<PAGE>





              COMPANY DATA:
              COMPANY CONFORMED NAME:              THE COBALT GROUP INC
              CENTRAL INDEX KEY:
              STANDARD INDUSTRIAL CLASSIFICATION:  SERVICES-COMPUTER PROCESSING
                                                   & DATA PREPARATION
              IRS NUMBER:                          911674947
              STATE OF INCORPORATION:              WA

        FILING VALUES:
              FORM TYPE:                           10-Q
              SEC ACT:
              SEC FILE NUMBER:                     000-26623
            FILM NUMBER:

        BUSINESS ADDRESS:
                STREET 1:                          2030 FIRST AVENUE, SUITE 300
                CITY:                              SEATTLE
                STATE:                             WA
                ZIP:                               98121
                BUSINESS PHONE:                    2062696363

10-Q
1
FORM 10-Q


<PAGE>

                                    FORM 10-Q

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



(Mark one)

[x]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 For the quarterly period ended September 30, 1999 or

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 For the transition period from ____________________ to
     ______________________


                          Commission File No. 000-26623

                             THE COBALT GROUP, INC.
             (Exact name of registrant as specified in its charter)


           Washington                                   91-1674947
           ----------                                   ----------
(State or other jurisdiction of                       (IRS Employer
incorporation or organization)                      Identification No.)


2030 FIRST AVENUE, SUITE 300, SEATTLE, WASHINGTON                98121
------------------------------------------------------------------------
(Address of principal executive offices)                      (Zip Code)

(206) 269-6363
------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
                                       ---     ---

As of October 31, 1999, 16,848,926 shares of the Company's common stock, $.01
par value, were outstanding.


                                        1
<PAGE>

                             THE COBALT GROUP, INC.
                           FORM 10-Q QUARTERLY REPORT

                                TABLE OF CONTENTS


PART I - Financial Information

   Item 1. - Financial Statements

     Consolidated Balance Sheets as of December 31, 1998 and
        September 30, 1999                                                     3

     Consolidated Statements of Operations for the Three and Nine
        Months Ended September 30, 1998 and 1999                               4

     Consolidated Statements of Cash Flows for the Nine
        Months Ended September 30, 1998 and 1999                               5

     Notes to Consolidated Financial Statements                                6

   Item 2. - Management's Discussion and Analysis of Financial
               Condition and Results of Operations

     Overview and Outlook                                                      9

     Results of Operations                                                    10

     Liquidity and Capital Resources                                          12

     Year 2000 Readiness                                                      13

     Risk Factors                                                             14

   Item 3. - Quantitative and Qualitative Disclosures about Market Risk       22

Part II - Other Information

   Item 2. - Changes in Securities and Use of Proceeds                        23

   Item 6. - Exhibits and Reports on Form 8-K                                 23

Signatures                                                                    24




                                       2
<PAGE>




ITEM 1. FINANCIAL STATEMENTS

                             THE COBALT GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                               DECEMBER 31,  SEPTEMBER 30,
                                                                                   1998          1999
                                                                               ------------  -------------
                                                                                              (UNAUDITED)
<S>                                                                                <C>         <C>

                                        ASSETS

Current assets
        Cash and cash equivalents                                                  $  5,756    $ 18,205
        Short-term investments                                                          983        --
        Accounts receivable, net of allowance for doubtful
           accounts of $85 and $203 (unaudited), respectively                         1,250       3,847
        Other current assets                                                            130       1,816
                                                                                   --------    --------
                                                                                      8,119      23,868

Capital assets, net of accumulated depreciation of $410
     and $1,252 (unaudited), respectively                                             1,453       3,863
Intangible assets, net of accumulated amortization of $321
     and $2,686 (unaudited), respectively                                               479      28,661

Other assets                                                                             11       1,047
                                                                                   --------    --------
           Total assets                                                            $ 10,062    $ 57,439
                                                                                   --------    --------
                                                                                   --------    --------


               LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
                       STOCK AND SHAREHOLDERS' (DEFICIT) EQUITY

Current liabilities
        Accounts payable                                                           $    191    $  1,786
        Accrued liabilities                                                             776       1,158
        Deferred revenue                                                              1,290       1,838
        Software financing contract, current portion                                    --          433
        Capital lease obligations, current portion                                      328         862
                                                                                   --------    --------
                                                                                      2,585       6,077
                                                                                   --------    --------
Non-current liabilities
        Software financing contract, non-current portion                                --          119
        Capital lease obligations, non-current portion                                  557       1,264
                                                                                   --------    --------
                                                                                        557       1,383

Mandatorily redeemable convertible preferred stock
        Series A; $0.01 par value per share; 2,106,282 and 0 (unaudited)
           shares issued and outstanding, respectively; redemption and
           liquidation value of $1,158 and $0 (unaudited), respectively               1,116         --
        Series B; $0.01 par value per share; 7,047,620 and 0 (unaudited) shares
           issued and outstanding, respectively; redemption and liquidation
           value of $29,600 plus unpaid dividends and $0 (unaudited),
           respectively                                                              30,046          --
                                                                                   --------    --------

                                                                                    31,162          --
                                                                                   --------    --------

Shareholders' (deficit) equity
        Preferred stock; $0.01 par value per share; 100,000,000 shares
           authorized; 9,153,902 and 0 shares issued and outstanding as
           mandatorily redeemable convertible preferred stock (unaudited),
           respectively                                                                 --          --
        Common stock; $0.01 par value per share; 200,000,000 shares authorized;
           1,343,898 and 16,836,811 (unaudited) issued
           and outstanding, respectively                                                 13         168
        Additional paid-in capital                                                    2,435      90,879
        Deferred compensation                                                        (1,686)     (4,392)
        Notes receivable from shareholders                                             (144)       (144)
        Accumulated deficit                                                         (24,860)    (36,532)
                                                                                   --------    --------
                                                                                    (24,242)     49,979
                                                                                   --------    --------
           Total liabilities, mandatorily redeemable convertible preferred
           stock and shareholders' (deficit) equity                                $ 10,062    $ 57,439
                                                                                   --------    --------
                                                                                   --------    --------


</TABLE>



          See accompanying notes to consolidated financial statements.



                                       3
<PAGE>




                             THE COBALT GROUP, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


<TABLE>
<CAPTION>

                                              THREE MONTHS ENDED              NINE MONTHS ENDED
                                                 SEPTEMBER 30,                   SEPTEMBER 30,
                                         ----------------------------    ----------------------------
                                             1998             1999          1998              1999
                                         ----------------------------    ----------------------------

<S>                                      <C>             <C>             <C>             <C>
Revenues                                 $      1,647    $      7,049    $      3,984    $     14,911
Cost of revenues                                  333           1,506             746           3,143
                                         ------------    ------------    ------------    ------------
    Gross profit                                1,314           5,543           3,238          11,768

Operating expenses
    Sales and marketing                         1,218           3,675           2,566           7,776
    Product development                           261             834             609           1,835
    General and administrative                  1,275           3,893           2,712           8,385
    Amortization of intangible assets              74           1,378             225           2,364
    Stock based compensation                      172           1,051             279           2,382
                                         ------------    ------------    ------------    ------------
       Total operating expenses                 3,000          10,831           6,391          22,742
                                         ------------    ------------    ------------    ------------

Loss from operations                           (1,686)         (5,288)         (3,153)        (10,974)

Gain on sale of HomeScout                         --              --            1,626             --
Interest expense                                  (43)           (374)            (58)           (926)
Other income, net                                  13             135              48             228
                                         ------------    ------------    ------------    ------------
Net loss                                 $     (1,716)   $     (5,527)   $     (1,537)   $    (11,672)
                                         ------------    ------------    ------------    ------------
                                         ------------    ------------    ------------    ------------
Net loss available to common
    shareholders                         $     (1,719)   $     (5,830)   $     (1,545)   $    (13,213)
                                         ------------    ------------    ------------    ------------
                                         ------------    ------------    ------------    ------------
Basic and diluted net loss per share     $      (0.50)   $      (0.52)   $      (0.45)   $      (2.67)
                                         ------------    ------------    ------------    ------------
                                         ------------    ------------    ------------    ------------
Weighted-average shares outstanding         3,438,216      11,286,321       3,423,258       4,955,322
                                         ------------    ------------    ------------    ------------
                                         ------------    ------------    ------------    ------------
Pro forma net loss available to common
    shareholders (unaudited)                             $     (5,527)                  $    (11,672)
                                                         ------------                    ------------
                                                         ------------                    ------------
Pro forma basic and diluted net loss
    per share (unaudited)                                $      (0.37)                  $      (0.94)
                                                         ------------                    ------------
                                                         ------------                    ------------
Pro forma weighted-average shares
    outstanding (unaudited)                                14,938,073                     12,389,063
                                                         ------------                    ------------
                                                         ------------                    ------------


</TABLE>




          See accompanying notes to consolidated financial statements.



