COBALT GROUP INC, 10-K, 2000-03-30

COBALT GROUP INC
10-K, 2000-03-30
COMPUTER PROCESSING & DATA PREPARATION

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-26623
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THE COBALT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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WASHINGTON 91-1674947
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION
OF INCORPORATION OR ORGANIZATION) NO.)
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2200 FIRST AVENUE SOUTH
SEATTLE, WASHINGTON 98134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (206) 269-6363
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $0.01
(TITLE OF EACH CLASS)

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 ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. No __

As of March 17, 2000 the aggregate market value of the registrant's Common
Stock held by
non-affiliates of the registrant was $93.3 million.

As of March 17, 2000 the number of shares of the registrant's Common Stock
outstanding was 17,180,929.

DOCUMENTS INCORPORATED BY REFERENCE:

Parts of the registrant's Proxy Statement for the 2000 annual meeting of
shareholders to be held on May 23, 2000 are incorporated by reference into
Part III of this report.

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS.................................................... 3

ITEM 2. PROPERTIES.................................................. 24

ITEM 3. LEGAL PROCEEDINGS........................................... 24

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 24

ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT........................ 24

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 26

ITEM 6. SELECTED FINANCIAL DATA..................................... 28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 29

ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 34

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.................. 34

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 52

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 53

ITEM 11. EXECUTIVE COMPENSATION...................................... 53

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 53

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 53

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 53
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PART I

ITEM 1. BUSINESS

OVERVIEW

We are a leading provider of Internet solutions and business-to-business
services to the automotive industry. Through Internet-based application
development and hosting, data management, and online referral services, we help
dealers, dealer groups and automobile manufacturers use the Internet to realize
new efficiencies, market their products and services more effectively and better
serve their customers. Our strength lies in our ability to integrate
Internet-based technologies to meet the needs of our clients, our expertise in
extracting, aggregating and mining large quantities of data, and our ability to
leverage our client base to provide network and distribution services.

We currently offer our clients:

- integrated Web site services;

- Internet-based application tools to complement our Web services;

- data extraction and data mining services;

- data distribution services; and

- training and support services to help them use the Internet effectively.

We seek to continually develop additional services to help our clients realize
the potential of the Internet to attract and retain customers, increase the
efficiency of their operations, and improve the productivity of their sales,
service, parts and finance and insurance departments.

We currently manage and maintain approximately 5,200 Web sites for clients
holding more than 7,000 new vehicle franchises. Our clients include over 50 of
the 100 largest dealer groups in the United States, as ranked by AUTOMOTIVE
NEWS. We are the manufacturer-endorsed provider of Web site solutions for the
U.S. dealership networks of Acura, Audi, Infiniti, Jaguar, Lexus, Mercedes-Benz,
Mitsubishi, Nissan, Saab, Subaru, Toyota and Volkswagen and we offer Web site
services that are endorsed by the National Automobile Dealers Association, or
NADA, an independent organization representing over 19,500 franchised automobile
dealer members in legal, political and business affairs. Our vehicle parts data
services are used by clients holding more than 10,000 new vehicle franchises and
the database contains over 46 million parts. We also provide vehicle parts data
services to DaimlerChrysler, Hyundai, Kia, Mazda, Mitsubishi, Subaru and Toyota.
In total, we provide our services to clients holding approximately 15,000 new
vehicle franchises.

We were incorporated under the laws of the State of Washington in 1995. Our
principal office is located at 2200 First Avenue South, Seattle, Washington
98134 and our telephone number is (206) 269-6363.

INDUSTRY BACKGROUND

The automotive retailing industry is one of the largest retail trade sectors
in the United States with revenues totaling more than $1 trillion annually. New
vehicle franchised dealerships generated more than $500 billion in new and
pre-owned vehicle sales in 1998. Significant additional revenues are generated
by the franchised dealership's three other profit centers: vehicle service,
vehicle parts sales, and vehicle financing and insurance.

While the automotive retailing industry is large, it remains highly
fragmented and is characterized by relatively small, independent dealerships.
There are more than 22,000 automobile dealerships in the United States
representing more than 49,000 franchises and 41 nameplates. According to
AUTOMOTIVE NEWs, the top ten U.S. dealer groups sold only 4.1% of the total new
and pre-owned vehicles sold in 1998.

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The automotive retailing industry is highly competitive and characterized by
relatively low margins. In many markets, there are numerous dealerships offering
consumers identical, or very similar, products and services. Furthermore, the
relatively high cost of a new car makes consumers price-sensitive and encourages
comparison shopping among dealerships. These market dynamics result in low
dealership pre-tax margins and require dealerships to maintain multiple sources
of profitability.

INTERNET USAGE

The growth of the Internet as a viable communication medium has created
opportunities for automobile manufacturers and dealerships to market
cost-effectively to and initiate relationships with a large and growing pool of
online consumers. According to a study published by the Stanford Institute for
the Quantitative Study of Society, more than 84 million adults in the U.S., or
approximately 55% of the total U.S. adult population, have access to the
Internet, and 36% use the Internet at least five hours per week. The number of
Internet users is projected by International Data Corporation, or IDC, to
increase to over 135 million by the end of 2002. According to IDC, the volume of
goods and services purchased over the Internet is projected to reach
$425 billion in 2002.

ONLINE AUTOMOBILE TRANSACTIONS

J.D. Power and Associates estimates that 40% of new vehicle purchasers used
the Internet to search for information on automobiles or otherwise assist them
with their purchases in 1999, and this figure is expected to increase to
approximately 66% by the end of 2001. Seventy-six percent of these prospective
customers who use the Internet during the shopping process visit manufacturers'
Web sites to conduct research on vehicles. According to Forrester
Research, Inc., $9.3 billion in vehicle sales in the U.S. were attributed to the
Internet in 1999. This number is projected to increase 144% in 2000 to
$22.7 billion.

DEALER INTERNET USAGE

Automobile dealers have come to realize the impact that the Internet is
having on their business. NADA reports that the Web presence of new-car dealers
reached an all-time high in February 2000. NADA's survey of Internet utilization
found the number of dealerships with Web sites in February 2000 was 80.3%, an
increase of 8.4% over the prior six month period. Ninety-three percent of these
sites are interactive, allowing the customer to send e-mail, order online,
schedule sales and service appointments or obtain financing. However, the
opportunity exists for many dealers to improve the flexibility of their Web
sites. For example, only 42% of dealer Web sites allow customers to schedule a
sales or service appointment. The NADA study also determined that two-thirds of
those dealerships currently without Web sites plan to be on the Internet within
the next six months. Furthermore, Forrester Research predicts that dealers will
increase spending on Internet marketing to $600 million annually by 2002.

BUSINESS-TO-BUSINESS E-COMMERCE

Business-to-business e-commerce is expected to grow from $250 billion in
2000 to $2.7 trillion in 2004, according to Forrester Research. For the
automotive industry, the Internet provides significant opportunities to create
efficiencies and expand online business-to-business transactions including
wholesale parts sales, wholesale vehicle auctions and dealer purchasing
services.

The original equipment manufacturer, or OEM, parts market generates in
excess of $30 billion in revenue annually. The Internet creates an opportunity
to improve interaction between dealers who need to trade parts, particularly
slow moving or obsolete parts that are typically written off. Similarly,
dealer-to-dealer transactions in used vehicles through wholesale auctions
provide more than 30% of the used cars inventory for franchised dealers. Again,
opportunities exist to leverage the Internet to provide vehicle auctions more
efficiently and cost effectively than otherwise possible. Finally, we believe
the average dealer spends $250,000 per year with approximately 800 individual
vendors who provide industry-

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specific goods and services such as motor oil, office supplies, and company
clothing. As networks of consumers are aggregated through the Internet, they can
be leveraged to consolidate the communication process and facilitate discounted
purchases of goods and services.

MARKET OPPORTUNITY

The advent of the Internet has created tremendous opportunities for
automobile dealers to leverage their market position and expertise to better
communicate with consumers, improve the efficacy and efficiency of the sales
process and, ultimately, generate increased profits. We believe that there are
opportunities to grow and leverage our network of dealer clients. As we add more
dealer clients, the information stored in our databases increases and the value
of that information to each client is enhanced, thereby increasing the value of
our network. Similarly, as our dealer client network grows and we add commercial
transaction capabilities, we position ourselves to create an efficient
business-to-business marketplace that provides value to our clients and new
revenue opportunities for us.

