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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2001

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 Number 000-26623

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

Washington(State or other jurisdiction
of incorporation or organization)

91-1674947(I.R.S. Employer Identification No.)


2200 First Avenue South
Seattle, Washington 98134(Address of principal executive offices) (Zip Code)

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

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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, 2001, 20,627,685 shares of the Company's common stock, $.01 par value, were outstanding.

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

|PART IFinancial Information
|----------------------------
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|PART IIOther Information   
|                            
|                            
|Signatures                  

2

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Item 1.  Financial Statements

The Cobalt Group, Inc.        Consolidated Balance Sheets        (in thousands, except share and per share amounts)        (unaudited)

|                                     |                                                                                                                                        | September 30,
2001                         |        | December 31,
2000 |       
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ----------------- | ------
|Assets                               |                                                                                                                                        |                                            |        |                   |       
|Current assets                       |                                                                                                                                        |                                            |        |                   |       
|                                     | Cash and cash equivalents                                                                                                              |                                            | $      | 3,815             |       
|                                     | Accounts receivable, net of allowance for doubtful accounts of $1,608 and $944, respectively                                           |                                            |        | 9,228             |       
|                                     | Other current assets                                                                                                                   |                                            |        | 2,276             |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        |                                            | 15,319 |                   |       
|Capital assets, net                  |                                                                                                                                        |                                            | 16,243 |                   |       
|Intangible assets, net               |                                                                                                                                        |                                            | 12,200 |                   |       
|Other assets                         |                                                                                                                                        |                                            | 922    |                   |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        | Total assets                               |        | $                 | 44,684
|                                     |                                                                                                                                        |                                            |        |                   |       
|Liabilities and Shareholders' Equity |                                                                                                                                        |                                            |        |                   |       
|Current liabilities                  |                                                                                                                                        |                                            |        |                   |       
|                                     | Accounts payable                                                                                                                       |                                            | $      | 2,837             |       
|                                     | Accrued liabilities                                                                                                                    |                                            |        | 3,398             |       
|                                     | Deferred revenue                                                                                                                       |                                            |        | 6,710             |       
|                                     | Notes payable                                                                                                                          |                                            |        | 2,000             |       
|                                     | Software financing contract, current portion                                                                                           |                                            |        | 482               |       
|                                     | Capital lease obligations, current portion                                                                                             |                                            |        | 299               |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        |                                            | 15,726 |                   |       
|Non-current liabilities              |                                                                                                                                        |                                            |        |                   |       
|                                     | Deferred revenues, non-current portion                                                                                                 |                                            |        | 1,168             |       
|                                     | Software financing contract, non-current portion                                                                                       |                                            |        |                  |       
|                                     | Capital lease obligations, non-current portion                                                                                         |                                            |        |                  |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        |                                            | 1,168  |                   |       
|Contingent liabilities               |                                                                                                                                        |                                            | 280    |                   |       
|Shareholders' equity                 |                                                                                                                                        |                                            |        |                   |       
|                                     | Preferred stock; $0.01 par value per share; 100,000,000 shares authorized; 0 shares issued and outstanding                             |                                            |        |                  |       
|                                     | Common stock; $0.01 par value per share; 200,000,000 shares authorized; 20,627,685 and 17,210,941 issued and outstanding, respectively |                                            |        | 206               |       
|                                     | Additional paid-in capital                                                                                                             |                                            |        | 124,159           |       
|                                     | Deferred equity subscriptions                                                                                                          |                                            |        | (8,343            | )     
|                                     | Deferred equity expenses                                                                                                               |                                            |        | (336              | )     
|                                     | Notes receivable from shareholders                                                                                                     |                                            |        | (144              | )     
|                                     | Accumulated deficit                                                                                                                    |                                            |        | (88,032           | )     
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        |                                            | 27,510 |                   |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        | Total liabilities and shareholders' equity |        | $                 | 44,684
|                                     |                                                                                                                                        |                                            |        |                   |       

See accompanying notes to consolidated financial statements.

3

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The Cobalt Group, Inc.        Consolidated Statements of Operations        (in thousands, except share and per share amounts)        (unaudited)

|                                    |                                                                                                         | Three months ended
September 30, |            | Nine months ended
September 30, |       
|----------------------------------- | ------------------------------------------------------------------------------------------------------- | -------------------------------- | ---------- | ------------------------------- | ------
|
|Revenues                            |                                                                                                         |                                  |            |                                 |       
|                                    | Internet applications and professional services                                                         |                                  | $          | 9,093                           |       
|                                    | Data extraction and aggregation services                                                                |                                  |            | 2,749                           |       
|                                    | Wholesale vehicle exchange services                                                                     |                                  |            | 31                              |       
|                                    | Other services                                                                                          |                                  |            | 683                             |       
|                                    |                                                                                                         |                                  |            |                                 |       
|                                    |                                                                                                         | Total revenues                   |            |                                 | 12,556
|Cost of revenues                    |                                                                                                         |                                  | 2,888      |                                 |       
|                                    |                                                                                                         |                                  |            |                                 |       
|                                    |                                                                                                         | Gross profit                     |            |                                 | 9,668 
|Operating expenses                  |                                                                                                         |                                  |            |                                 |       
|                                    | Sales and marketing, excluding stock-based compensation of ($65), $44, $1,211 and $96, respectively     |                                  |            | 6,535                           |       
|                                    | Product development, excluding stock-based compensation of $26, $51, $92 and $139 respectively          |                                  |            | 3,079                           |       
|                                    | General and administrative, excluding stock-based compensation of $27, $117, $199 and $517 respectively |                                  |            | 5,542                           |       
|                                    | Amortization of intangible assets                                                                       |                                  |            | 1,123                           |       
|Intangible asset impairment charge  |                                                                                                         |                                  |           |                                 |       
|                                    | Stock-based compensation                                                                                |                                  |            | (12                             | )     
|                                    |                                                                                                         |                                  |            |                                 |       
|                                    |                                                                                                         | Total operating expenses         |            |                                 | 16,267
|                                    |                                                                                                         |                                  |            |                                 |       
|Loss from operations                |                                                                                                         |                                  | (6,599     | )                               |       
|Interest expense                    |                                                                                                         |                                  | (43        | )                               |       
|Interest income                     |                                                                                                         |                                  | 1          |                                 |       
|Gain on sale of YachtWorld          |                                                                                                         |                                  |           |                                 |       
|Other income, net                   |                                                                                                         |                                  | 3          |                                 |       
|                                    |                                                                                                         |                                  |            |                                 |       
|                                    | Net income (loss) prior to change in accounting principle                                               |                                  | $          | (6,638                          | )     
|                                    |                                                                                                         |                                  |            |                                 |       
|                                    | Cumulative effect of change in accounting principle                                                     |                                  | $          |                                |       
|                                    |                                                                                                         |                                  |            |                                 |       
|                                    |                                                                                                         | Net income (loss)                |            | $                               | (6,638
|                                    |                                                                                                         |                                  |            |                                 |       
|Basic net loss per share            |                                                                                                         | $                                | (0.32      | )                               | $     
|                                    |                                                                                                         |                                  |            |                                 |       
|Weighted-average shares outstanding |                                                                                                         |                                  | 20,570,362 |                                 |       
|                                    |                                                                                                         |                                  |            |                                 |       

See
accompanying notes to consolidated financial statements.

