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 such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "estimate," "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, 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 such plans or achieve such goals and objectives or that we will be able successfully to do so on a profitable basis. These forward-looking statements are just predictions and involve risks and uncertainties such that actual results may differ materially from these statements. Important factors that could cause actual results to differ materially from those reflected in forward-looking statements made in this Quarterly Report on Form 10-Q are set forth under Part II "Item 1A. Risk Factors," and Part I. Item 1A of our Annual Report on Form-10K for the year ended December 31, 2007. Investors are urged not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We are under no 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. Unless specified otherwise, as used herein, the terms "we," "us" or "our" refer to Autobytel Inc. and its subsidiaries.

You should read the following discussion of our results of operations and financial condition in conjunction with our condensed consolidated 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, 2007.

We are a Delaware corporation. Our principal corporate offices are located in Irvine, California. Our common stock is listed on The NASDAQ Global Market under the symbol ABTL. Our corporate Web site is located at www.autobytel.com. Information on our Web site is not incorporated by reference in this Quarterly Report. At or through the Investor Relations section of our Web site 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 such 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 Web site.

Basis of Presentation

We sold certain assets and liabilities of its Automotive Information Center ("AIC") data operations on January 31, 2007; sold its wholly-owned subsidiary, Retention Performance Marketing, Inc., ("RPM") on June 30, 2007; and sold certain assets and liabilities of its AVV Inc. ("AVV") business on January 23, 2008, collectively the "Divestitures." Accordingly, the Divestures are presented in the consolidated condensed financial statements as discontinued operations. As discontinued operations, revenues and expenses of the Divestitures are presented on a net basis and stated separately from the respective captions in continuing operations in the Unaudited Consolidated Condensed Statements of Operations. Expenses included in discontinued operations are direct costs of the Divestures that will be eliminated from future operations.

Overview

Autobytel Inc. (the "Company" or "Autobytel") is an Internet automotive marketing services company that assists automotive dealers and manufacturers sell cars and related products and services. The Company owns and operates consumer-facing automotive web sites, including its newest site, MyRide.com ®, which is designed to help consumers find, see, buy and learn almost anything related to automobiles. The Company's other web sites are Autobytel.com ®, Autoweb.com ®, Car.comsm, CarSmart.com ®, AutoSite.com ®, and CarTV.com ®. By providing a convenient and comprehensive automotive consumer experience across the purchase and ownership lifecycle, Autobytel seeks to provide automotive dealers and manufacturers with opportunities to connect with a steady, diverse stream of motivated, serious shoppers, while providing dealers and manufacturers with targeted brand and product advertising opportunities. In addition to its web sites, the Company generates leads and advertising opportunities for dealers and manufacturers through its marketing network, which includes the AutoReach advertising network, co-branded websites, such as ESPN.com, and lead referral affiliates such as AOL, Edmunds and Kelly Blue Book.

For the three and nine months ended September 30, 2008 our results of operations have been affected and may continue to be affected in the future, by various factors, including, but not limited to, the following:

• general economic conditions and specifically market conditions in the automotive industry;

• the effects of competition (e.g., the availability and pricing of competing services and products and the resulting effects on sales and pricing of our services and products);

• a decline in purchase requests delivered to our retail and enterprise dealers;

• variations in spending by automotive manufacturers and others for our advertising services;

• the amount of visits (traffic) to our network of web sites;

• the cost of acquiring traffic to our network of web sites;

• the rates attainable from our advertisers; and

• the implementation of certain cost reduction initiatives.

As of September 30, 2008, we had approximately $32.2 million in cash and cash equivalents. For fourth quarter 2008, we will use cash in excess of cash generated from operations.

During the first nine months of 2008 consumer demand for new and used cars has substantially declined compared to the same period in the prior year. The declining consumer demand has resulted in fewer purchase requests delivered to our retail dealers. Additionally, many auto dealers are being adversely impacted by the automotive industry's downturn in sales. In the third quarter of 2008 we experienced increased cancellations of contracts for leads purchases from our participating retail dealers. Recent tightening in credit markets has increased the difficulty for consumers to obtain financing for their vehicle purchases and leases. This has created additional challenges for dealers in converting purchase requests into sales, which in turn has further impacted the number of leads being purchased by our retail dealers. The reduced availability of financing has also negatively impacted our finance leads business, which supplies dealers with customers who have below prime credit ratings. We do not believe there will be improvement of these conditions in our leads businesses in the near term.