                                       4
<PAGE>




                             THE COBALT GROUP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                              NINE MONTHS ENDED
                                                                                SEPTEMBER 30,
                                                                           --------------------
                                                                              1998        1999
                                                                           ----------  --------
<S>                                                                        <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES

     Net loss                                                              $ (1,537)   $(11,672)
     Adjustments to reconcile net loss to net cash
         used in operating activities
     Amortization of deferred compensation                                      279       2,382
     Depreciation and amortization                                              404       3,221
     Net (gain) loss on sale of assets                                       (1,616)          7
     Changes in:
         Accounts receivable                                                   (496)     (2,597)
         Other assets                                                          (100)     (2,722)
         Accounts payable and accrued liabilities                               837       1,977
         Deferred revenues                                                      163         548
                                                                           --------    --------
     Total  adjustments                                                        (529)      2,816
                                                                           --------    --------
         Net cash used in operating activities                               (2,066)     (8,856)
                                                                           --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES

     Acquisition of capital assets                                             (395)       (765)
     Proceeds from sale of short term investments                               --          983
     Investment in PartsVoice                                                   --       (3,281)
     Proceeds from sale of HomeScout                                          1,626        --
                                                                           --------    --------
         Net cash provided by (used in) investing activities                  1,231      (3,063)
                                                                           --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from initial public offering and direct sale, net of costs        --       49,776
     Proceeds from sale of preferred stock                                      --          100
     Proceeds from exercise of stock options                                      7         149
     Payments of dividends on preferred stock                                   --       (2,059)
     Payment of notes payable                                                  (177)    (26,600)
     Proceeds from notes payable                                              1,000       3,600
     Payment of capital lease obligation and software contract                  (68)       (598)
                                                                           --------    --------
         Net cash provided by financing activities                              762      24,368
                                                                           --------    --------
Net (decrease) increase in cash and cash equivalents                            (73)     12,449
Cash and cash equivalents, beginning of period                                  241       5,756
                                                                           --------    --------
Cash and cash equivalents, end of period                                   $    168    $ 18,205
                                                                           --------    --------
                                                                           --------    --------

</TABLE>



          See accompanying notes to consolidated financial statements.



                                       5
<PAGE>



                             THE COBALT GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1. NATURE OF THE BUSINESS

     The Cobalt Group, Inc. (the "Company") is a provider of Internet marketing
and data aggregation services to individual franchised automobile dealerships,
multi-franchise automobile dealer groups and automobile manufacturers in the
United States. The Company enables its clients to develop and implement
e-business strategies and to capitalize on the increasing use of the Internet by
consumers to research, evaluate and buy new and pre-owned vehicles, parts and
accessories and automotive-related services such as financing and insurance. The
Company's current service offerings include comprehensive Web site design,
development and management; data extraction, aggregation and maintenance;
Internet advertising and promotion; and Internet training and support.

     The Company also operates YachtWorld.com which provides prospective yacht
buyers with access to approximately 21,000 photo listings of boats and yachts
from hundreds of brokers, dealers and manufacturers, a directory of nearly
18,000 marine related businesses, content from several leading boat
publications, and other marine related content. The Company sold its HomeScout
business, a real estate search service, in 1998.

     The accompanying unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Certain information and note disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Results of operations for the three
and nine-month periods ended September 30, 1999 are not necessarily indicative
of future financial results.

     Investors should read these interim statements in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto for the fiscal year
ended December 31, 1998 (audited) and the three months ended March 31, 1999
(unaudited) included in our registration statement on Form S-1, SEC File No.
333-79483 filed with the United States Securities and Exchange Commission.

2. ACQUISITION OF PARTSVOICE

     On April 30, 1999, the Company acquired all of the equity interests in
PartsVoice, LLC, whose principal business is vehicle parts data acquisition and
management services. Immediately prior to the closing, PartsVoice distributed to
its owners certain assets and liabilities. At closing, the Company paid
aggregate purchase consideration for the PartsVoice equity of (i) $3.0 million
in cash; (ii) promissory notes in the principal amount of $23.0 million; (iii)
500,000 shares of Series C convertible preferred mandatorily redeemable stock at
$8.00 per share; and (iv) warrants to purchase 160,000 shares of the Company's
common stock at $6.00 per share. The warrants were valued at $381,000 using the
Black Scholes option-pricing model.

     The acquisition was accounted for using the purchase method of accounting.
The aggregate purchase price was allocated to the net assets acquired, based
upon their respective fair market values. The excess of the purchase price,
including acquisition costs, over the fair market value of the assets acquired
was allocated to intangible assets.


                                       6
<PAGE>


     The following summarizes the unaudited pro forma results of operations, on
a combined basis, as if the Company's acquisition of PartsVoice occurred as of
the beginning of each of the periods presented, after including the impact of
certain adjustments, such as amortization of goodwill and interest on
acquisition indebtedness:

<TABLE>
<CAPTION>

                                         THREE MONTHS ENDED     NINE MONTHS ENDED
                                            SEPTEMBER 30,          SEPTEMBER 30,
                                          1998       1999        1998        1999
                                       --------    --------    --------    --------
                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                    <C>         <C>         <C>         <C>
Net revenues                           $  4,015    $  7,049    $ 11,068    $ 18,346
Net loss                                 (2,287)     (5,527)     (3,599)    (12,382)
Basic and diluted net loss per share   $  (0.67)   $  (0.52)   $  (1.05)   $  (2.81)
</TABLE>

     The unaudited pro forma results are not necessarily indicative of the
results of operations that would have been reported had the acquisition occurred
prior to the beginning of the periods presented. In addition, they are not
intended to be indicative of future results.

3. NET LOSS PER SHARE

     The following table sets forth the computation of the numerators and
denominators in the basic and diluted net loss and pro forma net loss per share
calculations for the periods indicated:

<TABLE>
<CAPTION>

                                              THREE MONTHS ENDED           NINE MONTHS ENDED
                                                 SEPTEMBER 30,               SEPTEMBER 30,
                                           -------------------------    -------------------------
                                              1998           1999          1998          1999
                                           ----------    -----------    ----------    -----------
                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>           <C>            <C>           <C>
     Numerator:
       Net loss                            $   (1,716)   $    (5,527)   $   (1,537)   $   (11,672)
       Dividends on mandatorily
         redeemable convertible
         preferred stock                           --             (300)         --           (1,524)
       Accretion of mandatorily
         redeemable convertible
         preferred stock                           (3)            (3)           (8)           (17)
                                           ----------    -----------    ----------    -----------
     Net loss available to common
       shareholders                        $   (1,719)        (5,830)   $   (1,545)       (13,213)
                                           ----------                   ----------
                                           ----------                   ----------


       Effect of pro forma conversion
         of preferred shares:
       Dividends on mandatorily
         redeemable convertible
         preferred stock                                         300                        1,524
       Accretion of mandatorily
         redeemable convertible
         preferred stock                                           3                           17
                                                         -----------                  -----------
       Pro forma net loss available to
         common shareholders                             $    (5,527)                 $   (11,672)
                                                         -----------                  -----------
                                                         -----------                  -----------
     Denominator:
       Weighted-average shares
         outstanding                        3,438,216     11,286,321     3,423,258      4,955,322
                                           ----------                   ----------
                                           ----------                   ----------
       Weighted-average effect of pro
         forma conversion of
         preferred shares                                  3,651,752                    7,433,741
                                                         -----------                  -----------
       Pro forma weighted average shares
         outstanding                                      14,938,073                   12,389,063
                                                         -----------                  -----------
                                                         -----------                  -----------
</TABLE>


     Pro forma net loss per share is computed using the weighted-average number
of common shares outstanding, including the pro forma effects of conversion of
the Company's preferred stock on the date the shares were originally issued.


