You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements. Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that could materially affect such forward-looking statements include those discussed in "Risk Factors" in Part II, Item 1A. in this Quarterly Report on Form 10-Q, as well as Part I, Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 22, 2012. Investors are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances except as required by law.

Overview

DealerTrack's web-based software solutions and services enhance efficiency and profitability for all major segments of the automotive retail industry, including dealers, lenders, OEMs, third party retailers, agents and aftermarket providers. DealerTrack operates the largest online credit application networks in the United States and Canada. DealerTrack's dealer management system (DMS) solution provides dealers with easy-to-use tools and real-time data access to enhance their efficiency. DealerTrack's Inventory solutions offerings provide vehicle inventory management, merchandising, and transportation solutions to help dealers drive higher in-store and online traffic with real-time listings designed to accelerate used-vehicle turn rates and increase dealer profits.
DealerTrack's Sales and Finance solutions allow dealers to streamline the entire sales process as they structure deals from a single integrated platform.
Our Compliance offering helps dealers meet legal and regulatory requirements, and protect their assets. DealerTrack also offers Processing solutions for the automotive industry, including digital retailing, electronic motor vehicle registration and titling applications, paper title storage, and digital document services.

We monitor our business performance using a number of measures that are not found in our consolidated financial statements. These measures include the number of active dealers and lenders, active lender to dealership relationships in the DealerTrack network, the number of subscribing dealers in the DealerTrack network, the number of transactions processed, the average transaction price, the average monthly subscription revenue per subscribing dealership and transaction revenue per car sold. We believe that improvements in these metrics will result in improvements in our financial performance over time.

The following is a table consisting of non-GAAP financial measures and certain other business statistics that management is continually monitoring (amounts in thousands are GAAP net income, adjusted EBITDA, adjusted net income, capital expenditures and transactions processed):

                                            Three Months Ended June 30,            Six Months Ended June 30,
                                             2012                 2011              2012               2011
GAAP net income:                                 5,925                2,166            22,886            26,894

Non-GAAP Financial Measures and Other
Business Statistics:
Adjusted EBITDA - previous
presentation (non-GAAP) (1)             $       21,655       $       21,270     $      37,744       $    33,948
Adjusted EBITDA (non-GAAP) (1)          $       25,037       $       24,305     $      44,456       $    39,798
Adjusted net income (non-GAAP) (1)      $       13,714       $       10,835     $      23,158       $    18,325
Capital expenditures, software and
website development costs               $        7,688       $        6,117     $      15,652       $    16,333
Active dealers in our U.S. network as
of end of the period (2)                        18,638               17,660            18,638            17,660
Active lenders in our U.S. network as
of end of the period (3)                         1,212                1,062             1,212             1,062
Active lender to dealer relationships
as of end of the period (4)                    177,570              157,591           177,570           157,591
Subscribing dealers in our U.S. and
Canadian networks as of end of the
period (5)                                      16,280               14,488            16,280            14,488
Transactions processed (6)                      22,562               19,135            44,313            35,909
Average transaction price (7)           $         2.59       $         2.58     $        2.56       $      2.47
Average monthly subscription revenue
per subscribing dealership (8)          $          697       $          807     $         693       $       802
Transaction revenue per car sold (9)    $         6.12       $         5.73     $        7.12       $      6.13

(1) Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income excluding interest, taxes, depreciation and amortization expenses, stock-based compensation, contra-revenue and may exclude certain items such as: impairment charges, restructuring charges, impact of acquisition-related activity (including contingent consideration changes, compensation expense, basis difference amortization, and professional service fees), realized gains or losses on sales of securities, gains or losses on sales or disposals of subsidiaries and other assets, and certain other non-recurring items.

In response to requests, and in consideration of comparable peer companies, stock-based compensation expense is now excluded from the calculation of the Adjusted EBITDA non-GAAP measure. This reduces the comparability with prior periods. This non-cash expense was included in presentations prior to the fourth quarter of 2011 and is captioned above as "Adjusted EBITDA - previous presentation (non-GAAP)."

