.1% to 33.8% and 2.1% to 34.1% for the three and six months ended June 30, 2008, respectively, compared to the same periods in the prior year. The increase in gross margins for both periods was primarily due to a mix shift to in stock distribution, lower direct product costs from certain suppliers, partially offset by higher outbound freight expense.

General and Administrative Expense
                                       Three Months Ended          Six Months Ended
                                            June 30,                   June 30,
                                        2008          2007         2008         2007
                                                      (in thousands)
General and administrative expense   $    4,588      $ 3,655     $   9,211     $ 6,531
Percent of net sales                      10.6%         8.6%         11.0%        7.6%

General and administrative expense increased 25.5% and 41.0% for the three and six months ended June 30, 2008, from the same periods in the previous year. The increase for the three months ended June 30, 2008 primarily reflects higher payroll and related expenses in the amount of $400,000 due to increased headcount; increased amortization expense of $300,000; an increase of $200,000 related to administrative operating expenses related to public company compliance costs; partially offset by $300,000 of legal costs that the Company incurred in the prior year period. The increase for the six months ended June 30, 2008 primarily reflects higher payroll and related expenses in the amount of $1.1 million due to increased headcount; an increase of $200,000 of share-based compensation expense related to stock options; an increase of $900,000 of administrative operating costs; increased amortization expense of $500,000; partially offset by a decrease of $300,000 in legal costs.

Marketing Expense
                         Three Months Ended          Six Months Ended
                              June 30,                   June 30,
                          2008          2007         2008         2007
                                        (in thousands)
Marketing expense      $    6,635      $ 4,921     $ 12,602     $ 10,821
Percent of net sales        15.4%        11.7%        15.2%        12.6%

Marketing expense increased 34.8% and 16.5% for the three and six months ended June 30, 2008, respectively from the same periods in the previous year. The increase in both periods was due to $900,000 and $1.4 million of increased personnel costs added in our Philippines operations, partially offset by the elimination of the U.S. based call center costs; higher depreciation and operating expenses of $300,000 and $600,000 due to the expansion of our call center facility; and higher marketing services totaling $200,000 and $300,000, respectively. Advertising costs during the three months ended June 30, 2008 increased $300,000 but decreased for the six months ended June 30, 2008 by $600,000 compared to the same periods in the previous year, which was a result of the termination of certain marketing co-op reimbursements from a significant supplier now included as a reduction of direct product costs, partially offset by increased efficiency in our marketing spend.

Fulfillment Expense
                         Three Months Ended          Six Months Ended
                              June 30,                   June 30,
                          2008          2007         2008         2007
                                        (in thousands)
Fulfillment expense    $    2,377      $ 1,862     $   4,465     $ 3,579
Percent of net sales         5.5%         4.4%          5.4%        4.2%

Fulfillment expense increased 27.7% and 24.7% for the three and six months ended June 30, 2008 from the same periods in the previous year due to an increase of $400,000 and $600,000 in additional payroll and associated personnel costs related to the expansion of our warehousing and purchasing personnel; and higher depreciation of $100,000 and $300,000 related to the addition of our Tennessee distribution center.

  Technology Expense
                         Three Months Ended          Six Months Ended
                              June 30,                   June 30,
                         2008           2007          2008         2007
                                        (in thousands)
Technology expense     $     787       $   507     $    1,471     $  956
Percent of net sales        1.8%          1.2%           1.8%       1.1%

Technology expense increased 55.2% and 53.9% for the three and six months ended June 30, 2008, respectively, from the same periods in the previous year primarily due to costs incurred to build out the technology leadership team to support the Company's strategic plan and non-recurring severance costs.