                                       7
<PAGE>


4. INTANGIBLE ASSETS

     Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                      USEFUL LIVES    DECEMBER 31, 1998   SEPTEMBER 30, 1999
                                      ------------    -----------------   ------------------
                                         (YEARS)                 (IN THOUSANDS)
                                                          (AUDITED)

<S>                                        <C>           <C>                  <C>
Goodwill                                   6             $    --              $ 13,247
Trademarks/trade name                      6                  --                 1,200
PartsVoice customer list                   6                  --                13,800
DealerNet customer list                    3                  800                  800
Existing technology                        5                  --                 1,100
Workforce                                  5                  --                 1,200
                                                -----------------   ------------------
                                                              800               31,347
Accumulated amortization                                     (321)              (2,686)
                                                -----------------   ------------------
                                                         $    479             $ 28,661
                                                -----------------   ------------------
                                                -----------------   ------------------

</TABLE>


These assets are amortized over their respective estimated useful lives.

5. STOCK OPTIONS

     During the six month period from March 31 to September 30, 1999, the
Company granted stock options that resulted in deferred compensation costs of
$4.7 million. Of this amount, $4.0 million is related to 783,028 options granted
to employees at less than market value and is being amortized over the vesting
period, generally four years. An additional $250,000 is related to 50,000
options granted to employees at less than market value and is being amortized
over periods not to exceed one year. The remaining $400,000 is related to 68,500
options granted to third parties and is being amortized over the respective
service periods of up to one year.

6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

     Cash paid for interest during the nine months ended September 30, 1998 and
1999 was $54,000 and $926,000, respectively.

     During the nine months ended September 30, 1998 and 1999, the Company
purchased capital assets under capital leases and a software financing contract
of $627,000 and $2.4 million, respectively.

     Depreciation expense for the nine months ended September 30, 1998 and 1999
was $180,000 and $857,000, respectively. Amortization expense for the nine
months ended September 30, 1998 and 1999 was $224,000 and $2.4 million,
respectively.

7. INITIAL PUBLIC OFFERING

     On August 10, 1999, the Company completed an initial public offering in
which proceeds, net of underwriting discount and commission, of approximately
$46.0 million were raised. An additional $5.0 million was raised in a direct
sale of 454,545 shares of Common Stock to General Electric Capital Assurance
Company. A portion of the proceeds was used to retire the notes payable ($26.6
million at August 10, 1999) and pay all accumulated dividends ($2.1 million) on
mandatorily redeemable convertible preferred stock.

     Upon completion of the initial public offering on August 10, 1999 by the
Company, all outstanding shares of the Company's mandatorily redeemable
convertible preferred stock were converted to shares of common stock. One share
of common stock was exchanged for each share of preferred stock, resulting in an
increase in shareholder equity of $34.4 million.



                                       8
<PAGE>



ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.


INVESTORS SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN
THIS REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF
THE SECURITIES AND EXCHANGE ACT, AS AMENDED, THAT INVOLVE KNOWN AND UNKNOWN
RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. YOU SHOULD READ THE CAUTIONARY STATEMENTS MADE IN
THIS REPORT AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS REPORT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 14. YOU SHOULD NOT RELY ON
THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY OUR OPINION AS OF THE DATE
OF THIS REPORT. WE DO NOT ASSUME ANY OBLIGATION TO REVISE FORWARD-LOOKING
STATEMENTS.

OVERVIEW AND OUTLOOK

     We derive our revenues from fees charged to our automobile dealership,
dealer group and manufacturer clients for Web site design, development and
maintenance and data extraction and aggregation services, as well as for
Internet advertising and promotional services. Revenues from Web site design,
development and maintenance and data extraction and aggregation services are
recognized ratably over the applicable service period. Revenues from initial
setup fees and custom projects are recognized at the time of activation. Our
obligations for Internet advertising services typically include guarantees of a
minimum number of "impressions," or times that an advertisement is viewed. To
the extent that minimum guaranteed impressions are not met, we defer recognition
of the corresponding revenues until the remaining guaranteed impression levels
are achieved.

     The majority of our services are sold to clients under short-term service
agreements with an initial term of six or twelve months and month-to-month
thereafter. Revenues are recognized net of promotional discounts. We offer some
of our services on an initial "free trial" basis, generally for periods of one
to three months, in which case revenue is not recognized until the end of the
free trial period and the client continues service on a paying basis.

     We expect to continue to increase our revenues by acquiring more customers
and by increasing and improving our product offerings, although we may not
sustain the same rate of growth as is reported in these interim statements.

     Our cost of revenues consists of the costs associated with production,
maintenance and delivery of our services. These costs include the costs of
production, processing and design personnel, communication expenses related to
data transfer, fees payable to third parties for distribution of vehicle
inventory data to other Web sites and for banner advertising, site content
licensing fees and costs of Web and database servers used to host client data.

     Some strategic new products may be lower margin products. Further, we have
experienced increased demand for custom design and development projects, which
carry higher costs. As we respond to the customer demand for these products our
gross margin may decline.

     In April 1999, we acquired PartsVoice, LLC, an Oregon limited liability
company, whose principal business is vehicle parts data acquisition and
management services. The purchase price, including transaction expenses, was
$30.7 million, of which $3.0 million was paid in cash and $4.4 million was paid
by issuance of preferred stock and warrants at closing. The balance of the
purchase price was paid by issuance of short-term notes, which were paid in full
on August 10, 1999 with proceeds from the Company's initial public offering. See
"Liquidity and Capital Resources." The PartsVoice acquisition was accounted for
as a purchase transaction, and substantially all of the purchase price was
allocated to intangible assets. The consolidated results of operations include
PartsVoice for the period May 1, 1999 to September 30, 1999.



                                       9
<PAGE>



We may in the future pursue additional acquisitions of businesses, products or
technologies that could complement or expand our business. Integrating newly
acquired businesses or technologies may be expensive and time-consuming. The
negotiation of potential acquisitions or strategic relationships as well as the
integration of future acquired businesses, products or technologies could divert
our management's time and resources and could result in the issuance of dilutive
equity securities, the incurrence of debt or contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could have a material adverse effect on our business, results of
operations and financial condition.

     Since inception, but increasingly during the past year, we have made
substantial investments in infrastructure and in staffing and management to
accommodate current and anticipated future growth. Over the last twelve months
we have hired more than 183 employees, excluding the addition of PartsVoice
employees, and invested more than $3.6 million in capital assets. These
investments are intended to improve our service to clients, including backup
computer systems and more stable and scalable database systems. Our planned
growth will require additional staff and facilities.

     The Company is in the process of reorganizing its development, design and
production staff to improve focus on new product development and to reduce
turnaround time for client requests. We expect these changes may increase our
product development and production staff expenses relative to sales, marketing
and administrative costs.

     Our continued growth and the PartsVoice acquisition have placed and will
continue to place a significant strain on our managerial and operational
resources. To manage our anticipated growth, we must continue to implement and
improve our operational and financial systems and must expand, train and manage
our employee base.

     We intend to continue to invest in technology infrastructure development,
marketing and promotion, services development and strategic relationships. As a
result, we expect to continue to incur net losses and negative cash flows from
operations at least through 2000.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998

     REVENUES. Revenues increased from $1.6 million for the three months ended
September 30, 1998 to $7.0 million for the same period in 1999, an increase of
$5.4 million, or 328.0%. Of the increase, $2.8 million, or 52.0% of the change,
is attributable to revenues generated by PartsVoice. The remaining 48.0% of the
change is due to an increase in our client base and the sale of additional
services to existing clients. The revenue increase is net of client attrition of
1.6% during the three months ended September 30, 1999 compared with a client
attrition rate of 3.1% for the same period for 1998. Attrition rates were
determined based on total dealer clients as of September 30, 1999 and 1998,
respectively. As of September 30, 1999 Cobalt was paid to manage and maintain
Web sites for 4,647 dealer clients, compared to 3,699 at June 30, 1999.

     COST OF REVENUES. Cost of revenues increased from $333,000 for the three
months ended September 30, 1998 to $1.5 million for the same period in 1999, an
increase of $1.2 million or 352.1%. Of this increase, $414,000, or 35.3%, is
related to increased staffing required to accommodate our increased client base,
$373,000, or 31.8%, is attributable to PartsVoice, and $224,000, or 19.1%, is
associated with the costs of advertising and distribution of vehicle inventory
data to third party Web sites. Cost of sales as a percentage of sales has
increased from 20.2% to 21.4% for the quarter ended September 30, 1999
compared to the same period for 1998. Improvement in the product mix toward
higher-margin parts locating and hosting and maintenance services was offset
by the increase in production and design staff and service delivery facilities
required to support current and future growth in our customer base.



