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 significantly 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 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.

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 nine months ended September 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 September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, " Fair Value Measurements " ("SFAS 157") which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. We have adopted the provisions of SFAS 157 as of January 1, 2008 for financial assets. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1-defined as observable inputs such as quoted prices in active markets; Level 2-defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3-defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. We have evaluated both Level 2 and Level 3 evidence to measure the fair value of our $6.5 million of auction rate preferred securities ("ARPS") as of September 30, 2008. These investments consist solely of collateralized debt obligations supported by municipal and state agencies; do not include mortgage-backed securities or student loans; have redemption features that call for redemption at 100% of par value; and have a current credit rating of A or AAA. As of September 30, 2008, we received partial redemptions at par on our investments totaling $1.3 million. The fact that there is not an active market as of September 30, 2008 to liquidate 100% of these certain investments was the final determination in classifying them as Level 3. We used a discounted cash flow valuation model to estimate the fair value of the securities. As a result of the temporary declines in fair value of our ARPS, which we attribute to liquidity issues rather than credit issues, we have recorded an unrealized loss of $149,000 to accumulated other comprehensive income (loss).

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

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"), we recorded an impairment charge totaling $18.4 million in the quarter ended June 30, 2008 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 (iv) 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, we 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
as a % of net sales for the periods indicated:


                                      Three Months Ended          Nine Months Ended
                                         September 30,              September 30,
                                      2008           2007         2008          2007

Net sales                               100.0 %       100.0 %      100.0 %       100.0 %
Cost of sales                            67.0          63.8         66.2          66.7
Gross profit                             33.0          36.2         33.8          33.3
Operating expenses:
General and administrative               11.4           8.4         11.2           7.9
Marketing                                14.3          13.0         14.9          12.7
Fulfillment                               6.4           5.1          5.7           4.4
Technology                                2.8           1.2          2.1           1.1
Amortization of intangibles               1.0           5.5         19.2           5.1
Total operating expenses                 35.9          33.2         53.1          31.2
Income (loss) from operations            (2.9 )         3.0        (19.3 )         2.1
Other income:
Other income (loss)                      (0.1 )         0.0          0.0           0.0
Interest income, net                      0.7           1.0          0.6           0.5
Total other income                        0.6           1.0          0.6           0.5
Income (loss) before income taxes        (2.3 )         4.0        (18.7 )         2.6
Income tax provision (benefit)           (1.0 )         1.6         (7.5 )         1.1
Net income (loss)                        (1.3 ) %       2.4 %      (11.2 ) %       1.5 %

Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months
Ended September 30, 2007

Net Sales and Gross Margin
                  Three Months Ended           Nine Months Ended
                     September 30,               September 30,
                   2008          2007         2008          2007
                                  (in thousands)
Net sales       $   36,554     $ 37,787     $ 119,668     $ 123,642
Cost of sales       24,485       24,096        79,262        82,497
Gross profit    $   12,069     $ 13,691     $  40,406     $  41,145
Gross margin         33.0%        36.2%         33.8%         33.3%

Net sales decreased 3.3% to $36.6 million and decreased 3.2% to $119.7 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in the previous year. The three month year-over-year decrease was primarily due to a $1.0 million or 26.6% decrease in our offline business, which consists of our Kool Vue and wholesale operations. The nine month year-over-year decrease was due to 2.4% decrease in our online business and a 10.8% decrease in our offline business. Our online business consists of two sales channels, e-commerce and online marketplaces. 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. Our online marketplaces consist primarily of auction and other third-party websites.

E-commerce sales decreased 3.2% to $28.6 million for the three months ended September 30, 2008 from $29.5 million for the prior year period. This decrease is primarily due to a decline of 6,000 placed orders in our e-commerce channel over the prior-year period and a $6 decrease in our average order value to $121 for the third quarter of 2008 from $127 in the third quarter of 2007. For the nine months ended September 30, 2008 and 2007, e-commerce sales were $92.9 million and $95.4 million, respectively. The 2.6% decrease was primarily due to a $4 decrease in average order value compared to the prior-year period.

Online marketplaces sales increased 14.5% to $5.3 million for the three months ended September 30, 2008 from $4.6 million for the same period in the prior year. This increase was primarily due to increased sales on our auction platform. For the nine months ended September 30, 2008 and 2007, online marketplaces sales were $16.2 million and $16.4 million, respectively.