4

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The Cobalt Group, Inc.        Consolidated Statements of Cash Flows        (in thousands)        (unaudited)

|                                     |                                                                             | Nine months ended
September 30           |        
|------------------------------------ | --------------------------------------------------------------------------- | ---------------------------------------- | -------
|
|Cash Flows from Operating Activities |                                                                             |                                          |        
|                                     | Net income (loss)                                                           |                                          | $      
|                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                          |        
|                                     | Amortization of deferred equity expenses                                    |                                          |        
|                                     | Depreciation and amortization                                               |                                          |        
|                                     | Intangible asset impairment charge                                          |                                          |        
|                                     | Gain on sale of YachtWorld                                                  |                                          |        
|                                     | Net loss on disposition of assets                                           |                                          |        
|                                     | Changes in:                                                                 |                                          |        
|                                     |                                                                             | Accounts receivable                      |        
|                                     |                                                                             | Other assets                             |        
|                                     |                                                                             | Accounts payable and accrued liabilities |        
|                                     |                                                                             | Deferred revenues                        |        
|                                     |                                                                             |                                          |        
|                                     |                                                                             | Net cash used in operating activities    |        
|                                     |                                                                             |                                          |        
|Cash Flows from Investing Activities |                                                                             |                                          |        
|                                     | Acquisition of capital assets                                               |                                          |        
|                                     | Proceeds from sale of YachtWorld                                            |                                          |        
|                                     | Investment in IntegraLink                                                   |                                          |        
|                                     | Proceeds from sale of capital assets                                        |                                          |        
|                                     |                                                                             |                                          |        
|                                     |                                                                             | Net cash used in investing activities    |        
|                                     |                                                                             |                                          |        
|Cash Flows from Financing Activities |                                                                             |                                          |        
|                                     | Proceeds from exercise of stock options                                     |                                          |        
|                                     | Proceeds from employee stock purchase plan                                  |                                          |        
|                                     | Proceeds from lease financing transactions                                  |                                          |        
|                                     | Proceeds from deferred equity subscriptions                                 |                                          |        
|                                     | Proceeds from notes payable                                                 |                                          |        
|                                     | Payment of notes payable                                                    |                                          |        
|                                     | Payment of capital lease obligations and software financing contract        |                                          |        
|                                     |                                                                             |                                          |        
|                                     | Net cash provided by financing activities                                   |                                          |        
|                                     |                                                                             |                                          |        
|Net Change In Cash                   |                                                                             |                                          | (12,762
|Cash, Beginning of Period            |                                                                             |                                          | 16,577 
|                                     |                                                                             |                                          |        
|Cash, End of Period                  |                                                                             | $                                        | 3,815  
|                                     |                                                                             |                                          |        

See
accompanying notes to consolidated financial statements.

5

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The Cobalt Group, Inc.    Condensed Notes to Consolidated Financial Statements  (unaudited)

1.  Nature of the business

The Cobalt Group, Inc. (the "Company") is a provider of e-business services to automotive dealers and manufacturers in North America. The
Company's current service offerings include: comprehensive Internet applications and professional services; data extraction, aggregation and management services; an online wholesale vehicle exchange;
and other services such as dealer training and placement of advertisements.

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 ("SEC").

These
interim statements should be read 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, 2000 included in the Company's annual report on Form 10-K, SEC File No. 000-26623.

Basis of presentation

The Company's consolidated financial statements include the assets, liabilities and results of operations of majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Due
to anticipated technology investments required to maintain the current parts locator revenue stream, the Company changed the remaining estimated life of the technology associated
with the purchase of PartsVoice from 40 months to 12 months in December 2000. This change in estimated life increased amortization by $132,000 for the three months ended
September 30, 2001 and $264,000 for the nine months ended September 30,2001.

2.  Industry segment and geographic information

Industry Segments

The Company has identified three reportable segments. These segments are defined by our chief decision-makers as follows:



6

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In
addition, we have included other portions of our business that do not meet quantitative thresholds in a category labeled "All Other." This category includes placements of
advertising and Dealer Advisory Services, our e-business training and consulting services for manufacturers and dealers.

The
Company's operating segments are strategic business units that offer unique products and services. Separate and discrete financial information is produced for each segment, and is
made available to the chief operating decision makers for consideration in determining how to allocate resources and assess performance. During the 2001 budget preparation process, the Company began
to report information for separate business units to the chief decision-makers. As a result of this and other changes in management structure and focus, the Company is reporting segment information as
required by Statement of Financial Accounting Standards No. 131 ("SFAS No. 131") for the three and nine months ended September 30, 2001 and 2000.

For
management purposes, revenues are reported before the reduction of amounts billed to DaimlerChrysler Corporation ("DaimlerChrysler"), which are accounted for as equity
subscriptions, and before the deferral of revenues in accordance with Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 requires the Company to recognize set-up fees for
Internet applications ratably over the estimated customer life of three years and fees for professional services projects over the estimated project life of two years. For management purposes,
revenues from professional services projects are recognized on a percentage of completion basis.

In
addition, for each separate business unit, management measures earnings before depreciation and amortization, with adjustments to include deferrals resulting from the Company's
implementation of SAB 101 and amounts billed to DaimlerChrysler for services that are accounted for as equity subscriptions ("Adjusted EBDA"). Evaluation of segment results of operations excludes
assets, certain general and administrative expenses, and certain one-time charges, such as the $1.2 million warrant charge taken in the nine months ended September 30, 2001
(See Note 4). At this time, all revenues are substantially attributable to customers within the United States; therefore, no geographic information is presented. There are no material
inter-segment transactions.

