The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "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 our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2 and under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2008 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.

You should read the following discussion of our results of operations and financial condition in conjunction with our 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, 2008.

Our corporate website is located at www.autobytel.com. Information on our website is not incorporated by reference in this Quarterly Report. At or through the Investor Relations section of our website we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as practicable after 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 website.

Basis of Presentation

We sold certain assets and liabilities of its AVV Inc. ("AVV") business on January 23, 2008. Accordingly, AVV is presented in the unaudited consolidated condensed financial statements as discontinued operations. As discontinued operations, revenues and expenses are presented on a net basis and stated separately from the respective captions in continuing operations in the Consolidated Condensed Statements of Operations and Comprehensive Loss. Expenses included in discontinued operations are direct costs that will be eliminated from future operations.

Overview

We are an automotive marketing services company that assists automotive dealers and manufacturers sell cars and light trucks. By connecting consumers to automotive dealers and manufacturers through internet lead referral programs and on-line advertising, we provide automotive dealers and manufacturers with opportunities to efficiently market their vehicles to potential customers. We purchase from third parties and generate from our own websites consumer internet requests for pricing and availability on new and used cars as well as for vehicle financing (these consumer internet requests are referred to in this Quarterly Report on Form 10-Q as "Leads"). We sell the Leads primarily to our automotive dealer and manufacturer customers. Leads are purchased from a network of supplier websites, such as Edmunds, Kelley Blue Book, and Yahoo, ("Network Websites"). These Network Websites provide substantially all of our Leads. Additionally, we own and operate consumer-facing automotive websites, including Autobytel.com®, Autoweb.com®, AutoSite.com®, Car.comsm, CarSmart.com®, CarTV.com®, and MyRide.com® that provide consumers with information and tools to aid them with their automotive purchase decisions. Our owned websites provide a small percentage of our Leads but provide a significant portion of our page views for the advertising component of our business. In addition to advertising on our websites, we provide advertising opportunities for automotive manufacturers and other automotive advertisers through our marketing network, which includes our AutoReach advertising network ("Ad Network") and co-branded websites.

For the three and six months ended June 30, 2009 our results of operations were 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 the 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 Leads delivered to our Dealers;

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

• The amount of visits (traffic) to our websites;

• The cost of acquiring traffic to our websites;

• The rates attainable from our advertisers; and

• The implementation of certain cost reduction initiatives.

The automotive industry is currently experiencing what is considered to be the most challenging environment of the past several decades:

• North American vehicle sales have decreased significantly,

• Dealer consolidations, closings, and bankruptcies have increased significantly,

• General Motors and Chrysler filed and emerged from for bankruptcy in 2009, and

• Auto sales in the United States are expected to continue to remain at low levels throughout 2009 and into 2010.

One of the factors generally believed to be a contributing factor to the sharp decline in automotive sales has been the lack of available consumer credit to finance vehicle purchases. If credit availability does not improve, the recovery in sales may be further postponed. If automobile sales and the industry in general do not recover, then our business, results of operations and financial condition will be materially and adversely affected.

Results of Operations

 Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30,
2008

                                                                                                         Change
                                               % of Total                       % of Total
                                   2009       net revenues         2008        net revenues           $            %
                                                  ($ amounts in thousands)
Net revenues:
Lead Fees                        $ 11,583                86 %    $  17,178                91 %    $  (5,595 )      (33 )%
Advertising                         1,786                13          1,767                 9             19          1
Other                                  75                 1             41                 -             34         83
Total net revenues                 13,444               100         18,986               100         (5,542 )      (29 )
Cost of revenues (excludes
depreciation of $197 and $279
for the three months ended
June 30, 2009 and 2008,
respectively)                       9,022                67         12,214                64         (3,192 )      (26 )
Gross profit                        4,422                33          6,772                36         (2,350 )      (35 )
Operating expenses:
Sales and marketing                 2,542                19          4,320                23         (1,778 )      (41 )
Technology support                  1,226                 9          3,680                19         (2,454 )      (67 )
General and administrative          3,032                23          4,386                23         (1,354 )      (31 )
Patent litigation settlement         (179 )              (1 )            -                 -           (179 )        -
Goodwill impairment                     -                 -         52,074               274        (52,074 )     (100 )
Total operating expenses            6,621                50         64,460               339        (57,839 )      (90 )
Operating loss                   $ (2,199 )             (17 )%   $ (57,688 )            (303 )%   $  55,489        (96 )%

