Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

_**

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS **

This Annual Report on Form 10-K, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "intend," "forecast," "anticipate," "believe," "estimate," "predict," "potential," "continue" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-K involve known and unknown risks, uncertainties and situations that may cause our or our industry's actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part I, Item 1A.—"Risk Factors" of this Form 10-K and those discussed elsewhere in this Form 10-K. We encourage investors to review these factors carefully together with the other matters referred to herein, as well as in the other documents we file with the SEC. The Company may from time to time make additional written and oral forward-looking statements, including statements contained in the Company's filings with the SEC. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Although we believe that, based on information currently available to the Company and its management, the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

Overview

We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the Internet through our Virtual Bidding Second Generation Internet auction-style sales technology, which we refer to as VB2. Sellers are primarily insurance companies but also include banks and financial institutions, charities, car dealerships, fleet operators, vehicle rental companies and the general public. We sell principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters; however at certain locations, we sell directly to the general public. The majority of the vehicles sold on behalf of the insurance companies are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. We offer vehicle sellers a full range of services that expedite each stage of the salvage vehicle sales process and minimize administrative and processing costs. In the United States and Canada, or North America, we sell vehicles primarily as an agent and derive revenue primarily from fees paid by vehicle sellers and vehicle buyers as well as related fees for services such as towing and storage. In the United Kingdom, or UK, a significant portion of our business is conducted on a principal basis, purchasing salvage vehicles outright from insurance companies and reselling the vehicles for our own account.

Our revenues consist of sales transaction fees charged to vehicle sellers and vehicle buyers, transportation revenue, purchased vehicle revenues, and other remarketing services. Revenues from sellers are generally generated either on a fixed fee contract basis where we collect a fixed amount for selling each vehicle regardless of the selling price of the vehicle or, under our Percentage Incentive Program, or PIP program, where our fees are generally based on a predetermined percentage of the vehicle sales price. Under the consignment, or fixed fee, program, we generally

charge an additional fee for title processing and special preparation. Although sometimes included in the consignment fee, we may also charge additional fees for the cost of transporting the vehicle to our facility, storage of the vehicle, and other incidental costs. Under the consignment programs, only the fees associated with vehicle processing are recorded in revenue, not the actual sales price (gross proceeds). Sales transaction fees also include fees charged to vehicle buyers for purchasing vehicles, storage, loading and annual registration. Transportation revenue includes charges to sellers for towing vehicles under certain contracts. Transportation revenue also includes towing charges assessed to buyers for delivering vehicles. Purchased vehicle revenue includes the gross sales price of the vehicle which we have purchased or are otherwise considered to own and is primarily generated in the UK.

Operating costs consist primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle towing, insurance, fuel, equipment maintenance and repair, and costs of vehicles we sold under purchase contracts. Costs associated with general and administrative expenses consist primarily of executive management, accounting, data processing, sales personnel, human resources, professional fees, research and development and marketing expenses.

During fiscal 2004 and fiscal 2008, we converted all of our North American and UK sales, respectively, to an Internet-based auction-style model using our VB2 Internet sales technology which employs a two-step bidding process. The first step, called the preliminary bid, allows members to submit bids up to one hour before a real time virtual auction begins. The second step allows members to bid against each other, and the high bidder from the preliminary bidding process, in a real-time process over the Internet.

Acquisitions and New Operations

We have experienced significant growth in facilities as we have acquired fourteen facilities and established twelve new facilities since the beginning of fiscal 2008. All of these acquisitions have been accounted for using the purchase method of accounting.

As part of our overall expansion strategy of offering integrated services to vehicle sellers, we anticipate acquiring and developing facilities in new regions, as well as the regions currently served by our facilities. We believe that these acquisitions and openings strengthen our coverage as we have 152 facilities located in North America and the UK as of July 31, 2010 and are able to provide national coverage for our sellers.

The following table sets forth facilities that we have acquired or opened from August 1, 2007 through July 31, 2010:

Locations		Acquisition or Greenfield		Date		Geographic Service Area
Peterlee, England		Acquisition		August 2007		Northern England
Wisbech, England		Acquisition		August 2007		Eastern England
Rochford, England		Acquisition		August 2007		Southeast England
London, Canada		Greenfield		September 2007		Southern Ontario
Windsor, New Jersey		Greenfield		November 2007		Central New Jersey
Walton, Kentucky		Greenfield		January 2008		Northern Kentucky
Birmingham, Alabama		Greenfield		February 2008		Central Alabama
Inverkeithing, Scotland		Acquisition		March 2008		Central Scotland
Whitburn, Scotland		Acquisition		March 2008		Central Scotland
Featherstone, England		Acquisition		*March 2008		Northeast England
Doncaster, England		Acquisition		*March 2008		Northeast England
Minneapolis, Minnesota		Greenfield		March 2008		Central Minnesota and Wisconsin
Sikeston, Missouri		Acquisition		March 2008		Southeast Missouri
York, England		Acquisition		April 2008		Northern England
Prairie Grove, Arkansas		Greenfield		July 2008		Northwest Arkansas
Louisville, Kentucky		Greenfield		September 2008		Northwest Kentucky and Southern Indiana
Richmond, Virginia		Greenfield		**October 2008		Central Virginia
Montgomery, Alabama		Greenfield		February 2009		Central Alabama
Greer, South Carolina		Greenfield		February 2009		Northwest South Carolina
Warren, Massachusetts		Greenfield		June 2009		Central Massachusetts
Bristol, England		Acquisition		January 2010		United Kingdom
Bedford, England		Acquisition		January 2010		United Kingdom
Colchester, England		Acquisition		January 2010		United Kingdom
Gainsborough, England		Acquisition		***January 2010		United Kingdom
Luton, England		Acquisition		January 2010		United Kingdom
Scranton, Pennsylvania		Greenfield		February 2010		Pennsylvania