Adjusted net income is a non-GAAP financial measure that represents GAAP net income excluding stock-based compensation expense, the amortization of acquired identifiable intangibles, contra-revenue, and may also exclude certain items such as: impairment charges, restructuring charges, impact of acquisition-related activity (including contingent consideration changes, compensation expense, basis difference amortization, and professional service fees), realized gains or losses on sales of securities, gains or losses on sales or disposals of subsidiaries and other assets, adjustments to deferred tax asset valuation allowances, non-cash interest expense and certain other non-recurring items. These adjustments to net income, which are shown before taxes, are adjusted for their tax impact at their applicable statutory rates.

Adjusted EBITDA and adjusted net income are presented because management believes that they provide additional information with respect to the performance of our fundamental business activities and are also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We rely on adjusted EBITDA and adjusted net income as primary measures to review and assess the operating performance of our company and management team in connection with our executive compensation plan incentive payments.

Adjusted EBITDA and adjusted net income have limitations as an analytical tool and you should not consider them in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:

· Adjusted EBITDA and adjusted net income do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

· Adjusted EBITDA and adjusted net income do not reflect changes in, or cash requirements for, our working capital needs;

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

· Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it from adjusted net income and adjusted EBITDA when evaluating our ongoing performance for a particular period;

· Adjusted EBITDA and adjusted net income do not reflect the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations; and

· Other companies may calculate adjusted EBITDA and adjusted net income differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, adjusted EBITDA and adjusted net income should not be considered as measures 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 adjusted EBITDA and adjusted net income only as supplements to our GAAP results. Adjusted EBITDA and adjusted net income are measures of our performance that are not required by, or presented in accordance with, GAAP. Adjusted EBITDA and adjusted net income are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity.

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

                                            Three Months Ended June 30,            Six Months Ended June 30,
                                             2012                 2011              2012               2011
GAAP net income                         $        5,925       $        2,166     $      22,886       $    26,894
Interest income                                   (184 )                (84 )            (414 )            (198 )
Interest expense - cash                            988                  212             1,442               244
Interest expense - non-cash (10)                 2,220                    -             2,923                 -
Provision for (benefit from) income
taxes, net                                       1,443                4,085            12,832           (21,628 )
Depreciation of property and
equipment and amortization of
capitalized software and website
costs                                            6,295                5,286            11,395            10,171
Amortization of acquired identifiable
intangibles                                      6,653                7,708            13,532            14,568

EBITDA (non-GAAP)                               23,340               19,373            64,596            30,051
Adjustments:
Gain on disposal of subsidiary and
sale of other assets                            (5,500 )                  -           (33,193 )               -
Acquisition-related and other
professional fees                                  538                  886               737             1,216
Contra-revenue (11)                                996                1,114             2,098             2,057
Integration and other related costs
(including amounts related to
stock-based compensation)                          221                  306               221               958
Acquisition-related contingent
consideration changes and
compensation expense, net (12)                    (220 )                  -               (42 )              75
Amortization of equity method
investment basis difference (13)                   996                    -             1,993                 -
Rebranding expense                                 284                    -               334                 -
Change in fair value of warrant                  1,000                    -             1,000                 -
Realized gain on securities                          -                 (409 )               -              (409 )

Adjusted EBITDA - previous
presentation (non-GAAP)                         21,655               21,270            37,744            33,948
Stock-based compensation (excluding
amounts included in integration and
other related costs)                             3,382                3,035             6,712             5,850
Adjusted EBITDA (non-GAAP)              $       25,037       $       24,305     $      44,456       $    39,798

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

                                            Three Months Ended June 30,            Six Months Ended June 30,
                                             2012                 2011              2012               2011
GAAP net income                         $        5,925       $        2,166     $      22,886       $    26,894
Adjustments:
Deferred tax asset valuation
allowance (non-taxable) (14)                         -                1,001                 -           (23,547 )
Amortization of acquired identifiable
intangibles                                      6,653                7,708            13,532            14,568
Stock-based compensation (excluding
integration and other related costs)             3,382                3,035             6,712             5,850
Gain on disposal of subsidiary and
sale of other assets                            (5,500 )                  -           (33,193 )               -
Contra-revenue (11)                                996                1,114             2,098             2,057
Integration and other related costs
(including amounts related to
stock-based compensation)                          221                  306               221               958
Interest expense - non-cash (not
tax-impacted) (10)                               2,220                    -             2,923                 -
Amortization of equity method
investment basis difference (13)                   996                    -             1,993                 -
Acquisition-related and other
professional fees                                  538                  886               737             1,216
Acquisition-related contingent
consideration changes and
compensation expense, net (12)                    (220 )                  -               (42 )              75
Rebranding expense                                 284                    -               334                 -
Realized gain on securities
(non-taxable)                                        -                 (409 )               -              (409 )
Accelerated depreciation of certain
technology assets (15)                             929                    -               929                 -
Change in fair value of warrant                  1,000                    -             1,000                 -
Amended state tax returns impact
(non-taxable)                                        -                    -                 -                32
Tax impact of adjustments (16)                  (3,710 )             (4,972 )           3,028            (9,369 )