Lead Fees. Lead fees decreased $5.6 million or 33% in second quarter 2009, compared to second quarter 2008 and was primarily a result of the following:

· a 16% decline in the total volume of new and used car sales Leads delivered, which was due to a 32% net reduction in the number of auto-dealer customers, partially offset by a increase in the number of Leads delivered per customer. The decline in our Lead fees is consistent with the overall decline in U.S. light vehicle sales in second quarter 2009 compared to second quarter 2008 of approximately 32%, and

· a 9% decline in our average sales price per Lead, which was due primarily to sales incentives provided to new and existing auto-dealer customers.

Advertising. Advertising revenues for second quarter 2009 were consistent with the second quarter 2008. The decrease in page views was a result of the reduction in search engine marketing of approximately 68%, and was offset by the recognition of $0.2 million of deferred advertising revenue related to advertising campaigns that were closed out with certain advertisers.

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

The $3.2 million or 26% decrease in the cost of revenues in second quarter 2009 compared to second quarter 2008 was primarily due to a decrease of $1.5 million in Lead acquisition costs directly related to the decline in volume of Leads delivered, a decrease in depreciation of $0.7 million, a $0.4 million decrease in SEM, a decrease in hosting and data content of $0.4 million, and a $0.2 million decrease in other net various expense amounts. SEM costs have decreased due to cost containment initiatives and efforts to more efficiently deploy marketing dollars. Depreciation and other website related costs have decreased due to the decision to discontinue the use of the MyRide related software platform in the fourth quarter of 2008. The average cost per purchased Lead overall increased by approximately 1% in 2009. This increase is a result of increased cost per Leads related to Leads delivered to retail dealers, offset by the decrease in the cost of Leads delivered for a major OEM sales program.

Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, internal personnel costs and other costs associated with dealer sales, website advertising, and dealer support. Sales and marketing expense in second quarter 2009 decreased by $1.8 million or 41% compared to second quarter 2008, due principally to internal cost containment initiatives, which are related to the reductions in force which were initiated in the second half of 2008.

Technology Support. Technology support expense includes personnel costs related to enhancing the features, content and functionality of our Websites and our Internet-based communications platform, costs associated with our telecommunications and computer infrastructure, and costs related to data and technology development. Technology support expense in second quarter 2009 decreased by $2.5 million or 67% compared to second quarter 2008, due to compensation expense savings resulting from internal cost reduction initiatives, which are related to the reductions in force which were initiated in the second half of 2008.

General and Administrative. General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense in second quarter 2009 decreased $1.4 million or 31% compared to second quarter 2008 due to a decrease in net personnel and temporary labor expense of $1.2 million (including a $0.2 million decrease of stock compensation) and a decrease in insurance and other expenses of approximately $0.2 million.

Goodwill Impairment. During the three months ended June 30, 2008 we performed our annual impairment test by first comparing the carrying value of Autobytel to its fair value based on market capitalization at that date. As the carrying value exceeded the fair value, the second step impairment measurement was performed based on a discounted projection of future cash flows and market methods of determining fair value. As a result of this testing, a non-cash impairment charge of $52.1 million was recorded during the six months ended June 30, 2008.

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008

                                                                                                         Change
                                               % of Total                       % of Total
                                   2009       net revenues         2008        net revenues           $            %
                                                  ($ amounts in thousands)
Net revenues:
Lead Fees                        $ 23,735                87 %    $  35,339                89 %    $ (11,604 )      (33 )%
Advertising                         3,473                13          4,266                11           (793 )      (19 )
Other                                 107                 -             78                 -             29         37
Total net revenues                 27,315               100         39,683               100        (12,368 )      (31 )
Cost of revenues (excludes
depreciation of $450 and $598
for the six months ended June
30 2009 and 2008,
respectively)                      17,908                66         26,039                66         (8,131 )      (31 )
Gross profit                        9,407                34         13,644                34         (4,237 )      (31 )
Operating expenses:
Sales and marketing                 5,182                19          9,515                24         (4,333 )      (46 )
Technology support                  2,687                10          8,273                21         (5,586 )      (68 )
General and administrative          7,086                26         10,737                27         (3,651 )      (34 )
Patent litigation settlement       (2,846 )             (10 )       (2,667 )              (7 )         (179 )        7
Goodwill impairment                     -                 -         52,074               131        (52,074 )     (100 )
Total operating expenses           12,109                45         77,932               196        (65,823 )      (84 )
Operating loss                   $ (2,702 )             (11 )%   $ (64,288 )            (162 )%   $  61,586        (96 )%