Closed in fiscal 2008

**

Former MAG facility

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Closed in fiscal 2010

In January 2010, the Company completed the acquisition of D Hales Limited (D Hales) which operated five locations in the United Kingdom. This acquisition was undertaken because of its strategic fit with our business in the United Kingdom.

In April 2008, we completed the acquisition of Simpson Bros. (York) Holdings Limited, a UK limited liability company (Simpson), which operated one location in York, England. Simpson's primary business activity was the dismantling of automobiles and the sales of salvaged auto parts. In the same month, we also completed the acquisition of Bob Lowe Salvage Pool, Inc., which operated one location in Sikeston, Missouri. In February 2008, we completed the purchase of the assets and business of AG Watson Auto Salvage & Motors Spares (Scotland) Limited (AG Watson), which operated two salvage locations in Scotland and two salvage locations in northern England. In August 2007, we completed the acquisition of Century Salvage Sales Limited (Century), a vehicle salvage disposal company with three facilities located in the UK. The total consideration paid for these acquisitions consisted of approximately $38.2 million in cash, net of cash acquired.

On June 14, 2007, we acquired all the issued share capital of Universal Salvage plc, (Universal), for £2.00 per share (approximately $3.94 based on currency exchange rates on June 14, 2007). Universal, based in the UK and operating exclusively within the UK, is a service provider to the motor insurance and automotive industries. The aggregate acquisition consideration

paid by us totaled approximately £60.7 million (approximately $120.0 million based on currency exchange rates on June 14, 2007) and was funded from our available cash resources. We also assumed outstanding indebtedness of Universal totaling approximately £2.3 million ($4.5 million as of June 14, 2007). The acquisition was our first acquisition outside North America.

The period-to-period comparability of our operating results and financial condition is substantially affected by business acquisitions, new openings, weather and product introductions during such periods. In particular, we have certain contracts inherited through our UK acquisitions that require us to act as a principal, purchasing vehicles from the insurance companies and reselling them for our own account. It is our intention, where possible, to migrate these contracts to the agency model in future periods. Changes in the amount of revenue derived in a period from principal transactions relative to total revenue will impact revenue growth and margin percentages.

In addition to growth through acquisitions, we seek to increase revenues and profitability by, among other things, (i) acquiring and developing additional vehicle storage facilities in key markets, (ii) pursuing national and regional vehicle seller agreements, (iii) expanding our service offerings to sellers and members, and (iv) expanding the application of VB2 into new markets. In addition, we implement our pricing structure and auction procedures and attempt to introduce cost efficiencies at each of our acquired facilities by implementing our operational procedures, integrating our management information systems and redeploying personnel, when necessary.

Results of Operations

The following table sets forth for the periods indicated below, certain information derived from our consolidated statements of income presented in absolute dollars and as a percentage of revenues. There can be no assurance that any trend in operating results will continue in the future.

Fiscal 2010 Compared to Fiscal 2009

Revenues

The following sets forth information on revenue by class (in thousands, except percentages):

		2010			Percentage of Revenue			2009			Percentage of Revenue
Service revenues		$	642,134			83	%	$	615,352			83	%
Vehicle sales			130,745			17	%		127,730			17	%
		$	772,879			100	%	$	743,082			100	%

Service Revenues. Service revenues were approximately $642.1 million during fiscal 2010 compared to $615.4 million for fiscal 2009, an increase of $26.8 million, or 4.4%, above fiscal 2009. The increase in service revenue was due primarily to an increase in the average revenue per car sold. The increase in the revenue per car sold was driven by increased selling prices as over 50% of our service revenue is tied in some manner to the ultimate selling price of the vehicle at the auction. We believe the increase in the average selling price was primarily due to: (i) an increase in commodity pricing, particularly the per ton price for crushed car bodies which has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling; and (ii) the general increase in used car pricing, which has an impact on the average selling price of vehicles that are either repaired and retailed or purchased by the end user. We cannot determine the movement of these influences nor can we determine which vehicles are sold directly to the end user or for scrap, dismantling, retailing, or export and, accordingly, cannot quantify the specific impact that commodity pricing and used car pricing had on the selling price of vehicles. Unit volume grew by over one percent resulting in an increase in revenue of $7.1 million. The average dollar to pound exchange rate was 1.57 dollars to the pound and 1.59 dollars to the pound for fiscal 2010 and fiscal 2009, respectively, and led to a reduction in service revenue of $0.2 million.