We believe that the increasing demand for Internet solutions in the
automotive retailing industry provides a significant market opportunity for a
business-to-business technology company that:

- understands the unique marketing requirements of automobile manufacturers,
dealers and dealer groups;

- has a client network with the critical mass to create network-driven
transaction opportunities; and

- has the strategic and technical development capabilities to leverage a
large client network into a business-to-business exchange and distribution
system.

THE COBALT GROUP SOLUTION

We help dealers, dealer groups and automobile manufacturers use the Internet
to realize new efficiencies, market their products and services more effectively
and better serve their customers. We believe that our solution provides the
following benefits:

INTEGRATED WEB SITE SOLUTIONS

We can rapidly deploy sophisticated Web sites for our clients that are
integrated with other Web sites within an affiliated network and with our suite
of Internet-based applications and services. Web sites built and maintained by
us allow our dealer clients to manage their Internet marketing platform
individually while providing manufacturers with the means to manage their
brands. We achieve this by integrating network-wide style and graphics templates
that support a cohesive brand-building strategy with dealer-specific content
pages, a searchable vehicle database, and interactive communications tools.

Our core Web service offerings are integrated with applications for managing
Web sites and the Internet marketing process, data distribution services that
support the Internet marketing effort, data collection services that improve
dealer efficiency, and network services that leverage our client base. We design
our services to help our clients pursue, enrich and maintain customer
relationships, which we believe increase the likelihood that the dealership will
complete an initial sale and follow-on sales of vehicles and automotive-related
products and services.

APPLICATION SERVICES

We provide our clients with applications and services that enable them to
sell their products and services more efficiently. Our solution integrates a
dealership's Web presence with a suite of applications and services that allow
each client to actively manage its Web presence and to communicate efficiently
and effectively with prospective and current customers. Our suite of
Internet-based tools includes:

- TRAFFIC REPORTER, which provides reports for dealers to track user traffic
on their Web site;

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- LEAD MANAGER, a tool for organizing, tracking and distributing Internet
leads;

- ADWIZARD PLUS, a tool that allows dealers to create and post custom
advertisements on their Web site;

- AUTOSHOW, a tool to showcase inventory on dealer Web sites; and

- SERVICE SOLUTION 2-1-1, a collection of services that provide automatic
e-mail reminders to dealers' customers to bring their vehicles in for
service.

We believe a critical element of successfully marketing to consumers of
automotive products and services over the Internet is timely and relevant
communication. Our Internet-based editing and management tools allow our clients
to customize and update their Web sites continuously. To help our clients
understand the nature and sources of their Web traffic and to plan effective
online promotions, we offer tools that give our clients access to information
with which they can better understand their customers' behavior and preferences.
Our Lead Manager tool allows our clients to organize and track Internet sales
leads and enables them to manage prospective customers and follow-up activities
more effectively. Proactive customer communication is facilitated with services
that send e-mail to customers with service appointment and service schedule
reminders. By facilitating effective customer interaction, both pre- and
post-sale, our services support the management of customer relationships. In
addition, we believe that effective use of the Internet as a communication
medium can increase the efficiency and productivity of, and reduce turnover
among, a dealership's sales staff.

BUSINESS-TO-BUSINESS NETWORK SERVICES

We provide our clients with services that leverage the size of our client
base. Our MotorPlace.com business-to-business vertical portal aggregates vehicle
and parts data from across our client network to facilitate dealer transactions
and also provides information services such as daily automotive and national
news, sports scores, stock quotes and weather. Our data aggregation and
management capabilities leverage our client network to facilitate
business-to-business transactions by presenting our clients with consolidated,
system-wide vehicle and parts inventory information, collected from disparate
sources and systems, and searchable on a centralized Web site as well as on
individual dealership Web sites. By providing an inexpensive mechanism to market
vehicle and parts inventories to a broad audience, our clients can increase the
frequency of inventory turns, thus reducing obsolescence and financing costs.
Our dealership clients also can manage their inventory to meet customer needs
more effectively and increase the likelihood of closing a sale.

DATA MINING AND DISTRIBUTION

Our systems aggregate, manage and allow access to large quantities of data,
including data relating to customer activities, vehicle and parts inventories
and Internet traffic. The volume of data associated with our client network,
combined with our data acquisition and management expertise, provide us with an
opportunity to mine the data for the benefit of our clients, who can use it in
making informed business decisions. We provide dealers, dealer groups and
manufacturers with detailed reports on Web traffic, and we are able to provide
analyses of patterns that help our clients evaluate the effectiveness of
advertising and promotional campaigns and the sources of their traffic.
Similarly, we provide our clients with data analysis and reporting on vehicle
and parts inventory in our systems. We believe that as the size of our client
network grows, the volume of data and the opportunities for extracting valuable
information from it will increase.

We believe that searchable inventory is a valuable tool for automobile
dealers to use in acquiring Internet leads. We have established a data
distribution network to present our clients' vehicle inventories to automobile
shoppers on the Internet. Partners in our data distribution network include
Internet classifieds sites such as Yahoo!, Excite, InfoSpace, and
BuySellBid.com.

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GROWTH STRATEGY

Our objective is to be the premier provider of Internet solutions and create
the dominant dealer-to-dealer e-commerce network in the automotive retailing
industry. We intend to implement the following strategies to achieve this
objective:

EXPAND OUR CLIENT BASE

We intend to increase our market penetration by educating prospective
clients about the benefits of deploying our Internet marketing and e-commerce
solutions. The recent endorsement of our Web site services by NADA has resulted
in new sales of our Web site and data aggregation services and reflects an
appreciation by the automotive retailing industry of our alignment with
franchised automobile dealers and our understanding of the needs and attributes
of the "online shopper". We believe that we can leverage our reputation to
continue building key relationships with manufacturers, dealer groups and
individual dealerships. To take advantage of our position within the industry,
we have adopted a consultative approach in our sales and marketing efforts and
seek to be viewed by both current and prospective clients as their e-business
partner of choice.

SELL ADDITIONAL SERVICES TO OUR EXISTING CLIENTS

We seek to enhance our clients' understanding and appreciation of Internet
and business-to-business services and encourage them to upgrade their Web sites
with additional services and new features. We believe that our best informed
clients are the most likely to purchase additional services from us.
Consequently, our sales and marketing activities include recommending service
upgrades that are consistent with a client's e-business strategy, Internet
management capabilities, and budget. In addition, we estimate that less than 10%
of our client base purchase both Internet marketing and data aggregation
services from us. We believe that we have an opportunity to cross-sell our
entire suite of services to clients that currently purchase only one service
from us.

LEVERAGE OUR CLIENT NETWORK AND INCREASE OUR SERVICE OFFERINGS

We are committed to expanding our suite of Internet services to address the
evolving needs of our clients. We have identified a number of opportunities,
such as our MotorPlace.com business-to-business portal, that we believe leverage
our large network of dealership clients, our core competencies in data
acquisition and integration, and our technical and online marketing expertise.
With MotorPlace.com we intend to develop an Internet-based business-to-business
marketplace in which dealers and other industry participants will be able to
buy, sell and trade new and used vehicles, OEM parts and dealership equipment,
as well as other products and services.

PURSUE GROWTH BY ACQUISITIONS

We are continually assessing strategic investments and acquisitions that are
aligned with our goals of increasing our client base, expanding our service
offerings and improving our technology. Our acquisition of PartsVoice in
April 1999 provided us with access to clients representing an additional 8,000
franchises as well as a new suite of services. As a result, we are able to
cross-sell our Internet marketing and data aggregation services to our combined
client base. We expect our January 2000 acquisition of IntegraLink, Inc., a
provider of data acquisition solutions to the automotive industry, to enhance
the data acquisition capabilities of PartsVoice. In addition, the IntegraLink
acquisition provided us with client relationships through which we access the
information management systems of approximately 2,700 additional dealers.

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SERVICE OFFERINGS

We continue to develop and enhance our Internet-based services to enable our
clients to increase profits in all five dealership profit centers (new vehicles,
pre-owned vehicles, service, parts, and finance and insurance).

INTEGRATED WEB SITE SOLUTIONS

The foundation of our service offering is a powerful, cost-effective Web
site. We offer a wide range of features and options that enable our clients to
have a robust e-business platform. Our core Web site solution consists of two
packages, our Web Essentials Package-TM- and our Web Premier Package-TM-, that
allow dealers to select the suite of services that best meets their needs. In
January 2000, versions of our core packages were endorsed by NADA to accelerate
Web site adoption by NADA's dealer members. The NADA Web Essentials Package
provides fundamental Web development and business management tools. Included in
the package are Web site content and hosting, e-mail forms, automated new and
used vehicle inventory listing capabilities, traffic reporting and links to
manufacturer and NADA resources. The NADA Web Premier Package builds on the
Essentials package with advanced tools such as our AdWizard Plus, Lead Manager,
Service Solution 2-1-1 and the PartsVoice parts locator system.

