Basis of Presentation

The accompanying unaudited consolidated condensed financial statements presented herein are presented on the same basis as the 2011 Form 10-K. We have made disclosures in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included. The statements of operations and comprehensive income (loss) and cash flows for the periods ended June 30, 2012 and 2011 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.
The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2011 Form 10-K.

On July 11, 2012, the Company implemented a 1-for-5 reverse split of the Company's common stock, $0.001 par value per share ("Reverse Stock Split").
Trading of the common stock on a post-Reverse Stock Split adjusted basis on The NASDAQ Capital Market began on July 12, 2012. The primary reason for the Reverse Stock Split was to increase the per share price of the common stock in order to maintain compliance with The NASDAQ Capital Market's continued listing requirement that the common stock maintain a minimum closing bid price of at least $1.00 per share ("Minimum Bid Price Requirement"). Prior to the Reverse Stock Split, the Company was not in compliance with this continued listing requirement and was subject to possible delisting from trading on The NASDAQ Capital Market. On July 26, 2012, the Nasdaq Listing Qualifications staff informed the Company that the Company had regained compliance with the Minimum Bid Price Requirement.
We acquired substantially all of the assets of Cyber on September 17, 2010. The results of Cyber's operations have been included in the consolidated financial statements since that date.

Overview
We are an automotive marketing services company that assists automotive retail dealers ("Dealers") and automotive manufacturers ("Manufacturers") market and sell new and used vehicles to consumers through our programs for online purchase request referrals ("Purchase Requests"), Dealer marketing products and services, and online advertising programs and data products. Our consumer-facing automotive websites ("Company Websites"), including our flagship website Autobytel.com®, provide consumers with information and tools to aid them with their automotive purchase decisions and the ability to submit inquiries requesting Dealers to contact the consumers regarding purchasing or leasing vehicles ("Vehicle Purchase Requests"). For consumers who may not be able to secure loans through conventional lending sources, our Company Websites provide these consumers the ability to submit inquiries requesting Dealers or other lenders that may offer vehicle financing to these consumers to contact the consumers regarding vehicle financing ("Finance Purchase Requests"). The Company's mission for consumers is to be "Your Lifetime Automotive Advisor ™."

Purchase Request quality is measured by the conversion of Purchase Requests to actual vehicle sales. We rely on detailed feedback from Manufacturer and wholesale customers to confirm the performance of our Purchase Requests. In addition, in 2012 we began to utilize R.L. Polk data to evaluate the performance quality of Purchase Requests we generate from Company Websites as well as those Purchase Requests we acquire from third party Purchase Request suppliers. Our Manufacturer and wholesale customers and R.L. Polk match the Purchases Requests we deliver to our customers against vehicle sales data to provide us with closing rates for the Purchase Requests we deliver to our customers and information that allows us to compare these closing rates to the closing rates of the Purchase Requests we acquire from third party suppliers. Some of the data providers also provide comparisons to closing rates of Purchase Requests delivered directly to customers by the third party suppliers. Based on our evaluation of this information, we believe that the Purchase Requests we deliver to our customers generally are out-performing the closing rates of the Purchase Requests delivered by our third party Purchase Request suppliers. With this information, we report a number of key metrics to our customers, allowing them to gain a better understanding of the revenue opportunities that they may realize from acquiring Purchase Requests from us. We can now optimize the mix of Purchase Requests we deliver to our Dealers based on multiple sources of quality measurements.

In June 2011, we launched the first phase of a multi-phase redesign of our flagship website, Autobytel.com. The new website delivers a comprehensive consumer proposition to be Your Lifetime Automotive Advisor TM by assisting consumers as they navigate all stages of the automotive researching, shopping, buying and ownership experiences. By engaging consumers throughout the entire lifecycle of their automotive needs, Autobytel enhances its opportunity to further scale its brand and market penetration. Concurrent with the launch of the mobile version of Autobytel.com, we launched an enhanced dealer directory which allows consumers to find local dealers from a comprehensive list of all franchise dealers in the United States.

We launched the mobile version of Autobytel.com in June 2012. This mobile-optimized website gives consumers the opportunity to view photographs and videos, read car reviews and check pricing from their mobile devices. In addition, this mobile website has shopping tools that will allow a consumer to find a Dealer, browse inventory and request free Dealer price quotes. For the three and six months ended June 30, 2012, our business, results of operations and financial condition were affected, and may continue to be affected in the future, by general economic and market factors, conditions in the automotive industry, the market for Purchase Requests and the market for advertising services, including, but not limited to, the following:
· The adverse effect of high unemployment on the number of vehicle purchasers,

· Availability of, and interest rates for, financing for vehicle purchases,

· Pricing and purchase incentives for vehicles,

· Disruption in the available inventory of automobiles,

· The adverse effect of high demand/low supply vehicles on the need for Purchase Requests for such vehicles,

· Gasoline prices,

· Volatility in spending by Manufacturers and others in their marketing budgets and allocations,

· The effect of changes in search engine algorithms and internet space, and

· The impact of market factors on our ability to continue to attract, train, retain and motivate qualified management and other personnel.

