---

---

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

---

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 June 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

---

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

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 July 31, 2001, 20,555,583 shares of the Company's common stock, $.01 par value, were outstanding.

---

---

---



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

|PART IFinancial Information |                                                                                               |                                                                                                
|---------------------------- | --------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------
|                             | Item 1.Financial Statements (unaudited)                                                      |                                                                                                
|                             |                                                                                               | Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000                          
|                             |                                                                                               | Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000
|                             |                                                                                               | Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2001 and 2000
|                             |                                                                                               | Condensed Notes to Consolidated Financial Statements                                           
|                             | Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                
|                             |                                                                                               | Overview and Outlook                                                                           
|                             |                                                                                               | Results of Operations                                                                          
|                             |                                                                                               | Liquidity and Capital Resources                                                                
|                             | Item 3.Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                
|PART IIOther Information    |                                                                                               |                                                                                                
|                             | Item 1.Legal Proceedings                                                                     |                                                                                                
|                             | Item 4.Submission of Matters to a Vote of Security Holders                                   |                                                                                                
|Signatures                   |                                                                                               | 32                                                                                             

2

---



Item 1. Financial Statements

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

|                                     |                                                                                                                                        | June 30,
2001                              |        | December 31,
2000 |       
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ----------------- | ------
|Assets                               |                                                                                                                                        |                                            |        |                   |       
|Current assets                       |                                                                                                                                        |                                            |        |                   |       
|                                     | Cash and cash equivalents                                                                                                              |                                            | $      | 7,227             |       
|                                     | Accounts receivable, net of allowance for doubtful accounts of $1,466 and $944, respectively                                           |                                            |        | 8,205             |       
|                                     | Other current assets                                                                                                                   |                                            |        | 1,633             |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        |                                            | 17,065 |                   |       
|Capital assets, net                  |                                                                                                                                        |                                            | 15,992 |                   |       
|Intangible assets, net               |                                                                                                                                        |                                            | 13,323 |                   |       
|Other assets                         |                                                                                                                                        |                                            | 1,228  |                   |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        | Total assets                               |        | $                 | 47,608
|                                     |                                                                                                                                        |                                            |        |                   |       
|Liabilities and Shareholders' Equity |                                                                                                                                        |                                            |        |                   |       
|Current liabilities                  |                                                                                                                                        |                                            |        |                   |       
|                                     | Accounts payable                                                                                                                       |                                            | $      | 2,961             |       
|                                     | Accrued liabilities                                                                                                                    |                                            |        | 3,614             |       
|                                     | Deferred revenues, current portion                                                                                                     |                                            |        | 6,091             |       
|                                     | Notes payable                                                                                                                          |                                            |        |                  |       
|                                     | Software financing contract, current portion                                                                                           |                                            |        | 569               |       
|                                     | Capital lease obligations, current portion                                                                                             |                                            |        | 624               |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        |                                            | 13,859 |                   |       
|Non-current liabilities              |                                                                                                                                        |                                            |        |                   |       
|                                     | Deferred revenues, non-current portion                                                                                                 |                                            |        | 1,350             |       
|                                     | Software financing contract, non-current portion                                                                                       |                                            |        |                  |       
|                                     | Capital lease obligations, non-current portion                                                                                         |                                            |        |                  |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        |                                            | 1,350  |                   |       
|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; 20,443,354 and 20,140,376 issued and outstanding, respectively |                                            |        | 204               |       
|                                     | Additional paid-in capital                                                                                                             |                                            |        | 124,194           |       
|                                     | Deferred equity subscriptions                                                                                                          |                                            |        | (9,938            | )     
|                                     | Deferred equity expenses                                                                                                               |                                            |        | (523              | )     
|                                     | Notes receivable from shareholders                                                                                                     |                                            |        | (144              | )     
|                                     | Accumulated deficit                                                                                                                    |                                            |        | (81,394           | )     
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        |                                            | 32,399 |                   |       
|                                     |                                                                                                                                        |                                            |        |                   |       
|                                     |                                                                                                                                        | Total liabilities and shareholders' equity |        | $                 | 47,608
|                                     |                                                                                                                                        |                                            |        |                   |       

See
accompanying notes to consolidated financial statements.

3

---



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

|                                                       |                                                                                                    | Three months ended
June 30,         |            | Six months ended
June 30, |       
|------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ----------------------------------- | ---------- | ------------------------- | ------
|
|Revenues                                               |                                                                                                    |                                     |            |                           |       
|                                                       | Internet applications and professional services                                                    |                                     | $          | 8,978                     |       
|                                                       | Data extraction and aggregation services                                                           |                                     |            | 2,891                     |       
|                                                       |                                                                                                    | Wholesale vehicle exchange services |            |                           | 6     
|                                                       | Other services                                                                                     |                                     |            | 680                       |       
|                                                       |                                                                                                    |                                     |            |                           |       
|                                                       |                                                                                                    | Total revenues                      |            |                           | 12,555
|Cost of revenues                                       |                                                                                                    |                                     | 2,342      |                           |       
|                                                       |                                                                                                    |                                     |            |                           |       
|                                                       |                                                                                                    | Gross profit                        |            |                           | 10,213
|Operating expenses                                     |                                                                                                    |                                     |            |                           |       
|                                                       | Sales and marketing, excluding stock-based expense of $24, $74, $1,276 and $142 respectively       |                                     |            | 6,985                     |       
|                                                       | Product development, excluding stock-based expense of $29, $42, $66 and $88 respectively           |                                     |            | 3,051                     |       
|                                                       | General and administrative, excluding stock-based expense of $68, $134, $172 and $310 respectively |                                     |            | 6,148                     |       
|                                                       | Amortization of intangible assets                                                                  |                                     |            | 1,123                     |       
|                                                       | Stock-based expenses                                                                               |                                     |            | 121                       |       
|                                                       |                                                                                                    |                                     |            |                           |       
|                                                       |                                                                                                    | Total operating expenses            |            |                           | 17,428
|                                                       |                                                                                                    |                                     |            |                           |       
|Loss from operations                                   |                                                                                                    |                                     | (7,215     | )                         |       
|Interest expense                                       |                                                                                                    |                                     | (56        | )                         |       
|Interest income                                        |                                                                                                    |                                     | 140        |                           |       
|Gain on sale of YachtWorld                             |                                                                                                    |                                     |           |                           |       
|Other income, net                                      |                                                                                                    |                                     | (19        | )                         |       
|                                                       |                                                                                                    |                                     |            |                           |       
|                                                       | Net loss prior to change in accounting principle                                                   |                                     | $          | (7,150                    | )     
|                                                       |                                                                                                    |                                     |            |                           |       
|Cumulative effect of change in accounting principle    |                                                                                                    | $                                   |           |                           | $     
|                                                       |                                                                                                    |                                     |            |                           |       
|Net loss                                               |                                                                                                    | $                                   | (7,150     | )                         | $     
|Basic and diluted net loss per share                   |                                                                                                    | $                                   | (0.35      | )                         | $     
|                                                       |                                                                                                    |                                     |            |                           |       
|Weighted-average shares outstanding- basic and diluted |                                                                                                    |                                     | 20,362,685 |                           |       
|                                                       |                                                                                                    |                                     |            |                           |       