WEB SITE LAYOUT AND CONTENT TEMPLATES. Using our Design Gallery set of Web
site templates, we are able to draw from a collection of layouts with
approximately 100 style and color variations, along with an extensive selection
of splash page options and graphics. Dealers can complement the designs by
providing photos and other images that are specific to the dealership. Once the
layout is determined, we provide our clients with a range of content templates
and format styles that enable them to customize the dealer-specific content of
their online presence and highlight the specific benefits and attributes
associated with their dealerships.

E-MAIL FORMS. We offer a variety of tailored e-mail forms on the Web site
to address specific customer needs and interests, including requests for
financing pre-qualification, service appointments, and price quotes on specific
vehicles. These forms include dynamically generated content, such as information
about a vehicle listing and a photograph of the vehicle about which the customer
has inquired. The forms also solicit context-specific information from the
customer to enhance the shopping experience and ensure that the dealership
receives the information necessary to respond fully and promptly to the inquiry.

DEALER-MANAGED PAGES AND CONTENT LIBRARY. Our integrated Web site tools
include features that allow our clients to build special promotional pages on
their sites quickly and easily using a simple step-by-step program and a wide
array of stylistic templates, vehicle images and logos. Using our ADWIZARD PLUS
tool, dealers can create and post custom, new vehicle display advertisements on
their Web site. Our clients can also create coupons for services and highlight
special offerings and can use our AUTOSHOW tool to showcase inventory on their
Web sites with built-in editing and management tools.

TRAFFIC REPORTER. Our Web site user traffic reporting feature allows our
clients to review activity on their Web sites. Available data include total page
views, addresses of referral sites, and parameters of vehicle searches conducted
by site visitors. This information enables dealers to make informed decisions
about management of their Internet marketing programs and to allocate their
marketing resources more effectively.

LEAD MANAGER. Our Lead Manager product is an Internet-based software tool
that helps dealers save time by organizing and tracking Internet leads and
routing them to dealer sales staff members. By integrating Internet leads from
multiple sources, Lead Manager enables dealers to manage prospective customers
and follow-up activities more effectively. Additional features of Lead Manager
include paging capability to alert dealership employees when a new lead has
entered their system, tools to alert management when leads are not responded to
quickly, and standardized and customizable e-mail responses to customer
inquiries.

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SERVICE SOLUTION 2-1-1. We offer our dealer clients a service that provides
automatic e-mail reminders to customers to bring their vehicles into the
dealership for service. In addition, customers can access recommended service
milestone information online.

BUSINESS-TO-BUSINESS NETWORK SERVICES

MOTORPLACE.COM. In January 2000 we launched MotorPlace.com, a
business-to-business vertical portal for the automotive industry. MotorPlace.com
aggregates vehicle and parts data from across our client network to facilitate
dealer transactions. MotorPlace.com provides access to automobile parts
inventories from our PartsVoice parts locator system and more than 580,000 new
and used vehicles, MotorPlace.com also serves as an access point for several of
our Internet-based Web site and data management tools. To promote MotorPlace.com
as a gathering point for employees of U.S. new car dealerships and other
participants in the automotive industry, we also provide information services
such as daily automotive and national news, sports scores, stock quotes and
weather.

PARTSVOICE. We extract parts inventory data on behalf of our clients from
dealerships representing more than 10,000 dealer franchises, and our database
contains information on more than 46 million parts. Through our PartsVoice parts
locator system manufacturer clients and dealership parts managers can access
this database over the Internet or through an interactive voice response
telephone system to check parts inventories and to locate parts needed by their
customers. In 1999, our parts inventory database received more than 8 million
queries.

DATA EXTRACTION, AGGREGATION AND DISTRIBUTION SERVICES

An important component of our services to our clients is our ability to
extract data from their dealership management information systems, process this
data into standard record structures, and integrate it with data from other
sources into our databases.

VEHICLE INVENTORY DATA EXTRACTION AND DATABASE MANAGEMENT. Our vehicle
inventory data extraction and management service allows dealerships to include a
searchable database of their new and pre-owned vehicle inventory on their Web
sites. In most cases, we can extract basic inventory data from a dealership's
information system, populate the database with this information, and then permit
the dealership to make real time enhancements to their listings by adding
photos, descriptive text or other information.

In addition to making inventory available on a dealer's Web site, we
encourage traffic to our dealer clients' Web sites and enhance the value of
their Internet marketing efforts by distributing their vehicle inventory data
through our data distribution network. Our data distribution network includes
our own consumer automotive portal, DealerNet.com as well as Internet
classifieds sites such as Yahoo!, Excite, InfoSpace, BuySellBid.com,
Usedcars.com and Cartrackers.com. These outlets for dealer inventory generate
visibility for our dealership clients' inventories of new and pre-owned vehicles
and increase traffic to their Web sites.

PARTS INVENTORY AND SERVICE RECORD DATA EXTRACTION AND DATABASE
MANAGEMENT. Collecting data from automobile dealer information systems and
effectively managing that data is a complex task in which we believe that we
have considerable expertise. In connection with providing parts locating
services, our PartsVoice subsidiary collects and processes parts inventory data
from clients holding more than 7,900 franchises. Our acquisition of IntegraLink
in January 2000, a leader in extracting data from dealership information
systems, has added to our expertise in extracting and normalizing service
record, vehicle and parts sales and inventory data. In 1999 we introduced a
service record extraction and decoding service. This service extracts individual
vehicle service records from dealership information systems and converts
disparate dealership labor operations codes into a standard set of codes, making
it possible to review service record information across a network of dealer
databases. This process enables automobile manufacturers to aggregate vehicle
service records across their entire dealership network. We currently

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provide this service to DaimlerChrysler through our PartsVoice subsidiary and
similar services through our IntegraLink subsidiary.

ADDITIONAL DATA EXTRACTION SERVICES. We also perform customized data
extraction and aggregation tasks for our manufacturer clients, such as
dealership sales and financial performance and parts sales history reporting.

CREATIVE AND DEVELOPMENT SERVICES

Many of our clients request custom solutions or service upgrades to enhance
our standard dealership Web site system. For example, dealer group Web sites
generally require significant custom design and development work to enable
prospective customers to access information about multiple franchises and
dealerships as well as search the aggregated inventory of all dealerships in the
group on one central site. We provide these custom development services on a
per-project basis and typically charge fees based on the anticipated staff time
required to complete the project.

TRAINING AND SUPPORT

We offer both fee-based and complimentary training programs for our clients
to educate dealership and dealer group owners, managers, and sales staff,
manufacturer marketing personnel, and other client personnel about implementing
an effective Internet marketing program. In addition, our direct sales
consultants, service consultants and Web site advisors meet with clients to
provide one-on-one training and our customer service staff provides telephone
support to our clients to address technical questions about our services that
may arise from time to time.

CLIENTS

INDIVIDUAL DEALERSHIPS

We have designed, developed and currently maintain approximately 5,200 Web
sites for clients holding more than 7,000 new vehicle franchises. Our vehicle
parts data services are used by clients holding more than 10,000 vehicle
franchises. Fewer than 10% of our clients purchase both services, and we believe
that we have the opportunity to strengthen our relationships with our dealership
clients by cross-selling our other services to clients that currently purchase
only one category of service from us.

MULTI-FRANCHISE DEALER GROUPS

Dealer groups are networks of franchised dealerships under common ownership
and management. In general, marketing strategies for dealer groups are designed
and implemented on a centralized basis. Our Internet solutions are particularly
applicable to the needs of both large dealership consolidation companies and
smaller, regional dealership groups that recognize the need to aggressively
establish their companies' online brand identities and implement Internet
marketing programs across their dealership networks. We provide services to more
than 50 of the 100 largest multi-franchise dealer groups in the United States
including seven of the ten largest multi-franchise dealer groups as ranked by
AUTOMOTIVE NEWs: AutoNation, Inc., Hendrick Automotive Group, Holman Automotive,
Group One Automotive, Planet Automotive, Sonic Automotive Inc., and United Auto
Group Inc.