7

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The table below presents information about reported segments for the three and nine months ended September 30, 2001 and September 30, 2000:

|                                      |                                                 | Three months ended
September 30,                        |        | Nine months ended
September 30, |        
|------------------------------------- | ----------------------------------------------- | ------------------------------------------------------- | ------ | ------------------------------- | -------
|
|
|Gross Revenues                        |                                                 |                                                         |        |                                 |        
|                                      | Internet applications and professional services |                                                         | 11,103 |                                 | 7,727  
|                                      | Data extraction and aggregation services        |                                                         | 2,749  |                                 | 3,213  
|                                      | Wholesale vehicle exchange services             |                                                         | 31     |                                 |       
|                                      | All other                                       |                                                         | 683    |                                 | 366    
|                                      |                                                 |                                                         |        |                                 |        
|                                      |                                                 | Total gross revenues, by segment                        |        | 14,566                          |        
|Operating income (loss)               |                                                 |                                                         |        |                                 |        
|                                      | Internet applications and professional services |                                                         | (1,851 | )                               | (92    
|                                      | Data extraction and aggregation services        |                                                         | (483   | )                               | (10,588
|                                      | Wholesale vehicle exchange services             |                                                         | (1,420 | )                               | (98    
|                                      | All other                                       |                                                         | 295    |                                 | 326    
|                                      |                                                 |                                                         |        |                                 |        
|                                      |                                                 | Total operating loss, by segment                        |        | (3,459                          | )      
|Adjusted EBDA                         |                                                 |                                                         |        |                                 |        
|                                      | Internet applications and professional services |                                                         | (992   | )                               | 139    
|                                      | Data extraction and aggregation services        |                                                         | 921    |                                 | 1,098  
|                                      | Wholesale vehicle exchange services             |                                                         | (1,220 | )                               | (78    
|                                      | All other                                       |                                                         | 265    |                                 | 153    
|                                      |                                                 |                                                         |        |                                 |        
|                                      |                                                 | Total adjusted EBDA, by segment                         |        | (1,026                          | )      
|Depreciation and amortization expense |                                                 |                                                         |        |                                 |        
|                                      | Internet applications and professional services |                                                         | 1,421  |                                 | 620    
|                                      | Data extraction and aggregation services        |                                                         | 1,051  |                                 | 1,740  
|                                      | Wholesale vehicle exchange services             |                                                         | 177    |                                 | 20     
|                                      | All other                                       |                                                         | 34     |                                 | 35     
|                                      |                                                 |                                                         |        |                                 |        
|                                      |                                                 | Total depreciation and amortization expense, by segment |        | 2,683                           |        

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The
following table provides reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements for the
three and nine months ended September 30, 2001 and September 30, 2000:

|                                          |                                                                                                                                                                         | Three months ended
September 30, |        | Nine months ended
September 30, |       
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------ | ------------------------------- | ------
|
|
|Total gross revenues, by segment          |                                                                                                                                                                         | 14,566                           |        | 11,306                          |       
|                                          | DaimlerChrysler equity subscriptions                                                                                                                                    |                                  | (1,552 | )                               | (118  
|                                          | SAB 101 revenue deferrals                                                                                                                                               |                                  | (458   | )                               | (412  
|                                          |                                                                                                                                                                         |                                  |        |                                 |       
|                                          |                                                                                                                                                                         | Reported revenues                |        | 12,556                          |       
|Total operating income (loss), by segment |                                                                                                                                                                         | (3,459                           | )      | (10,452                         | )     
|                                          | Unallocated expenses, including corporate, finance, legal, business development, executive and the one-time warrant charge of $1.2 million in the first quarter of 2001 |                                  | (1,130 | )                               | (5,732
|                                          | Adjustments from gross revenue, above                                                                                                                                   |                                  | (2,010 | )                               | (530  
|                                          |                                                                                                                                                                         |                                  |        |                                 |       
|                                          |                                                                                                                                                                         | Reporting operating loss         |        | (6,599                          | )     
|Total adjusted EBDA, by segment           |                                                                                                                                                                         | (1,026                           | )      | 1,312                           |       
|                                          | Unallocated expenses                                                                                                                                                    |                                  | (1,130 | )                               | (5,732
|                                          | Non-cash portion                                                                                                                                                        |                                  | 1,356  |                                 | 1,154 
|                                          | Non-operating income                                                                                                                                                    |                                  | 114    |                                 | 183   
|                                          | Adjustments to revenues                                                                                                                                                 |                                  | (2,010 | )                               | (530  
|                                          |                                                                                                                                                                         |                                  |        |                                 |       
|                                          |                                                                                                                                                                         | EBDA                             |        | (2,696                          | )     

Adjusted
EBDA and EBDA may not be consistent with the calculations of EBDA for other public companies. Investors should not view Adjusted EBDA as an alternative to generally accepted
accounting principles, or to cash flows from operations, investing and financing activities as a measure of liquidity.

The
table below presents reportable segments asset information, net of accumulated depreciation, as of September 30, 2001 and December 31, 2000.

For the Nine
Months Ended
September 31,

For the Twelve
Months Ended
December 31,2001

2000(in thousands)
(unaudited)Internet applications and professional services

14,280

13,320Data extrction and aggregation services

12,712

16,169Wholesale vehicle exchange services

1,451

337All other






For
segment reporting purposes, depreciation and amortization expenses are allocated to each reportable segment with other operating expenses creating an allocation of assets and
depreciation that is not proportional. Assets are not a measure of segment profitability for management at this time and are not allocated as such.

For
the quarter ending September 30, 2001, DaimlerChrysler represented 23% of the Company's Internet applications and professional services segment revenues and 32% of the data
extraction and

9

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aggregation services segment revenues. On a consolidated basis, DaimlerChrysler represented 27% of the Company's reported revenues in the quarter ended September 30, 2001.

3.  Sale of YachtWorld.com

In January 2000, the Company sold the assets of its YachtWorld.com operation to Boats.com, Inc. ("Boats.com"). The assets were sold for cash
proceeds of $3.5 million and a promissory note in the amount of $10.5 million. The Company also received a warrant to purchase 473,455 shares of Boats.com common stock. No value was
attributed to the warrant. The total expected gain on the sale of
YachtWorld.com was $13.5 million. However, due to the risk associated with collection of the sales proceeds, the Company recognized the gain associated with the sale of YachtWorld.com as
payments were received.

On
September 29, 2000 the Company and Boats.com entered into a note modification agreement. Under the note modification agreement, the $4.8 million balance of the note
receivable was re-negotiated to extend the final payment date to March 31, 2001 from December 31, 2000, and the interest rate was increased to 12.0% per annum. On
March 28, 2001, a final payment was received in the amount of $1.2 million from Boats.com. At the time of this payment, the Company agreed to forgive the remaining $3.6 million of
the note receivable balance. As a result, no further payments or gains are expected on the sale of YachtWorld.com assets.