Net sales from our offline business decreased 26.6% to $2.7 million and 10.8% to $10.6 million for the three and nine months ended September 30, 2008, compared to the same periods in the prior year. This decrease in net sales is primarily due to reduced purchases from a significant customer in the second and third quarters of 2008. We anticipate that sales from our wholesale operations will continue to decline as a percentage of net sales 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 was $12.1 million or 33.0% of net sales and $40.4 million or 33.8% of net sales for the three and nine months ended September 30, 2008, compared to $13.7 million or 36.2% of net sales and $41.1 million or 33.3% of net sales in the same periods in the prior year. The decrease of 3.2% in gross margins for the three months ended September 30, 2008 compared to the same period in the prior year was primarily due to higher fuel costs and third party shipping costs, higher raw material costs, and lower vendor rebates. The 0.5% increase in gross margins for the nine months ended September 30, 2008 compared to the same periods in the prior year was primarily due to a mix-shift to in stock distribution, partially offset by higher outbound freight costs.

General and Administrative Expense
                                       Three Months Ended          Nine Months Ended
                                          September 30,              September 30,
                                        2008          2007          2008         2007
                                                       (in thousands)
General and administrative expense   $    4,170      $ 3,184     $   13,381     $ 9,715
Percent of net sales                      11.4%         8.4%          11.2%        7.9%

General and administrative expense increased $1.0 million or 31.0% and $3.7 million or 37.7% for the three and nine months ended September 30, 2008, from the same periods in the previous year. The increase for the three months ended September 30, 2008 primarily reflects $400,000 higher payroll related costs; $300,000 of increased amortization expense; a $200,000 increase in share-based compensation expense; and $100,000 of additional professional fees. The increase for the nine months ended September 30, 2008 primarily reflects $1.5 million higher payroll costs; $800,000 of increased professional fees and public company operating expenses; $800.000 of higher amortization expense; and $300,000 of increased share-based compensation expense.
During the three and nine months ended September 30, 2008, we recognized $800,000 and $2.1 million, respectively, of share-based compensation, determined in accordance with SFAS 123(R). Based on options outstanding as of September 30, 2008, we expect to recognize $7.1 million in additional share-based compensation expense over a weighted average period of 2.7 years.

Marketing Expense
                         Three Months Ended          Nine Months Ended
                            September 30,              September 30,
                          2008          2007         2008          2007
                                         (in thousands)
Marketing expense      $    5,240      $ 4,917     $  17,842     $ 15,738
Percent of net sales        14.3%        13.0%         14.9%        12.7%

Marketing expense increased $300,000 or 6.6% and $2.1 million or 13.4% for the three and nine months ended September 30, 2008, from the same periods in the previous year. As a percentage of net sales, marketing expense increased 1.3% to 14.3% for the three months ended September 30, 2008 compared to the prior-year period primarily due to higher depreciation expense related to the expansion of our offshore facilities. As a percentage of net sales, marketing expense increased 2.2% to 14.9% for the nine months ended September 30, 2008 compared to the prior-year period primarily due to $1.3 million of increased personnel costs in our offshore operations; partially offset by the elimination of our U.S. based call center costs; and $600,000 of higher depreciation expense.

Fulfillment Expense
                         Three Months Ended          Nine Months Ended
                            September 30,              September 30,
                          2008          2007          2008         2007
                                         (in thousands)
Fulfillment expense    $    2,322      $ 1,920     $    6,787     $ 5,499
Percent of net sales         6.4%         5.1%           5.7%        4.4%

Fulfillment expense increased $400,000 or 20.9% and $1.3 million or 23.4% for the three and nine months ended September 30, 2008, from the same periods in the previous year. As a percentage of net sales, fulfillment expense increased 1.3% to 6.4% for the three months ended September 30, 2008 compared to the prior-year period primarily due to $100,000 of additional payroll related costs; a $200,000 increase in our fulfillment center costs; and $100,000 higher depreciation expense. As a percentage of net sales, fulfillment expense increased 1.3% to 5.7% for the nine months ended September 30, 2008 compared to the prior-year period primarily due to $600,000 in payroll costs; a $300,000 increase in our fulfillment center costs; and $400,000 of higher depreciation expense.

Technology Expense
                         Three Months Ended          Nine Months Ended
                            September 30,              September 30,
                          2008           2007         2008         2007
                                         (in thousands)
Technology expense     $    1,041       $  438     $    2,512     $ 1,394
Percent of net sales         2.8%         1.2%           2.1%        1.1%

Technology expense increased 137.7% to $1.0 million and increased 80.2% to $2.5 million for the three and nine months ended September 30, 2008, respectively. The increase in both periods was due to increased investments in our technology platform with increased headcount and third-party service providers.

