Three Months Ended March 31,
                                                             2009                 2008
EBITDA and Other Business Statistics:
EBITDA (1)                                              $         (629 )     $       13,344
Capital expenditures, software and web site
development costs                                       $        5,234       $        2,914
Active dealers in our network as of end of the
period (2)                                                      18,998               22,457
Active financing sources in our network as of end of
period (3)                                                         736                  578
Active lender to dealer relationships (4)                      134,475              220,264
Subscribing dealers in our network as of end of the
period (5)                                                      14,646               13,641
Transactions processed (6)                                      14,327               23,889
Average transaction price (7)                           $         1.68       $         1.60
Average monthly subscription revenue per subscribing
dealership (8)                                          $          635       $          547

(1) EBITDA represents net income before interest (income) expense, taxes, depreciation and amortization. We present EBITDA because we believe that EBITDA provides useful information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We rely on EBITDA as a primary measure to review and assess the operating performance of our company and management team in connection with our executive compensation plan incentive payments.

EBITDA has
limitations as an
analytical tool
and you should
not consider it
in isolation, or
as a substitute
for analysis of
our results as
reported under
Generally
Accepted
Accounting
Principles in the
United States of
America (GAAP).
Some of these
limitations are:

• EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

• EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

• EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

• Other companies may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. EBITDA is a measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity.

The following table sets forth the reconciliation of EBITDA, a non-GAAP financial measure, to net (loss) income, our most directly comparable financial measure in accordance with GAAP (in thousands):

                                                           Three Months Ended March 31,
                                                             2009                 2008
GAAP net (loss) income                                  $       (5,625 )     $        2,338
Interest income                                                   (402 )             (1,563 )
Interest expense                                                    50                   92
(Benefit) provision for income taxes                            (3,381 )              1,955
Depreciation of property and equipment and
amortization of capitalized software and website
costs                                                            3,443                2,896
Amortization of acquired identifiable intangibles                5,286                7,626


EBITDA (non-GAAP)                                       $         (629 )     $       13,344

(2) We consider a dealer to be active as of a date if the dealer completed at least one revenue-generating credit application processing transaction using the DealerTrack network during the most recently ended calendar month.

(3) We consider a financing source to be active in our network as of a date if it is accepting credit application data electronically from dealers in the DealerTrack network, including financing sources visible to dealers through drop down menus. This counting methodology reflects revisions made in July 2008 to more accurately reflect the number of financing sources available on the network.

(4) Lender to dealer relationships are made up of two components, the number of financing sources on the DealerTrack network and the number of active dealers submitting applications. Lender to dealer relationships are counted by pair. For example, one lender's relationship with 50 dealerships is counted as fifty relationships; the next lender's relationship with the same 50 dealership would bring our relationship count to 100. The number of lender to dealer relationships is impacted by both the loss of lenders or dealers. For example, if a lender goes out of business, exits indirect auto financing or reduces the number of dealers it does business with, our relationship count is negatively impacted by each of the dealers that are no longer doing business with that lender. If a dealer goes out of business our relationship count is also negatively impacted.

(5) Represents the number of dealerships with a current subscription in the DealerTrack or DealerTrack Canada network at the end of a given period.

(6) Represents revenue-generating transactions processed in the DealerTrack, DealerTrack Digital Services and DealerTrack Canada networks at the end of a given period.

(7) Represents the average revenue earned per transaction processed in the DealerTrack, DealerTrack Digital Services and DealerTrack Canada networks during a given period.

(8) Represents net subscription revenue divided by subscribing dealers in the DealerTrack and DealerTrack Canada networks.