4.  Termination of agreement with GE Capital to operate MotorPlace Auto Exchange

On August 18, 2000, the Company entered into an agreement with General Electric Capital Auto Financial Services Corporation ("GE Capital") to develop
and operate MotorPlace Auto Exchange, an Internet-based wholesale automobile listing and purchasing system for use by automobile dealers and lessors. Consideration for the agreement included a warrant
to purchase 400,000 shares of the Company's common stock. The warrant was valued at $1.3 million using the Black-Scholes option-pricing model with the following assumptions: fair value of
common stock of $4.81 per share, expected life of five and one-third years, risk free interest rate of 6.11%, volatility of 93% and dividend yield of 0%. The value of the warrant was
initially amortized on a straight-line basis to cost of revenues over the life of the agreement, which originally expired December 31, 2005.

In
the first quarter of 2001, the Company reached an agreement in principle with GE Capital to terminate the operating agreement relating to MotorPlace Auto Exchange. The agreement in
principle was due in part to the dissolution of the after-market auto finance and leasing operations of GE Capital. As a result of the agreement in principle, the Company expensed all unamortized
warrant charges related to the operating agreement, which totaled approximately $1.2 million in the quarter ended March 31, 2001, and assumed full control over the operations and
development of MotorPlace Auto Exchange. The Company finalized the termination agreement on October 10, 2001, with an effective date of January 1, 2001.

5.  Loan facilities

On March 8, 2001 the Company executed a loan and security agreement with Silicon Valley Bank Commercial Finance Division ("Silicon Valley Bank"). Under
the agreement with Silicon Valley Bank, the Company could borrow amounts not to exceed the lesser of $10 million or 80% of eligible accounts receivable. The eligibility of receivables is
limited based on agings of the accounts, appropriate reserves and other factors. The Company is also subject to a variety of covenants, including an obligation to maintain a minimum tangible net worth
throughout the term of the agreement. On June 2, 2001, the
Company defaulted on the terms of the loan and security agreement by entering into an agreement and plan of merger with a wholly-owned subsidiary of Warburg, Pincus Equity Partners, L.P.

10

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On September 7, 2001, the Company entered into a $5 million loan agreement with Warburg, Pincus Equity Partners, L.P. As of October 31, 2001, the Company has
borrowed $2 million under this facility. The terms of the agreement provide for 8% interest, with repayment due on or before September 7, 2003.

6.  Net loss per share

Basic net loss per share represents net loss available to common shareholders divided by the weighted-average number of shares outstanding during the period.
Diluted net loss per share represents net loss available to common shareholders divided by the weighted-average number of shares outstanding including the potentially dilutive impact of common stock
options and warrants. Common stock options and warrants are converted using the treasury stock method. Basic and diluted net loss per share is equal for the three and nine months ended
September 30, 2001 because the impact of potential common stock equivalents is anti-dilutive. A total of 6,598,561 and 5,562,340 common stock options and warrants were outstanding
at September 30, 2001 and 2000, respectively.

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

|                                          |                                                       | Three months ended
September 31, |        | Nine months ended
September 31, |  
|----------------------------------------- | ----------------------------------------------------- | -------------------------------- | ------ | ------------------------------- | -
|
|
|Numerator:                                |                                                       |                                  |        |                                 |  
|                                          | Reported net income                                   |                                  | $      | (6,612                          | )
|                                          | Cumulative change in accounting principle             |                                  |        |                                |  
|                                          |                                                       |                                  |        |                                 |  
|Net loss available to common shareholders |                                                       | $                                | (6,612 | )                               | $
|Denominator:                              |                                                       |                                  |        |                                 |  
|                                          | Weighted-average shares outstandingbasic and diluted |                                  |        | 20,570,362                      |  

7.  New accounting pronouncements

The Company adopted SFAS No. 133 "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133") in the quarter ended March 31, 2001.
The adoption of this standard did not have a material impact on the Company's financial position, results of operations or cash flows.

In
July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141 ("FAS 141"), Business Combinations, and No. 142 ("FAS 142"),
Goodwill and Other Intangible Assets. FAS 141 addresses financial accounting and reporting for business combinations and supercedes APB 16, Business Combinations. The provisions of
FAS 141 require adoption by July 1, 2001. The most significant changes made by FAS 141 are: (1) requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria for the recognition of intangible assets separately from goodwill, and (3) requiring unallocated
negative goodwill to be written off immediately as an extraordinary gain.

FAS 142
primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition and supercedes APB 17, Intangible Assets. The Company is required
to adopt the provisions of FAS 142 as of January 1, 2002. The most significant changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets will no
longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting unit level, (3) intangible assets deemed to have an indefinite life will be tested for
impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years.

11

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The Company adopted SFAS 141 effective July 1, 2001 which will result in the Company accounting for any business combination consummated on or after that date under the
purchase method of accounting. The Company will also apply the non-amortization provisions of FAS 142 for any business combination consummated on or after July 1, 2001.

The
Company will adopt FAS 142 effective January 1, 2002, which will result in the Company no longer amortizing its existing goodwill as of that date. As part of the
transition provisions the Company will be required to measure goodwill for impairment effective January 1, 2002. Any impairment resulting from the adoption of this pronouncement will be
recognized as the cumulative effect of a change in accounting principle. The Company will not be able to determine if impairment will be required until completion of this impairment test.

In
June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement provides accounting and reporting standards for recognizing
obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of
long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset
retirement costs is capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense using a systematic and rational method over the assets' useful
life. Any subsequent changes to the fair value of the liability due to passage of time or changes in the amount or timing of estimated cash flows is recognized as an accretion expense. The Company
will be required to adopt this statement no later than January 1, 2003. The Company is currently assessing the impact of this statement on its results of operations, financial position and cash
flows.

In
October of 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for fiscal years beginning
after Dec 15, 2001. This statement supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
However, it retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of
long-lived assets to be disposed of by sale. Impairment on Goodwill is not included in the scope of SFAS No. 144 and will be treated in accordance with the accounting standards
established
in SFAS No. 142, "Goodwill and Other Intangible Assets." According to SFAS No. 144, long-lived assets are to be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing or discontinued operations. The statement applies to all long-lived assets, including discontinued operations, and replaces the provisions of
APB Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions," for the disposal of segments of a business. Cobalt will be required to adopt this statement no later than January 1, 2002. We are currently assessing the impact of this
statement on its results of operations, financial position and cash flows.