Although we believe automotive manufacturers continue to transition advertising and marketing budgets from traditional media to on-line and other directly measurable media, overall advertising and marketing budgets are down, and if the unfavorable automotive industry and general economic conditions persist, we believe that there may be a negative impact on the on-line advertising and marketing expenditures by the automotive manufacturers, dealer groups, and related businesses. To date we have not been informed by advertisers in the 2009 media buying cycle that they plan significant advertising expenditure reductions for advertising that may be placed with us in 2009 compared to expenditures for advertising actually placed with us in 2008, but there can be no assurance that expenditure reductions will not occur. We are experiencing decreases in our advertising revenues primarily resulting from a decrease in page views as a result of low quality traffic; a reduction in search engine marketing; and a reduction in advertising rates from some advertisers due to weak advertisement click-through rates and other advertisement performance measures. We believe that there may be some improvement in the number of page views resulting from improved efficiency in our search engine marketing, expanded search engine optimization and syndication in 2009.

As previously announced, we engaged an investment banking firm, RBC Capital Markets Corporation (RBC), to act as a financial advisor and to assist the Company in exploring and evaluating strategic alternatives to maximize shareholder value. Any such alternatives could include the possible sale of the Company or certain of its assets or strategic partnerships. There can be no assurances that the process will result in any specific transaction or transactions. We do not intend to disclose developments regarding the process unless and until the Company's board of directors approves a definitive course of action.

Results of Operations

Revenues by groups of similar services were as follows:



                                            Three Months Ended                                     Nine Months Ended
                                               September 30                 Change                    September 30                 Change
                                           2008             2007          $          %            2008             2007          $          %
                                          (amounts in thousands)                                 (amounts in thousands)
REVENUES:
Lead Fees                             $       15,571    $     17,576   $ (2,005 )   (11 )%   $       50,910    $     51,485       (575 )    (1 )%
Advertising                                    1,640           4,318     (2,678 )   (62 )%            5,906          13,971     (8,065 )   (58 )%
Other                                             59              17         42     247 %               137              43         94     219 %

TOTAL REVENUES                        $       17,270    $     21,911   $ (4,641 )   (21 )%   $       56,953    $     65,499   $ (8,546 )   (13 )%

Percent of Revenue by groups of similar services were as follows:

                                 Three Months Ended          Nine Months Ended
                                    September 30               September 30
                                 2008           2007        2008          2007
         Percent of Revenue:
         Lead Fees                   90 %           80 %        90 %          79 %
         Advertising                 10 %           20 %        10 %          21 %
         Other                       -              -           -             -

         TOTAL REVENUES             100 %          100 %       100 %         100 %

Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007

Lead Fees. The $2.0 million or 11% decrease in lead fees for third quarter 2008, compared to third quarter 2007 was primarily due to a $1.7 million decrease in retail new-car lead revenue, a $0.4 decrease in used-car lead revenue and a $0.4 million decline in finance lead revenue, partially offset by a $0.5 million increase in wholesale auto lead revenue. The decline in retail new, used and finance lead revenue was the result of a decline in overall auto related consumer requests and a net loss of participating dealers. The increase in wholesale auto lead revenue resulted from the higher multiple of lead deliveries enabled by our multiple lead delivery technology, implemented in the third quarter 2007, and the addition of certain wholesale relationships.

Advertising. The $2.7 million or 62% decrease in advertising revenues for third quarter of 2008, compared to third quarter 2007 was primarily due to three factors: (1) a decrease in page views as a result of initiatives to eliminate low quality traffic; (2) a decrease in page views due to the reduction in search engine marketing; and (3) a reduction in advertising rates from some advertisers due to poor advertisement click-through rates and other advertisement performance measures in prior periods.

Cost and expenses were as follows:

                                                 Three Months Ended
                                                   September 30,             Change
                                                  2008         2007        $          %
                                                   (in thousands)
  Costs and expenses:
  Cost of revenues                             $    11,107   $ 14,934   $ (3,827 )   (26 )%
  Sales and marketing                                4,001      5,260     (1,259 )   (24 )%
  Technology support                                 3,651      4,577       (926 )   (20 )%
  General and administrative                         4,551      5,599     (1,048 )   (19 )%
  Amortization of acquired intangible assets            42         42         -       -

  Total costs and expenses                     $    23,352   $ 30,412   $ (7,060 )   (23 )%

Accrued Liability Related to Workforce Reductions. See Results of Operations for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, and Part I, Item 1, Note 6 to the unaudited consolidated condensed financial statements, "Selected Balance Sheet Accounts - Accrued Liability Related to Workforce Reductions" of this Report on Form 10-Q.

