There are two separate legal issues at hand in the frysad.com case, try to keep that in mind. The first and potentially most damaging for frysad.com is the allegation of trademark infringement. The second issue is distinct from trademark infringement: the allegation of copyright infringement.
The trademark infringement issue is a bigger problem partly because the potential damages are much greater. Even under the recently strengthened copyright code in the DMCA, Fry's Electronics can't seek statutory damages against frysad.com unless they registered their ads with the US Copyright Office. They most likely did not, so they can't gain much with civil action for the copyright infringement.
The trademark infringement is more important since the possible damages are much greater, and since winning the trademark case would shut down frysad.com permanently. A critical issue in a trademark infringement case is whether or not there is a realistic possibility of confusion between the alleged infringer and the trademark holder. In this case, Fry's could probably show that confusion is possible, given that the site violated Fry's copyright by posting the ads. Whether or not warnings that say "This is not the real Fry's site" are sufficient in preventing confusion is a toss-up.
The trademark infringement would obviously not be a problem if frysad.com had nothing to do with electronics sales. Trademarks are industry-specific, Apple Records can't sue Apple Computers over the "Apple" in the trademark. This case, however, actually does pertain to one business using another's trademark in direct competition.
That's why the letter from the Fry's attorney focuses almost entirely on the trademark aspect. I'm just worried because I can see people already beginning to confuse the copyright infringement issue with the trademark issue.
[This comment does not constitute legal advice.]
-Keslin, the naked nerd girl.