8.  Agreement and plan of merger with Cobalt Acquisition Corporation

On June 2, 2001, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), with Cobalt Acquisition Corporation ("Merger Sub"),
a Washington corporation that is wholly-owned by Warburg, Pincus Equity Partners, L.P. ("Warburg Pincus"), a private equity firm and the Company's largest shareholder. Pursuant to the Merger
Agreement, Merger Sub will be merged with and into the Company, with the Company as the surviving corporation (the "Merger").

At
the effective time of the Merger, each outstanding share of common stock of the Company, par value $0.01 per share, except for those shares owned by (i) Warburg Pincus, John
W.P. Holt, a director and the chief executive officer of the Company, certain other of the Company's senior management and certain other continuing shareholders (the "Participating Shareholders") and
(ii) shareholders who

12

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exercise their dissenters' rights under Washington law, will be converted into the right to receive $3.50 in cash. Following completion of the Merger, the Company will be privately held by Warburg
Pincus and the Participating Shareholders.

The
board of directors of the Company unanimously approved the Merger after receiving the unanimous recommendation of a special committee of independent directors that was established
to evaluate and negotiate the Merger on behalf of the Company's board of directors.

Following
the announcement of the execution of the Merger Agreement on June 4, 2001, three purported class action lawsuits were filed against the Company, Warburg Pincus, and
members of the Company's board of directors. On July 12, 2001, the defendants filed a Joint Motion to Consolidate the three purported class action shareholder lawsuits and, on July 24,
2001, that motion was granted. On November 1, 2001, the plaintiffs and the defendants entered into a Memorandum of Understanding pursuant to which the parties agreed to settle the lawsuits,
subject to completion of definitive documentation and court approval. As part of the settlement, the Company agreed to issue supplemental disclosure to shareholders regarding the Merger and to pay
fees and expenses of plaintiffs' counsel in the amount of $280,000.

Completion
of the Merger is subject to the satisfaction of customary closing conditions set forth in the Merger Agreement, including the approval of shareholders holding a majority of
the Company's outstanding shares of common stock and receipt of regulatory and other approvals. Warburg Pincus and John W.P. Holt, the Company's president and chief executive officer, who collectively
own approximately 49% of the outstanding common stock of the Company, have entered into a voting agreement pursuant to which they have agreed to vote their shares of common stock to approve the Merger
and against any competing proposal to acquire the Company or any other action that could reasonably be expected to impede, interfere with, delay, postpone, or materially adversely affect the
transactions contemplated by the Merger Agreement. The Company currently expects that the Merger will be consummated in November 2001.

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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 as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes included in the Company's
annual report on Form 10-K.In addition to historical information, the following discussion contains certain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve known and unknown risks and uncertainties, such as statements of our plans,
objectives, expectations and intentions. The cautionary statements made in this report should be read 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 below and in the section entitled "Factors That May Affect Our Future Results" in our annual report on Form 10-K. 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 update forward-looking statements.

Overview

General

We are a leading provider of e-business products and services to the automotive industry. Our products include feature-rich Web sites,
Internet-based software applications, and customer relationship management tools for automotive dealers. Also included in our product line are PartsVoice e-commerce services for original
equipment manufacturer parts, IntegraLink data collection, normalization, and reporting services, MotorPlace Auto Exchange wholesale vehicle remarketing services, and Dealer Advisory Services
e-business training and consulting services for manufacturers and dealers.

We
currently provide Internet-hosted applications and professional services to approximately 8,700 automotive dealer clients and we are a manufacturer-endorsed provider of
e-business solutions for the dealership networks of 14 automotive manufacturers. We also offer a variety of packaged e-business solutions that are endorsed by the National
Automobile Dealers Association. Our IntegraLink data extraction and aggregation services are used to collect data from approximately 13,000 new vehicle franchises. The PartsVoice parts locator
database contains over 38 million parts. In total, we provide our services to clients representing approximately 15,000 new vehicle franchises.

Industry Segments

Our business consists of three strategic business units that offer different products and services and for which discrete financial information is evaluated by
our chief operating decision makers: Internet applications and professional services; data extraction and aggregation services; and wholesale vehicle exchange services. These segments are defined by
our chief decision-makers as follows:



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In
addition, we have included other portions of our business that do not meet quantitative thresholds in a category labeled "All Other." This category includes placements of
advertising and Dealer Advisory Services, our e-business training and consulting services for manufacturers and dealers.

For
management purposes, segment revenues are reported before the reduction of amounts billed to DaimlerChrysler Corporation ("DaimlerChrysler"), which are accounted for as equity
subscriptions, and before the deferral of revenues in accordance with Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 requires us to recognize set-up fees for Internet
applications ratably over the estimated customer life of three years and fees for professional services projects over the estimated project life of two years. Evaluation of segment results of
operations excludes assets, certain general and administrative expenses, and certain one-time charges, such as the $1.2 million warrant charge taken in the nine months ended
September 30, 2001.

Sources of Revenue and Revenue Recognition Policy

We derive our revenues from fees charged to our automotive dealer and manufacturer clients. Our current service offerings include: comprehensive Internet
applications and professional services; data extraction, aggregation and management services; and other services such as dealer training, placement of advertisements and an online wholesale vehicle
exchange. The majority of our services are sold to clients under short-term service agreements.

Consolidated
revenues are reported after reductions to amounts billed to DaimlerChrysler relating to the fair value of warrants and common stock issued in connection with our
agreement that are accounted for as equity subscriptions. The warrants and common stock issued to DaimlerChrysler were valued at $14.6 million and are being amortized ratably with amounts
billed over the initial term of the agreement, which expires December 31, 2002. As of September 30, 2001, we had recognized $5.9 million less in revenues from DaimlerChrysler than
amounts billed, including $842,000 in the year 2000 and $5.1 million in the first nine months of 2001. The deferred equity subscriptions balance as of September 30, 2001 of
$8.1 million includes $9.3 million remaining to be amortized, offset by deferred revenues related to DaimlerChrysler of $1.2 million.

Cost of Revenues and Operating Expenses

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

Our
sales and marketing expenses consist primarily of salary and commissions for our sales staff. In addition, our sales and marketing expenses include the cost of travel associated
with our sales force as well as advertising and public relations costs for the entire organization.

Product
development costs primarily consist of personnel dedicated to our product development initiatives, as well as outside consulting services to support our development efforts.
Product development costs related to investments in our Web site technology platform are capitalized in accordance with the American Institute of Certified Public Accountants Statement of Position
98-1 ("SOP 98-1"). This statement provides that certain costs associated with the development of software for internal use should be capitalized, including both internal and
external costs in the installation, coding and testing phases. However, costs related to the research and definition of project parameters, as well as the transfer of data to new software are not
capitalized and are expensed as incurred. Costs related to the development of our Web sites are accounted for in accordance with Emerging Issues Task Force Issues Summary 00-02,
"Accounting for Web Site Development Costs" ("EITF 00-02"). We expense all costs relate to the planning and post-implementation phases of Web site development. Costs

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incurred in the development phase are capitalized and recognized over the Web site's useful life if the Web site is expected to have a useful life beyond one year.