See
accompanying notes to consolidated financial statements.

4

---



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

|                                     |                                                                             | Six months ended
June 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                                               |                                                     |       
|                                     | Gain on sale of YachtWorld                                                  |                                                     |       
|                                     | 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 provided by (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                                 |                                                     |       
|                                     | Payment of note payable                                                     |                                                     |       
|                                     | Payment of capital lease obligations and software financing contract        |                                                     |       
|                                     |                                                                             |                                                     |       
|                                     | Net cash provided by financing activities                                   |                                                     |       
|                                     |                                                                             |                                                     |       
|Net change in cash                   |                                                                             |                                                     | (9,350
|Cash, beginning of period            |                                                                             |                                                     | 16,577
|                                     |                                                                             |                                                     |       
|Cash, end of period                  |                                                                             | $                                                   | 7,227 
|                                     |                                                                             |                                                     |       

See
accompanying notes to consolidated financial statements.

5

---



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 in order 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 June 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

---



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 six months ended June 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 six months ended June 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

---

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

|                                      |                                                 | For the Three Months Ended
June 30,               |        | For the Six Months Ended
June 30, |       
|------------------------------------- | ----------------------------------------------- | ------------------------------------------------- | ------ | --------------------------------- | ------
|
|
|Gross revenues                        |                                                 |                                                   |        |                                   |       
|                                      | Internet applications and professional services |                                                   | 11,193 |                                   | 7,373 
|                                      | Data extraction and aggregation services        |                                                   | 2,891  |                                   | 3,139 
|                                      | Wholesale vehicle exchange services             |                                                   | 6      |                                   |      
|                                      | All other                                       |                                                   | 680    |                                   | 476   
|                                      |                                                 |                                                   |        |                                   |       
|                                      |                                                 | Total gross revenues, by segment                  |        | 14,770                            |       
|Operating income (loss)               |                                                 |                                                   |        |                                   |       
|                                      | Internet applications and professional services |                                                   | (2,881 | )                                 | (3,343
|                                      | Data extraction and aggregation services        |                                                   | 20     |                                   | 163   
|                                      | Wholesale vehicle exchange services             |                                                   | (1,194 | )                                 |      
|                                      | All other                                       |                                                   | 323    |                                   | 112   
|                                      |                                                 |                                                   |        |                                   |       
|                                      |                                                 | Operating loss, by segment                        |        | (3,732                            | )     
|Adjusted EBDA                         |                                                 |                                                   |        |                                   |       
|                                      | Internet applications and professional services |                                                   | (1,768 | )                                 | (2,321
|                                      | Data extraction and aggregation services        |                                                   | 1,327  |                                   | 1,587 
|                                      | Wholesale vehicle exchange services             |                                                   | (1,084 | )                                 |      
|                                      | All other                                       |                                                   | 343    |                                   | 321   
|                                      |                                                 |                                                   |        |                                   |       
|                                      |                                                 | Total Adjusted EBDA, by segment                   |        | (1,182                            | )     
|Depreciation and amortization expense |                                                 |                                                   |        |                                   |       
|                                      | Internet applications and professional services |                                                   | 995    |                                   | 607   
|                                      | Data extraction and aggregation services        |                                                   | 1,305  |                                   | 1,643 
|                                      | Wholesale vehicle exchange services             |                                                   | 110    |                                   |      
|                                      | All other                                       |                                                   | 19     |                                   | 5     
|                                      |                                                 |                                                   |        |                                   |       
|                                      |                                                 | Depreciation and amortization expense, by segment |        | 2,429                             |       

8

---

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 six months ended June 30, 2001 and June 30, 2000:

|                                          |                                                                                                                                                                         | For the Three Months Ended
June 30, |        | For the Six Months Ended
June 30, |       
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------ | --------------------------------- | ------
|
|
|Total gross revenues, by segment          |                                                                                                                                                                         | 14,770                              |        | 10,988                            |       
|                                          | DaimlerChrysler equity subscriptions                                                                                                                                    |                                     | (1,401 | )                                 | (14   
|                                          | SAB 101 revenue deferrals                                                                                                                                               |                                     | (814   | )                                 | (779  
|                                          |                                                                                                                                                                         |                                     |        |                                   |       
|                                          |                                                                                                                                                                         | Reported revenues                   |        | 12,555                            |       
|Total operating income (loss), by segment |                                                                                                                                                                         | (3,732                              | )      | (3,068                            | )     
|                                          | 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 |                                     | (1,271 | )                                 | (1,844
|                                          | Adjustments from gross revenue, above                                                                                                                                   |                                     | (2,212 | )                                 | (793  
|                                          |                                                                                                                                                                         |                                     |        |                                   |       
|                                          |                                                                                                                                                                         | Reported operating loss             |        | (7,215                            | )     
|Total Adjusted EBDA, by segment           |                                                                                                                                                                         | (1,182                              | )      | (413                              | )     
|                                          | Unallocated expenses                                                                                                                                                    |                                     | (1,275 | )                                 | (1,946
|                                          | Non-cash portion of unallocated expenses                                                                                                                                |                                     |       |                                   |      
|                                          | Non-operating income                                                                                                                                                    |                                     | 69     |                                   | 240   
|                                          | Adjustments to revenues                                                                                                                                                 |                                     | (2,212 | )                                 | (793  
|                                          |                                                                                                                                                                         |                                     |        |                                   |       
|                                          | EBDA                                                                                                                                                                    |                                     | (4,600 | )                                 | (2,912