Revenue
Transaction Services Revenue. Transaction services revenue consists of revenue earned from our financing source customers for each credit application or contract that dealers submit to them. We also earn transaction services revenue from financing source customers for each financing contract executed via our electronic contracting and digital contract processing solutions, as well as for any portfolio residual value analyses we perform for them. We also earn transaction services revenue from dealers or other service and information providers, such as aftermarket providers, accessory providers, and credit report providers, for each fee-bearing product accessed by dealers.
Subscription Services Revenue. Subscription services revenue consists of revenue earned from our customers (typically on a monthly basis) for use of our subscription or license-based products and services. Some of these subscription services enable dealer customers to manage their dealership data and operations, compare various financing and leasing options and programs, sell insurance and other aftermarket products, analyze inventory, and execute financing contracts electronically.
Other Revenue. Other revenue consists of revenue primarily earned through forms programming, data conversion and training of our DMS suite, shipping commissions earned from our digital contract business and consulting and analytical revenue earned from ALG.
Cost of Revenue and Operating Expenses
Cost of Revenue. Cost of revenue primarily consists of expenses related to running our network infrastructure (including Internet connectivity and data storage), amortization expense on acquired intangible assets, compensation and related benefits for network and technology development personnel, amounts paid to third parties pursuant to contracts under which a portion of certain revenue is owed to those third parties (revenue share) and direct costs for data licenses, direct costs (printing, binding, and delivery) associated with our residual value guides, forms programming, data conversion, training, and hardware costs associated with our DMS product offering, allocated overhead and amortization associated with capitalization of software.
Product Development Expenses. Product development expenses consist primarily of compensation and related benefits, consulting fees and other operating expenses associated with our product development departments. The product development departments perform research and development, as well as enhance and maintain existing products.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of compensation and related benefits, facility costs and professional services fees for our sales, marketing, customer service and administrative functions.
We allocate overhead such as occupancy and telecommunications charges, and depreciation expense based on headcount, as we believe this to be the most accurate measure. As a result, a portion of general overhead expenses is reflected in our cost of revenue and each operating expense category. We allocated the restructuring costs related to our January 5, 2009 realignment of our workforce and business to the appropriate cost of revenue and operating expense categories based on each of the terminated employees respective functions. For further information, please refer to Note 19 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
Fair Value Measurements
Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
• Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

• Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

• Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

We have segregated all financial assets that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.
Assets measured at fair value on a recurring basis include the following as of March 31, 2009 (in thousands):

                                 Quoted        Significant
                               Prices in          Other          Significant
                                 Active        Observable       Unobservable
                                Markets          Inputs            Inputs         March 31,
                               (Level 1)        (Level 2)         (Level 3)          2009
  Cash equivalents (1)         $  120,683     $           -     $           -     $  120,683
  Short-term investments (2)       11,179             1,813                 -         12,992
  Long-term investments (3)             -                 -             3,626          3,626


  Total                        $  131,862     $       1,813     $       3,626     $  137,301

(1) Cash equivalents consist primarily of money market funds with original maturity dates of three months or less, for which we determine fair value through quoted market prices.

(2) Level 1 short-term investments consist primarily of tax-advantaged preferred stock of financial institutions, corporate bonds and municipal notes with maturity dates of one year or less, for which we determine fair value through quoted market prices.

As of
December 31,
2008 we had
$2.3 million
(net of
impairment
charge) of
Level 2
auction rate
securities
(ARS) invested
in
tax-advantaged
preferred
stock trusts
in which the
underlying
equities are
preferred
stock. These
ARS were
associated
with failed
auctions, for
which the
trust
dissolved and
distributed
the underlying
preferred
security
during the
first quarter
of 2009. The
result of this
distribution
is a
realizable
event in which
we recognized
a loss in the
statement of
operations of
$0.3 million
on the
decreased fair
value from
December 31,
2008 through
the
dissolution of
the trust.
Subsequent to
the trust
dissolution
through
March 31, 2009
we recorded a
loss in other
comprehensive
income of
$0.2 million
on the
decreased fair
value.

(3) Level 3 long-term investments consist of auction rate securities (ARS) invested in tax-exempt state government obligations that was valued at par. Our intent is not to hold the $1.6 million of ARS invested in tax-exempt state government obligations to maturity, but rather use the interest reset feature to provide liquidity, if applicable. We have classified this as long-term due to the maturity date of the security being in 2011, coupled with ongoing failed auctions in the marketplace.