                                       10
<PAGE>



     SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation for sales and marketing personnel, including sales commissions,
travel expenses and expenses for promotional advertising and marketing. Sales
and marketing expenses increased from $1.2 million for the three months ended
September 30, 1998 to $3.7 million for the same period in 1999, an increase of
$2.5 million, or 201.6%. Of this increase, $814,000 or 33.2%, is due to the
increase in the number of our sales and marketing personnel, $658,000, or 26.7%,
is attributable to an increase in commissions paid to sales staff and management
which reflects the significant increase in customers during the third quarter,
$401,000, or 16.3%, is attributable to PartsVoice, and $333,000, or 13.6%, is
attributable to increased corporate brand advertising.

     PRODUCT DEVELOPMENT. Our product development expenses consist primarily of
compensation for product development personnel and costs of related computer
equipment. We expense product development costs as they are incurred. We
increased our product development costs from $261,000 for the three months ended
September 30, 1998 to $834,000 for the same period in 1999, an increase of
$573,000, or 220.1%. This increase is due to the increase in the number of our
product development personnel and associated computer related costs, resulting
from the increased emphasis on product development initiatives.

     GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist
primarily of compensation for administrative personnel, facilities and
communications expenses and fees for outside professional advisors. General and
administrative expenses increased from $1.3 million for the three months ended
September 30, 1998 to $3.9 million for the same period in 1999, an increase of
$2.6 million, or 205.5%. Of this increase, $1.1 million, or 40.5% is
attributable to the increase in the number of staff and management personnel,
$403,000, or 15.4%, is due to PartsVoice, and $301,000, or 11.5%, is
attributable to the increase in facilities and general office expenses.

     AMORTIZATION OF INTANGIBLE ASSETS. The increase is due to amortization of
the intangible assets and goodwill related to the PartsVoice acquisition on
April 30, 1999.

     STOCK BASED COMPENSATION. Stock based compensation increased from $172,000
for the three months ended September 30, 1998 to $1.1 million for the same
period in 1999, an increase of $879,000, or 510.9%. The increase is due to an
increase in the number of options that were granted to employees with exercise
prices below the fair value of the underlying stock.

   NET LOSS. Our net loss for the three months ended September 30, 1998 was $1.7
million compared to a net loss of $5.5 million for the same period in 1999, an
increase of $3.8 million or 222.0%. Increased operating expenses described
above, including the increase in non-cash charges of $1.3 million for goodwill
amortization and $879,000 for stock based compensation, offset the increase in
revenues.

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998

     REVENUES. Revenues increased from $4.0 million for the nine months ended
September 30, 1998 to $14.9 million for the same period in 1999, an increase of
$10.9 million, or 274.2%. Of this increase $4.6 million or 42.2% is attributable
to PartsVoice. The remaining increase is due in part to the significant net
increase in our client base and the sale of additional services to existing
customers. The increase is net of dealer client attrition of 5.2% during the
nine months ended September 30, 1999 compared with a client attrition rate of
6.7% for the same period for 1998. Attrition rates were determined based on
total dealer clients as of September 30, 1999 and 1998, respectively.

     COST OF REVENUES. Cost of revenues increased from $746,000 for the nine
months ended September 30, 1998 to $3.1 million for the same period in 1999, an
increase of $2.4 million, or 321.0%. Of this increase, $735,000, or 30.7% is due
to an increase in costs related to increased staffing required to accommodate
our increased client base, $664,000, or 27.7%, is associated with increased
sales of advertising and distribution of vehicle inventory data to third party
Web sites, and $579,000, or 24.2%, is attributable to PartsVoice. Cost of
sales as a percentage of sales increased from 18.7% to 21.1% for the
nine-month period ended September 30, 1999 compared to the same period for
1998. During this period, the product mix had shifted to lower margin
products, creative and development services and resale of third party
products, in addition to the increase in production and design staff and
service delivery facilities required to support current and future growth in
our customer base. Since PartsVoice was acquired on April 30, 1999, the
year-to-date period reflects only five months of the higher margin parts
locating service revenues. On a pro forma basis, assuming PartsVoice had been
acquired at the beginning of the period, our reported margins would have been
22.1% for the nine-month period ended September 30, 1999.



                                       11
<PAGE>


     SALES AND MARKETING. Sales and marketing expenses increased from $2.6
million for the nine months ended September 30, 1998 to $7.8 million for the
same period in 1999, an increase of $5.2 million, or 203.0%. Of this increase,
$2.0 million or 38.3%, is due to the increase in the number of our sales and
marketing personnel, $1.1 million, or 21.0%, is attributable to increased
corporate brand advertising, $932,000, or 17.9%, is attributable to an increase
in commissions paid on sales, and $613,000, or 11.8% is due to PartsVoice.

     PRODUCT DEVELOPMENT. Our product development costs increased from $609,000
for the nine months ended September 30, 1998 to $1.8 million for the same period
in 1999, an increase of $1.2 million, or 201.5%. This increase is due to the
increase in the number of our product development personnel and associated
computer equipment costs, resulting from the increased emphasis on product
development initiatives.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $2.7 million for the nine months ended September 30, 1998 to $8.4 million
for the same period in 1999, an increase of $5.7 million, or 209.2%. Of this
cost increase, $2.4 million, or 43.0% is due to the increase in the number of
staff and management personnel, $758,000, or 13.4%, is attributable to increased
consulting, legal and accounting fees, and $687,000, or 12.1%, is attributable
to the increase in facilities and general office expenses.

     AMORTIZATION OF INTANGIBLE ASSETS. The increase is due to amortization of
the intangible assets and goodwill related to the PartsVoice acquisition on
April 30, 1999.

     STOCK BASED COMPENSATION. Stock based compensation increased from $279,000
for the nine months ended September 30, 1998 to $2.4 million for the same period
in 1999, an increase of $2.1 million. The increase is due to an increase in the
number of options that were granted to employees with exercise prices below the
fair value of the underlying stock.

     NET LOSS. During the nine months ended September 30, 1998 we sold the
assets of our HomeScout real estate search service division and realized a gain
of $1.6 million. Excluding the gain on sale of HomeScout, our net loss for the
nine months ended September 30, 1998 was $3.2 million compared to a net loss of
$11.7 million for the same period in 1999, an increase of $8.5 million.
Increased operating expenses described above, including the increase in non cash
charges of $2.2 million for goodwill amortization and $2.1 million for stock
based compensation, offset the increase in revenues.

     As a strategic initiative or as a response to the competitive environment,
we may from time to time make pricing, service, technology or marketing
decisions or business or technology acquisitions that could have a material
adverse effect on our short-term operating results. We also may experience
seasonality in our business in the future resulting in diminished revenues as a
result of diminished demand for our services during seasonal periods that
correspond to seasonal fluctuations in the automotive industry or to
fluctuations in industry spending for Internet marketing services. Due to all or
any of the foregoing factors, in some future quarter our operating results may
fall below the expectations of securities analysts and investors. In such event,
the trading price of our common stock would likely be materially and adversely
affected.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have financed our operations primarily from sales of
common and preferred stock, cash flow from operations and, to a lesser extent,
borrowings under short-term debt facilities. Our initial public offering in
August 1999 yielded proceeds of $46.0 million, net of underwriting discounts.
A direct sale of common stock to General Electric Capital Assurance Company in
August 1999 yielded an additional $5.0 million in proceeds. These proceeds
were used to repay the PartsVoice acquisition indebtedness of $23.0 million
and borrowings of $3.6 million outstanding under a line of credit. In
addition, we used approximately $2.1 million of the net proceeds to pay
dividends on preferred stock.

     Net cash used in operating activities was $8.9 million for the nine months
ended September 30, 1999. Cash used in operating activities consisted primarily
of net operating losses after non-cash charges and increases in accounts
receivable and other assets, offset by increases in current liabilities.



                                       12
<PAGE>


     Net cash used in investing activities was $3.1 million for the nine months
ended September 30, 1999. Cash used in investing activities consisted of the
initial cash payment and expenses for the PartsVoice acquisition and the
investment in capital assets offset by proceeds from short-term investment
maturities.

     Net cash provided by financing activities was $24.4 million for the nine
months ended September 30, 1999. Cash provided by financing activities consisted
primarily of proceeds from the initial public offering and direct sale of common
stock offset by payments of notes and dividends on preferred stock.

     We believe that the net proceeds from our initial public offering and the
direct sale to General Electric Capital Assurance Company, together with cash
flow from operations, will be sufficient to meet our cash requirements for the
next twelve months. Depending on our rate of growth and cash requirements, we
may require additional equity or debt financing to meet future working capital
needs. We cannot assure you that such additional financing will be available or,
if available, that such financing can be obtained on satisfactory terms.