Our
general and administrative expenses consist primarily of staff and management costs, facilities expenses and depreciation charges. Our intangible asset amortization charges are
associated with our acquisitions of PartsVoice, IntegraLink and Dealernet.

Dispositions

In January 2000, we sold the assets of our YachtWorld.com operation to Boats.com, Inc. ("Boats.com"). The assets were sold for cash proceeds of
$3.5 million and a promissory note in the amount of $10.5 million. We also received a warrant to purchase 473,455 shares of Boats.com common stock. As of December 31, 2000, a
total of $6.1 million had been received as payment on the note and related interest. On March 28, 2001, a final payment was received in the amount of $1.2 million from Boats.com.
At the time of this payment, the Company agreed to forgive the remaining $3.6 million of the note receivable balance. As a result, no further payments or gains are expected on the sale of
YachtWorld.com. The total gain recognized on the sale of YachtWorld.com was $9.9 million, which represents the cash paid, net of transaction expenses over the book value of the assets sold.

MotorPlace Auto Exchange

On August 18, 2000, we entered into an agreement with General Electric Capital Auto Financial Services Corporation ("GE Capital") to develop and operate
MotorPlace Auto Exchange, an Internet-based wholesale automobile listing and purchasing system for use by automobile dealers and lessors. Consideration for the agreement included a warrant to purchase
400,000 shares of the Company's common stock. The warrant was valued at $1.3 million and the value of the warrant was being amortized on a straight-line basis to cost of revenues
over the life of the agreement, which originally expired December 31, 2005.

In
the first quarter of 2001, we reached an agreement in principle with GE Capital to terminate the operating agreement relating to MotorPlace Auto Exchange. As a result of the
termination, we expensed all unamortized warrant charges related to the agreement, which totaled approximately $1.2 million on September 30, 2001, and agreed to assume all expenses
related to MotorPlace Auto Exchange. We finalized the agreement on October 10, 2001, with an effective date of January 1, 2001.

Technology Investment

We are engaged in a project related to our Web site technology platform that entails significant investments in internally-developed software. As of
September 30, 2001, we were in the development phase of this project and had incurred software development costs of $8.7 million of which $6.4 million were capitalized.
Additionally, related capital assets purchased as of September 30, 2001 totaled $2.0 million.

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Results of Operations

Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000

Three months ended
September 30,2001

2000Gross RevenuesInternet applications and professional services

11,103

7,727Data extraction and aggregation services

2,749

3,213Wholesale vehicle exchange services

31

All other

683

366Total gross revenues, by segment

14,566

11,306DaimlerChrysler equity subscriptions

(1,552
)
(118
)SAB 101 revenue deferrals

(458
)
(412
)Reported revenues

12,556

10,776


Revenues.Our consolidated revenues increased to $12.6 million for the three months
ended September 30, 2001 from $10.8 million for the same period in 2000. This increase is primarily attributable to increased revenues from our Internet applications and professional
services segment.

Internet applications and professional services.Revenues for the Internet applications and professional services
segment increased 44% to $11.1 million for the three months ended September 30, 2001 from $7.7 million for the same period in 2000. This increase is calculated prior to reductions
in revenues of $1.5 million and $118,000 from amounts billed to DaimlerChrysler in the three months ended September 30, 2001 and September 30, 2000, respectively. In addition, the
increase is calculated prior to non-recurring fees deferred under SAB 101 of $458,000 and $328,000, respectively. The increase in revenues prior to these adjustments is primarily
attributable to an increase in both the number of our dealer Web site clients as well increased revenue per dealer Web site.

Data extraction and aggregation services.Revenues from our data extraction and aggregation services segment decreased
16% to $2.7 million for the three months ended September 30, 2001 from $3.2 million for the same period in 2000. This decrease is primarily attributable to client attrition.

Wholesale vehicle exchange.Revenues from our wholesale vehicle exchange segment were $31,000 for the three months
ended September 30, 2001. Revenues were $0 for the three months ended September 30, 2000.

Cost of revenues.The gross profit margin percentage for the quarter ended September 30,
2001 was 77% compared to 80% in the same period of 2000. The decreased margin was a result of increased personnel costs as well as increased Web site content and licensing costs.

Sales and marketing.Sales and marketing costs, excluding stock-based expense, increased 7% to
$6.5 million for the quarter ended September 30, 2001 from $6.1 million for the same period of 2000. Of the increase, 80% was attributable to additional sales and service
personnel, net of lower commission expense.

Product development.Excluding stock-based expense, product development expenses increased 27%
to $3.1 million for the quarter ended September 30, 2001, as compared to $2.2 million in the same period of 2000. Increases in personnel and outside consulting services dedicated
to our product development initiatives accounted for the increase.

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General and administrative.General and administrative costs, excluding stock-based expense,
increased less than 1% for the quarter ended September 30, 2001 as compared to the same period of 2000.

Stock-based compensation expense.The cancellation of employee stock options for terminated
employees, as well as the use of an accelerated method of expensing stock-based compensation expense, resulted in a contra stock-based expense of $12,000 in the quarter ended September 30,
2001, as compared to an expense of $212,000 in the same period of 2000.

Operating income (loss).Loss from operations was $6.6 million, for the quarter ended
September 30, 2001 compared to a loss of $16.7 million for the same period of 2000. The decrease in net loss is primarily attributable to the $9.7 million intangible asset
impairment charge in the three months ended September 30, 2000 and the related decrease in amortization charges of those intangible assets.

Loss
from operations for our Internet applications and professional services segment was $1.9 million for the quarter ended September 30, 2001 compared to a loss of
$92,000 for the same period of 2000. The increase in segment loss is primarily attributable to increased personnel costs related to our product development and sales initiatives.

Loss
from operations for our data aggregation and extraction services segment was $483,000 for the quarter ended September 30, 2001 compared to $10.6 million for the
same period of 2000. The decrease in segment loss from operations is primarily attributable to the intangible asset impairment charge in the quarter ended September 30, 2000 of
$9.7 million.

Loss
from operations for our wholesale vehicle exchange services segment was $1.4 million for the quarter ended September 30, 2001 compared to $98,000 for the same
period of 2000. The increase in segment operating loss is primarily due to the launch of MotorPlace Auto Exchange, which took place in August 2000. The majority of the operating loss is
associated with start-up investment in MotorPlace Auto Exchange and is made up of investments in personnel and outside consulting expenses.