Lead Fees. Lead fees decreased $11.6 million or 33% in first half 2009, compared to first half 2008 and was primarily a result of the following:

· a 21% decline in the total volume of new and used car sales Leads delivered, which was due to a 32% net reduction in the number of automotive dealer customers, partially offset by a increase in the number of Leads delivered per customer. The decline in our Lead fees roughly correlates with the overall decline in U.S. light vehicle sales in first half 2009 compared to first half 2008 of approximately 35%, and

· an 8% decline in our average sales price per Lead, which was due primarily to sales incentives provided to new and existing auto-dealer customers.

Advertising. The $0.8 million or 19% decrease in advertising revenues for first half 2009, compared to first half 2008 was due primarily due to a decrease in page views as a result of the reduction in search engine marketing of approximately 87%, partially offset by the recognition of $0.4 million of deferred advertising revenue in the first half of 2009 related to advertising campaigns that were closed out with certain advertisers.

Cost of Revenues. The $8.1 million or 31% decrease in the cost of revenues in first half 2009 compared to first half 2008 was primarily due to a decrease of $2.8 million in Lead acquisition costs directly related to the decline in volume of Leads delivered, a $2.6 million decrease in SEM, a decrease in depreciation of $1.3 million, a $0.7 million decrease in other net various expense amounts, and a decrease in hosting and data content of $0.7 million. SEM costs have decreased due to cost containment initiatives and efforts to more efficiently deploy marketing dollars. Depreciation and other website related costs have decreased due to the decision to discontinue the use of the MyRide related software platform in the fourth quarter of 2008. The average cost per purchased Lead increased by approximately 8% in 2009 primarily due to an increase in overall quality of the leads purchased during the period.

Sales and Marketing. Sales and marketing expense in first half 2009 decreased by $4.3 million or 46% compared to first half 2008, due principally to internal cost containment initiatives, which are related to the reductions in force which were initiated in the second half of 2008.

Technology Support. Technology support expense in first half 2009 decreased by $5.6 million or 68% compared to first half 2008, due to compensation expense savings resulting from internal cost reduction initiatives, which are related to the reductions in force which were initiated in the second half of 2008.

General and Administrative. General and administrative expense in first half 2009 decreased $3.7 million or 34% compared to first half 2008 due to the following:

· a decrease in net personnel and temporary labor expense of $2.3 million (including a $0.6 million decrease of stock compensation),

· a decrease in professional fees of $0.9 million, primarily as a result of cost containment initiatives, and

· a decrease in insurance and other expenses of approximately $0.4 million.

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 "Settlement Agreement"). 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 its parent company 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. In March 2009, we received the second of three $2.7 million settlement payments pursuant to the Settlement Agreement. We recorded the payment as patent litigation settlement in the period payment was received, as a reduction to costs and operating expenses. The remaining payment is guaranteed by WP Equity Partners, Inc., a Warburg Pincus affiliate and is expected to be received in March 2010. 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. We do not have reasonable assurance that we will receive the remaining payment on its respective due date or at all, and therefore have not recorded any amounts receivable related to the Settlement Agreement as of June 30, 2009.

Goodwill Impairment. During the three months ended June 30, 2008 we performed our annual impairment test by first comparing the carrying value of Autobytel to its fair value based on market capitalization at that date. As the carrying value exceeded the fair value, the second step impairment measurement was performed based on a discounted projection of future cash flows and market methods of determining fair value. As a result of this testing, a non-cash impairment charge of $52.1 million was recorded during the six months ended June 30, 2008.

As of July 15, 2009, we had 108 employees. We also use independent contractors as required. None of our employees are represented by labor unions. We have not experienced any work stoppages and consider our employee relations to be generally good.

Liquidity and Capital Resources

The table below sets forth a summary of our cash flows for the six months ended
June 30, 2009 and 2008:

                                                                        Six Months Ended June 30,
                                                                        2009                2008
                                                                             (in thousands)

   Net cash used in operating activities                            $     (2,359 )     $      (12,341 )
   Net cash (used in) provided by investing activities                     1,734               19,859
   Net cash provided by financing activities                                   -                  601

Our principal sources of liquidity are our cash and cash equivalents balances and proceeds from dispositions of non-core businesses and the Dealix patent litigation settlement payments. We continue to have no debt. Our cash and cash equivalents totaled $26.8 million as of June 30, 2009 compared to cash and cash equivalents of $27.4 million as of December 31, 2008.