Adjusted net income (non-GAAP)          $       13,714       $       10,835     $      23,158       $    18,325

(2) We consider a dealer to be active in our U.S. network as of a date if the dealer completed at least one revenue-generating credit application processing transaction using the U.S. DealerTrack network during the most recently ended calendar month. The number of active U.S. dealers is based on the number of dealer accounts as communicated by lenders on the U.S. DealerTrack network.

(3) We consider a lender to be active in our U.S. network as of a date if it is accepting credit application data electronically from U.S. dealers in the U.S. DealerTrack network.

(4) Each lender to dealer relationship represents a pair between an active U.S. lender and an active U.S. dealer at the end of a given period.

(5) Represents the number of dealerships with one or more active subscriptions on the U.S. DealerTrack or DealerTrack Canada networks at the end of a given period.

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

(7) Represents the average revenue earned per transaction processed in the U.S.
DealerTrack, DealerTrack Aftermarket Services, DealerTrack Processing Solutions and DealerTrack Canada networks during a given period. Revenue used in the calculation adds back (excludes) transaction related contra-revenue.

(8) Represents subscription services revenue divided by average subscribing dealers for a given period in the U.S. DealerTrack and DealerTrack Canada networks. Revenue used in the calculation adds back (excludes) subscription related contra-revenue.

(9) Represents transaction revenue divided by our estimate of total new and used car sales for the period in the U.S. and Canada. Revenue used in this calculation adds back (excludes) transaction related contra-revenue.

(10) Represents interest expense relating to the amortization of deferred financing costs and debt discount.

(11) For further information, please refer to Note 16 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 16 in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

(12) Represents the change in the acquisition-related contingent consideration from the eCarList acquisition and other additional acquisition related compensation charges.

(13) Represents amortization of the basis difference between the book basis of contributed Chrome assets and the fair value of the investment in Chrome Data Solutions.

(14) As a result of the acquisition of DealerTrack Processing Solutions, on January 31, 2011, we evaluated the combined enterprises past and expected future results, including the impact of the future reversal of the acquired deferred tax liabilities, and determined that the future reversal of the acquired deferred tax liabilities would provide sufficient taxable income to support realization of certain of DealerTrack's deferred tax assets and thereby we reduced the valuation allowance by approximately $24.5 million during the three months ended March 31, 2011.

(15) Represents the accelerated depreciation of certain technology assets due to the discontinuation of those projects.

(16) The tax impact of adjustments for the three and six months ended June 30, 2012 are based on a U.S. statutory tax rate of 37.4% applied to taxable adjustments other than amortization of acquired identifiable intangibles and stock-based compensation expense, which are based on a blended tax rate of 37.3% and 36.8%, respectively, for the three months ended June 30, 2012, and 37.3% and 36.9%, respectively, for the six months ended June 30, 2012. The tax impact of adjustments for the three and six months ended June 30, 2011 are based on a U.S. statutory tax rate of 38.3% applied to taxable adjustments other than amortization of acquired identifiable intangibles and stock-based compensation expense, which are based on a blended tax rate of 38.2% and 37.9%, respectively, for the three months ended June 30, 2011, and 37.9% and 37.9%, respectively, for the six months ended June 30, 2011.

Revenue

Transaction Services Revenue. Transaction services revenue consists of revenue earned from our lender customers for each credit application or contract that dealers submit to them. In addition, we earn transaction services revenue from lender customers for each financing contract executed via our electronic contracting and digital contract processing solutions, as well as for any ALG portfolio residual value analyses performed prior to disposal. In addition, we earn transaction service revenue from lender customers for collateral management transactions.

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. This includes transaction revenue for completion of on-line registrations with department of motor vehicles, completion of inventory appraisals, and accessing of credit reports.