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 June 30, 2001 and December 31, 2000:

2001

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

13,665

13,320Data extraction and aggregation services

14,081

16,169Wholesale vehicle exchange services

1,569

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 June 30, 2001, DaimlerChrysler represented 24% of the Company's Internet applications and professional services segment revenues and 40% of the data
extraction and aggregation services segment revenues. For the quarter ending March 31, 2001, DaimlerChrysler represented 19% of the Company's Internet applications and professional services
segment revenues and 45% of the data extraction and aggregation services segment revenues. On a consolidated basis,

9

---

DaimlerChrysler represented 31% of the Company's reported revenues in the quarter ended June 30, 2001 and 29% of the Company's reported revenues in the quarter ended March 31, 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.

5.  Loan Facility

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 facility contract by entering into an agreement and plan of merger with Warburg, Pincus Equity Partners, L.P.

10

---

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 are equal for the three and six months ended June 30,
2001 because the impact of potential common stock equivalents is anti-dilutive. A total of 7,058,175 and 5,058,781 common stock options and warrants were outstanding at June 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
June 30, |        | Six months ended
June 30, |  
|----------------------------------------- | ------------------------------------------------------- | --------------------------- | ------ | ------------------------- | -
|
|
|Numerator:                                |                                                         |                             |        |                           |  
|                                          | Previously reported net income                          |                             | $      | (7,150                    | )
|                                          | Cumulative change in accounting principle               |                             |        |                          |  
|                                          |                                                         |                             |        |                           |  
|Net loss available to common shareholders |                                                         | $                           | (7,150 | )                         | $
|Denominator:                              |                                                         |                             |        |                           |  
|                                          | Weighted-average shares outstanding  basic and diluted |                             |        | 20,362,685                |  

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 our financial positions, 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.

The
Company will adopt FAS 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.

11

---

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. At June 30,
2001 net goodwill approximated $731,000. Goodwill amortization approximated $932,000 and $1.9 million for the three and six-months ended June 30, 2001, respectively. In
addition, the company currently has $1.0 million in net workforce that will be transferred to goodwill effective January 1, 2002. Finally, 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.

8.  Agreement and plan of merger with Warburg, Pincus Equity Partners, L.P.

On June 2, 2001, the Company entered into an Agreement and Plan of Merger, dated as of June 2, 2001 (the "Merger Agreement"), with Cobalt
Acquisition Corporation ("Merger Sub"), a Washington corporation that is wholly-owned by Warburg, Pincus Equity Partners, L.P. ("Warburg"), 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, John W.P.
Holt, a director and the chief executive officer of the Company, Ernest Pomerantz, a director of the Company, and certain other of the Company's senior management, directors, officers, and other
shareholders to be determined (the "Participating Shareholders") and (ii) shareholders who exercise their dissenters' rights
under Washington law, would be converted into the right to receive $3.50 in cash. Following completion of the Merger, Warburg and the Participating Shareholders would privately hold the Company.

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
Cobalt's announcement of the execution of the merger agreement on June 4, 2001, three purported class action lawsuits were filed against Cobalt, Warburg, and members
of Cobalt'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. Pursuant to the Consolidation Order, the plaintiffs have been directed to file an amended and consolidated complaint, which they have not yet done. The plaintiff's unconsolidated
complaints had sought preliminary and permanent injunctions with respect to the consummation of the merger, rescission of the transaction and recissionary damages in the event the proposed transaction
is consummated, disgorgement of any profits earned by the defendants and the reasonable fees and expenses of the plaintiff's attorneys.

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 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 October 2001.

12

---

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 this Form 10-Q. 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 8,900 automotive dealer clients and we are the 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:



13

---



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 101requires 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 six months ended
June 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. We believe that continued revenue growth will be primarily attributable to growth in
revenues from our Internet applications and professional service offerings. We anticipate that these additional revenues will primarily come from individual dealer sales and sales resulting from
manufacturer endorsements. The scope and timing of manufacturer endorsements and their related activities may cause variations in our revenue growth rates.

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 June 30, 2001, we had recognized $3.6 million less in revenues from DaimlerChrysler than
amounts billed, including $842,000 in the year 2000 and $2.7 million in the first six months of 2001. The deferred equity subscriptions balance as of June 30, 2001 of
$10.2 million includes $11.0 million remaining to be amortized, offset by deferred revenues related to DaimlerChrysler of $800,000.

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

14

---

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 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 assets. 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, the Company reached an agreement in principle with GE Capital to terminate the operating agreement relating to MotorPlace Auto Exchange. As a result of
the termination, the Company expensed all unamortized warrant charges related to the agreement, which totaled approximately $1.2 million on June 30, 2001, and agreed to assume all
expenses related to MotorPlace Auto Exchange.

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
June 30, 2001, we were in the development phase of this project and had incurred software development costs of $7.1 million of which $5.2 million were capitalized. Additionally,
related capital assets purchased as of June 30, 2001 totaled $2.0 million. We expect to continue to incur substantial costs related to this project throughout the remainder of 2001. Upon
completion of the project, these costs will be amortized over their expected useful life of three years.

In
addition, we anticipate continued investment in the development of MotorPlace Auto Exchange. The operations of MotorPlace Auto Exchange will require significant development of the
MotorPlace.com Web site. As of June 30, 2001, we have invested approximately $2.3 million in this effort, consisting of expensed and capitalized labor and consulting costs as well as
capital asset purchases. Beginning in the third quarter of 2001, these costs will be amortized over their expected useful life of three years.