Adjusted EBDA.Adjusted EBDA is the primary metric used by the chief operating decision-makers
to measure our ability to generate cash flow. We define Adjusted EBDA as earnings, excluding other income, before depreciation and amortization charges, with adjustments to include deferrals resulting
from our implementation of SAB 101 and amounts billed to DaimlerChrysler for services that are accounted for as equity subscriptions. Adjusted EBDA may not be consistent with the calculation of EBDA
for other public companies. Investors should not view Adjusted EBDA as an alternative to generally accepted accounting principles, or to cash flows from operations, investing and financing activities
as a measure of liquidity.

Consolidated
EBDA for the three months ended September 30, 2001 was a loss of $2.7 million, compared with a loss of $3.6 million for the same period of 2000.
After adjustments for unallocated expenses, DaimlerChrysler equity subscriptions and revenue deferrals under SAB 101, total Adjusted EBDA by segment for the three months ended September 30,
2001 was a loss of $1.0 million compared with income of $1.3 million for the same period of 2000, due primarily to losses associated with investment in our wholesale vehicle exchange
services segment.

For
our Internet applications and professional services segment, Adjusted EBDA for the three months ended September 30, 2001 was a loss of $992,000 compared with income of
$139,000 for the same period of 2000. The decrease in Adjusted EBDA is primarily attributable to increased expenses related to product development as well as sales and marketing costs, partially
offset by the increase in revenues.

For
our data extraction and aggregation services segment, Adjusted EBDA for the three months ended September 30, 2001 was $921,000 compared with $1.1 million for the
same period of 2000. The

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decrease in Adjusted EBDA is primarily attributable to the decrease in revenue, partially offset by decreased amortization charges.

For
our wholesale vehicle exchange services segment, Adjusted EBDA for the three months ended September 30, 2001 was a loss of $1.2 million, compared to a loss of
$78,000 for the same period of 2000. MotorPlace Auto Exchange was launched in August of 2000, and is continuing to incur expenses associated with the start up of the exchange, without offsetting
revenue increases.

Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000

Nine months ended
September 30,2001

2000Gross RevenuesInternet applications and professional services

33,336

20,889Data extraction and aggregation services

8,756

9,384Wholesale vehicle exchange services

44

All other

1,797

1,304Total gross revenues, by segment

43,932

31,577DaimlerChrysler equity subscriptions

(4,275
)
(132
)SAB 101 revenue deferrals

(2,264
)
(1,560
)Reported revenues

37,394

29,885


Revenues.Our consolidated revenues increased to $37.4 million for the nine months ended
September 30, 2001 from $29.9 million for the same period in 2000. This increase is primarily attributable to increased revenues from our Internet applications and professional services
segment.

Internet applications and professional services.Revenues for the Internet applications and professional services
segment increased 59% to $33.3 million for the nine months ended September 30, 2001 from $20.9 million for the same period in 2000. This increase is calculated prior to reductions
in revenues of $4.3 million and $132,000 from amounts billed to DaimlerChrysler in the three months ended September 30, 2001 and September 30, 2000, respectively. In addition, the
increase is calculated prior to non-recurring fees deferred under SAB 101 of $2.3 million and $1.6 million, respectively. This increase in revenues prior to these adjustments
is primarily attributable to an increase in both the number of our dealer Web site clients as well increased revenue per dealer Web site. In addition, professional services custom development projects
contributed to the increase.

Data extraction and aggregation services.Revenues from our data extraction and aggregation services segment decreased
6% to $8.8 million for the nine months ended September 30, 2001 from $9.4 million for the same period in 2000. This decrease is primarily attributable to client attrition.

Wholesale vehicle exchange.Revenues from our wholesale vehicle exchange segment were $44,000 for the nine months ended
September 30, 2001. Revenues were $0 for the three months ended September 30, 2000 because the exchange was not launched until August 2000.

Cost of revenues.The gross profit margin percentage for the nine months ended
September 30, 2001 was 79% compared to 80% in the same period of 2000. The decreased margin was a result of increased personnel costs and the use of outside services in our development efforts.

Sales and marketing.Sales and marketing costs, excluding stock-based expense, increased 24% to
$20.5 million for the nine months ended September 30, 2001 from $15.5 million for the same period of

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2000. Of the increase, 89% was attributable to additional sales and service personnel as well as the implementation of our customer service department, eCare, in the second half of 2000.

Product development.Excluding stock-based expense, product development expenses increased 44%
to $9.3 million for the nine months ended September 30, 2001 as compared to $5.2 million in the same period of 2000. Increases in personnel and outside consulting services
dedicated to our product development initiatives accounted for 92% of the increase.

General and administrative.General and administrative costs, excluding stock-based expense,
increased to $17.8 million for the nine months ended September 30, 2001 from $14.3 million for the same period in 2000, an increase of 20%. Increases in overhead charges,
including bad debt expense, depreciation and facilities costs, accounted for 84% of the increase.

Stock-based compensation expense.Stock-based expense increased to $1.5 million for the
nine months ended September 30, 2001 from $750,000 for the same period of 2000. The increasing charges are primarily attributable to the write-off of all unamortized warrant charges
associated with the termination of our operating agreement with GE Capital.

Operating income (loss).Loss from operations was $22.7 million, for the nine months
ended September 30, 2001 compared to a loss of $26.4 million for the same period of 2000. The decrease in operating loss is
primarily attributable to the intangible asset impairment charge taken in the quarter ended September 30, 2000. The impact of this charge is being partially offset by increased operating
expenses.

Loss
from operations for our Internet applications and professional services segment was $7.8 million for the nine months ended September 30, 2001 compared to a loss of
$5.9 million for the same period of 2000. The increased loss is primarily attributable to increased personnel costs related to supporting our Internet application and professional services
clients, partially offset by the increase in revenues.

Loss
from operations for our data aggregation and extraction services segment was $460,000 for the quarter ended September 30, 2001 compared to $10.5 for the same period of
2000. The decrease in segment loss from operations is primarily attributable to the intangible asset impairment charge in the quarter ended September 30, 2000 of $9.7 million, as well as
the decrease in revenues due to client attrition.

Loss
from operations for our wholesale vehicle exchange services segment was $3.6 million for the nine months ended September 30, 2001 compared to a loss of $98,000 for
the same period of 2000. The increase in operating loss is primarily due to the launch of MotorPlace Auto Exchange, which took place in the second half of 2000. The majority of the operating loss is
associated with start-up investment in MotorPlace Auto Exchange and is made up of investments in personnel and outside consulting expenses.