Vehicle Sales. We have assumed certain contracts through our UK acquisitions that require us to act as a principal, purchasing vehicles from the insurance companies and reselling them for our own account. Vehicle sales revenues were approximately $130.7 million during fiscal 2010 compared to $127.7 million for fiscal 2009, an increase of $3.0 million, or 2.4%, above fiscal 2009. The increase in vehicle sales revenue was due to the rise in the average selling price of vehicles which resulted in increased revenue of $30.0 million. The rise in the average selling price per unit was primarily due to: (i) the increase in commodity pricing, particularly the per ton price for crushed car bodies, which has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling, (ii) the general increase in used car pricing, which has an impact on the average selling price of vehicles that are either repaired and retailed or purchased by the end user; and (iii) in the UK, the continuing beneficial impact of VB2 which we introduced to the UK in 2008 and which expands our buyer base by opening vehicle sales to buyers worldwide. We cannot determine which vehicles are sold directly to the end user or for scrap, dismantling, retailing, or export and, accordingly, cannot quantify the specific impact of commodity pricing and used car pricing, nor can we isolate the impact that VB2 had on the ultimate selling price of vehicles sold in the UK. The change in volume reflects the migration of certain contracts in the UK from the principal model to the agency model and resulted in a reduction in vehicle sales revenue of $25.0 million. The negative impact on recorded vehicle sales revenue due to the change in the GBP to USD exchange rate was $2.0 million.

Yard Operation Expenses. Yard operation expenses were approximately $320.2 million during fiscal 2010 compared to $324.8 million for fiscal 2009, a decline of approximately $4.6 million, or 1.4%, below fiscal 2009. The decline was driven primarily by operational efficiencies and by reductions in subhauling costs relative to the first two quarters of fiscal 2009 when the cost of diesel fuel peaked. Included in yard operation costs were depreciation and amortization expenses which were $34.9 million and $32.8 million for the fiscal years ended July 31, 2010 and 2009, respectively.

Cost of Vehicle Sales. The cost of vehicles sold was approximately $104.7 million during fiscal 2010 compared to $106.0 million for fiscal 2009, a decline of approximately $1.4 million, or 1.3%. Unit volume decline led to a reduction of $18.0 million and was primarily due to the migration of certain contracts in the UK from a principal basis to a fee basis. Cost per unit sold was up and represented a $17.1 million increase relative to last year. The negative impact on the cost of sales due to the change in the GBP to USD exchange rate was $0.5 million.

General and Administrative Expenses. General and administrative expenses were approximately $108.9 million for fiscal 2010 compared to $86.9 million for fiscal 2009, an increase of approximately $22.0 million, or 25.3%. The growth in general and administrative costs was due primarily to: (i) increased advertising costs as we invested in events and media promotions, including NASCAR and NHRA sponsorships, to generate new member activity; (ii) the additional costs associated with the Chairman and Chief Executive Officer's non-cash compensation package approved by the shareholders in April 2009 and (iii) increased headcount. These changes increased general and administrative expenses by $8.6 million, $6.1 million, and $4.8 million, respectively. Also included in general and administrative expenses were depreciation and amortization expenses which were $8.3 million and $9.0 million for the years ended July 31, 2010 and 2009, respectively.

Other Income (Expense). Total other income was approximately $0.4 million during fiscal 2010 compared to $2.4 million for fiscal 2009, a decline of approximately $2.0 million, or 82.3%. Net interest income declined $1.4 million due primarily to reduced interest yields. Other income, net, declined $0.6 million primarily due a decline in rental income of $1.7 million and the loss of $0.8 million on the sale of an airplane in the current year and was offset by a $1.1 million impairment of a note receivable, relating to the disposal of the assets of a discontinued business, and a $1.0 million loss on the sale of an airplane in the prior year.

Income Taxes. Our effective income tax rates for fiscal 2010 and 2009 were approximately 36.7% and 38.7%, respectively. The decrease was driven primarily by the reduction of state income taxes and the favorable tax treatment we received relating to certain interest expenses in the UK.

Net Income. Due to the foregoing factors, we realized net income of approximately $151.6 million for fiscal 2010, compared to net income of approximately $141.1 million for fiscal 2009.

Fiscal 2009 Compared to Fiscal 2008

Revenues

The following sets forth information on customer revenue by class (in thousands, except percentages):

		2009			Percentage of Revenue			2008			Percentage of Revenue
Service revenues		$	615,352			83	%	$	619,728			79	%
Vehicle sales			127,730			17	%		165,120			21	%
		$	743,082			100	%	$	784,848			100	%