YEAR 2000 READINESS

     Many existing computer programs and hardware use only two digits to
identify a year. These computer programs and hardware were designed and
developed without addressing the impact of the upcoming change in the century.
If not corrected, many computer programs and hardware could fail or create
erroneous results by, at or beyond the year 2000. We have evaluated our internal
and third party hardware and software systems and, based on this evaluation and
statements published by our hardware and software suppliers, which we have not
verified, we have determined that substantially all of our systems are Year 2000
compliant. All of our non-compliant purchased software is used for internal
processes only. We have replaced or upgraded several such software products and
will complete this process prior to December 31, 1999. We also intend to replace
all of our non-compliant hardware prior to December 31, 1999. We are in the
process of remediating our internally developed software for Year 2000
compliance and intend to have all such software fully compliant prior to
December 31, 1999. We have executed a substantial number of test scenarios that
simulate the date change for all critical systems and intend to continue
execution of such testing during the remainder of 1999.

     The products and services used by our clients in connection with our
services may not be Year 2000 compliant and as a result may lead to claims
against us, the impact of which cannot be currently estimated. The aggregate
cost of defending and resolving these claims, if any, could be significant. Year
2000 issues also could affect the purchasing patterns of our clients and
potential clients as many automobile dealers, dealer groups and manufacturers
are expending significant resources to replace or remedy their current hardware
and software systems in order to resolve Year 2000 issues. In addition, our
clients may experience interruptions to their businesses as a result of their
failure to timely correct their Year 2000 issues. As a result, our clients may
postpone or cancel purchases of our services, potentially causing interruptions
to our revenue that could have a material adverse effect on our business,
operating results and financial condition.

     In addition, we utilize other services developed and provided by third
party vendors that may fail due to Year 2000 issues. We are currently assessing
the Year 2000 readiness of services provided by our third party vendors. If we
identify specific risks we will develop and implement a remediation plan with
respect to third party services that may fail to be Year 2000 compliant.

     To date, we have expended internal resources associated with assessment and
remediation of Year 2000 issues. Total costs associated with our entire review
and assessment are expected to be less than $25,000. The failure of our software
and computing systems and of our third party vendors to be Year 2000 compliant
could have a material adverse effect on our business, results of operations and
financial condition.

    We will be developing contingency plans to respond to unanticipated issues
associated with unremediated Year 2000 problems.



                                       13
<PAGE>



RISK FACTORS

     You should carefully consider the risks and uncertainties described below
and the other information in this report in evaluating our business, operations
and prospects.

     AS AN EARLY STAGE COMPANY IN A NEW AND RAPIDLY CHANGING MARKET, OUR
BUSINESS STRATEGY IS UNPROVEN. ACCORDINGLY, IT IS DIFFICULT TO PREDICT OUR
FUTURE GROWTH OR OPERATING RESULTS.

     We began operations in March 1995. Accordingly, we have only a limited
operating history and our business is in an early stage of development. You
should evaluate the risks and challenges that an early stage company like ours
will face in the rapidly changing and competitive environment of the Internet.
We may not successfully meet the challenges of growing our company.

     OUR LIMITED OPERATING HISTORY AND UNPROVEN, EVOLVING BUSINESS MODEL MAKE IT
DIFFICULT TO EVALUATE OUR PROSPECTS.

     We began offering our services to automobile dealers in November 1995. We
must achieve broad market acceptance of our services and continue to expand our
service offerings for our business to succeed. Our client base represents a
relatively small percentage of the total franchised automobile dealer community
in the United States, and many of our dealer clients have been clients for only
a short time. We cannot assure you that our new and planned future offerings
will be successful or that our broader business model, as it evolves, will
succeed.

     WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE OR MAINTAIN
PROFITABILITY. IF WE CONTINUE TO LOSE MONEY, OUR OPERATIONS MAY NOT BE
FINANCIALLY VIABLE.

     We have incurred net losses each year since we began operations and we
expect that we will not be profitable at least through the year 2000. We cannot
guarantee that our business strategy will be successful or that we will ever
achieve or maintain significant revenues or profitability. After giving pro
forma effect to Cobalt's acquisition of PartsVoice, we had a net loss of $12.4
million for the nine months ended September 30, 1999. As of September 30, 1999,
we had an accumulated deficit of $36.5 million. We have not had operating
profits on a quarterly or annual basis. We expect to continue to incur
significant operating expenses and, as a result, we will need to generate
significant quarterly revenue increases to achieve and maintain profitability.

     ANY FAILURE TO INTEGRATE PARTSVOICE WITH COBALT COULD COMPROMISE OUR GROWTH
STRATEGY AND ADVERSELY AFFECT OUR BUSINESS.

     To execute our business plan, we must continue to integrate PartsVoice and
Cobalt operations and services into a cohesive, combined entity. Cobalt's
acquisition of PartsVoice has significantly increased the size and the
geographic dispersion of our workforce and operations and has expanded our
physical facilities. In addition, as the integration of PartsVoice has
progressed certain employees of PartsVoice have chosen to leave the company,
including Brian Allen, the former president of PartsVoice. Geographic
dispersion and the loss of PartsVoice personnel increases the risk that we
will fail to effectively gather, store, and communicate information and ideas,
including technical knowledge and expertise, throughout our organization,
which in turn would negatively impact our business. Also, if we fail to
effectively integrate PartsVoice, we will not achieve the increases in sales
to our existing client base that are a key element of our future growth.
Finally, we may fail to realize operating efficiencies from combining
operations such as extracting parts inventory and other data from automobile
dealerships and consequently our results of operations may suffer.

                                       14
<PAGE>

     ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY WILL ADVERSELY AFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS.

     We are experiencing rapid growth that places significant strain upon our
management and operational systems and resources. Failure to manage our growth
effectively will have a material adverse effect upon our business, results of
operations and financial condition. Our ability to compete effectively as a
provider of Internet marketing services to the automobile industry and to manage
future growth requires us to continue to improve our operational systems,
software development organization and our financial and management controls,
reporting systems and procedures. We may fail to make these improvements
effectively. Additionally, our efforts to make these improvements may divert the
focus of our personnel.

     We recently have hired a significant number of new employees, including key
executives, and we will continue to add personnel to maintain our ability to
grow in the future. For example, we have hired more than 153 new full-time
employees in the first nine months of 1999 and our Vice Presidents of
Development, Business Development, and Field Sales, each have been with us for
less than one year. We must integrate our key executives into a cohesive
management team and at the same time train and manage our employee work force
in a timely and effective manner to expand our business. We cannot guarantee
that we will be able to do so successfully.

     WE HAVE RELIED ON ISSUANCES OF EQUITY SECURITIES AND BORROWINGS TO FINANCE
OUR OPERATIONS AND MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OUR FUTURE
OPERATIONS. ANY FAILURE TO OBTAIN ADDITIONAL CAPITAL WHEN NEEDED OR ON
SATISFACTORY TERMS COULD DAMAGE OUR BUSINESS AND PROSPECTS.

     We do not generate sufficient cash to fully fund operations. To date we
have financed our operations principally through the issuance of equity
securities and through borrowings, and expect that we may need to raise
additional capital in the future to fund our ongoing operations. Any equity or
debt financing, if available at all, may be on terms that are not favorable to
us and, in the case of equity offerings, may result in dilution to our
shareholders. Any difficulty in obtaining additional financial resources could
force us to curtail our operations or prevent us from pursuing our growth
strategy.

     ANY FAILURE TO BUILD STRONG RELATIONSHIPS WITH CURRENT AND PROSPECTIVE
FRANCHISED DEALERSHIP, MULTI-FRANCHISE DEALER GROUP AND AUTOMOBILE MANUFACTURER
CLIENTS COULD LIMIT OUR GROWTH PROSPECTS AND ADVERSELY AFFECT OUR BUSINESS.

     For our business to succeed, we must continue to develop relationships with
franchised dealerships and multi-franchise dealer groups. We derive a
substantial portion of our revenues from fees paid by our automobile dealer
clients and our future growth depends in part on expanding our base of
dealer clients. We also must maintain close working relationships with
manufacturers. While we have established relationships with a number of
manufacturers, these relationships are relatively new and we have little
experience in maintaining them. In addition, manufacturers may elect to
implement their own Internet strategies, which could reduce our potential client
base. For example, during the period ended September 30, 1999 Hyundai Motor
America chose to consolidate all of their Internet services with a single vendor
and notified us of their intent not to renew its contract.