Level 3
long-term
investments
also includes
tax-advantaged
preferred
stock of a
financial
institution.
It is
uncertain
whether we
will liquidate
these
securities
within the
next twelve
months, as
such we have
classified
them as
long-term on
our
consolidated
balance
sheets. Due to
the lack of
observable
market quotes
we utilized
valuation
models that
rely
exclusively on
Level 3 inputs
including
those that are
based on
expected cash
flow streams,
including
assessments of
counterparty
credit
quality,
default risk
underlying the
security,
discount rates
and overall
capital market
liquidity.

During the
three months
ended
March 31, 2009
our investment
in ARS
invested in
certain
tax-advantaged
preferred
stock trusts
as of
December 31,
2008 dissolved
and the
trustee
distributed
the underlying
preferred
stock
instruments.
As a result of
these
conversions we
measured the
fair value of
the Level 3
long-term
tax-advantaged
preferred
stock on the
distribution
date and
determined
that the value
increased from
December 31,
2008 and as a
result we
recorded a
realized gain
in the
statement of
operations of
$0.7 million
for the three
months ended
March 31,
2009.

The change in the carrying amount of Level 3 investments for the three months ended March 31, 2009 is as follows (in thousands):

    Balance as of January 1, 2009                                      $ 1,550
    Reclassification from Level 2 investments to Level 3 investments     1,360
    Gain on available for sale securities                                  716


    Balance as of March 31, 2009                                       $ 3,626

Realignment of Workforce and Business
On January 5, 2009, we announced a realignment of our workforce and business aimed at sharpening our focus on high growth opportunities and to reflect current market conditions. To do this, we reduced our workforce by approximately 90 people, or 8% of our total employees, including several executive and senior-level positions. As a result of the realignment, we expensed total restructuring costs during the three months ended March 31, 2009 of approximately $6.7 million, including approximately $3.9 million of net non-cash compensation expense. The expenses associated with these charges are reflected in operating costs and expenses in our consolidated statement of operations. The table below sets forth the significant cash components and activity under the restructuring program for the three months ended March 31, 2009 (in thousands):

                      Balance as of                                         Balance as of
                     January 1, 2009      Charges       Cash Payments      March 31, 2009
    Severance        $              -     $  2,732     $         1,388     $         1,344
    Other benefits                  -          130                 130                   -


    Total            $              -     $  2,862     $         1,518     $         1,344

As of March 31, 2009, the remaining liability of $1.3 million represents the severance payments for three executives that were terminated. Pursuant to the severance agreements for these executives, the remaining liability is expected to be paid on the six month anniversary of their termination dates which will be during the third quarter of 2009.
Critical Accounting Policies and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the amounts reported for assets, liabilities, revenue, expenses and the disclosure of contingent liabilities.
Our critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations and that involve difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The estimates are based on historical experience and on various assumptions about the ultimate outcome of future events. Our actual results may differ from these estimates if unforeseen events occur or should the assumptions used in the estimation process differ from actual results. Management believes there have been no material changes during the three months ended March 31, 2009, except as noted below, to the critical accounting policies discussed in the section entitled "Management Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 24, 2009.
In December 2007, the FASB issued SFAS No. 141R which replaced SFAS No. 141. SFAS No. 141R retains the fundamental requirements of SFAS No. 141, but revises certain principles, including the definition of a business combination, the recognition and measurement of assets acquired and liabilities assumed in a business combination, the accounting for goodwill, and financial statement disclosure. We have adopted the provisions of SFAS No. 141R as of January 1, 2009. For further information about the adoption of the provisions of SFAS No. 141R refer to Note 8 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on From 10-Q.

Results of Operations
The following table sets forth, for the periods indicated, the selected
consolidated statements of operations:

                                                         Three Months March 31,
                                                  2009                             2008
                                                        % of Net                         % of Net
                                        $ Amount        Revenue          $ Amount        Revenue
                                                   (In thousands, except percentages)
Consolidated Statements of
Operations Data:
Net revenue                            $   55,700           100.0 %     $   64,308           100.0 %

. . .