Service Revenues. Service revenues were approximately $615.4 million during fiscal 2009 compared to $619.7 million for fiscal 2008, a decline of $4.4 million, or 0.7%, below fiscal 2008. The decline in service revenue was due to the negative impact on recorded service revenues due to the change in the GBP to USD exchange rate and was offset by growth in unit volume and a marginal growth in revenue per transaction. The average dollar to pound exchange rate was 1.59 dollars to the pound and 2.00 dollars to the pound for fiscal 2009 and fiscal 2008, respectively, and led to a reduction in service revenue of $9.5 million. Growth in unit volume was driven primarily by an increase in the units sold on behalf of insurance companies and units sold on behalf of franchise and independent car dealerships. The growth resulted from market wins and, with respect to insurance company cars, from what we believe to be an increase in salvage frequency. Salvage frequency is the percentage of cars involved in accidents that are deemed total economic losses by the insurance company. We believe the increased availability of such cars was as a result of lower average used car pricing. The growth in unit volume generated $4.9 million in additional revenue relative to last year. Revenue yield per transaction was marginally higher as the decline in the average selling price was offset by higher yield on services provided and generated $0.2 million in additional revenue compared to last year. Over 50% of our service revenue is tied in some manner to the ultimate selling price of the vehicles. We believe the decline in the average selling price was primarily due to: (i) the recent declines in commodity and used car pricing as we believe that commodity pricing, particularly the per ton price for crushed car bodies, has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling; (ii) the decline in used car pricing because we believe used car pricing has an impact on the ultimate selling price of vehicles sold to rebuilders and retailers; and (iii) the strengthening of the dollar as we believe a stronger dollar increases the purchase price of US vehicles paid for in our international buyers' local currencies. However, we do not have sufficient information to determine which vehicles are sold for scrap, dismantling, retailing or export and, accordingly, cannot quantify the impact that commodity pricing, used car pricing and foreign currency exchange rates had on the selling price of vehicles.

Vehicle Sales. We have assumed certain contracts through our UK acquisitions that require us to act as a principal, purchasing vehicles from the insurance companies and reselling them for our own account. Vehicle sales revenues were approximately $127.7 million during fiscal 2009 compared to $165.1 million for fiscal 2008, a decline of $37.4 million, or 22.6%, below fiscal 2008. The decline in vehicle sales revenue was due to the negative impact on recorded vehicle sales revenue due to the change in the GBP to USD exchange rate, the decline in unit volume, and

the decline in revenue per transaction. The decline in the average USD to GBP exchange rate led to a reduction in vehicle sales revenue of $29.7 million. The decline in unit volume lead to a reduction in revenue of $5.3 million and was due primarily to the migration of certain contracts in the UK from a principal basis to a fee basis. The decline in the average revenue per transaction led to a reduction of revenue of $2.3 million. We believe the decline in the average selling price was primarily due to: (i) the declines in commodity pricing as we believe that commodity pricing, particularly the price per ton for crushed car bodies, has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling; (ii) the decline in used car pricing because we believe used car pricing has an impact on the ultimate selling price of vehicles sold to rebuilders and retailers; and (iii) the strengthening of the dollar as we believe a stronger dollar increases the purchase price of US vehicles paid for in our international buyers' local currencies. However, we do not have sufficient information to determine which vehicles are sold for scrap, dismantling, retailing or export and, accordingly, cannot quantify the impact that commodity pricing, used car pricing and foreign currency exchange rates had on the selling price of vehicles.

Yard Operation Expenses. Yard operation expenses were approximately $324.8 million during fiscal 2009 compared to $328.9 million for fiscal 2008, a decline of approximately $4.1 million, or 1.3%, below fiscal 2008. The beneficial impact on yard operating expenses due to the change in GBP to USD exchange rate was $10.6 million and was offset by an increase in the cost to process each car which was driven primarily by an increase in subhauling costs in the US and the additional costs associated with five new facilities. Included in yard operation costs were depreciation and amortization expenses which were $32.8 million and $32.2 million for the fiscal years ended July 31, 2009 and 2008, respectively.

Cost of Vehicle Sales. The cost of vehicles sold was approximately $106.0 million during fiscal 2009 compared to $133.7 million for fiscal 2008, a decline of approximately $27.6 million, or 20.7%. The beneficial impact on the cost of sales due to the change in the GBP to USD exchange rate was $23.8 million. Unit volume decline was responsible for $4.3 million of the total decline and was due primarily to the migration of certain contracts in the UK from a principal basis to a fee basis. Cost per unit sold was up marginally and represented a $0.4 million increase relative to last year.

General and Administrative Expenses. General and administrative expenses were approximately $86.9 million for fiscal 2009 compared to $84.3 million for fiscal 2008, an increase of approximately $2.6 million, or 3.1%. The beneficial impact on general and administrative expenses due to the change in GBP to USD exchange rate was approximately $3.0 million. The growth in general and administrative costs was due primarily to: i) increased IT payroll and technology costs as we expanded our development and network departments, ii) increased advertising costs as we invested in events and media promotions to generate public awareness, and iii) the additional costs associated with the CEO and President's non-cash compensation package approved by the shareholders in April 2009. Also included in general and administrative expenses were depreciation and amortization expenses which were $9.0 million and $10.6 million for the years ended July 31, 2009 and 2008, respectively.