15

---

Results of Operations

Three Months ended June 30, 2001 Compared to Three Months ended June 30, 2000

|                |                                                 | For the Three Months Ended
June 30, |       
|--------------- | ----------------------------------------------- | ----------------------------------- | ------
|
|
|Gross Revenues: |                                                 |                                     |       
|                | Internet applications and professional services |                                     | 11,193
|                | Data extraction and aggregation services        |                                     | 2,891 
|                | Wholesale vehicle exchange services             |                                     | 6     
|                | All other                                       |                                     | 680   
|                |                                                 |                                     |       
|                |                                                 | Total gross revenues, by segment    |       
|                | DaimlerChrysler equity subscriptions            |                                     | (1,401
|                | SAB 101 revenue deferrals                       |                                     | (814  
|                |                                                 |                                     |       
|                |                                                 | Reported revenues                   |       

Revenues.Our consolidated revenues increased to $12.6 million for the three months
ended June 30, 2001 from $10.2 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 52% to $11.2 million for the three months ended June 30, 2001 from $7.4 million for the same period in 2000. This increase is calculated prior to reductions in
revenues of $1.4 million and $14,000 from amounts billed to DaimlerChrysler in the three months ended June 30, 2001 and June 30, 2000, respectively. In addition, the increase is
calculated prior to non-recurring fees deferred under SAB 101 of $814,000 and $779,000, respectively. This increase in revenues prior to these adjustments is primarily attributable to an
increase in both the number of 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
7.0% to $2.9 million for the three months ended June 30, 2001 from $3.1 million for the same period in 2000. This decrease is primarily attributable to higher client attrition
rates.

Wholesale vehicle exchange.Revenues from our wholesale vehicle exchange segment were $6,000 for the three months ended
June 30, 2001. Revenues were $0 for the three months ended June 30, 2000 since the exchange was not launched until the third quarter of 2000.

Cost of revenues.The gross profit margin percentage for the quarter ended June 30, 2001
was 81.3% compared to 78.5% in the same period of 2000. The increased margin was a result of decreased personnel costs as well as an increased revenue base for certain fixed site content and licensing
costs.

Sales and marketing.Sales and marketing costs, excluding stock-based expense, increased 35% to
$7.0 million for the quarter ended June 30, 2001 from $5.2 million for the same period of 2000. Of the increase, 95% 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 82%
to $3.1 million for the quarter ended June 30, 2001 as compared to $1.7 million in the same

16

---

period of 2000. Increases in personnel and outside consulting services dedicated to our product development initiatives accounted for 86% of the increase.

General and administrative.General and administrative costs, excluding stock-based expense,
increased to $6.1 million for the quarter ended June 30, 2001 from $5.0 million for the same period in 2000. Increases in overhead charges, including bad debt expense,
depreciation and equipment maintenance costs, accounted for 83% of the increase.

Stock-based expense.Stock-based expense decreased to $120,000 in the quarter ended
June 30, 2001 from $250,000 in the same period of 2000. These charges are attributable to stock options granted to employees. The use of an accelerated method of amortizing deferred
compensation and the cancellation of employee stock options in connection with employee terminations contributed to the decrease.

Operating income (loss).Loss from operations was $7.2 million, for the quarter ended
June 30, 2001 compared to a loss of $5.7 million, for the same period of 2000. The increase in net loss is primarily attributable to increased personnel costs, depreciation and
amortization as well as outside consulting services, partially offset by the increase in revenues.

Loss
from operations for our Internet applications and professional services segment was $2.9 million for the quarter ended June 30, 2001 compared to a loss of
$3.3 million for the same period of 2000. The decrease in net loss is primarily attributable to increased revenues attributable to the segment, partially offset by increased expenses, marketing
programs, facilities costs, depreciation and other overhead expenses.

Income
from operations for our data aggregation and extraction services segment was $20,000 for the quarter ended June 30, 2001 compared to $163,000 for the same period of
2000. The decrease in segment income from operations is primarily due to a decrease in revenue due to customer attrition.

Loss
from operations for our wholesale vehicle exchange services segment was $1.2 million for the quarter ended June 30, 2001. There was no loss in the corresponding
period of 2000, as the launch of MotorPlace Auto Exchange 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. Loss from operations does not include the $1.2 million write-off of warrants issued to GE
Capital related to the termination of the agreement to operate MotorPlace Auto Exchange.

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 June 30, 2001 was a loss of $4.6 million, compared with a loss of $2.9 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 June 30, 2001 was a loss of
$1.2 million compared with a loss of $413,000 for the same period of 2000.

17

---

For our Internet applications and professional services segment, Adjusted EBDA for the three months ended June 30, 2001 was a loss of $1.8 million compared with a loss
of $2.3 million for the same period of 2000. The increase in Adjusted EBDA is primarily attributable to increased revenues, partially offset by increasing expenses related to product
development as well as sales and marketing costs.

For
our data extraction and aggregation services segment, Adjusted EBDA for the three months ended June 30, 2001 was $1.3 million compared with $1.6 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 three months ended June 30, 2001 was a loss of $1.1 million. The vehicle exchange was launched
in the third quarter of 2000, and as a result had no loss in the comparable period.

Six Months ended June 30, 2001 Compared to Six Months ended June 30, 2000

For the Six Months Ended
June 30,2001

2000(in thousands)
(unaudited)Gross Revenues:Internet applications and professional services

22,220

13,163Data extraction and aggregation services

6,007

6,171Wholesale vehicle exchange services

12

All other

1,128

938Total gross revenues, by segment

29,367

20,272DaimlerChrysler equity subscriptions

(2,723
)
(14
)SAB 101 revenue deferrals

(1,806
)
(1,147
)Reported revenues

24,838

19,111


Revenues.Our consolidated revenues increased to $24.8 million for the
six months ended June 30, 2001 from $19.1 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 69% to $22.2 million for the six months ended June 30, 2001 from $13.2 million for the same period in 2000. This increase is calculated prior to reductions in
revenues of $2.7 million and $14,000 from amounts billed to DaimlerChrysler in the three months ended June 30, 2001 and June 30, 2000, respectively. In addition, the increase is
calculated prior to non-recurring fees deferred under SAB 101 of $1.8 million and $1.2 million, respectively. This increase in revenues prior to these adjustments is
primarily attributable to an increase in both the number of dealer web site clients as well increased revenue per dealer web site. In addition, professional services work, including custom development
contributed to the increase.