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MANUFACTURERS

We are the manufacturer-endorsed provider of Web site solutions for the U.S.
dealership networks of Acura, Audi, Infiniti, Jaguar, Lexus, Mercedes-Benz,
Mitsubishi, Nissan, Saab, Subaru, Toyota and Volkswagen. In addition, we are a
provider of vehicle parts data services to DaimlerChrysler, Hyundai, Kia, Mazda,
Mitsubishi, Subaru and Toyota. We intend to cross-sell our service offerings to
our current manufacturer clients, and continue to pursue relationships with
other manufacturers to expand our client base.

OTHER CLIENTS

Within the automotive retailing industry, we provide Internet marketing
services to single- and multi-franchise regional dealership associations. The
Western Washington Toyota Dealers Association, Infiniti West Region, and the Bay
Area Nissan Retailers have each established an online presence to promote their
members' individual sales and marketing programs.

We also provide Web site services to the U.S. heavy equipment dealer network
of The Case/ International Harvester Corporation. We believe that there are a
number of other dealer-based industries with attributes similar to the
automotive retailing industry that would benefit from our Internet solution.

SALES AND MARKETING

Our sales and marketing staff is responsible for sales to and support of our
individual dealership, dealer group and manufacturer clients.

MARKETING ORGANIZATION. Our marketing staff consists of professionals who
are principally responsible for initiating and managing our relationships with
automobile manufacturers and large dealer groups, as well as for marketing
communications, advertising and promotional activities. Relationships are
initiated with automobile manufacturer and dealer group clients by senior
marketing staff, and, once a relationship is established the client is assigned
to a specific account executive that is responsible for that relationship. The
account executive consults with the client's marketing managers in developing an
Internet marketing plan, and helps the client understand the value of our
integrated Web site solutions, applications and data aggregation and management
capabilities.

SALES AND SERVICE ORGANIZATION. Our field sales and client service staff is
composed of sales consultants who are principally responsible for initiating
direct contact with our individual dealership and smaller dealer group clients
and Web site advisors who are responsible for maintaining contact with our
dealer clients and helping them to maximize the benefits of our solution. The
field sales organization is organized into 21 geographic territories within six
regions. In addition, we maintain a headquarters-based sales and service team
that is dedicated to supporting our staff in the field and providing customer
service to our dealership clients.

TECHNOLOGY INFRASTRUCTURE

Our technology infrastructure consists of our proprietary Web site
production and publishing system, our data extraction, aggregation and
management tools, our software development capabilities and our Web server and
database management infrastructure.

WEB SITE PRODUCTION AND PUBLISHING

We have developed a hardware and software system and a body of software
tools that enable us to generate large numbers of Web sites with a consistent
look and feel while simultaneously preserving the flexibility to enhance each
site with custom content and features. Our Web site production and publishing
system has enabled us to launch and maintain thousands of individual dealership
Web sites in connection with automobile manufacturer and dealer group Internet
marketing initiatives.

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DATA EXTRACTION, AGGREGATION AND MANAGEMENT

We also have developed tools to collect, aggregate and manipulate
efficiently large quantities of data from disparate sources. We currently
extract data from a variety of dealership information systems, and we also
collect data from our manufacturer and dealer group clients. In addition, we
provide our dealer clients with tools to modify and enhance their inventory data
when it resides in our database. We then aggregate data from these disparate
sources to provide access to and searchability of our dealer clients' vehicle
and parts inventory across our entire dealer network, to defined groups of our
dealer clients, or to individual dealers.

SOFTWARE DEVELOPMENT

We believe that strong software development capabilities are essential to
implementing our strategy of expanding our customer base successfully, selling
more of our services to our existing customers and expanding our service
offerings. We spend a substantial amount of time and resources on the
development of new services. In an effort to increase our ability to develop and
bring new services to market rapidly, we maintain an Austin, Texas office
dedicated to new services development. In addition, we work to enhance our
existing suite of services. We believe that our future success will depend in
significant part on our ability to improve the performance, functionality and
reliability of our Internet marketing, e-commerce and data aggregation and
management services.

WEB SERVER AND DATABASE MANAGEMENT

The demands on our Web site publishing system have increased rapidly with
the increase in the number of Web sites maintained on our system, the traffic
loads on our Web servers, and the volume of queries to our database servers. Our
Web site production and publishing system resides on a range of Web and database
servers. We currently have database servers running the Oracle database on Sun
hardware. We also operate Digital Equipment VAX servers. This hardware and
software support the system that maintains all the Web sites we create, as well
as manage the vehicle inventory, parts inventory and other data employed in our
data aggregation services. We have invested significantly in hardware and
software to support the rapid growth in demands on our hardware and software
infrastructure and we continually strive to improve the capacity, efficiency,
and performance of our systems. We believe that we have established a scalable
technology platform, and we anticipate that continued growth in demands on our
system will require substantial additional investments.

Our Internet connectivity is established through our bandwidth provider's
multiple and redundant private network access points to the Internet backbone.
Our system hardware is housed in locked, climate controlled, dedicated rooms at
facilities in Seattle, Washington, Portland, Oregon and Columbus, Ohio. Security
is provided through features inherent in our operating systems.

COMPETITION

Our Internet marketing services compete directly with services offered by
local and regional Web site development firms, with companies that have a
national presence such as AutoTrader.com, and indirectly with advertising
agencies. In February 2000, Ford Motor Company and Trilogy Software announced a
joint venture to operate all of Ford's consumer-oriented Web sites, including
dealer Web sites. We may also be perceived by some dealerships to compete with
automobile sales lead generation services such as autobytel.com, AutoVantage,
CarPoint and Autoweb.com, if these dealerships maintain a distinct Internet
marketing budget. We believe that the endorsement of our Web site solutions by
NADA and our manufacturer clients differentiates us from our competition. In
addition, we believe that we currently do not have a direct competitor in our
Internet marketing services business that has market penetration, geographic
coverage, service offerings, technical expertise and infrastructure comparable
to ours.

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Our data aggregation and management services compete with data aggregation
service providers such as The Reynolds and Reynolds Company and Automatic Data
Processing, or ADP. Several new companies such as Parts.com, Carparts.com,
Autovia and Carstation.com, have entered the automotive parts e-commerce
business and are both potential competitors and partners for our PartsVoice
subsidiary. In February 2000, ADP, CCC Information Services Inc. and The
Reynolds and Reynolds Company announced plans to form an independent company
that will develop an electronic parts network to link buyers and sellers. If
implemented, this initiative could significantly affect usage of the PartsVoice
parts locator service unless we respond with a similar initiative. To this end,
we are working to leverage the market position our parts locating services enjoy
and to increase the capabilities of our existing client network with parts
trading and other e-commerce services.

It is possible that, in the future, some or all automobile manufacturers
could attempt to provide services comparable to those that we provide to our
dealership clients. In such an event, our ability to retain our dealership
clients would be impaired. For example, if implemented successfully, the
Ford-Trilogy joint venture could reduce our revenues for Internet marketing
services to Ford dealers. While we believe that we will be able to leverage our
expertise and dealership network to provide better quality services at lower
cost than dealerships likely would receive from an automobile manufacturer, we
cannot be certain that we will be successful in doing so, or that our
manufacturer clients will not attempt to bring such services in-house for other
reasons beyond our control.

Our recently launched MotorPlace.com business-to-business portal faces
competition from data services providers such as ADP, from automobile
manufacturer supply chain rationalization efforts and from new entities such as
bbcn.com and USAutonews.com. While we have a client base already using the
MotorPlace.com site and are actively pursuing partnerships to enhance the
capabilities and value of MotorPlace.com, we can not assure you that these
efforts will be successful.

While the market for Internet-related services is competitive, we believe
the following factors will contribute to our future success in providing such
services to the automotive industry:

- our ability to offer an integrated, comprehensive Internet solution;

- our cooperative relationships with a significant number of dealerships,
dealer groups, manufacturers and NADA;

- the depth and breadth of our industry expertise;

- our proprietary technology and technical expertise; and

- our commitment to customer service.

The market for providing Internet marketing services is relatively new and
rapidly evolving. We anticipate competition in the market for automotive
retailing industry Internet services will increase over time. Barriers to entry
on the Internet are relatively low, and we may face competitive pressures from
numerous companies, particularly those with existing data aggregation
capabilities that may be easily integrated with Internet services. Furthermore,
our existing and potential competitors may develop offerings that are perceived
as better than our services or otherwise achieve greater market acceptance.