Other Income (Expense). Total other income was approximately $2.4 million during fiscal 2009 compared to $11.7 million for fiscal 2008, a decline of approximately $9.3 million, or 79.5%. Net interest income declined $6.1 million due to reductions in both the average cash balances and the interest yield. Other income, net, declined $3.2 million primarily due to the impairment of a note receivable relating to the sale of assets of the public auction business which we exited in 2006 and the loss on the sale of an airplane in the UK, together totaling $2.2 million, currency exchange losses on certain intercompany obligations and losses on the disposition of other certain assets.

Income Taxes. Our effective income tax rates for fiscal 2009 and 2008 were approximately 38.7% and 37.1%, respectively. The increase was driven primarily by the decline in tax exempt interest income.

Discontinued Operations. During fiscal 2009, we received a $12 million payment for a note receivable resulting from the sale of certain MAG business assets and real estate. We exited the MAG business in our 2006 fiscal year. The gain on the sale of the real estate was deferred until payment on the note receivable was received. The $1.6 million of income from discontinued operations represents that gain, net of taxes.

Net Income. Due to the foregoing factors, we realized net income of approximately $141.1 million for fiscal 2009, compared to net income of approximately $156.9 million for fiscal 2008.

Liquidity and Capital Resources

Our primary source of working capital is cash generated though operations. Potential internal sources of additional working capital are the sale of assets or the issuance of equity through option exercises and shares issued under our Employee Stock Purchase Plan. A potential external source of additional working capital is the issuance of debt and equity. However, with respect to the issuance of equity or debt, we cannot predict if these sources will be available in the future and, if available, if they can be issued under terms commercially acceptable to us.

Historically, we have financed our growth through cash generated from operations, public offerings of common stock, the equity issued in conjunction with certain acquisitions and debt financing. Our primary source of cash generated by operations is from the collection on sellers' fees, members' fees and reimbursable advances from the proceeds of auctioned salvage vehicles. Our business is seasonal as inclement weather during the winter months increases the frequency of accidents and, consequently, the number of cars totaled by the insurance companies. During the winter months, most of our facilities process 10% to 30% more vehicles than at other times of the year. This increased volume requires the increased use of our cash to pay out advances and handling costs of the additional business.

Our primary source of working capital is net income. Accordingly, factors affecting net income are the principal factors affecting the generation of working capital. Those primary factors: (i) seasonality, (ii) market wins and losses, (iii) supplier mix, (iv) accident frequency, (v) salvage frequency, (vi) change in market share of our existing suppliers, (vii) commodity pricing, (viii) used car pricing, (ix) foreign currency exchanges rates, (x) product mix, and (xi) contract mix to the extent appropriate, are discussed in the Results of Operations and Risk Factors sections in this Form 10-K.

As of July 31, 2010, we had working capital of approximately $330.2 million, including cash, and cash equivalents of approximately $268.2 million. Cash and cash equivalents consisted primarily of US Treasury Bills and funds invested in money market accounts, which bear interest at a variable rate. Cash and cash equivalents increased by approximately $105.5 million from fiscal 2009 to fiscal 2010.

We believe that our currently available cash and cash equivalents and cash generated from operations will be sufficient to satisfy our operating and working capital requirements for at least the next 12 months. However, if we experience significant growth in the future, we may be required to raise additional cash through the issuance of new debt or additional equity.

Operating Activities

Net cash provided by operating activities decreased by approximately $3.9 million to $199.4 million during fiscal 2010 when compared to fiscal 2009, due to the timing of routine changes in working capital items.

Net cash provided by operating activities increased by approximately $9.3 million to $203.3 million during fiscal 2009 when compared to fiscal 2008. The increase was driven primarily by a reduction in income taxes receivable of $18.0 million which was offset by a decrease in net income of $15.8 million. The remaining increase of $7.1 million is due to the timing of routine changes in working capital items.

Net cash provided by operating activities increased by approximately $12.0 million to $194.1 million during fiscal 2008 when compared to fiscal 2007, due to the increase in net income which was offset in part by the timing of routine changes in working capital items. The increase in net income is primarily the result of increased revenue in fiscal 2008.

Investing Activities

During the fiscal year ended July 31, 2008, we purchased approximately $154.4 million of short-term investments, which was offset by the sale of $257.0 million of short-term investments. We historically invested our cash in auction rate notes with ratings of AAA. By the end of the first quarter of fiscal 2008, we converted our entire balance of short-term investments to cash and cash equivalents.

Capital expenditures related to continuing operations (excluding those associated with fixed assets attributable to acquisitions) were approximately $75.8 million, $78.9 million and $113.4 million for fiscal 2010, 2009 and 2008, respectively. Our capital expenditures are primarily related to lease buyouts of certain facilities, opening and improving facilities and acquiring yard equipment. We continue to expand and invest in new and existing facilities and standardize the appearance of existing locations. We have no material commitments for future capital expenditures as of July 31, 2010.

During the fiscal year ended July 31, 2010, we used approximately $21.4 million in cash for the acquisition of D Hales. We made no acquisitions during the fiscal year ended July 31, 2009. During the fiscal year ended July 31, 2008, we used approximately $38.2 million in cash for the acquisitions of Century; Simpson; AG Watson; and Bob Lowe's Salvage Pool.