Data extraction and aggregation services.Revenues from our data extraction and aggregation services segment decreased
2.7% to $6.0 million for the six months ended June 30, 2001 from $6.2 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 $12,000 for the six months ended
June 30, 2001. Revenues were $0 for the three months ended June 30, 2000 since the exchange was not launched until the third quarter of 2000.

18

---

Cost of revenues.The gross profit margin percentage for the six months ended June 30,
2001 was 80.5% compared to 79.2% in the same period of 2000. The increased margin was a result of decreased personnel costs as well as an increased revenue base for certain fixed site content and
licensing costs.

Sales and marketing.Sales and marketing costs, excluding stock-based expense, increased 47% to
$13.9 million for the six months ended June 30, 2001 from $9.4 million for the same period of 2000. Of the increase, 85% 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 112%
to $6.2 million for the six months ended June 30, 2001 as compared to $2.9 million in the same period of 2000. Increases in personnel and outside consulting services dedicated to
our product development initiatives accounted for 89% of the increase.

General and administrative.General and administrative costs, excluding stock-based expense,
increased to $12.2 million for the six months ended June 30, 2001 from $8.8 million for the same period in 2000, an increase of 39%. Increases in overhead charges, including bad
debt expense, depreciation and equipment maintenance costs, accounted for 65% of the increase. An additional 27% of the increase was attributable to additional personnel costs.

Stock-based expense.Stock-based expense increased to $1.5 million in the six months
ended June 30, 2001 from $540,000 in 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 (loss).Loss from operations was $16.1 million, for the six months ended
June 30, 2001 compared to a loss of $9.7 million, for the same period of 2000. The increase in operating loss is
primarily attributable to increased personnel costs, depreciation and amortization as well as outside consulting services.

Loss
from operations for our Internet applications and professional services segment was $6.0 million for the quarter ended June 30, 2001 compared to a loss of
$5.8 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.

Income
from operations for our data aggregation and extraction services segment was $23,000 for the quarter ended June 30, 2001 compared to $72,000 for the same period of 2000.
This decrease is primarily attributable to customer attrition and the resulting decrease in revenues.

Loss
from operations for our wholesale vehicle exchange services segment was $2.2 million for the six months ended June 30, 2001. There was no loss in the corresponding
period of 2000, as the launch of MotorPlace Auto Exchange took place in the second half of 2000. The majority of the operating loss is associated with start-up investments in personnel and
outside consulting.

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 six months ended June 30, 2001 was a loss of $9.5 million, compared with a loss of $4.4 million for the same period of 2000. The
decrease in Adjusted EBDA was a result

19

---

of the launch of MotorPlace Auto Exchange as well as increased expenses related to the support of our increased client base and increased technology investments.

For
our Internet applications and professional services segment, Adjusted EBDA for the six months ended June 30, 2001 was a loss of $3.7 million compared with a loss of
$4.1 million for the same period of 2000. The increase in Adjusted EBDA is primarily attributable to increased revenues, partially offset by increasing expenses related to product development
as well as sales and marketing costs.

For
our data extraction and aggregation services segment, Adjusted EBDA for the six months ended June 30, 2001 was $2.7 million compared with $3.1 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 six months ended June 30, 2001 was a loss of $1.9 million. The vehicle exchange was launched
in the third quarter of 2000, and as a result had no loss in the comparable period.

Liquidity and Capital Resources

At June 30, 2001 our cash balance was $7.2 million, which reflects a decrease of $9.4 million from our cash balance at December 31,
2000.

Net
cash used in operating activities was $7.6 million for the six months ended June 30, 2001 compared to $4.0 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 $3.1 million for the six months ended June 30, 2001 compared to cash provided by investing activities for the same period of 2000 of $1.3 million. 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 $1.4 million for the six months ended June 30, 2001, compared to cash provided by financing activities for the same period
of 2000 of $1.0 million. This increase is due primarily to proceeds from deferred equity subscriptions related to the DaimlerChrysler agreement, offset by increased payments on capital and
software financing contracts.

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 Warburg,
Pincus Equity Partners, L.P.

Following
the announcement of the merger agreement on June 4, 2001, three purported class action lawsuits were filed against Cobalt, Warburg Pincus and members of Cobalt'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. Pursuant to the Consolidation Order, the plaintiffs have been directed to file an amended and consolidated complaint, which they
have not yet done. Accordingly, no responsive pleading is due. The plaintiffs' unconsolidated complaints had sought preliminary and permanent injunctions with respect to the consummation of the
merger, rescission of the transaction and recissionary damages in the event the proposed transaction is consummated, disgorgement of any profits earned by the defendants and the reasonable fees and
expenses of the plaintiff's attorneys. We anticipate that our insurance will fully cover any losses and we expect no cash impact of these lawsuits.

We
anticipate continued investment of substantial resources in developing technology that supports our Internet applications and professional services business. This investment will
include staffing and

20

---

consulting costs, in addition to capital purchases. As of June 30, 2001 we had invested an aggregate of $9.1 million in our current project to develop technology that supports our
Internet applications business, consisting of $5.2 million in capitalized labor costs, $2.0 million in hardware and software purchases and another $1.9 million in labor and
consulting expenses. As of June 30, 2001 we had invested an aggregate of $2.3 million in the MotorPlace Auto Exchange development effort, consisting of expensed and capitalized labor and
consulting costs as well as capital asset purchases.

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. For example, our
investment in MotorPlace Auto Exchange requires increased staffing and infrastructure to accommodate anticipated growth in our transaction volumes. We also anticipate that we will require increased
infrastructure and staffing to support expanded service offerings.

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. If the merger with Warburg 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 roll-out of new products and significantly reduce our operations.

Factors That May Affect Our Future Results

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

Risks Relating to our Business

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. If the merger with Warburg 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 roll-out of new products and significantly reduce our operations.