Subscription Services Revenue. Subscription services revenue consists of revenue earned from our dealers and other customers (typically on a monthly basis) for use of our subscription or license-based products and services. Our subscription services enable dealer customers to manage their dealershipdata and operations, compare various financing and leasing options and programs, sell insurance and other aftermarket products, analyze and merchandise inventory and execute financing contracts electronically.

Other Revenue. Other revenue consists of revenue primarily earned through forms programming, data conversion, training and hardware and equipment sales from our dealer management system (DMS) solution, shipping fees and commissions earned from our digital contract business, consulting and analytical revenue earned from ALG in periods prior to disposal, and training fees earned from our inventory management solution. Other revenue is recognized when the service is rendered.

Operating Expenses

Cost of Revenue. Cost of revenue primarily consists of expenses related to running our network infrastructure (including Internet connectivity, hosting expenses, and data storage), amortization expense on acquired intangible assets, capitalized software and website development costs, compensation and related benefits for network and technology development personnel, amounts paid to third parties pursuant to contracts under which (i) a portion of certain revenue is owed to those third parties (revenue share) or, (ii) fees are due on the number of transactions processed, direct costs for data licenses and direct costs (printing, binding and delivery) associated with our residual value guides from ALG in periods prior to disposal. Cost of revenue also includes hardware costs associated with our DMS product offering, and compensation, related benefits and travel expenses associated with DMS installation personnel, compensation and related benefits associated with strategic inventory consulting personnel, compensation and related benefits, and temporary labor associated with personnel who process transactions for our digital contract, collateral management, and registration and titling solutions, and advertising expenses associated with our search and media product offerings.

Product DevelopmentExpenses. 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, in addition to enhancing and maintaining existing products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of compensation and related benefits, facility costsand 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 cost of revenue and each otheroperating expense category.

Acquisitions

On August 1, 2012, DealerTrack, Inc. purchased all issued and outstanding shares of capital stock of 1st Auto Transport Directory, Inc., a Delaware corporation. The consideration, which consists of $74.0 million in cash, is subject to working capital adjustments subsequent to closing.

Foundedin 1997, San Diego-based 1st Auto Transport delivers a comprehensive suite of vehicle transportation related solutions for auto dealers, brokers, shippers, and carriers within the U.S. and Canadian automotive retail markets. The company's offerings include CentralDispatch.com, jTracker.comand MoveCars.com.

Fair Value Measurements

We have segregated all financial assets that are measured at fair value on a recurring basis 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.

A reconciliation of the beginning and ending balances for the warrant, a Level 3 investment, is as follows (in thousands):

Balance as of December 31, 2011   $  6,500
Change in fair value of warrant     (1,000 )

Balance as of June 30, 2012       $  5,500

In connection with our October 1, 2011 disposal of ALG, we acquired a warrant to purchase 6.3 million additional shares of TrueCar common stock and recorded the warrant as a long-term investment. As a result of a net settlement feature, the warrant is revalued each reporting period through its expiration date of October 1, 2012, with the change in fair value recorded in the consolidated statements of operations. The fair value of the warrant is estimated using a Black-Scholes option pricing model. The significant unobservable inputs used in the pricing model are share price, expected volatility, and expected term. An increase (decrease) in any of these individual inputs would result in a significantly higher (lower) estimated fair value measurement. For the three months ended June 30, 2012, the value decreased by $1.0 million due to a decrease in the remaining expected term.

A reconciliation of the beginning and ending balances of the contingent consideration, a Level 3 liability, is as follows (in thousands):

Balance as of December 31, 2011                    $ (900 )
Change in fair value of contingent consideration      900

Balance as of June 30, 2012                        $    -

A portion of the purchase price of eCarList included contingent consideration that is payable in the first quarter of 2013 based upon the achievement of certain revenue targets in 2012. The fair value of the contingent consideration is determined based upon probability-weighted revenue forecasts for the underlying period. The contingent consideration is revalued each reporting period, until settled, with the resulting gains and losses recorded in the consolidated statements of operations. As of June 30, 2012, we do not expect to make any contingent consideration payments for the achievement of revenue targets in 2012. We recorded income of $0.7 million and $0.9 million for the three and six months ended June 30, 2012, respectively, as a result of the decrease in the estimated settlement of the contingent consideration from the estimated amount as of December 31, 2011.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of our operations is based on our consolidated financial statements, which have been preparedin 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.

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