Financing Activities

In fiscal 2010, 2009 and 2008, we generated approximately $6.3 million, $3.1 million and $12.7 million, respectively, through the exercise of stock options.

In fiscal 2010, 2009 and 2008, we generated approximately $2.0 million, $1.9 million and $1.7 million, respectively, through the issuance of shares under the Employee Stock Purchase Plan.

In fiscal 2009, we used approximately $17.5 million and in 2008 we generated approximately $8.2 million through changes in our book overdraft.

In February 2003, our Board of Directors authorized us to repurchase up to 9.0 million shares of our common stock. In October 2007, our Board of Directors approved a 20 million share increase in our stock repurchase program bringing the total current number of shares authorized for repurchase to 29 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as we deem appropriate and may be discontinued at any time. For the year ended July 31, 2010, we repurchased 121,251 shares of our common stock at a price of $36.76. For the year ended July 31, 2009, we did not repurchase any shares under our stock repurchase program. For the year ended July 31, 2008, we repurchased 6,615,764 shares of our common stock at a weighted average price of $40.70. As of July 31, 2010, the total number of shares repurchased under the program was 13,770,720 and 15,229,280 shares were available for repurchase under our program.

In the second and fourth quarters of fiscal year 2009 and the first quarter of fiscal year 2010, Mr. Adair, Chief Executive Officer (and then President), exercised stock options through cashless exercises. In the fourth quarter of fiscal year 2010, Mr. Johnson, Chairman of the Board, exercised stock options through a cashless exercise. A portion of the options exercised were net settled in satisfaction of the exercise price and federal and state minimum statutory tax withholding requirements. We remitted approximately $17.2 million to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements. In fiscal year 2008 no stock options were exercised through the cashless exercise method. The exercises are summarized in the following table:

Period		Options Exercised			Exercise Price			Shares Net Settled for Exercise			Shares Withheld for Taxes(1)			Net Shares to Employee			Share Price for Withholding			Tax Withholding (in 000's)
FY 2009—Q2			600,000		$	4.47			96,929			222,817			280,254		$	26.93		$	6,000
FY 2009—Q4			361,035		$	11.12			116,741			109,595			134,699		$	34.39		$	3,769
FY 2010—Q1			323,631		$	13.03			114,354			95,746			113,531		$	36.89		$	3,532
FY 2010—Q4			350,000		$	12.91			122,922			105,827			121,251		$	36.76		$	3,890

(1)

Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against our stock repurchase program.

Contractual Obligations

We lease certain domestic and foreign facilities, and certain equipment under non-cancelable operating leases. In addition to the minimum future lease commitments presented, the leases generally require the company to pay property taxes, insurance, maintenance and repair costs which are not included in the table because we have determined these items are not material. The following table summarizes our significant contractual obligations and commercial commitments as of July 31, 2010 (in thousands):

		Payments Due By Period
Contractual Obligations		Total			Less than 1 Year			1-3 Years			3-5 Years			More than 5 Years			Other
Operating leases(1)		$	77,108		$	19,916		$	28,617		$	11,553		$	17,022		$	—
Capital leases(1)			986			421			443			122			—			—
Tax liabilities(2)			23,369			—			—			—			—			23,369
Total contractual obligations		$	101,463		$	20,337		$	29,060		$	11,675		$	17,022		$	23,369

		Amount of Commitment Expiration Per Period
Commercial Commitments(3)		Total			Less than 1 Year			1-3 Years			3-5 Years			More than 5 Years			Other
Letters of credit		$	7,768		$	7,768		$	—		$	—		$	—		$	—

(1)

Contractual obligations consist of future non-cancelable minimum lease payments under capital and operating leases, used in the normal course of business.

(2)

Tax liabilities include the long-term liabilities in the consolidated balance sheet for unrecognized tax positions. At this time we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.

(3)

Commercial commitments consist primarily of letters of credit provided for insurance programs and certain business transactions.

Credit Facilities

On March 6, 2008, we entered into an unsecured credit agreement with Bank of America, N.A. (the Credit Agreement) providing for a $200 million revolving credit facility (the Credit Facility). Currently available under the Credit Agreement is $150 million, subject to a $100 million foreign currency borrowing sublimit and a $50 million letter of credit sublimit. Amounts borrowed under the Credit Facility may be used for repurchases of stock, capital expenditures, working capital and other general corporate purposes. The Credit Facility matures and all outstanding borrowings are due on the fifth anniversary of the Credit Agreement (the Maturity Date), with annual reductions in availability of $25 million on each of the first three anniversaries of the Credit Agreement. Amounts borrowed under the Credit Facility may be repaid and re-borrowed until the Maturity Date and bear interest, at our option, at either Eurocurrency Rate plus 0.5% to 0.875%, depending on the leverage ratio, as defined in the Credit Agreement, at the end of the previous quarter or at the US prime rate. A default interest rate applies on all obligations during an event of default under the Credit Facility at a rate per annum equal to 2.0% above the otherwise applicable interest rate. The Credit Facility requires us to pay a commitment fee on the unused portion of the Credit Facility. The commitment fee ranges from 0.075% to 0.15% depending on the leverage ratio as of the end on the previous quarter. The Credit Facility contains customary representations and warranties and places certain business operating restrictions on us relating to, among other things, indebtedness, liens and other encumbrances, investments, mergers and acquisitions, asset sales, and dividends, distributions and redemptions of capital stock. In addition, the Credit Agreement provides for a maximum total leverage ratio and a minimum interest coverage ratio. The Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, cross-defaults to certain other indebtedness, bankruptcy and insolvency defaults, material judgments, invalidity of the loan documents and events constituting a change of control. The Credit Facility is guaranteed by our material domestic subsidiaries. The Credit Facility contains restrictions with respect to investments, mergers and acquisitions, dividends and distributions and redemptions of capital stock, these restrictions become effective only after our debt to EBITDA ratio exceeds 1.0:1.0. At July 31, 2010, the debt to EBITDA ratio was less than 1.0:1.0. As of July 31, 2010 and July 31, 2009, we did not have an outstanding balance under the Credit Facility.