Amortization of Intangibles and impairment loss

                                              Three Months Ended             Six Months Ended
                                                   June 30,                      June 30,
                                              2008           2007           2008          2007
                                                               (in thousands)
Amortization of intangibles and
impairment loss                            $    20,541     $   2,100     $   22,640     $   4,154
Percent of net sales                             47.7%          5.0%          27.2%          4.8%

Amortization of intangibles and impairment loss increased by $18.5 million to $20.5 million and $22.6 million for the three and six months ended June 30, 2008, respectively, due to a non-cash impairment charge totaling $18.4 million on intangible assets associated with the Partsbin business, which we acquired in May 2006. The Company recorded an impairment loss of $16.7 million for its websites; $0.1 million for software; $0.9 million for vendor agreements; and $0.7 million for its domain names. The interim impairment charges were primarily the result of: i) the recent deterioration in the economic environment and the Company's stock price, ii) lower sales and profitability which generated losses from certain Partsbin websites, iii) deficiencies in the software platform also acquired from Partsbin, and iii) the termination of volume discounts and marketing co-ops from certain vendor agreements. The Company utilized a discounted cash flow approach in determining fair value for both the websites and vendor agreement intangible assets. The decrease in future cash flows from certain acquired websites and vendor agreements resulted in the long-lived assets being impaired, as the carrying value of the website assets and vendor agreement assets exceeded the fair value of those assets determined as the net present value of future projected cash flows. The software and domain name assets' fair value was determined using a relief from royalty

Other Income, Net
                         Three Months Ended          Six Months Ended
                              June 30,                   June 30,
                         2008           2007         2008          2007
                                        (in thousands)
Other income, net      $     236       $   548     $     508      $  270
Percent of net sales        0.5%          1.3%          0.6%        0.3%

The decrease in other income, net during the three months ended June 30, 2008 was primarily due to $300,000 less interest income received related to lower interest rates in the second quarter of 2008 compared to the prior year period. The increase in other income, net during the six months ended June 30, 2008 was primarily due to a $600,000 reduction of interest expense due to the repayment of approximately $28.0 million of our long-term indebtedness upon completion of our initial public offering in February 2007 offset by $300,000 of interest income generated from investing the IPO proceeds.

Income Tax Provision (Benefit)
                                   Three Months Ended          Six Months Ended
                                        June 30,                   June 30,
                                    2008           2007        2008          2007
                                                  (in thousands)
Income tax provision (benefit)   $    (8,042 )    $  515     $  (8,606 )    $  675
Percent of net sales                  (18.7% )      1.3%        (10.3% )      0.8%

The decrease in income tax provision (benefit) during the three and six months ended June 30, 2008 was primarily due to the tax effect of the $18.4 million impairment loss on our intangible assets. This is a temporary timing difference as we expect to reduce our cash paid for taxes over the remaining asset life for tax purposes.

Liquidity and Capital Resources

Sources of Liquidity

We have historically funded our operations from cash generated from operations, credit facilities, bank and stockholder loans, equity financings and capital lease financings. At June 30, 2008, we had no balance outstanding under our bank line of credit, which expires on October 30, 2009 and bears interest at prime minus 0.5%.

Cash Flows

We had cash and cash equivalents of $34.1 million as of June 30, 2008, representing an $8.0 million decrease from $42.1 million of liquid assets as of December 31, 2007. The decrease in our cash and cash equivalents as of June 30, 2008 was primarily due to a reclassification of $6.7 million of our investments in ARPS to long-term.

Operating Activities

We generated $1.9 million of net cash from operating activities for the six months ended June 30, 2008. The significant components of cash flows from operating activities were a net loss of $13.0 million; an increase of $8.5 million to deferred tax assets related to the impairment loss on our intangibles; an increase of $2.6 million to our inventory; a $0.3 million net change in other current assets and liabilities; offset by $6.0 million in non-cash depreciation and amortization expense; $18.4 million of a non-cash impairment loss on intangibles; and $1.3 million of non-cash stock-based compensation expense.

Investing Activities

Cash provided by investing activities during the six months ended June 30, 2008 totaled $13.8 million and was primarily attributable to our net change in investments of $15.8 million in ARPS and purchases of $2.0 million of property and equipment.

Financing Activities

Cash used in financing activities during the six months ended June 30, 2008 totaled $1.0 million and was primarily due to repayments made on notes payable.

We had working capital of $35.9 million as of June 30, 2008, which was primarily due to the cash generated from our initial public offering. The historical . . .