     EXCESSIVE TURNOVER OF OUR DEALERSHIP CLIENTS COULD INCREASE OUR COSTS,
DAMAGE OUR REPUTATION AND SLOW OUR GROWTH.

     Our service agreements with dealerships generally are short-term and
cancelable on 30 days' notice. To be successful, we will need to maintain low
dealer client turnover. During 1998, 262 dealer clients, or approximately
8.0% of our total dealer clients as of year-end, were terminated. For the nine
months ended September 30, 1999, 242 dealer clients, or approximately 5.2% of
our total dealer clients as of September 30, 1999 were terminated. Our rate of
dealer client turnover may fluctuate from period to period, and may exceed
recent levels. A material decrease in the number of dealer clients purchasing
our services could have a material adverse effect on our business, results of
operations and financial condition.

                                       15
<PAGE>

     WE EXPEND CONSIDERABLE RESOURCES IN SELLING OUR SERVICES TO PROSPECTIVE NEW
CLIENTS. SALES EFFORTS THAT TAKE LONGER THAN EXPECTED TO COMPLETE OR THAT ARE
UNSUCCESSFUL COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.

     The time, expense and effort of securing dealership engagements may exceed
our expectations. The length of the sales cycle varies by dealership and dealer
group, but can range from four to eight months. Because the decision to purchase
Internet marketing services often involves adoption by a dealership of a new way
of thinking about the automobile sales process, we often devote significant time
and resources to a prospective dealership client, including costs associated
with multiple site visits and demonstrations, without any assurance that the
prospective client will decide to purchase our services. Larger engagements and
efforts to secure manufacturer endorsements have a longer sales cycle.

     WE WILL FACE INTENSE COMPETITION AND, IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, OUR BUSINESS WILL BE SERIOUSLY HARMED.

     The market for Internet marketing and data aggregation services is very
competitive. We face competition from Internet development firms, automobile
sales lead generation services and data aggregation businesses. Our parts
inventory data services, for example, face competition from data aggregation
service providers such as Universal Computer Systems, Inc., The Reynolds and
Reynolds Company and Automatic Data Processing, Inc., or ADP. Similarly, our Web
site design, development and maintenance services face competition from local
and national Internet development firms and services provided by AutoTrader.com,
and Autobytel.com, Inc. In addition, we compete indirectly with automobile sales
lead generation service companies, such as Autobytel.com, AutoVantage,
AutoTrader.com, Microsoft CarPoint and Autoweb.com, and advertising agencies
because their service offerings compete with ours for a share of the automobile
dealership's Internet marketing budget.

     We anticipate that competition in the market for automotive industry
Internet services will increase significantly over time. Barriers to entry on
the Internet are relatively low, and we expect to face competitive pressures
from numerous companies, particularly those with existing data aggregation
capabilities that may be readily integrated with Internet services. Furthermore,
our existing and potential competitors may develop offerings that equal or
exceed the quality of our offerings or achieve greater market acceptance than
ours. Many of our current and future competitors have and will continue to have
substantially greater capital, resources and access to additional financing than
we do or will. We cannot assure you that we will be able to compete successfully
against our current and future competitors or that competition will not have a
material adverse effect on our business, results of operations or financial
condition.

     IF AUTOMOBILE MANUFACTURERS DECIDE TO PROVIDE INTERNET MARKETING AND DATA
AGGREGATION SERVICES DIRECTLY TO THEIR DEALERSHIP NETWORKS, OUR REVENUES AND
GROWTH PROSPECTS WILL BE SEVERELY IMPAIRED.

     It is possible that some or all automobile manufacturers may attempt to
provide services comparable to those that we provide to our clients. If this
occurs, our ability to maintain or expand our client base and revenues will be
impaired. In 1997, DaimlerChrysler Corporation announced an internal initiative
to bring elements of our parts locator service in-house. This initiative could
significantly reduce our contract revenues from parts data services that we
currently provide to DaimlerChrysler dealers. In 1998, DaimlerChrysler elected
to host the parts locator data internally, although we continue to extract and
aggregate parts inventory from its dealers. For the nine months ended September
30, 1999, revenues from parts data services provided to the MOPAR division of
DaimlerChrysler represented 20.9% of our pro forma combined revenues.


                                       16
<PAGE>

     IF WE ARE UNSUCCESSFUL IN QUICKLY AND EFFECTIVELY INTEGRATING FUTURE
ACQUISITIONS, OUR BUSINESS AND RESULTS OF OPERATIONS COULD SUFFER.

     A key element of our growth strategy is to pursue strategic acquisitions.
Integrating newly acquired businesses or technologies may be expensive and
time-consuming. We may fail to manage these integration efforts successfully.
The negotiation of potential acquisitions or strategic relationships as well as
the integration of future acquired businesses, products or technologies could
divert our management's time and resources. We may not be able to operate any
acquired businesses profitably or otherwise implement our growth strategy
successfully. If we are unable to integrate any newly acquired entities or
technologies effectively, our business and results of operations could suffer.
Acquisitions may cause us to incur contingent liabilities and to amortize
expenses related to goodwill and other intangible assets, which could adversely
affect our results of operations.

     OUR QUARTERLY RESULTS LIKELY WILL FLUCTUATE, WHICH MAY SUBJECT THE MARKET
PRICE OF OUR COMMON STOCK TO RAPID AND UNPREDICTABLE CHANGE.

     As our business grows and the market for Internet marketing services
matures, we expect that our quarterly operating results will fluctuate. Factors
that we expect to lead to such period-to-period changes include:

          -    the level of demand in the automotive industry for Internet
               marketing and data aggregation services;

          -    the rate and volume of additions to our client base;

          -    the amount and timing of expenditures by clients for our
               services;

          -    the introduction of new products or services by us or our
               competitors;

          -    the amounts and timing of expenses such as those affected with
               increased headcount and sales commissions;

          -    our ability to attract and retain personnel with the necessary
               technical, sales, marketing and creative skills required to
               develop our services and to service our clients effectively;

          -    technical difficulties with respect to the Internet or our
               infrastructure; and

          -    economic conditions generally and those specific to the
               automotive industry.

     We expect our business to experience seasonality, reflecting seasonal
fluctuations in the automotive industry, Internet and commercial online service
usage and advertising expenditures. Our expenses are relatively fixed in the
short term and are based in part on our expectations of future revenues, which
may vary significantly. If we do not achieve expected revenue targets, we may be
unable to adjust our spending quickly enough to offset any revenue shortfall. If
this were to occur, our results of operations could be significantly affected.

     WE MAY FAIL TO RETAIN OUR KEY EXECUTIVES AND TO ATTRACT AND RETAIN
TECHNICAL PERSONNEL, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS.

     The loss of the services of one or more of our executive officers could
have a material adverse effect on the development of our business and,
accordingly, on our operating results and financial condition. We generally do
not enter into employment agreements with our key executive officers and cannot
guarantee that we will be able to retain them.

     Qualified technical personnel are in great demand throughout the Internet
industry. Our future growth will depend in large part upon our ability to
attract and retain highly skilled technical and engineering personnel. Our
failure to attract and retain the technical personnel that are integral to our
expanding service development needs may limit the rate at which we can develop
new services, which could have a material adverse effect on our business,
results of operations and financial condition.


                                       17
<PAGE>


     IF THE USE OF THE INTERNET AS A COMMERCIAL MEDIUM DOES NOT GROW AS WE
ANTICIPATE, OUR BUSINESS WILL BE SERIOUSLY HARMED.

     We depend heavily on the growth and use of the Internet. Automobile
manufacturers and dealerships will not widely accept and adopt an Internet
strategy if the Internet fails to provide consumers with a satisfactory
experience. For example, transmission of graphical and other complex information
may lead to delays. If data transmission speeds do not increase in step with the
complexity of the information available, consumers may become frustrated with
their Internet experiences, which could lead users to seek alternatives to
Internet-based information retrieval.

     Furthermore, the recent growth in Internet traffic generally has caused
periods of decreased performance. If Internet usage continues to increase
rapidly, the Internet infrastructure may not be able to support the demands
placed on it by this growth and its performance and reliability may decline. If
Internet delays occur frequently, overall Internet usage or usage of our
clients' Web sites could increase more slowly or not at all. Our future success
and revenue growth will depend substantially upon continued growth in the use of
the Internet in the sales and service process. The Internet may prove not to be
a viable commercial marketing medium for vehicles and related products and
services. If use of the Internet does not continue to increase, our business,
results of operations and financial condition would be materially and adversely
affected.