Our limited operating history and unproven, evolving business model make it difficult to evaluate our prospects.

We
began offering our services in March 1995. We must achieve broad market acceptance of our services and continue to expand our service offerings for our business to succeed.
Although our client base represents a significant percentage of the total franchised automotive dealer community in the United States, many of our dealer clients have been clients for only a short
time. Furthermore, several of our newest product offerings and strategic initiatives, particularly MotorPlace Auto Exchange, are not yet in full commercial release or have yet to be proven in the
marketplace. We cannot assure you that our new and planned future offerings will be successful or that our broader business model, as it evolves, will succeed.

21

---

We have a history of losses and may never achieve or maintain profitability. If we continue to lose money, our operations will not be financially
viable.

We
have incurred net losses each year since we began operations and we expect that we will not be profitable at least through 2001. We cannot guarantee that our business strategy will
be successful or that we will ever achieve or maintain significant revenues or profitability. We had a net loss of $7.2 million for the quarter ended June 30, 2001. As of that date, we
had an accumulated deficit of
$81.4 million. We have not had operating profits on a quarterly or annual basis. We expect to continue to incur significant operating expenses and, as a result, we will need to generate
significant revenue increases and control expenses to achieve and maintain profitability.

We have relied primarily on issuances of equity securities to finance our operations and will need to raise additional capital to fund our future operations. Any failure to
obtain additional capital when needed or on satisfactory terms could damage our business and prospects.

We
do not generate sufficient cash to fully fund operations and our current cash reserves are not adequate to fund our operations through [the end of the
year]. As a result of our continued operating losses, limited cash reserves, and 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. We will need to raise additional capital in the future to fund our ongoing operations. If we issue additional securities in connection with strategic
relationships or to raise additional capital, the percentage ownership of our then-current shareholders will be reduced.

Our
future capital requirements depend on many factors, including the extent of our efforts to develop our new Internet application services technology platform, the rate at which we
develop and deploy MotorPlace Auto Exchange, the extent to which we expand our other product and service offerings, the occurrence, timing, size and success of acquisitions, and the effect of
competition on our performance. Any difficulty in obtaining additional capital when needed or on satisfactory terms could force us to curtail our operations significantly or prevent us from pursuing
our growth strategy.

We expend considerable resources in the development of our technology infrastructure, our services and the pursuit of strategic opportunities. Development efforts that take
longer than expected to complete or that are unsuccessful could negatively affect our results of operations and financial condition.

We
are engaged in the development of a new technology platform to support our Internet application services. In aggregate, we expect this project alone will cost approximately
$11 million. The time, expense and effort associated with developing and implementing this new technology infrastructure, as well as our product and service offerings and strategic initiatives,
may exceed our expectations. The length of the development cycle varies depending on the nature and complexity of the product, service or initiative, the availability of development, marketing and
other internal resources, and the responsiveness of strategic or technology partners. Larger, more complex products, services or initiatives, such as the development of our technology infrastructure
and the development of MotorPlace Auto Exchange, tend to have longer development cycles. Any delay or failure in developing or implementing these products, services or initiatives would have a
negative effect on our results of operations and financial condition.

If we are unsuccessful in quickly and effectively integrating future acquisitions, our business and results of operations could suffer.

A
key element of our growth strategy is to pursue strategic acquisitions and business relationships. Integrating newly acquired businesses or technologies may be expensive and
time-consuming. We may fail to manage these integration efforts successfully. The negotiation of potential acquisitions or strategic relationships as well as the integration of future
acquired businesses, products or technologies could divert our management's time and resources. We may not be able to operate any acquired businesses profitably or otherwise implement our growth
strategy successfully. If we are unable to integrate any newly acquired entities or technologies effectively, our business and results of operations

22

---

could suffer. Acquisitions may cause us to incur contingent liabilities and to amortize expenses related to goodwill and other intangible assets, which could adversely affect our results of
operations. In addition, acquisitions may result in dilution to our shareholders.

Any failure to build strong relationships with current and prospective automotive dealer and manufacturer clients could limit our growth prospects and adversely affect our
business.

For
our business to succeed, we must continue to develop relationships with franchised automotive dealers. We derive most of our revenues from fees paid by our automotive dealer
clients and our future growth depends in part on expanding our base of dealer clients. We also must maintain close working relationships with automotive manufacturers. While we have established
relationships with a number of manufacturers, these relationships are relatively new and we have little experience in maintaining them. In addition, manufacturers may elect to implement their own
Internet strategies, which could reduce our potential client base. For example, during 2000 General Motors Corporation announced its intent to create a subsidiary focused solely on providing
technology solutions, including e-business services such as dealer Web sites, to franchised General Motors dealers.

Excessive turnover of our dealer clients could increase our costs, damage our reputation and slow our growth.

Our
service agreements with dealers generally are short-term and cancelable on 30 days' notice. To be successful, we will need to maintain low dealer client
turnover. During the quarter ended June 30, 2001, approximately 627 Web sites, or 7% of our total Web sites as of quarter-end, were terminated. Our rate of dealer client turnover
may fluctuate from period to period, and may exceed recent levels. A material decrease in the number of dealers purchasing our services could have a material adverse effect on our business, results of
operations, and financial condition.

We will face intense competition and, if we are unable to compete successfully, our business will be seriously harmed.