INTELLECTUAL PROPERTY

We regard substantial elements of our service offerings as proprietary and
believe that they are protected by intellectual property rights including
trademark, service mark, copyright, and trade secret laws, and contractual
restrictions on their use by licensees and others. Although from time to time we
may apply for registration of our trademarks, service marks, and copyrights with
the appropriate U.S. agencies, we do not rely on such registrations for the
protection of these intellectual property rights. We often enter into
confidentiality agreements with our employees and consultants and with third
parties in connection with our business operations and services offerings. These
confidentiality agreements generally seek to

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control access to, and distribution of, our technology, documentation, and other
confidential information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use or disclose to others our
confidential information without authorization or to develop similar technology
independently. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or trademarks or to
determine the validity and scope of the intellectual property rights of others.
Furthermore, our business activities may infringe upon the proprietary rights of
others and other parties may assert infringement claims against us, including
claims that arise from directly or indirectly providing hyper-text links to Web
sites operated by third parties. Moreover, from time to time, we may be subject
to claims of alleged infringement by us or our clients of the patents,
trademarks, service marks and other intellectual property rights of third
parties. These claims and any resultant litigation, should it occur, might
subject us to significant liability for damages, might result in invalidation of
our intellectual property rights and, even if not meritorious, could result in
substantial costs and diversion of resources and management attention and have a
material adverse effect on our business, results of operations and financial
condition.

We currently license from third parties technologies and information
incorporated into our products and services. As we continue to introduce new
services that incorporate new technologies and information, we may be required
to license additional technology and information from others. We cannot assure
you that these third-party technology and information licenses will continue to
be available to us on commercially reasonable terms, if at all. Additionally, we
cannot assure you that the third parties from which we currently license our
technology and information will be able to defend their proprietary rights
successfully against claims of infringement or invalidity. If any of these
technology and information licenses are not available to us in the future, we
may be delayed in introducing, or fail to introduce, new features, functions or
services. It could also adversely affect the performance of our existing
services until equivalent technology or information can be identified, obtained
and integrated.

EMPLOYEES

As of March 17, 2000, we had 361 full time employees. We also engage
independent contractors primarily for database management, Web site production,
and programming activities. We consider our relations with our employees to be
good. We have never had a work stoppage, and no employees are represented under
collective bargaining agreements.

RISK FACTORS

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

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

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

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

We began offering our services in November 1995. We must achieve broad
market acceptance of our services and continue to expand our service offerings
for our business to succeed. Our client base represents only a small percentage
of the total franchised automobile dealer community in the United States, and
many of our dealer clients have been clients for only a short time. Furthermore,
several of our newest product offerings and strategic initiatives, including our
MotorPlace.com business-to-business portal, 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.

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

We have incurred net losses each year since we began operations and we
expect that we will not be profitable at least through 2000. 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
$16.5 million for the year ended December 31, 1999. As of that date, we had an
accumulated deficit of $41.4 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 to achieve and maintain profitability.

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

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

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

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

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

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

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

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For our business to succeed, we must continue to develop relationships with
franchised dealerships and multi-franchise dealer groups. We derive a
substantial portion of our revenues from fees paid by our automobile dealership
clients and our future growth depends in part on expanding our base of
dealership clients. We also must maintain close working relationships with
manufacturers. While we have established relationships with a number of
manufacturers, these relationships are relatively new and we have little
experience in maintaining them. In addition, manufacturers may elect to
implement their own Internet strategies, which could reduce our potential client
base. For example, during 1999 Hyundai elected to terminate its endorsement of
our Web site services to its franchised dealers.

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

Our service agreements with dealerships generally are short-term and
cancelable on 30 days' notice. To be successful, we will need to maintain low
dealership client turnover. During 1999, 348 Web sites, or approximately 7% of
our total Web sites as of year-end, were terminated. Our rate of dealership
client turnover may fluctuate from period to period, and may exceed recent
levels. A material decrease in the number of dealerships purchasing our services
could have a material adverse effect on our business, results of operations and
financial condition.

WE EXPEND CONSIDERABLE RESOURCES IN THE DEVELOPMENT OF NEW SERVICES AND THE
PURSUIT OF NEW 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.

The time, expense and effort of developing and implementing new services and
new strategic initiatives may exceed our expectations. The length of the
development cycle varies depending on the nature and complexity of the product
or initiative, the availability of development, marketing and other internal
resources and the responsiveness of strategic or technology partners, but can
range from four to eighteen months. Larger or more complex products or
initiatives such as MotorPlace.com tend to have longer development cycles.

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

Our data aggregation and management services compete with data aggregation
service providers such as The Reynolds and Reynolds Company, ADP and Digital
Motorworks. Several new companies such as Parts.com, Carparts.com, Autovia and
Carstation.com, have entered the automotive parts e-commerce business and are
potential competitors for our PartsVoice operation. In February 2000, ADP, CCC
Information Services Inc., and The Reynolds and Reynolds Company announced plans
to form an independent company that will develop an electronic parts network to
link buyers and sellers. If implemented, this initiative could adversely affect
usage of the PartsVoice parts locator service. Our recently launched
Motorplace.com business to business portal faces competition from both data
services providers such as ADP, from automobile manufacturer supply chain
rationalization efforts and from startups such as bbcn.com and USAutonews.com.

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

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

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

It is possible that some or all automobile manufacturers may attempt to
provide services comparable to those that we provide to our clients. If this
occurs, our ability to maintain or expand our client base and revenues will be
impaired. In 1997, DaimlerChrysler announced an internal initiative to bring
elements of our parts locator service in-house. This initiative could
significantly reduce our contract revenues from parts data services that we
currently provide to DaimlerChrysler dealers. In 1998, DaimlerChrysler elected
to host the parts locator data internally, although we continue to extract and
aggregate parts inventory from its dealers. In 1999, revenues from parts data
services provided to the MOPAR division of DaimlerChrysler represented
approximately 13% of our total revenues. Similarly, if implemented, the
Ford-Trilogy venture could reduce our revenues for Internet marketing services
to Ford dealers. At December 31, 1999, 200 of our clients were Ford dealers
which represented approximately 4% of our total clients.

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 marketing services to the automobile industry and to manage
future growth will require us to continue to improve our operational systems,
software development organization and our financial and management controls,
reporting systems and procedures. We may fail to make these improvements
effectively. Additionally, our efforts to make these improvements may divert the
focus of our personnel. For example, our conversion to a new database system in
late 1998 through early 1999 diverted the focus of our sales personnel from
selling our services to maintaining current client relationships. We believe
that this diversion contributed to the lower revenue growth rate that we
experienced during the first quarter of 1999, as compared to the fourth quarter
of 1998.

We recently have hired a significant number of new employees, including key
executives, and we will continue to add personnel to maintain our ability to
grow in the future. For example, our Vice Presidents of Business Development and
Product Management, and Field Sales and our General Counsel, each have been with
us for one year or less. 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

THE FAILURE TO EFFECTIVELY MANAGE AND EXPAND OUR SALES AND MARKETING
ORGANIZATION COULD IMPEDE MARKET ACCEPTANCE OF OUR SERVICES AND NEGATIVELY
AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.

Our business, results of operations and financial condition will be
materially adversely affected if we fail to expand our sales and marketing
infrastructure and resources. In 1999 we reorganized our sales force to include
a distributed field sales organization covering a large number of geographic
territories and regions.

We have very limited experience operating and managing a distributed sales
organization. In addition, we expect to continue expanding our
headquarters-based sales and customer support organization. Our future revenue
growth will depend in large part on our ability to recruit, train and manage
sales and marketing personnel and expand those organizations. We have
experienced and may continue to experience difficulty in recruiting qualified
sales and marketing personnel. We may not be able to successfully expand and
manage our direct sales force and distribution channels and this expansion, if
it occurs, may not result in increased revenues.

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

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

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alternatives to Internet-based information retrieval. Furthermore, the recent
growth in Internet traffic generally has caused periods of decreased
performance. If Internet usage continues to increase rapidly, the Internet
infrastructure may not be able to support the demands placed on it by this
growth and its performance and reliability may decline. If Internet delays occur
frequently, overall Internet usage or usage of our clients' Web sites could
increase more slowly or not at all.

Our future success and revenue growth will depend substantially upon
continued growth in the use of the Internet for effecting commercial
transactions. Security concerns, response times and other concerns may result in
the Internet proving not to be a viable commercial marketing medium for vehicles
and related products and services. If use of the Internet does not continue to
increase, our business, results of operations and financial condition would be
materially and adversely affected.