     IF WE BECOME UNABLE TO EXTRACT DATA FROM OUR CLIENTS' INTERNAL MANAGEMENT
SYSTEMS, THE VALUE OF OUR SERVICES WOULD DECREASE DRAMATICALLY.

     A significant component of our business and revenues depends on our ability
to extract various data types from our clients' internal management systems.
Most dealership information management systems have been developed and sold by
The Reynolds and Reynolds Company and ADP and our ability to interface with
these systems is essential to the success of our data aggregation service
offerings. It is possible that new products, services or information management
systems installed by dealerships could limit or otherwise impair our ability to
collect data from dealerships. This could have a material adverse effect on our
business, results of operations and financial condition.

     WE ARE VULNERABLE TO DISRUPTIONS IN OUR COMPUTER SYSTEMS AND NETWORK
INFRASTRUCTURE. SYSTEM OR NETWORK FAILURES WOULD ADVERSELY AFFECT OUR
OPERATIONS.

     We depend on the continued performance of our systems and network
infrastructure. Any system or network failure that causes interruption or slower
response time for our services could result in less traffic to our clients' Web
sites and, if sustained or repeated, could reduce the attractiveness of our
services to clients. An increase in the volume of Internet traffic to sites
hosted by us could strain the capacity of our technical infrastructure, which
could lead to slower response times or system failures. Any failure of our
servers and networking systems to handle current or future volumes of traffic
would have a material adverse effect on our business and reputation.

     In addition, our operations depend upon our ability to maintain and protect
our computer systems, which are located at facilities in Seattle, Washington;
Portland, Oregon; and Austin, Texas. Our systems are vulnerable to damage from
fire, floods, earthquakes, power loss, telecommunications failures and similar
events. Although we maintain back-up systems and capabilities and also maintain
insurance against fires and general business interruptions, our back-up
systems and our insurance coverages may not be adequate in any particular
case. The occurrence of a catastrophic event could have a material adverse
effect on our business, results of operations and financial condition.

                                       18
<PAGE>


     UNKNOWN SOFTWARE DEFECTS OR SYSTEM FAILURES COULD CAUSE SERVICE
INTERRUPTIONS, WHICH COULD DAMAGE OUR REPUTATION AND ADVERSELY AFFECT OUR
BUSINESS.

     Our service offerings depend on complex systems as well as software, both
internally developed and licensed from third parties. Complex software often
contains defects, particularly when first introduced or when new versions are
created. Although we conduct extensive testing, we may not discover software
defects that affect our new or current services or enhancements until after they
are deployed. Complex systems may not perform properly, particularly when first
deployed or when upgraded or reconfigured. Software or system defects could
cause service interruptions, which could damage our reputation or increase our
service costs. They also could cause us to lose revenue and divert our
development resources.

     IF WE ARE UNABLE TO KEEP PACE WITH TECHNOLOGICAL ADVANCES RELATING TO THE
INTERNET AND E-COMMERCE, CLIENTS MAY STOP BUYING OUR SERVICES AND OUR REVENUES
WILL DECREASE.

     The market for Internet services is characterized by rapid technological
developments, evolving industry standards and customer demands and frequent new
service introductions and enhancements. Our future success will significantly
depend on our ability to continually improve the quality of our data aggregation
and management, product development, Web site maintenance, management and
related services as well as content on our clients' Web sites. In addition, the
widespread adoption of developing multimedia-enabling technologies could require
fundamental and costly changes in our technology and could fundamentally affect
the nature of Internet-based content, which could adversely affect our business,
results of operations and financial condition.

     ECONOMIC TRENDS THAT NEGATIVELY AFFECT THE AUTOMOTIVE RETAILING INDUSTRY
MAY ADVERSELY AFFECT OUR BUSINESS BY DECREASING THE NUMBER OF AUTOMOBILE DEALERS
PURCHASING OUR SERVICES, DECREASING THE AMOUNT OUR CLIENTS SPEND ON OUR
SERVICES, OR BOTH.

     Purchases of new vehicles are typically discretionary for consumers and may
be particularly affected by negative trends in the economy. The success of our
business will depend upon a number of factors influencing the spending patterns
of automobile dealerships and manufacturers for marketing and advertising
services. These patterns are in part influenced by factors relating to
discretionary consumer spending for automobile and automobile-related purchases,
including economic conditions affecting disposable consumer income, such as
employment, wages and salaries, business conditions, interest rates and
availability of credit for the economy as a whole and in regional and local
markets. Because the purchase of a vehicle is often a significant investment,
any reduction in disposable income and the impact such reduction may have on our
clients may affect us more significantly than businesses serving other
industries or segments of the economy.

     OUR BUSINESS DEPENDS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS AND SUCH PROTECTION IS COSTLY AND MAY BE INADEQUATE. THE LOSS
OF ANY OF THESE RIGHTS OR PROPERTY WOULD SERIOUSLY HARM OUR BUSINESS.

     Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and still evolving, and we cannot predict the future viability or value of any
of our proprietary rights. We also cannot assure you that the steps that we have
taken to protect our intellectual property rights and confidential information
will prevent unauthorized disclosure, misappropriation or infringement of these
valuable assets.

     In addition, our business activities may infringe upon the intellectual
property rights of others and other parties may assert infringement claims
against us. Any litigation to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others might
result in substantial costs and diversion of resources and management attention.
Moreover, if we infringe upon the rights of others, we may be required to pay
substantial amounts and may be required to either license the infringed
intellectual property or to develop alternative technologies independently. We
may not be able to obtain suitable substitutes for the infringed technology on
acceptable terms or in a timely manner, which could adversely affect our
business, results of operations and financial condition.


                                       19
<PAGE>


     OUR ABILITY TO USE THE TRADEMARKS AROUND WHICH WE HAVE BUILT OUR BRAND
IDENTITIES MAY BE LIMITED, WHICH COULD DIMINISH MARKET ACCEPTANCE OF OUR
SERVICES AND UNDERMINE OUR MARKETING EFFORTS.

     We have filed for federal trademark protection for our trademark "Cobalt,"
which we use in both word and logo form. Other organizations within the computer
and software industries also have filed trademark registration applications for
"Cobalt." We have filed an opposition proceeding before the Trademark Trial and
Appeal Board of the United States Patent and Trademark Office with respect to
two of these competing registration applications. That opposition is pending and
we are in discussions with a third party applicant regarding a potential
trademark use consent agreement. We may be unsuccessful in these proceedings or
negotiations and may be required to limit the use of the tradenames or marks
around which we have attempted to build brand identities.

     WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER
THE INTERNET AND LIABILITY FOR PRODUCTS SOLD OVER THE INTERNET.

     We could be exposed to liability with respect to third party information
that is accessible through Web sites we create. These claims might assert that,
by directly or indirectly providing links to Web sites operated by third
parties, we should be liable for copyright or trademark infringement or other
wrongful actions by third parties through these sites. It is also possible that
if any information provided on our clients' Web sites contains errors, consumers
and our clients could make claims against us for losses incurred in relying on
this information. We access the systems and databases of our clients and,
despite precautions, we may adversely affect these systems. Even if these claims
do not result in liability to us, we could incur significant costs in
investigating and defending against these claims and our reputation could suffer
dramatically. While we believe our insurance is adequate, our general liability
insurance and contractual indemnity and disclaimer provisions may not cover all
potential claims to which we are exposed and may not be adequate to indemnify us
for all liability that may be imposed. Any imposition of liability that is not
covered by insurance or is in excess of insurance coverage could have a material
adverse effect on our business, results of operations and financial condition.

     INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR INTERNET
SERVICES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

     Due to concerns arising from the increasing use of the Internet, a number
of laws and regulations have been and may be adopted covering issues such as
user privacy, pricing, acceptable content, taxation and quality of products and
services. This legislation could dampen the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Further, due to the global nature of the Internet, it is
possible that multiple federal, state or foreign jurisdictions might attempt to
regulate Internet transmissions or levy sales or other taxes relating to
Internet-based activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel and personal
privacy is uncertain. We cannot assess the impact of any future regulation of
the Internet on our business.

     THE FAILURE OF OUR SOFTWARE, TECHNOLOGY AND OTHER SYSTEMS, AND OF THE
SOFTWARE, TECHNOLOGY AND SYSTEMS OF OUR KEY SUPPLIERS AND CLIENTS, TO BE YEAR
2000 COMPLIANT MAY NEGATIVELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS.