Amortization of Intangibles and Impairment Loss
                                               Three Months Ended            Nine Months Ended
                                                 September 30,                 September 30,
                                              2008            2007           2008          2007
                                                               (in thousands)
Amortization of intangibles and
impairment loss                            $      365       $   2,097     $   23,005     $   6,251
Percent of net sales                             1.0%            5.5%          19.2%          5.1%

Amortization of intangibles and impairment loss decreased $1.7 million or 82.6% for the three months ended September 30, 2008 and increased by $16.8 million to $23.0 million for the nine months ended September 30, 2008. The decrease for the three months ended September 30, 2008 was primarily due to lower pre-tax income from the prior year period. The increase for the nine months ended September 30, 2008 was primarily due to a non-cash impairment charge in the second quarter of 2008 totaling $18.4 million on intangible assets associated with the Partsbin business, which we acquired in May 2006. For further discussion, refer to our SFAS 144 disclosure in the Critical Accounting Policies section. We estimate aggregate amortization expense for the remaining three months ending December 31, 2008, and the years ending December 31, 2009, 2010, 2011 and thereafter to be approximately $400,000, $700,000, $300,000, $300,000 and $400,000, respectively.

Other Income
                         Three Months Ended          Nine Months Ended
                            September 30,              September 30,
                         2008           2007         2008           2007
                                         (in thousands)
Other income           $     216       $   392     $     724       $  662
Percent of net sales        0.6%          1.0%          0.6%         0.5%

The decrease in other income during the three months ended September 30, 2008 was primarily due to $200,000 lower interest income related to lower interest rates in the third quarter of 2008 compared to the prior year period. The increase in other income during the nine months ended September 30, 2008 compared to the prior-year period was primarily due to interest income generated from investing the IPO proceeds, which was partially offset by 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.

Income Tax Provision (Benefit)
                                   Three Months Ended          Nine Months Ended
                                      September 30,              September 30,
                                    2008           2007         2008         2007
                                                   (in thousands)
Income tax provision (benefit)   $     (362)      $  633     $  (8,968)     $ 1,309
Percent of net sales                  (1.0%)        1.6%         (7.5%)         1.1

The decrease in income tax provision (benefit) during the three and nine months ended September 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 of twelve years for tax purposes.

Liquidity and Capital Resources

Sources of Liquidity

We have historically funded our operations from cash generated from operations, credit facilities, bank loans, equity financings and capital lease financings. At September 30, 2008, we had no balance outstanding under our bank line of credit, which expires on October 31, 2009. The credit agreement contains customary covenants that, among other things, require compliance with certain financial ratios and targets and restrict the incurrence of additional indebtedness. As of September 30, 2008, we were in violation of our minimum EBITDA requirement; however, we have received a waiver from our lender.

Cash Flows

We had cash and cash equivalents of $33.1 million as of September 30, 2008, representing a $9.0 million decrease from $42.1 million of liquid assets as of December 31, 2007. The decrease in our cash and cash equivalents as of September 30, 2008 was primarily due to a reclassification of $6.4 million of our investments in ARPS to long-term and a $3.4 million payment related to our securities litigation settlement in July 2008.

Operating Activities

We generated $1.9 million of net cash from operating activities for the nine months ended September 30, 2008. The significant components of cash flows from operating activities were a net loss of $13.4 million; an increase of $8.9 million in deferred tax assets primarily related to the tax benefit from the impairment loss on our intangibles; an increase of $0.9 million to our inventory; a $2.6 million net change in other current assets and liabilities, which primarily relates to the $3.4 million settlement in our securities class action litigation; offset by $7.2 million in non-cash depreciation and amortization expense; $18.4 million of a non-cash impairment loss on intangibles; and $2.1 million of non-cash stock-based compensation expense.

Investing Activities

Cash provided by investing activities during the nine months ended September 30, 2008 totaled $12.8 million and was primarily attributable to our net change in investments of $16.2 million in ARPS and purchases of $2.9 million of property and equipment.

Financing Activities

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

Funding Requirements

We had working capital of $36.1 million as of September 30, 2008, which was primarily due to the cash generated from our initial public offering. The historical seasonality in our business during the first and fourth calendar quarters of each year cause cash and cash equivalents, inventory and accounts payable to be generally higher in these quarters, resulting in seasonal fluctuations in our working capital. We anticipate that funds generated from operations, and cash on hand will be sufficient to meet our working capital needs and expected capital expenditures for at least the next twelve months. Our future capital requirements may, however, vary materially from those now planned or anticipated. Changes in our operating plans, lower than anticipated net sales, increased expenses or other events, including those described in "Risk Factors," may cause us to seek additional debt or equity financings in the future. Financing may not be available on acceptable terms, on a timely basis, or at all, and our failure to raise adequate capital when needed could negatively impact our growth plans and our financial condition and results of operations. In addition, our $6.4 million of ARPS investments as of September 30, 2008 were classified as long-term investments as a result of failed auctions and liquidity issues and we may not have access to those funds.

We are currently planning on opening a new distribution center on the east coast which would result in a significant capital investment. We expect to incur approximately $2.0 million in facility start-up costs which includes a new warehouse technology platform and up to an additional $3.0 million in . . .