Results of Operations
 Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011

The following table sets forth certain income statement data for the three-month
periods ended June 30, 2012 and 2011 (certain amounts may not calculate due to
rounding):
                                        % of total                      % of total
                           2012          revenues          2011          revenues         $ Change      % Change
                                                      (Dollar amounts in thousands)
Revenues:
Purchase requests        $  14,760                94 %   $  14,189                93 %   $      571            4 %
Advertising                    927                 6           988                 7            (61 )         (6 )
Other revenues                  44                 -            70                 -            (26 )        (37 )
Total revenues              15,731               100        15,247               100            484            3
Cost of revenues
(excludes depreciation
of $32 and $87 for the
three months ended
June 30, 2012 and
2011, respectively)          9,396                60         8,885                58            511            6
Gross profit                 6,335                40         6,362                42            (27 )          -
Operating expenses:
Sales and marketing          2,268                14         2,211                15             57            3
Technology support           1,619                10         1,662                11            (43 )         (3 )
General and
administrative               1,773                11         1,943                13           (170 )         (9 )
Depreciation and
amortization                   401                 3           504                 3           (103 )        (20 )
Litigation settlements         (67 )               -          (261 )              (2 )          194          (74 )
Total operating
expenses                     5,994                38         6,059                40            (65 )         (1 )
Operating income               341                 2           303                 2             38           13
    Interest and other
income (expense), net           (3 )               -            13                 -            (16 )       (123 )
Income before income
tax provision                  338                 2           316                 2             22            7
    Income tax
provision                      107                 1           117                 1            (10 )         (9 )
Net income               $     231                 1 %   $     199                 1 %   $       32           16 %

Purchase Requests. Purchase Request revenue increased $0.6 million or 4% in the second quarter of 2012 compared to the second quarter of 2011 primarily due to an increase of 5% and 6% in the volume of automotive Purchase Requests delivered to new and used retail Dealers and Manufacturers and other wholesale purchasers, respectively.

Advertising. Advertising revenues decreased $61,000 or 6% in the second quarter of 2012 compared to the second quarter of 2011 due primarily to timing delays of certain Manufacturer direct marketing campaigns.

Cost of Revenues. Cost of revenues consists of Purchase Request and traffic acquisition costs and other cost of revenues. Purchase Request and traffic acquisition costs consist of payments made to our Purchase Request providers, including internet portals and on-line automotive information providers. Other cost of revenues consists of search engine marketing ("SEM") and fees paid to third parties for data and content, including search engine optimization ("SEO") activity, included on our properties, connectivity costs, development costs related to our websites, compensation related expense and technology license fees, server equipment depreciation and technology amortization directly related to the Company's websites. SEM, sometimes referred to as paid search marketing, is the practice of bidding on keywords on search engines to drive traffic to a website.
Cost of revenues increased $0.5 million or 6% in the second quarter of 2012 compared to the second quarter of 2011 primarily due to an increase in SEM costs.

The following table sets forth certain income statement data for the six-month periods ended June 30, 2012 and 2011 (certain amounts may not calculate due to rounding):

                                       % of total                     % of total
                           2012         revenues         2011          revenues         $ Change      % Change
                                                     (Dollar amounts in thousands)
Revenues:
Purchase requests        $ 30,554               94 %   $  29,153               93 %    $    1,401            5 %
Advertising                 1,786                6         1,989                7            (203 )        (10 )
Other revenues                 96                -           138                -             (42 )        (30 )
Total revenues             32,436              100        31,280              100           1,156            4
Cost of revenues
(excludes depreciation
of $64 and $142 for
the six months ended
June 30, 2012 and
2011, respectively)        19,265               59        18,758               60             507            3
Gross profit               13,171               41        12,522               40             649            5
Operating expenses:
Sales and marketing         4,613               14         4,630               15             (17 )          -
Technology support          3,447               11         3,386               11              61            2
General and
administrative              3,788               12         4,028               12            (240 )         (6 )
Depreciation and
amortization                  803                2           950                3            (147 )        (15 )
Litigation settlements       (137 )              -          (328 )             (1 )           191          (58 )
Total operating
expenses                   12,514               39        12,666               40            (152 )         (1 )
Operating income
(loss)                        657                2          (144 )              -             801         (556 )
    Interest and other
income (expense), net          (4 )              -            23                -             (27 )       (117 )
Income (loss) before
income tax provision          653                2          (121 )              -             774         (640 )
    Income tax
provision                     169                1           250                1             (81 )        (32 )
Net income (loss)        $    484                1 %   $   ( 371 )             (1 %)   $      855         (230 %)

Advertising. Advertising revenues decreased $0.2 million or 10% in the first six months of 2012 compared to the first six months of 2011 due primarily to timing delays of certain Manufacturer direct marketing campaigns.