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

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

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

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

In addition, our operations depend upon our ability to maintain and protect
our computer systems, which are located at facilities in Seattle, Washington,
Portland, Oregon, 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 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 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.

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

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

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

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

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

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

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

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

20
<PAGE>
could incur significant costs in investigating and defending against these
claims and our reputation could suffer dramatically. While we believe our
insurance is adequate, our general liability insurance and contractual indemnity
and disclaimer provisions may not cover all potential claims to which we are
exposed and may not be adequate to indemnify us for all liability that may be
imposed. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on our
business, results of operations and financial condition.

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

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

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

As of March 17, 2000, E.M. Warburg, Pincus & Co., LLC beneficially owned
approximately 45.2% of our common stock and is able to exercise significant
influence over us, including on matters submitted to our shareholders for a
vote, such as:

--the election of our board of directors;

--the removal of any of our directors;

--the amendment of our articles of incorporation or bylaws; and

-- the adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving us.

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

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

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

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

Our articles of incorporation provide for the division of our board of
directors into three classes, as nearly equal in number as possible, with the
directors in each class serving for a three-year term, and one class being
elected each year by our shareholders. Directors may be removed only for cause.
Because this system of electing and removing directors generally makes it more
difficult for shareholders to replace a

21
<PAGE>
majority of the board of directors, it may tend to discourage a third party from
making a tender offer or otherwise attempting to gain control of Cobalt.

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

-- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;

-- termination of 5% or more of the employees of the corporation as a result
of the acquiring person's acquisition of 10% or more of the shares; and

--allowing the acquiring person to receive any disproportionate benefit as a
shareholder.

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

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

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 services by us
or our competitors, market conditions in the automobile industry, changes in
financial estimates by securities analysts or other events or factors, many of
which are beyond our control. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology and services companies and
that often have been unrelated to the operating performance of these companies.

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

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

22
<PAGE>
ITEM 2. PROPERTIES

In January 2000 we relocated our principal offices, which total
approximately 76,000 square feet and are located in Seattle, Washington. Under
the current lease, which commenced on August 24, 1999, and expires on
December 31, 2005, we pay a monthly base rent of $133,128 until November 2000,
with annual increases thereafter. We have both the right to extend the lease for
two additional five-year terms and the right of first opportunity on adjacent
expansion space. We also lease approximately 2,700 square feet of office space
in Austin, Texas with a monthly base rent of $4,893 until November 2000, with
annual increases thereafter. This lease expires on September 30, 2002

Our PartsVoice subsidiary operates from approximately 9,120 square feet of
office space in Portland, Oregon, that is leased through November 30, 2002 at a
monthly base rent of $11,780 until November 2000, with annual increases
thereafter. Our IntegraLink subsidiary occupies office space in Columbus, Ohio
pursuant to an operating agreement through January 2001.

We believe that this space is adequate to meet our needs for the present,
and that additional or substitute space will be available as needed to
accommodate any expansion of our operations.

ITEM 3. LEGAL PROCEEDINGS

There are no claims or actions pending against us, the ultimate disposition
of which would have a material adverse effect on our business, results of
operations and financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to the
executive officers of the Company as of March 17, 2000.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
John W.P. Holt President, Chief Executive Officer and
43 Director

David M. Douglass 43 Chief Financial Officer, Executive Vice
President and Secretary

Rajan Krishnamurty 42 Chief Technology Officer and Executive
Vice President

Joseph W. Petrucci 41 Vice President, Field Sales

David L. Potts 38 Vice President, Business Development and
Product Management
</TABLE>

MR. HOLT co-founded Cobalt in March 1995. He has served as its President and
Chief Executive Officer since January 2000 and as a Director since inception.
From the Company's inception to January 2000, Mr. Holt served as Co-Chief
Executive Officer. From March 1994 to February 1995, Mr. Holt was Director of
Affiliate Label Publishing for IVI Publishing, Inc. where he developed and
directed IVI's affiliate label publishing program. From 1989 to 1993, Mr. Holt
served as Vice President of Growth and Development at Oceantrawl Inc., a seafood
processing company. Mr. Holt holds an M.P.P.M. degree from The Yale School of
Organization and Management and a B.A. degree in English from Bowdoin College.

MR. DOUGLASS has served as Cobalt's Chief Financial Officer since
July 1998, as Executive Vice President since January 2000 and Secretary since
May 1999. From July 1998 to January 2000 Mr. Douglass

23
<PAGE>
served as Cobalt's Vice President of Operations. From 1977 to 1998,
Mr. Douglass was employed by PACCAR Inc, a heavy-duty truck manufacturer
encompassing the Kenworth, Peterbilt, Foden and DAF nameplates. His positions
included Managing Director of Foden Trucks, Director of Internal Audit--PACCAR,
and National Dealer Development Manager--Peterbilt Motors. Mr. Douglass holds an
M.B.A. degree from the University of Washington and a B.A. degree in Economics
and Finance from the University of Puget Sound.

MR. KRISHNAMURTY has served as Cobalt's Chief Technology Officer and
Executive Vice President since January 2000. From December 1998 to
January 2000, Mr. Krishnamurty served as Cobalt's Vice President of Development.
From 1997 to 1998, Mr. Krishnamurty was a Manager of Test Execution for Perot
Systems, a software services and consulting company. Before joining Perot
Systems Corporation, from December 1976 to July 1997, Mr. Krishnamurty held
various management positions at International Business Machines Corporation,
including General Manager of Professional Services, India, and Program Director
of Power Personal Systems in Austin, Texas, where he was responsible for key
software solutions to differentiate Power PC-based systems. Mr. Krishnamurty
holds an M.S. degree in Electrical Engineering from the University of Texas and
a B.S. degree in Electrical Engineering from the University of Houston.

MR. PETRUCCI has served as Cobalt's Vice President of Field Sales since
June1999. From April 1999 to June 1999 Mr. Petrucci was Cobalt's Director of
Sales. From January 1990 to April 1999 Mr. Petrucci was employed by Etak, Inc.,
a provider of digital mapping services. His positions included: Vice President
of Sales; Vice President of Sales & Marketing; Director of Internet Sales;
Director of Western Region Sales and Western Region Sales Manager. Prior to his
tenure at Etak, Mr. Petrucci was a member of Stanford University's teaching
staff and held the positions of Director of Marine Development and Director of
Sailing from September 1980 to March 1989. Mr. Petrucci has a B.A. degree in
Economics and Geology from Tufts University.

MR. POTTS has served as Cobalt's Vice President of Business Development and
Product Management since January 2000. From April 1999 to January 2000,
Mr. Potts was Cobalt's Vice President of Business Development. From 1996 to
1999, Mr. Potts was a Managing Director for 2Bridge Software where he was
responsible for sales, product management and professional services development.
From 1995 to 1996, Mr. Potts was Vice President of Multimedia Business
Development for Dataware Technologies, Inc. In 1992, Mr. Potts co-founded Ledge
Multimedia, a CD-Rom production company where he served as Executive Vice
President until 1995. Mr. Potts holds an M.A. degree in Law & Diplomacy from the
Fletcher School at Tufts University and a B.A. degree in History from the
University of Virginia.

24
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

MARKET INFORMATION AND DIVIDENDS

Cobalt's common stock is traded on the Nasdaq National Market under the
symbol CBLT. On March 17, 2000, we had 17,180,929 shares of common stock
outstanding which were held by 120 holders of record. We have not paid cash
dividends on our common stock. We currently anticipate that we will retain all
available funds for use in our business and do not anticipate paying any cash
dividends on our common stock in the foreseeable future. The quarterly high, low
and closing sales prices of the common stock for the periods indicated are as
follows:

<TABLE>
<CAPTION>
1999
HIGH LOW CLOSE
-------- -------- --------
<S> <C> <C> <C>
Third Quarter............................................... $18.50 $7.313 $9.656
Fourth Quarter.............................................. $10.50 $ 5.50 $9.375
</TABLE>

On March 17, 2000 the closing sale price for the common stock was $13.875.

25
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES

Between January 1, 1999 and December 31, 1999, we issued and sold the
following unregistered securities on the dates and for the consideration
indicated:

During the period from January 1, 1999 through September 7, 1999, Cobalt
granted options to purchase an aggregate of 1,244,068 shares of common stock
pursuant to its stock option plan at various exercise prices between $0.75 per
share and $11.00 per share. These options and the shares issued on the exercise
of such options were granted in reliance on the exemption from registration
provided under Rule 701 under the Securities Act.