Our
Internet applications and professional services compete with services offered by large enterprise software providers such as The Reynolds and Reynolds Company ("Reynolds") and
Automated Data Processing Corporation ("ADP") as well as local and regional Web site development firms and application providers. We may also be perceived by some dealers as competitors of automobile
sales lead generation services such as Autobytel, Inc., Microsoft CarPoint and Autoweb.com, Inc. if these dealers maintain a distinct Internet marketing budget. Our data extraction and
aggregation services compete with services provided by Reynolds, ADP and Digital Motorworks, Inc. In 2000, established industry participants announced the formation of two new businesses to
provide parts e-commerce services to the automotive industry. ChoiceParts, LLC was formed by Reynolds, ADP and CCC Information Services Corporation and OEConnect, LLC was formed by Ford
Motor Company, General Motors, DaimlerChyrsler and Bell and Howell Co. If implemented, these businesses could adversely affect usage of the PartsVoice parts locator service and significantly impair
the growth of our data extraction and aggregation services. We anticipate that competition in the market for automotive industry Internet services will increase significantly over time. Barriers to
entry on the Internet are relatively low, and we expect to face competitive pressures from numerous companies, particularly those with data aggregation capabilities that may be readily integrated with
Internet services. Furthermore, our existing and potential competitors may develop offerings that equal or exceed the quality of our offerings or achieve greater market acceptance than ours. Many of
our current and future competitors have and will continue to have substantially greater capital, resources and access to additional financing than we do or will. We cannot assure you that we will be
able to compete successfully against our current and future competitors or that competition will not have a material adverse effect on our business, results of operations or financial condition.

If automotive manufacturers decide to provide Internet applications or data extraction and aggregation services directly to their dealer networks our revenues and growth
prospects will be severely impaired.

23

---

It is possible that some, or all, automotive manufacturers may attempt to provide services comparable to those that we provide to our clients. If this occurs, our ability to maintain
or expand our client base and revenues will be impaired. In 1997, DaimlerChrysler announced an internal initiative to bring elements of our parts locator service in-house. We believe that
this initiative will significantly reduce our contract revenues from parts data services that we currently provide to DaimlerChrysler dealers. Manufacturers may choose to provide competitive services
directly or through affiliation. For example, if OEConnect is implemented, it may result in a significant reduction in the data extraction and aggregation services we provide to dealers affiliated
with the major domestic automotive manufacturers.

Any failure to manage our growth effectively will adversely affect our business and results of operations.

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

Our
relationships with clients and strategic partners are frequently informal and are subject to frequent change. These changes are also often informal. A practice of entering into
verbal agreements and of modifying or terminating past agreements by verbal agreement has resulted in the past, and may result in the future, in disputes regarding the existence, interpretation and
circumstances regarding modification or termination of commercial contracts. If our relationships with clients or strategic partners evolve in an adverse manner, if we get into contractual disputes
with clients or strategic partners or if any agreements with such persons are terminated, our business could suffer.

We
must integrate our key executives into a cohesive management team and at the same time increase the total number of employees and train and manage our employee work force in a
timely and effective manner to expand our business. We cannot guarantee that we will be able to do so successfully. To manage the expected growth of our operations and personnel, we must continue
improving or replacing existing operational, accounting and information systems, procedures and controls. We will also need to expand, train and manage our growing employee base, particularly our
finance, administrative and operations staff. Further, we must manage effectively our relationships with our dealer, dealer group and manufacturer clients and other third parties necessary to our
business. If we are unable to manage growth effectively, our business could suffer.

Our quarterly results likely will fluctuate, which may subject the market price of our common stock to rapid and unpredictable change.

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



24

---



We
expect our business to experience seasonality, reflecting seasonal fluctuations in the automotive industry, Internet and commercial online service usage and advertising
expenditures. In addition, because we only began operations in March 1995, and because the market for automotive e-business services such as ours is still evolving, it is very
difficult to predict future financial results. Due partly to our investments in our technology infrastructure and to our development of MotorPlace Auto Exchange, we plan to significantly increase our
technology and development, sales and marketing, as well as general and administrative expenses during the remainder of the year 2001. Our expenses are relatively fixed in the short term and are based
in part on our expectations of future revenues, which may vary significantly. If we do not achieve expected revenue targets, we may be unable to adjust our spending quickly enough to offset any
revenue shortfall. If this were to occur, our results of operations would be significantly affected.

We may fail to retain our key executives and to attract and retain technical personnel, which would adversely affect our business and prospects.

The
loss of the services of one or more of our executive officers could have a material adverse effect on the development of our business and, accordingly, on our operating results
and financial condition. We generally do not enter into employment agreements with our key executive officers and cannot guarantee that we will be able to retain them. Qualified technical personnel
are in great demand throughout the Internet industry. Our future growth will depend in large part upon our ability to attract and retain highly skilled technical and engineering personnel. Our failure
to attract and retain the technical personnel that are integral to our expanding development needs may limit the rate at which we can develop new products and services, which could have a material
adverse effect on our business, results of operations and financial condition.

If we become unable to extract data from our clients' internal management systems, the value of our services would decrease dramatically.

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

We are vulnerable to disruptions in our computer systems and network infrastructure. System or network failures would adversely affect our operations.

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

25

---

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

Unknown software defects could cause service interruptions, which could damage our reputation and adversely affect our business.

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

Economic trends that negatively affect the automotive retailing industry may adversely affect our business by decreasing the number of automotive dealers purchasing our
products and services, decreasing the amount our clients spend on our products and services, or both.

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

Our business depends on the protection of our intellectual property and proprietary rights and such protection is costly and may be inadequate. The loss of any of these rights
or property would seriously harm our business.

Legal
standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and still evolving, and we cannot
predict the future viability or value of any of our proprietary rights. We also cannot assure you that the steps that we have taken to protect our intellectual property rights and confidential
information will prevent unauthorized disclosure, misappropriation or infringement of these valuable assets. In addition, our business activities may infringe upon the intellectual property rights of
others and other parties may assert infringement claims against us. Any litigation to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of
others might result in substantial costs and diversion of resources and management attention. Moreover, if we infringe upon the rights of others, we may be required to pay substantial amounts and may
be required to either license the infringed intellectual property or to develop alternative technologies independently. We may not be able to obtain suitable substitutes for the infringed technology
on acceptable terms or in a timely manner, which could adversely affect our business, results of operations and financial condition.

26

---

We could face liability for information retrieved from or transmitted over the Internet and liability for products sold over the Internet.

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

Increasing government regulation could limit the market for Internet services, which could seriously harm our business.

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

Our principal shareholder and its affiliates will continue to influence matters affecting us, which could conflict with your interests.