Off-Balance Sheet Arrangements

As of July 31, 2010, we had no off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to vehicle pooling costs, self-insured reserves, allowance for doubtful accounts, income taxes, revenue recognition, share-based compensation, long-lived asset impairment calculations and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Annual Report on Form 10-K. Our

significant accounting policies are described in Note 1 to our consolidated financial statements for fiscal 2010. The following is a summary of the more significant judgments and estimates included in our critical accounting policies used in the preparation of our consolidated financial statements. Where appropriate, we discuss sensitivity to change based on other outcomes reasonably likely to occur.

Revenue Recognition

We provide a portfolio of services to our sellers and buyers that facilitate the sale and delivery of a vehicle from seller to buyer. These services include the ability to use our Internet sales technology and vehicle delivery, loading, title processing, preparation and storage. We evaluate multiple-element arrangements relative to our member and seller agreements in accordance with FASB ASC 605-25, Revenue Recognition, Multiple Element Arrangements, which addresses accounting for multiple-element arrangements and revenue recognition for units of accounting.

The services we provide to the seller of a vehicle involve disposing of a vehicle on the seller's behalf and, under most of our current North American contracts, collecting the proceeds from the member. We are not entitled to any such seller fees until we have collected the sales proceeds from the member for the seller and, accordingly, we recognize revenue for seller services after service delivery and cash collection, net of applicable rebates or allowances.

Vehicle sales, where we purchase and remarket vehicles on our own behalf, are recognized in accordance with ASC 605-25 on the sale date, which is typically the point of high bid acceptance. Upon high bid acceptance, a legal binding contract is formed with the member, and we record the gross sales price as revenue.

In certain cases, seller fees are not contingent upon collection of the seller proceeds from the member. However, we determined that we are not able to separate the services into separate units of accounting because we do not have fair value for undelivered items. As a result, we do not recognize seller fees until the final seller service has been delivered, which generally occurs upon collection of the sales proceeds from the member for the seller.

We provide a number of services to the buyer of the vehicle, charging a separate fee for each service. Each of these services has been assessed under the criteria of ASC 605-25 to determine whether we have met the requirements to separate them into units of accounting within a multi-element arrangement. We have concluded that the sale and the post-sale services are separate units of accounting. The fees for sale services are recognized upon completion of the sale, and the fees for the post-sale services are recognized upon successful completion of those services using the residual method.

We also charge members an annual registration fee for the right to participate in our vehicle sales program, which is recognized ratably over the term of the arrangement, and relist and late-payment fees, which are recognized upon receipt of payment by the member. No provision for returns has been established, as all sales are final with no right of return, although we provide for bad debt expense in the case of non-performance by our members or sellers.

Vehicle Pooling Costs

We defer in vehicle pooling costs certain yard operation expenses associated with vehicles consigned to and received by us, but not sold as of the balance sheet date. We quantify the deferred costs using a calculation that includes the number of vehicles at our facilities at the beginning and end of the period, the number of vehicles sold during the period and an allocation of certain yard operation expenses of the period. The primary expenses allocated and deferred are certain facility costs, labor, transportation, and vehicle processing. If our allocation factors change, then yard operation expenses could increase or decrease correspondingly in the future. These costs

are expensed as vehicles are sold in the subsequent periods on an average cost basis. Given the fixed cost nature of our business there is not a direct correlation in an increase in expenses or units processed on vehicle pooling costs.

We apply the provisions of FASB ASC 330-10-35, Inventory Subsequent Measurement, to our vehicle pooling costs. ASC 330-10-35 requires that items such as idle facility expense, excessive spoilage, double freight and rehandling costs be recognized as current period charges regardless of whether they meet the criteria of "so abnormal" as provided in ASC 330-10-35. In addition, ASC 330-10-35 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of production facilities.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts in order to provide for estimated losses resulting from disputed amounts billed to sellers or members and the inability of our sellers or members to make required payments. If billing disputes exceed expectations and/or if the financial condition of our sellers or members were to deteriorate, additional allowances may be required. The allowance is calculated by taking both seller and buyer accounts receivables written off during the previous 12 month period as a percentage of the total accounts receivable balance, i.e. total write-offs/total accounts receivable (write-off percentage). We note that a one percentage point deviation in the write-off percentage would have resulted in an increase or decrease to the allowance for doubtful accounts balance of less than $0.1 million.