Adjusted EBDA.Adjusted EBDA is the primary metric used by the chief operating decision-makers
to measure our ability to generate cash flow. We define EBDA as earnings, excluding other income, before depreciation and amortization charges, with adjustments to include deferrals resulting from our
implementation of SAB 101 and amounts billed to DaimlerChrysler for services that are accounted for as equity subscriptions. Adjusted EBDA may not be consistent with the calculation of EBDA for other
public companies. Investors should not view Adjusted EBDA as an alternative to generally accepted accounting principles, or to cash flows from operations, investing and financing activities as a
measure of liquidity.

Consolidated
EBDA for the nine months ended September 30, 2001 was a loss of $13.5 million, compared with a loss of $9.0 million for the same period of 2000.
After adjustments for unallocated expenses, DaimlerChrysler equity subscriptions and revenue deferrals under SAB 101, total Adjusted

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EBDA by segment for the three months ended September 30, 2001 was a loss of $3.5 million compared with income of $917,000 for the same period of 2000.

The
decrease in Adjusted EBDA was primarily a result of the launch of MotorPlace Auto Exchange.

For
our Internet applications and professional services segment, Adjusted EBDA for the nine months ended September 30, 2001 was a loss of $4.7 million compared with a
loss of $3.9 million for the same period of 2000.

For
our data extraction and aggregation services segment, Adjusted EBDA for the nine months ended September 30, 2001 was $3.6 million compared with $4.2 million
for the same period of 2000. The decrease in Adjusted EBDA is primarily attributable to the decrease in revenue due to customer attrition.

For
our wholesale vehicle exchange services segment, Adjusted EBDA for the nine months ended September 30, 2001 was a loss of $3.2 million compared with a loss of
$78,000 for the same period of 2000.

Liquidity and Capital Resources

At September 30, 2001 our cash balance was $3.8 million, which reflects a decrease of $12.8 million from our cash balance at
December 31, 2000.

Net
cash used in operating activities was $12.2 million for the nine months ended September 30, 2001 compared to $3.8 million for the same period of 2000. The
increase was primarily attributable to the increase in net loss, after adjustments for non-cash depreciation and amortization and payments on accounts payables and accrued expenses. Net
cash used in investing activities was $4.8 million for the nine months ended September 30, 2001 compared to cash provided by investing activities for the same period of 2000 of $170,000.
The change was primarily attributable to the lower proceeds from the sale of YachtWorld received in 2001 compared to the prior year.

Net
cash provided by financing activities was $4.2 million for the nine months ended September 30, 2001, compared to cash provided by financing activities for the same
period of 2000 of $825,000. This increase is due primarily to proceeds from deferred equity subscriptions related to the DaimlerChrysler agreement, as well as $2.0 million in proceeds from the
loan agreement between the Company and Warburg, Pincus Equity Partners, L.P. ("Warburg Pincus").

On
March 8, 2001 we executed a loan and security agreement with Silicon Valley Bank Commercial Finance Division ("Silicon Valley Bank"). Under the agreement with Silicon Valley
Bank, we could borrow amounts not to exceed the lesser of $10 million or 80% of eligible accounts receivable. The eligibility of receivables is limited based on agings of the accounts,
appropriate reserves and a variety of
covenants. On June 2, 2001, the Company defaulted on the terms of the loan facility contract by entering into an agreement and plan of merger with a wholly-owned subsidiary of Warburg Pincus.

On
September 7, 2001, we entered into a $5.0 million loan agreement with Warburg Pincus. As of October 31, 2001, we had borrowed $2.0 million under this
facility. The terms of the agreement provide for 8% interest, with repayment due on or before September 7, 2003.

We
anticipate continued investment of substantial resources in developing core technology to support our Internet applications and professional services business. This investment will
include staffing and consulting costs, in addition to capital purchases. As of September 30, 2001 we had invested an aggregate of $10.7 million in this project, consisting of
$6.4 million in capitalized labor costs, $2.0 million in hardware and software purchases and another $2.3 million in labor and consulting expenses.

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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 require near-term investment, including staff, management and infrastructure costs that may negatively affect near-term operating results.

We
do not currently generate sufficient cash to fully fund operations and our current cash reserves are not adequate to fund our operations through the end of the year. As a result of
incurring continuing losses from operations and our inability to borrow under our credit facility with Silicon Valley Bank, substantial doubts have been raised about our ability to continue as a going
concern. Accordingly, in September 2001, in order to fund our operations, we entered into a $5.0 million loan agreement with Warburg Pincus. As of October 31, 2001, we had
borrowed $2.0 million under that agreement. We anticipate drawing the remaining $3.0 million under the loan facility in order to fund the expenses of the merger between the Company and a
subsidiary of Warburg Pincus, and for working capital. If the merger is not completed, we will require additional equity or debt financing to meet future working capital needs. We cannot be certain
that such additional financing will be available, or if available, that such financing can be obtained on satisfactory terms. If we are unable to obtain additional financing, we will be required to
curtail our technology investment, delay or terminate rollout of new products and significantly reduce our operations.

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PART IIOTHER INFORMATION

Item 1Legal Proceedings.

Following the announcement on June 4, 2001 of the execution an Agreement and Plan of Merger between the Company and Cobalt Acquisition Corporation, a
wholly-owned by Warburg, Pincus Equity Partners, L.P. ("Warburg Pincus"), three purported class action lawsuits were filed against the Company, Warburg Pincus, and members of the Company's board of
directors. On July 12, 2001, the defendants filed a Joint Motion to Consolidate the three purported class action shareholder lawsuits and, on July 24, 2001, that motion was granted. On
November 1, 2001, the plaintiffs and the defendants entered into a Memorandum of Understanding pursuant to which the parties agreed to settle the lawsuits, subject to completion of definitive
documentation and court approval. As part of the settlement, the Company agreed to issue supplemental disclosure to shareholders regarding the Merger and to pay fees and expenses of plaintiffs'
counsel in the amount of $280,000

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

|10.1* |  | Loan Agreement, dated as of September 7, 2001 between The Cobalt Group, Inc. and Warburg, Pincus Equity Partners, L.P.     
|----- |  | ---------------------------------------------------------------------------------------------------------------------------
|10.2* |  | Unsecured Promissory Note, dated September 7, 2001 between The Cobalt Group, Inc. and Warburg, Pincus Equity Partners, L.P.

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On September 14, 2001, the Company filed a Current Report on Form 8-K for the event of September 7, 2001, which included
disclosure under Items 5 and 7.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned
hereunto duly authorized, in Seattle, Washington on November 14, 2001.

| |  | The Cobalt Group, Inc.
| |  | ----------------------
| |  | By:                   

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