On April 30, 1999, Cobalt issued and sold 12,500 shares of Series C
Preferred Stock to Howard Tullman, a Director of Cobalt. Also on April 30, 1999,
Cobalt issued and sold 500,000 shares of Series C Preferred Stock to two
entities that previously held equity in PartsVoice, LLC and warrants to purchase
160,000 shares of common stock at an exercise price of $6.00 per share to those
same two entities and a third entity that previously held equity in PartsVoice
LLC for an aggregate consideration of $4.1 million. Sales of the Series C
Preferred Stock and the warrants were made in reliance on the exemption from
registration provided by Rule 506 of Regulation D under the Securities Act.

All shares of Cobalt's preferred stock were converted into common stock on a
one-for-one basis upon the effectiveness of Cobalt's initial public offering in
August 1999.

USE OF PROCEEDS

On August 4, 1999, Cobalt's registration statement on Form S-1, file
No. 333-79483, became effective. As of December 31, 1999, we realized and used
the proceeds from our initial public offering as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Proceeds from sale of 4,500,000 shares, less underwriters'
discounts of $3,465,000................................... $46,035
Proceeds from the direct sale to General Electric Capital
Assurance Company......................................... 5,000
Expenses related to the initial public offering............. (1,259)
-------
Total proceeds.............................................. $49,776
=======
Use of proceeds:
Repayment of PartsVoice acquisition notes................... $23,000
Repayment of notes payable.................................. 3,600
Payment of preferred stock dividends to related parties..... 2,100
Payment of management fee to related party.................. 150
Acquisition of capital assets............................... 1,103
Working capital............................................. 5,599
-------
Use of proceeds............................................. $35,552
=======
</TABLE>

The balance of proceeds has been invested in investments with maturities of
less than one year.

26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read together with the
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Form 10-K.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, INCEPTION
----------------------------------------- (MARCH 17, 1995) TO
1999 1998 1997 1996 DECEMBER 31, 1995
-------- -------- -------- -------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 23,286 $ 6,245 $ 1,711 $ 312 $ 70
Cost of revenues......................... 4,819 1,199 285 51 16
-------- ------- ------- ------ ------
Gross profit........................... 18,467 5,046 1,426 261 54
Operating expenses
Sales and marketing.................... 11,591 4,048 1,740 286 55
Product development.................... 3,168 961 361 125 39
General and administrative............. 13,199 4,328 1,592 676 375
Amortization of intangible assets...... 3,696 299 22 -- --
Stock based compensation............... 2,806 806 406 -- --
-------- ------- ------- ------ ------
Total operating expenses............. 34,460 10,442 4,121 1,087 469
-------- ------- ------- ------ ------
Loss from operations..................... (15,993) (5,396) (2,695) (826) (415)
Gain on sale of HomeScout................ -- 1,626 -- -- --
Common and preferred stock repurchase
premium................................ -- (1,384) -- -- --
Interest expense......................... (993) (93) (17) (2) --
Other income, net........................ 485 142 47 -- --
-------- ------- ------- ------ ------
Net loss................................. $(16,501) $(5,105) $(2,665) $ (828) $ (415)
======== ======= ======= ====== ======
Basic and diluted net loss per share..... $ (2.26) $ (4.74) $ (0.77) $(0.24) $(0.24)
======== ======= ======= ====== ======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $ 14,224 $ 5,756 $ 241 $ 4 $ 2
Working capital (deficit)............... 13,828 5,534 (1,264) (712) (235)
Total assets............................ 54,032 10,062 1,951 168 22
Long-term obligations, net of current
portion............................... 1,245 557 424 51 --
Mandatorily redeemable convertible
preferred stock....................... -- 31,162 2,439 -- --
Total shareholders' equity (deficit).... 45,585 (24,242) (2,897) (651) (219)
</TABLE>

27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

OVERVIEW

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

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

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

In April 1999, we acquired PartsVoice, LLC, an Oregon limited liability
company, whose principal business is vehicle parts data acquisition and
management services. The purchase price, including transaction expenses of
$281,000, was $30.7 million, of which $26.0 million was paid in cash and notes
and $4.4 million was paid by issuance of preferred stock and warrants. Upon
closing of the initial public offering, the preferred stock was converted to
common stock, and the notes were paid in full. See "--Liquidity and Capital
Resources," and Note 2 of Notes to the Consolidated Financial Statements. The
PartsVoice acquisition was accounted for as a purchase transaction.

In January 2000 we purchased the assets of IntegraLink, Inc. This purchase
expanded our client base and enhanced our data extraction capabilities. At
closing, we paid purchase consideration of $1.5 million in cash, promissory
notes in the principal amount of $250,000 due January 14, 2001, and 85,000
shares of Cobalt common stock valued at $22.00 per share.

In January 2000 we sold the assets of our YachtWorld division to Boats.com,
Inc. The sale provides additional capital for future growth and operations of
our core business. The division was sold for cash proceeds of $3.5 million and a
note receivable in the amount of $10.5 million. The note bears interest at

28
<PAGE>
8.0% and is due in three installments during 2000. The first installment of $3.5
million was paid on March 27, 2000. We also acquired warrants to purchase
473,455 shares of Boats.com common stock at $18.91 per share.

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

During 1999 we made substantial investments in infrastructure and in
staffing and management to accommodate current and anticipated future growth. In
this period we increased our headcount by more than 240 employees and invested
approximately $4.4 million in capital assets. A large portion of these assets is
intended to improve our service to clients, including backup computer systems
and more stable and scalable database systems. Our planned growth will require
additional staff, management and infrastructure.

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

Our continued growth and acquisitions of other businesses have placed and
will continue to place a significant strain on our managerial, operational and
financial resources. To manage our anticipated growth, we must continue to
implement and improve our operational and financial systems and must expand,
train and manage our employee base. We may not be able to manage the expansion
of our operations effectively, and our systems, procedures or controls may not
be adequate to support our operations. Any inability to manage growth
effectively could have a material adverse effect on our business, results of
operations and financial condition. See "Business--Risk Factors--Any failure to
manage our growth effectively will adversely affect our business and results of
operations."

We have incurred net losses each year since we began operations. We had a
net loss of $16.5 million for the year ended December 31, 1999, which includes
non-cash charges of $3.7 million in amortization of intangible assets and
$2.8 million in stock-based compensation. We intend to continue our investment
in technology infrastructure development, marketing and promotion, product
development and strategic relationships. As a result, we expect to continue to
incur net losses and negative cash flows from operations at least through 2001.
Our limited operating history makes it difficult to forecast further operating
results. Although our net revenues have grown in recent quarters, we cannot be
certain that net revenues will continue to increase or that they will increase
at a rate sufficient to achieve and maintain profitability. Even if we were to
achieve profitability in any period, we might fail to sustain or increase that
profitability on a quarterly or annual basis. See "Business--Risk Factors--We
have a history of losses and may never achieve or maintain profitability. If we
continue to lose money, our operations may not be financially viable."

29
<PAGE>
RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................... $ 23,286 $ 6,245 $ 1,711
Cost of revenues............................................ 4,819 1,199 285
-------- -------- --------
Gross profit................................................ 18,467 5,046 1,426
Operating expenses
Sales and marketing......................................... 11,591 4,048 1,740
Product development......................................... 3,168 961 361
General and administrative.................................. 13,199 4,328 1,592
Amortization of intangible assets........................... 3,696 299 22
Stock-based compensation.................................... 2,806 806 406
-------- -------- --------
Total operating expenses.................................... 34,460 10,442 4,121
-------- -------- --------
Loss from operations........................................ (15,993) (5,396) (2,695)
Gain on sale of HomeScout................................... -- 1,626 --
Common and preferred stock
repurchase premium.......................................... -- (1,384) --
Interest expense............................................ (993) (93) (17)
Other income, net........................................... 485 142 47
-------- -------- --------
Net loss.................................................... $(16,501) $ (5,105) $ (2,665)
======== ======== ========
</TABLE>

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUES. Our revenues increased to $23.3 million in 1999 from
$6.2 million in 1998. This increase was due in part to a significant net
increase in our client base as well as the sale of additional services to
existing clients, which accounted for $9.0 million, or 53% of the increase.
During 1999 we began offering parts locating services through PartsVoice, which
we acquired in April 1999. These services accounted for $7.3 million or 43% of
the increase in revenues. The increase in our client base is net of dealer
client Web site attrition of 7% for the year ended December 31, 1999 compared
with an attrition rate of 8% for 1998. Attrition rates were determined based on
total dealer Web site clients as of December 31, 1999 and 1998, respectively.