As of June 30, 2001, E.M. Warburg, Pincus & Co., LLC ("Warburg") beneficially owned approximately 45.8% of our issued and outstanding common
stock and is able to exercise significant influence over us, including on matters submitted to our shareholders for a vote, such as:



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

Our stock price may be volatile, which could result in substantial losses for individual shareholders and would increase the likelihood that we will be subject to securities
class action litigation.

27

---

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

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

Risks Relating to the Proposed Merger with Warburg

Failure to complete the merger could negatively impact the market price of Cobalt common stock.

If the proposed merger with Warburg is not completed for any reason, Cobalt will be subject to a number of material risks, including:



If
the merger is terminated and our board of directors seeks another merger or business combination, shareholders cannot be certain that we will be able to find a partner willing to
pay an equivalent or more better price than the price to be paid by Warburg in the merger.

During the pendency of the merger, Cobalt may not be able to enter into a merger or business combination with another party at a favorable price because of restrictions in the
merger agreement.

Unless
or until the merger agreement is terminated, subject to specified exceptions, Cobalt is restricted from entering into or soliciting, initiating or encouraging any inquiries or
proposals that may lead to a proposal or offer for a merger, consolidation, business combination, sale of substantial assets, tender offer, sale of shares of capital stock or other similar
transactions with any person or entity other than Warburg. As a result of these restrictions, Cobalt may not be able to enter into an alternative transaction at a more favorable price, if at all,
without incurring potentially significant liability to Warburg.

Cobalt's officers and directors have conflicts of interest that may influence them to support or approve the merger.

The
directors and officers of Cobalt have interests in the merger that are different from, or in addition to, those of unaffiliated shareholders. The directors and officers of Cobalt
may therefore have

28

---

been and may be more likely to vote to adopt and approve the merger agreement than if they did not have these interests. Shareholders should consider whether these interests may have influenced these
directors and officers to support or recommend the approval of the merger.

Uncertainties associated with the merger may cause Cobalt to lose key personnel.

Our
current and prospective employees may experience uncertainty about their future roles with Cobalt following the completion of the merger. This uncertainty may adversely affect our
ability to attract and retain key management, sales, marketing and technical personnel.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

29

---



PART IIOTHER INFORMATION

Item 1Legal Proceedings.

Following Cobalt's announcement of the execution of the merger agreement on June 4, 2001, three purported class action lawsuits were filed against
Cobalt, Warburg, and members of Cobalt'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. Pursuant to the Consolidation Order, the plaintiffs have been directed to file an amended and consolidated complaint, which they have not yet done.
Although the consolidated complaint is yet to be filed, the allegations are likely to be substantially similar to those set forth in the complaints that were initially filed. It is expected that the
Consolidated Complaint will allege that the members of Cobalt's board of directors breached their fiduciary duties, the per share merger consideration was inadequate, Warburg, John Holt and the other
continuing shareholders timed the proposed transaction at a time when Cobalt's stock price was depressed in order to capture for themselves Cobalt's future potential without paying an adequate or fair
price and that given the potential or actual conflicts of interest Warburg, John W.P. Holt and other members of management were acting solely out of self interest and without regard for what is best
for Cobalt's unaffiliated shareholders. The plaintiff's unconsolidated complaints had sought preliminary and permanent injunctions with respect to the consummation of the merger, rescission of the
transaction and recissionary damages in the event the proposed transaction is consummated, disgorgement of any profits earned by the defendants and the reasonable fees and expenses of the plaintiff's
attorneys.

Item 4. Submission of Matters to a Vote of Security Holders.

On May 22, 2001, at the annual meeting of shareholders:



The
number of votes cast for or against and abstentions on each matter were as follows:

|Name of Nominee     |  | Votes "For" |  | Votes Withheld |  | 
|------------------- |  | ----------- |  | -------------- |  | 
|John W.P. Holt      |  | 17,803,899  |  | 34,364         |  | 
|Mark T. Koulogeorge |  | 17,807,064  |  | 31,197         |  | 

|                                                                     |  | Votes "For" |  | Votes "Against" |  | Abstentions
|-------------------------------------------------------------------- |  | ----------- |  | --------------- |  | -----------
|Proposal to Approve The Cobalt Group, Inc. 2000 Stock Incentive Plan |  | 13,369,613  |  | 207,769         |  | 6,522      

|                                                                                                                                                    |  | Votes "For" |  | Votes "Against" |  | Abstentions
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | --------------- |  | -----------
|Proposal to Ratify the Appointment of PriceWaterhouseCoopers as Independent Accountants of the Company for the fiscal year ending December 31, 2001 |  | 17,821,901  |  | 12,885          |  | 3,475      

The
matters listed above are described in detail in the Company's definitive proxy statement, filed with the Securities and Exchange Commission on April 24, 2001, for the
Annual Meeting of Shareholders held on May 22, 2001.

30

---

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

|2.1  |  | Agreement and Plan of Merger between The Cobalt Group, Inc. and Cobalt Acquisition Corporation, dated June 2, 2001 (1)                           
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|2.2  |  | Letter Agreement, dated June 2, 2001, between Warburg, Pincus Equity Partners, L.P., and certain of its affiliates and The Cobalt Group, Inc. (1)
|2.3  |  | Voting Agreement between Warburg, Pincus Equity Partners, L.P. and John W.P. Holt, dated June 2, 2001 (1)                                        
|23   |  | Consent of Independent Accountants (2)                                                                                                           
|99.1 |  | The Cobalt Group, Inc. Press Release issued June 4, 2001 (1)                                                                                     
|99.2 |  | Report of Independent Accountants and Financial Statements of The Cobalt Group, Inc. (2)                                                         

---

On
June 5, 2001, the Company filed a Current Report on Form 8-K for the event of June 2, 2001, which included disclosure under Items 5 and 7.

On
June 28, 2001, the Company filed a Current Report on Form 8-K for the event of June 28, 2001, which included disclosure under Items 5 and 7.
Exhibit 99 to the Form 8-K included the Report of Independent Accountants and Financial Statements of The Cobalt Group, Inc. at and for the fiscal year ended
December 31, 2000.

31

---



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 August 13, 2001.

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

32

---

QuickLinks