Valuation of Goodwill

We evaluate the impairment of goodwill of our North America and UK operating segments annually (or on an interim basis if certain indicators are present) by comparing the fair value of the operating segment to its carrying value. Future adverse changes in market conditions or poor operating results of the operating segments could result in an inability to recover the carrying value of the investment, thereby requiring impairment charges in the future.

Income Taxes and Deferred Tax Assets

We account for income taxes in accordance with FASB ASC 740, Income Taxes. We are subject to income taxes in the US, Canada and UK. In arriving at a provision of income taxes, we first calculate taxes payable in accordance with the prevailing tax laws in the jurisdictions in which we operate; we then analyze the timing differences between the financial reporting and tax basis of our assets and liabilities, such as various accruals, depreciation and amortization. The tax effects of the timing difference are presented as deferred tax assets and liabilities in the consolidated balance sheet. We assess the probability that the deferred tax assets will be realized based on our ability to generate future taxable income. In the event that it is more likely than not the full benefit would not be realized from the deferred tax assets we carry on our consolidated balance sheet, we record a valuation allowance to reduce the carrying value of the deferred tax assets to the amount expected to be realized. As of July 31, 2010, we had approximately $0.8 million of valuation allowance arising from the net operating losses in states where we had discontinued certain operations in prior years and the potential losses if certain capital assets are sold in the UK. To the extent we establish a valuation allowance or change the amount of valuation allowance in a period, we reflect the change with a corresponding increase or decrease in our income tax provision in the consolidated income statement.

Historically, our income taxes have been sufficiently provided to cover our actual income tax liabilities among the jurisdictions in which we operate. Nonetheless, our future effective tax rate could still be adversely affected by several factors, including (i) the geographical allocation of our

future earnings, (ii) the change in tax laws or our interpretation of tax laws, (iii) the changes in governing regulations and accounting principles, (iv) the changes in the valuation of our deferred tax assets and liabilities and (v) the outcome of the income tax examinations. As a result, we routinely assess the possibilities of material changes resulting from the aforementioned factors to determine the adequacy of our income tax provision.

Based on our results for the twelve months ended July 31, 2010, a one percentage point change in our provision for income taxes as a percentage of income before taxes would have resulted in an increase or decrease in the provision of approximately $2.4 million.

Effective August 1, 2007, we adopted FASB ASC 740-10-25, Accounting for Uncertainty in Income Taxes, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest settlement of any particular position, could require the use of cash. In addition, we are subject to the continuous examination of our income tax returns by various taxing authorities, including the Internal Revenue Service and US states. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Long-lived Asset Valuation, Including Intangible Assets

We evaluate long-lived assets, including property and equipment and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the use of the asset. If the estimated undiscounted cash flows change in the future, we may be required to reduce the carrying amount of an asset.

Stock-Based Compensation

We account for our stock-based awards to employees and non-employees using the fair value method as required by ASC 718, Compensation—Stock Compensation. ASC 718 requires that the compensation cost related to share-based payment transactions, measured based on the fair value of the equity or liability instruments issued, be recognized in the financial statements. Determining the fair value of options using the Black-Scholes model, or other currently accepted option valuation models, requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the grant date. If actual results are not consistent with our assumptions and judgments used in estimating the key assumptions, we may be required to record additional compensation or income tax expense, which could have a material impact on our consolidated financial position and results of operations.

Retained Insurance Liabilities

We are partially self-insured for certain losses related to medical, general liability, workers' compensation and auto liability. Our insurance policies are subject to a $250,000 deductible per claim, with the exception of our medical policy which is $150,000 per claim. In addition, each of our policies contains an aggregate stop loss which limits our ultimate exposure. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates. The primary estimates used in the actuarial analysis include total payroll and revenue. Our estimates have not materially fluctuated from actual results. While we believe these estimates are reasonable based on the information currently available, if actual trends, including the severity of claims and medical cost inflation, differ from our estimates, our consolidated financial position, results of operations or cash flows could be impacted. The process of determining our insurance reserves requires estimates with various assumptions, each of which can positively or negatively impact those balances. The total amount reserved for all policies is approximately $4.8 million as of July 31, 2010. If the total number of participants in the medical plan changed by 10% we estimate that our medical expense would change by approximately $1.0 million and our medical accrual would change by approximately $200,000. If our total payroll changed by 10% we estimate that our workers' compensation expense would change by approximately $100,000 and our accrual for workers' compensation expenses would change by $100,000. A 10% change in revenue would change our insurance premium for the general liability and umbrella policy by less than $25,000.

Segment Reporting

Our North American and UK regions are considered two separate operating segments, which have been aggregated into one reportable segment because they share similar economic characteristics.

Recently Issued Accounting Standards

For a description of the new accounting standards that affect us, refer to Note 1 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.