We entered into a Settlement Agreement with Dealix, which among other things, provides for settlement payments. We received settlement payments in 2007, 2008, and 2009. We have been unable to assess with reasonable assurance the collectability of the remaining payment due in March 2010 under the Settlement Agreement, as we do not have financial information to support the credit worthiness of the debtor or guarantor. We do not have reasonable assurance that we will receive the remaining payment on its due date or at all, and therefore, we have not recorded any amounts receivable related to the Settlement Agreement and cannot rely on these payments as a source of future liquidity.

During the first six months of 2009 both General Motors ("GM") and Chrysler LLC ("Chrysler") filed for reorganization bankruptcy. Chrysler emerged from bankruptcy in June 2009 and GM emerged from Bankruptcy in July 2009. For the six months ended June 30, 2009, approximately 9% of our total revenues were derived from GM and Chrysler, and approximately 14% or $1.3 million of the gross accounts receivable relate to GM and Chrysler at June 30, 2009. GM and Chrysler's bankruptcies have not significantly impacted our liquidity during the first half of 2009; however the future impact to our liquidity as a result of these events is uncertain.

Net Cash Used in Operating Activities

Net cash used in operating activities in first half 2009 of $2.4 million resulted primarily from a net operating loss of $0.6 million and an increase in cash used to reduce accrued expenses and other liabilities of $3.2 million primarily related to severance costs that were accrued as of December 31, 2008 and paid in first half 2009, partially offset by cash received related to the reduction of our accounts receivable of $0.7 million. Net cash used in operating activities in first half 2008 was $12 million. The reduction in cash used in operating activities from 2008 to 2009 was primarily due to the reduction in losses combined with changes in working capital requirements.

Net Cash Provided by Investing Activities

Net cash provided by investing activities was $1.7 million in first half 2009. The Company received approximately $1.3 million of the $1.9 million AVV asset sale proceeds held in escrow, that is not recorded on the balance sheet. Subsequent to the June 30, 2009 balance sheet date, we received a further $0.4 million of the escrow amounts, with the remaining $0.2 million subject to certain contingencies. In addition, we sold all of our available-for-sale investment for cash proceeds of $0.6 million. Net cash provided by investing activities in first half 2008 of $19.9 million was due to an increase in cash proceeds from divestures of $21.4 million, partially offset by increases in capital expenditures of $1.5 million.

Net Cash Provided by Financing Activities

Our primary source of cash from financing activities is from the exercise of stock options and the issuance of common stock pursuant to the employee stock purchase plan. There were no financing activities in first half 2009 and $0.6 million of proceeds from option activity in first half 2008.

Off-Balance Sheet Arrangements

At June 30, 2009 we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Recent Accounting Pronouncements

SFAS 157: In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS 157, "Fair Value Measurements." SFAS 157 establishes a framework for measuring fair value and expands disclosures of fair value measurements. SFAS 157 is effective for financial statements issued for periods beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2 which defers the effective date of SFAS 157 for non-financial assets and liabilities that are not recorded at fair value on a recurring basis until periods beginning after November 15, 2008. The adoption of the non-deferred portion of SFAS 157 on January 1, 2008, and the adoption of the deferred portion of SFAS 157 on January 1, 2009, did not have an impact on our consolidated financial position, results of operations, or cash flows.

SFAS 161: In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133." SFAS 161 provides new disclosure requirements for derivative and hedging activities and is effective for periods beginning after November 15, 2008. We adopted SFAS 161 on January 1, 2009, and it did not have a material effect on our consolidated financial statements.

SFAS 160: In December 2007, the FASB issued SFAS 160, "Non-Controlling Interests in Consolidated Financial Statements - an amendment of ARB 51." This standard provides new accounting guidance and disclosure requirements for non-controlling interests in a subsidiary. Since we do not have non-controlling interests in our subsidiaries, the adoption of SFAS 161 on January 1, 2009 did not have any effect on our consolidated financial statements.

SFAS 141(R): In December 2007, the FASB issued SFAS No. 141R, "Business Combinations." SFAS 141R establishes principles and requirements for how the . . .