Cost of Revenues. Cost of revenues increased $0.5 million or 3% in the first six months of 2012 compared to the first six months of 2011 primarily due to an increase in SEM costs.
Sales and Marketing. Sales and marketing expense in the first six months of 2012 was relatively stable compared to the first six months of 2011. Technology Support. Technology support expense in the first six months of 2012 increased by $61,000 or 2% compared to the first six months of 2011 due to increased personnel costs and computer and software maintenance.
General and Administrative. General and administrative expense in the first six months of 2012 decreased by $0.2 million or 6% compared to the first six months of 2011 due to a decrease in headcount-related compensation costs and professional and legal fees.
Depreciation and amortization. Depreciation and amortization expense decreased $0.1 million or 15% in the first six months of 2012 compared to the first six months of 2011 primarily due to assets becoming fully depreciated related to MyRide after the second quarter of 2011.
Litigation settlements. Litigation settlements for the first six months of 2012 were $137,000 compared to $328,000 in the first six months of 2011. Litigation settlements for the first six months of 2011 were primarily from the settlement of an arbitration claim seeking indemnification from a third party supplier relating to the third party's method of soliciting Purchase Requests. The arbitration settlement represented the recovery of legal fees and other related expenses previously expensed under General and Administrative operating expenses.
Income taxes. Income tax expense was $169,000 in the first six months of 2012 compared to income tax expense of $250,000 in the first six months of 2011. The current tax expense related to the New York state income tax audit assessment, state taxes in Texas, California and Florida and the deferred tax liability related to tax deductible goodwill amortization. Tax expense in the first six months of 2011 related to state taxes in Texas, Michigan and Florida and the increase in the deferred tax liability related to tax deductible goodwill amortization.

Employees
As of July 31, 2012 we had 117 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, 2012 and 2011:
                                                     Six Months Ended June 30,
                                                        2012            2011
                                                           (in thousands)
Net cash provided by operating activities                $ 2,910           $ 213
Net cash used in investing activities                      (105)           (619)
Net cash (used in) provided by financing activities      (1,605)             154

Our principal sources of liquidity are our cash and cash equivalents balances and positive operating cash flow. Our cash and cash equivalents totaled $12.4 million as of June 30, 2012 compared to cash and cash equivalents of $11.2 million as of December 31, 2011.
Net Cash Provided by Operating Activities. Net cash provided by operating activities in the six months ended June 30, 2012 of $2.9 million resulted primarily from net income of $0.5 million, as adjusted for non-cash charges to earnings, in addition to cash used to reduce accrued liabilities of $0.9 million primarily related to the payment of annual incentive compensation amounts and severance accrued in 2011 and paid in the first six months of 2012 offset by a $1.5 million increase in our accounts payable balance. Net cash provided by operating activities in the six months ended June 30, 2011 of $0.2 million resulted primarily from net losses of $0.4 million, as adjusted for non-cash charges to earnings, in addition to cash used to reduce accrued liabilities of $1.3 million primarily related to the payment of annual incentive compensation amounts and severance accrued in 2010 and paid in the first six months of 2011 and a $1.4 million decrease in our accounts receivable balance related to the timing of payments received from our customers.
Net Cash Used in Investing Activities. Net cash used in investing activities was $0.1 million in the six months ended June 30, 2012 primarily related to net changes in a certificate of deposit used to secure the processing of certain SEM activity offset by purchase of property and equipment. Net cash used in investing activities was $0.6 million in the six months ended June 30, 2011 and is related primarily to the investment in upgrading our internal information technology infrastructure.
Net Cash (Used in) Provided by Financing Activities. Stock options for 6,744 shares of stock were exercised in the six months ended June 30, 2012 resulting in $15,000 cash inflow. Net cash used in financing activities in the six months ended June 30, 2012 consisted of contingent payments of $167,000 related to the Cyber acquisition and $1.5 million used to repurchase 379, 811 shares of our common stock. Stock options for 77,402 shares of stock were exercised in the six months ended June 30, 2011, resulting in $0.3 million of cash inflow. In addition, $167,000 of contingent payments were made related to the Cyber acquisition in the six months ended June, 2011. Our future cash flows from employee stock options, if any, will depend on the future timing, exercise price, and amount of stock option exercises. Off-Balance Sheet Arrangements
At June 30, 2012, we had no off-balance sheet arrangements as defined in Regulation SK, Item 303(a)(4)(D)(ii).