     We may not accurately identify all potential Year 2000-related problems
that could affect our business, and the corrective measures that we implement
may be ineffective or incomplete. Any Year 2000-related problems could interrupt
our ability to provide services to our clients, process orders or accurately
report operating and financial data. Similar problems and consequences could
result if any of our key suppliers and clients experience Year 2000-related
problems. To the extent that our clients rely on hardware or software that may
not be Year 2000 compliant, our ability to provide our services, in particular
our data extraction, aggregation and management services, could be materially
and adversely affected. Our failure or the failure of our significant suppliers
and clients to adequately address the Year 2000 issue could adversely affect our
business, operating results and financial condition.


                                       20
<PAGE>

     SUBSTANTIAL SALES OR THE PERCEPTION OF FUTURE SALES OF OUR COMMON STOCK MAY
DEPRESS THE MARKET PRICE FOR OUR STOCK.

     Future sales of substantial amounts of our common stock in the public
market could adversely affect the market prices for our common stock.
Approximately 10.9 million shares are subject to lock-up agreements that
prohibit the sale of these shares until February 2000. Immediately after the
lock-up period expires, these shares will become available for sale. Additional
shares of common stock will become available for sale at various times
thereafter upon the expiration of one-year holding periods.

     OUR PRINCIPAL SHAREHOLDER AND ITS AFFILIATES WILL CONTINUE TO INFLUENCE
MATTERS AFFECTING US, WHICH COULD CONFLICT WITH YOUR INTERESTS.

     As of September 30, 1999, E.M. Warburg, Pincus & Co., LLC beneficially
owned approximately 46% of our common stock and is able to exercise significant
influence over us, including on matters submitted to our shareholders for a
vote, such as:

          -    the election of our board of directors;
          -    the removal of any of our directors;
          -    the amendment of our articles of incorporation or bylaws; and
          -    the adoption of measures that could delay or prevent a change in
               control or impede a merger, takeover or other business
               combination involving us.

     Actions taken by Warburg could conflict with interests of other
shareholders. As a result of Warburg's significant shareholdings, a potential
acquirer could be discouraged from attempting to obtain control of us, which
could have a material adverse effect on the market price of our common stock.

     OUR ARTICLES OF INCORPORATION AND WASHINGTON LAW CONTAIN PROVISIONS THAT
COULD DISCOURAGE THIRD PARTIES FROM ACQUIRING US OR LIMIT THE PRICE THAT THEY
WOULD BE WILLING TO PAY FOR OUR STOCK.

     Our articles of incorporation and the Washington Takeover Act could have
the effect of delaying or preventing a change in control.

     ARTICLES OF INCORPORATION. Our board of directors, without shareholder
approval, has the authority under our articles of incorporation to issue
preferred stock with rights superior to the rights of the holders of common
stock. As a result, preferred stock could be issued quickly and easily, could
adversely affect the rights of holders of common stock and could be issued with
terms calculated to delay or prevent a change in control of Cobalt or make
removal of management more difficult.

     Our articles of incorporation provide for the division of our board of
directors into three classes, as nearly equal in number as possible, with the
directors in each class serving for a three-year term, and one class being
elected each year by our shareholders. Directors may be removed only for cause.
Because this system of electing and removing directors generally makes it more
difficult for shareholders to replace a majority of the board of directors, it
may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of Cobalt.

     WASHINGTON TAKEOVER ACT. Washington law imposes restrictions on certain
transactions between a corporation and certain significant shareholders. Chapter
23B.19 of the Washington Business Corporation Act prohibits a corporation, with
some exceptions, from engaging in significant business transactions with an
"acquiring person," which is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the corporation, for a
period of five years after such acquisition, unless the transaction or
acquisition of shares is approved by a majority of the members of the
corporation's board of directors prior to the time of acquisition. Significant
business transactions include:

          -    a merger or consolidation with, disposition of assets to, or
               issuance or redemption of stock to or from, the acquiring person;
          -    termination of 5% or more of the employees of the corporation as
               a result of the acquiring person's acquisition of 10% or more of
               the shares; and
          -    allowing the acquiring person to receive any disproportionate
               benefit as a shareholder.


                                       21
<PAGE>

     After the five-year period, a significant business transaction may occur,
as long as it complies with the fair price provisions of the statute. A
corporation may not opt out of this statute. This provision may have the effect
of delaying, deterring or preventing a change in control of Cobalt.

     OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INDIVIDUAL SHAREHOLDERS.

     The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of new services by us or our competitors,
market conditions in the automobile industry, changes in financial estimates by
securities analysts or other events or factors, many of which are beyond our
control. In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many technology and services companies and that often have been
unrelated to the operating performance of these companies.

     IF OUR STOCK PRICE IS VOLATILE, THE LIKELIHOOD THAT WE WILL BE SUBJECT TO
SECURITIES CLASS ACTION LITIGATION WILL INCREASE.

     In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources, and
could cause our stock price to decline.

     WE HAVE NOT DESIGNATED A SPECIFIC USE FOR ALL OF THE NET PROCEEDS FROM OUR
INITIAL PUBLIC OFFERING. OUR MANAGEMENT MAY FAIL TO ALLOCATE A PORTION OF THE
PROCEEDS TO PRODUCTIVE USES.

     Our management has significant discretion in applying the remainder of the
net proceeds of our initial public offering. We currently expect to use the
remaining net proceeds of the offering for general corporate purposes, including
capital expenditures and working capital. We also may use a portion of the net
proceeds for the acquisition of companies, technology or services that
complement our business or for strategic alliances with, or investments in,
companies that provide complementary products and services. Failure to allocate
these proceeds to productive uses would adversely affect our business,
operations and revenues.

ITEM 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Substantially all of our cash equivalents and marketable securities are at
fixed interest rates, and, as such, the fair value of these instruments is
affected by changes in market interest rates. However, all of our cash
equivalents and marketable securities mature within one year. As a result, we
believe that the market risk arising from our holding of these financial
instruments is minimal. In addition, all of our current clients pay in U.S.
dollars and, consequently, our foreign currency exchange rate risk is
immaterial. We do not have any derivative instruments and do not engage in
hedging transactions.



                                       22
<PAGE>

PART II -- OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

1.   On August 4, 1999, Cobalt's Registration Statement on Form S-1,
     Registration No. 333-79483 (the "Registration Statement"), was declared
     effective by the SEC. The Registration Statement registered 5,559,615
     shares of common stock to be offered and sold in Cobalt's initial public
     offering and in a direct sale to General Electric Capital Assurance
     Company.

2.   On August 10, 1999, 2,106,282, 7,047,620, and 512,500 shares of Series A,
     B, and C mandatorily redeemable convertible preferred stock, respectively,
     were converted to common stock. One share of common stock was exchanged for
     each share of preferred stock.

3.   As of September 30, 1999, Cobalt had realized and used the proceeds from
     its initial public offering as follows:

<TABLE>
<CAPTION>
                                                                (in thousands)
<S>                                                                <C>
         Proceeds from sale of 4,500,000 shares, less
             underwriters' discounts of $3,465,000                 $  46,035
         Proceeds from the direct sale to General
             Electric Capital Assurance Company                        5,000
         Expenses related to the initial public offering                (564)
                                                                   ---------
         Total proceeds                                            $  50,471
                                                                   ---------
                                                                   ---------

         Use of proceeds:
         Repayment of PartsVoice acquisition notes                 $  23,000
         Repayment of notes payable                                    3,600
         Payment of preferred stock dividends to related
           parties                                                     2,100
         Payment of management fee to related party                      150
         Acquisition of capital assets                                   141
         Working capital                                               3,275
                                                                   ---------
          Use of proceeds                                          $  32,266
                                                                   ---------
                                                                   ---------
</TABLE>

         The balance of proceeds were invested in short-term (less than one
year) investments.

ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K:

      a. Exhibits

         Exhibit 27 - Financial Data Schedule

         Exhibit 10.1 - Lease Agreement (office form dated October 24, 1999)

         Exhibit 10.2 - Lease Agreement (parking dated October 24, 1999)

      b. Reports on Form 8-K.

    No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 1999.





                                       23
<PAGE>


                                   SIGNATURES


     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                             THE COBALT GROUP, INC.



                            By: /s/ David M. Douglass
                               ------------------------
                                David M. Douglass
                            Chief Financial Officer,
                           Vice President Operations,
                                  and Secretary


                                 DAVID DOUGLASS

                            Dated: NOVEMBER 15, 1999




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