Cost of Revenues. Cost of revenues consists of lead acquisition costs, traffic acquisition costs and other cost of revenues. Lead acquisition costs consist of payments made to our Internet consumer request providers, including Internet portals and online automotive information providers. Traffic acquisition costs consist of search engine marketing, revenue share payments to traffic providing partners, and other costs incurred to generate page views on the Autobytel network of web sites. Other cost of revenues consists of salaries and compensation related expenses, fees paid to third parties for data and content included on our Web site properties, connectivity costs, technology license fees, and server equipment depreciation.

The $3.8 million or 26% decrease in the cost of revenues in third quarter 2008 compared to third quarter 2007 was primarily due to a decrease of $1.5 million in search engine marketing costs, a $1.1 million decrease in lead acquisition costs, a decrease of $0.5 million in other traffic acquisition costs, a $0.3 million decrease in computer software maintenance, a $0.2 million decrease in data licensing costs, and a $0.2 million net decrease in other costs. Search engine and other traffic acquisition costs have decreased due to initiatives to more efficiently deploy marketing dollars. Lead acquisition costs have decreased due to the decreased volume of acquired leads.

Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, internal personnel costs and other costs associated with dealer sales, Web site advertising, and dealer support. Sales and marketing expense in third quarter 2008 decreased by $1.3 million or 24% compared to third quarter 2007, due principally to internal cost containment initiatives.

Technology Support. Technology support expense includes personnel costs related to developing new products, enhancing features, content and functionality of our Web sites and our Internet-based communications platform, costs associated with our telecommunications and computer infrastructure, and costs related to data and technology development. Technology support expense in third quarter 2008 decreased by $0.9 million or 20% compared to third quarter 2007, due to compensation expense savings resulting from internal cost reduction initiatives.

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 third quarter 2008 decreased $1.0 million or 19% compared to third quarter 2007 due to a decrease in personnel, temporary labor, and professional fees of $0.8 million and a decrease in stock compensation of $0.3 million.

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

Lead Fees. The $0.6 million or 1% decrease in lead fees for the nine months ended September 30, 2008, compared to the same period in the prior year was primarily due to a decrease in the number of leads delivered. This was the result of a decline in overall auto related consumer requests, and a decline in finance leads, partially offset by a higher multiple of lead deliveries enabled by our multiple lead delivery technology, implemented in the third quarter 2007, and the addition of several wholesale relationships.

Advertising. The $8.1 million or 58% decrease in advertising revenues for the nine months ended September 30, 2008 compared to the same period in the prior year was primarily due to two factors: (1) a decrease in page views across our websites; and (2) a reduction in advertising rates. The decrease in page views across our websites was primarily the result of our initiatives to eliminate low quality traffic and a reduction in search engine marketing for the nine months ended September 30, 2008.

Cost and expenses were as follows:

                                          Nine Months Ended
                                            September 30,               Change
                                         2008          2007           $          %
                                           (in thousands)
        Costs and expenses:
        Cost of revenue                $  37,146     $  39,371     $ (2,225 )    (6 )%
        Sales and marketing               13,516        16,181       (2,665 )   (16 )%
        Technology support                11,924        13,389       (1,465 )   (11 )%
        General and administrative        15,203        20,507       (5,304 )   (26 )%
        Amortization of intangibles          125           422         (297 )   (70 )%
        Patent litigation settlement      (2,667 )     (12,000 )      9,333     (78 )%
        Goodwill impairment               52,074            -        52,074      -

        Total costs and expenses       $ 127,321     $  77,870     $ 49,451      64 %

Accrued Liability Related to Workforce Reductions. See Results of Operations for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, and in Part I, Item 1, Note 6 to the unaudited consolidated condensed financial statements, "Selected Balance Sheet Accounts-Accrued Liability Related to Workforce Reductions" of this Report on Form 10-Q.

Cost of Revenues. The $2.2 million or 6% decrease in the cost of revenues for the nine months ended September 30, 2008 compared to the same period in the prior year was primarily due to a decrease of $2.4 million in search engine marketing costs and a $1.7 million decrease in other traffic acquisition costs, partially offset by a $1.3 million increase in depreciation, a $0.3 million increase in Web site hosting costs, an increase in lead acquisition costs of $0.2 million, and other net cost increases of $0.1 million. Search engine marketing and other traffic acquisition costs have decreased due to cost containment initiatives and efforts to more efficiently deploy marketing dollars. Depreciation and Web site hosting costs have increased due to the launch of the MyRide.com Web site in third quarter 2007. Lead acquisition costs increased due to the increased volume of acquired leads.

Sales and Marketing. Sales and marketing expense for the nine months ended September 30, 2008 decreased by $2.7 million or 16% compared to the same period in the prior year, due principally to personnel reductions and other internal cost containment initiatives.

Technology Support. Technology support expense for the nine months ended September 30, 2008 decreased by $1.5 million or 11% compared to the same period in the prior year, due to compensation expense related savings resulting from internal cost reduction initiatives.

General and Administrative. General and administrative expense for the nine months ended September 30, 2008 decreased $5.3 million or 26% compared to the same period in the prior year due to a decrease in personnel, temporary labor and other compensation expense of $2.9 million, a decrease in professional fees of $1.4 million, a decrease in stock compensation of $0.9 million, and a decrease of $0.1 million of other net expenses.

Patent Litigation Settlement. In 2004, we brought a lawsuit for patent infringement against Dealix Corporation ("Dealix"). In December 2006, we entered into a settlement agreement with Dealix. The agreement provides that Dealix will pay us a total of $20.0 million in settlement payments for a mutual release of claims and a license from us to Dealix and the Cobalt Group of certain of our patent and patent applications. On March 13, 2007, we 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 annual anniversary dates of the initial payment. On March 14, 2008, we received the first of three $2.7 million settlement payments pursuant to the agreement. We recorded the payments as patent litigation settlement, in the period payment was received, as reduction to costs and operating expenses. The remaining payments are guaranteed by WP Equity Partners, Inc., a Warburg Pincus affiliate. We have been unable to assess with reasonable assurance the collectability of the remaining payments under the Settlement Agreement as we do not have financial information to support the credit worthiness of the debtor or guarantor. Therefore, we do not have reasonable assurance that we will receive any remaining payments on their respective due dates or at all.

Goodwill Impairment. See Results of Operations for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, and Part I, Item 1, Note 6 to the unaudited consolidated condensed financial statements, "Selected Balance Sheet Accounts - Goodwill Impairment" of this Report on Form 10-Q.

Employees

As of October 31, 2008, we had a total of 151 employees. We also utilize independent contractors as required. None of our employees are represented by labor unions. We have not experienced any work stoppages and generally consider our employee relations to be good.

Liquidity and Capital Resources

Our cash and cash equivalents totaled $32.2 million as of September 30, 2008 compared to cash, cash equivalents and short-term investments of $27.6 million as of December 31, 2007.

Our working capital, excluding assets and liabilities held for sale, increased by $8.5 million, to $34.3 million at September 30, 2008 compared to $25.8 million at December 31, 2007. The increase was primarily due to the $21.4 million of proceeds from the sale of AVV and to the $2.7 cash related to the Dealix patent litigation settlement agreement received in the first quarter 2008, as well as increases in accounts receivable due to an increase in days sales outstanding and a decrease in accounts payable and accrued expenses due to accrued payments related to the MyRide web site in 2007 that did not recur in 2008.

Net Cash Used In Operating Activities

For the nine months ended September 30, 2008, net cash flows used in operating activities were $15.2 million, compared to $2.3 million used in the same period in the prior year. The increase in net cash flows used for operating activities was primarily due to the increase in losses combined with changes in working capital.

Net Cash Provided By Investing Activities

For the nine months ended September 30, 2008, net cash flows provided by investing activities were $19.1 million, compared to $5.7 million provided in the same period in the prior year. The increase was due to an increase in cash proceeds from the Divestures in 2008 of $21.4 million, compared to $9.7 million in 2007, lower capital spending in the nine months ended September 30, 2008 compared to the same period in the prior year of $5 million, which was due to the substantial completion of the MyRide.com Web site in 2007 and no new significant capital projects in the nine months ended September 30, 2008, partially offset by a $3 million decrease in cash received from investment maturities.

Net Cash Provided By Financing Activities

For the nine months ended September 30, 2008, cash flows provided by financing activities were $0.6 million, compared to $2.1 million for the same period in the prior year. The decrease was due to fewer stock option exercises in 2008 compared to 2007.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined in Regulation S-K
303(a)(4)(ii).

Recent Accounting Pronouncements

In September 2006, Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a frame work for measuring fair value and expands disclosure about fair value measurements. SFAS 157 does not require new fair value measurements but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of information. SFAS 157 is effective for fiscal years beginning after November 15, 2007. However, on February 12, 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2 which delays the effective date for all non-financial assets

and liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within the fiscal years for items within the scope of FSP FAS 157-2. Therefore, effective for 2008, we adopted SFAS 157, except as it applies to those non-financial assets and non-financial liabilities as noted in FSP FAS 157-2. The adoption of SFAS 157 for financial assets and liabilities as of January 1, 2008 did not have an impact on Autobytel's consolidated financial position, results of operations or cash flows. The Company does not expect the adoption of FSP FAS 157-2 in 2009 to have a material effect on its consolidated financial position, results of operations or cash flows.

. . .