COST OF REVENUES. Cost of revenues increased to $4.8 million in 1999 from
$1.2 million in 1998. Costs related to additional staffing required to
accommodate our growing client base accounted for $1.8 million, or 50% of the
increase. Service delivery costs, which include server costs and telephone
charges, accounted for $908,000, or 25% of the increase. Costs related to sales
of advertising and distribution of vehicle inventory data to third party Web
sites increased proportionally with sales and consituted $796,000, or 22% of the
increase.

Our gross margin percentage decreased to 79% in 1999 from 81% in 1998. We
added a parts locating service to the product mix during 1999, which has a
higher gross margin percentage than our other products. The impact of these
higher margin revenues was offset by the increase in corporate service sales
which, due to an increase in personnel needed to service our manufacturer and
corporate clients, have lower margins. Also during 1999, revenues from sale of
third party products increased, which contributed to lower margins.

SALES AND MARKETING. Sales and marketing costs increased to $11.6 million
in 1999 from $4.0 million in 1998. The increase is primarily due to the growth
in the number of our sales and marketing personnel

30
<PAGE>
and commissions on higher levels of revenue. These costs accounted for
$5.3 million, or 70% of the increase. We also increased spending to promote our
corporate brand by $1.5 million. We expect sales and marketing expenses to
continue to increase as we continue to expand our sales and marketing
organization and seek to expand our presence in the marketplace. Sales and
marketing expenses as a percentage of revenues decreased to 50% in 1999 from 65%
in 1998 due primarily to the significant increase in revenues during the same
period.

PRODUCT DEVELOPMENT. Product development costs increased to $3.2 million in
1999 from $961,000 in 1998. The increase was due to the increase in the number
of our product development personnel. During 1999 we increased our emphasis on
product development initiatives. This was done in part by opening a product
development office in Austin, Texas to take advantage of technology resources in
that region. We expect that product development expenses will continue to
increase in the future as we pursue new strategy initiatives and hire additional
product development personnel.

GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$13.2 million in 1999 from $4.3 million in 1998. These expenses increased
primarily due to the increase in the number of staff and management personnel.
General and administrative spending not directly related to personnel increased
in order to support our overall growth.

AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased to $3.7 million in 1999 from $299,000 in 1998 due to amortization of
the intangible assets related to the PartsVoice acquisition.

STOCK-BASED COMPENSATION. Stock-based compensation costs increased to
$2.8 million in 1999 from $806,000 in 1998. The increase was due to an increase
in the number of options that we granted to employees with exercise prices below
the fair value of the underlying stock and to the vesting of previously issued
options. We do not currently and do not in the future expect to grant options
with exercise prices below fair market value. Because we are no longer granting
options with exercise prices below fair value and because we use an accelerated
method of amortizing deferred compensation expense we expect these charges to
decrease in the future.

NET LOSS. Our net loss was $16.5 million for 1999 compared to $5.1 million
in 1998. Increased operating expenses described above, including the increase in
non-cash charges of $3.4 million for amortization of intangibles and the
increase of $2.0 million for stock-based compensation, offset the increase in
revenues.

PROVISION FOR INCOME TAXES. We incurred operating losses from inception
through December 31, 1999. We have recorded a valuation allowance for the full
amount of our net deferred tax assets based on the available evidence.

As of December 31, 1999, we had net operating loss carryforwards for federal
tax purposes of approximately $17.6 million. These federal tax loss
carry-forwards are available to reduce future taxable income and expire at
various dates through fiscal 2019. Under the provisions of the Internal Revenue
Code, certain substantial changes in our ownership may limit the amount of net
operating loss carry-forwards that could be utilized annually in the future to
offset taxable income. We determined that such a change occurred in
October 1998 and the utilization of loss carryforwards generated through that
period will be limited.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUES. Our revenues increased to $6.2 million in 1998 from $1.7 million
in 1997. This increase in revenues was primarily attributable to substantial
growth in our dealer client base, net of client attrition of 8%. In
December 1997 we acquired the assets of the DealerNet division of The Reynolds
and Reynolds Company for a purchase price of $800,000. These assets included
approximately 600 client contracts.

31
<PAGE>
COST OF REVENUES. Cost of revenues increased to $1.2 million in 1998 from
$285,000 in 1997. The increase in cost of revenues was primarily due to the
increase in costs of resale products of $534,000, which represented 58% of the
increase, the increase in the cost of production and design personnel of
$258,000, which represented 28% of the increase.

SALES AND MARKETING. Sales and marketing expenses increased to
$4.0 million in 1998 from $1.7 million in 1997. Sales and marketing expenses
increased primarily due to personnel and related expenses, which accounted for
$1.9 million, or 83% of the increase. We expanded our sales force and marketing
department to address the substantial increase in our client base and to
position us to reach new clients more effectively. Lesser increases resulted
from expenditures for a program of nationwide corporate branding and
advertising. Sales and marketing expenses as a percentage of revenues decreased
to 65% in 1998 from 102% in 1997 due primarily to the significant increase in
revenues during the same period.

PRODUCT DEVELOPMENT. Product development costs increased to $961,000 in
1998 from $361,000 in 1997. The increase in product development expenses was
attributable to additional product development personnel and related equipment.

GENERAL AND ADMINISTRATIVE. General and administrative costs increased to
$4.3 million in 1998 from $1.6 million in 1997. General and administrative
expenses increased due primarily to additional staff and management personnel
costs, related facilities expenses and increased consulting, legal and
accounting fees.

AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased to $299,000 in 1998 from $22,000 in 1997 due to amortization of the
customer list related to the DealerNet acquisition.

STOCK-BASED COMPENSATION. Stock-based compensation costs increased to
$806,000 in 1998 from $406,000 in 1997. The increase was due to an increase in
the number of options that were granted to employees and non-employees with
exercise prices below the fair value of the underlying stock.

NET LOSS. Our net loss was $5.1 million in 1998 compared to $2.7 million in
1997. Increased operating expenses offset the increase in revenues.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily from sales of
common and preferred stock, cash flows from customer payments and, to a lesser
extent, borrowings under short-term debt facilities. Our initial public offering
and direct sale of common stock in August 1999 yielded proceeds of
$49.8 million, net of underwriters' discounts and expenses. These proceeds were
used to repay the PartsVoice acquisition indebtedness of $23.0 million and
borrowings of $3.6 million outstanding under a line of credit. In addition, we
used approximately $2.1 million of the proceeds to pay dividends on preferred
stock. At December 31, 1999 we had cash and cash equivalents of $14.2 million.

Net cash used in operating activities was $11.4 million in 1999 compared to
$3.8 million in 1998. In each period, cash used in operating activities
consisted primarily of net operating losses after non-cash charges and increases
in operating assets, offset by increases in current liabilities. The increase in
accounts receivable in 1999 reflects the growth in revenues.

Investments in capital assets and PartsVoice totaled $5.2 million in 1999.
In 1998, we received proceeds of $1.6 million from the sale of the assets of our
former HomeScout division and invested $472,000 in capital assets. We have used
lease financing facilities to acquire capital assets in addition to cash
acquisitions. The value of assets acquired under terms of these capital leases
was $2.5 million in 1999 and $959,000 in 1998. In January 2000, we acquired
IntegraLink, Inc. As part of the purchase price, we paid $1.5 million in cash at
closing.

32
<PAGE>
Net cash provided by financing activities was $24.1 million in 1999 compared
to $9.2 million in 1998. In 1999 cash provided by financing activities consisted
primarily of proceeds from the initial public offering and direct sale of common
stock offset by payments of notes and dividends on preferred stock, as described
above. In 1998, net cash provided by financing activities consisted primarily of
proceeds from the issuance of preferred stock net of the repurchase of common
and preferred stock.

As of December 31, 1999, we had total minimum payment obligations of
approximately $14.0 million under long-term noncancellable lease agreements.

During January 2000 we relocated our corporate headquarters. Moving expenses
were $67,000 and our investment in leasehold improvements at the new facilities
was approximately $432,000. We expect our capital asset acquisitions to be
approximately $2.9 million during 2000. We may obtain a credit facility of up to
$2.5 million, which would require minimum cash balances and would be secured by
the assets financed.

We believe that the cash and cash equivalents at December 31, 1999, together
with cash of $7.0 million received from the sale of our YachtWorld division
through March 27, 2000, will be sufficient to meet our cash requirements for the
next twelve months. Depending on our rate of growth and investment in
MotorPlace.com and other e-commerce initiatives, we may require additional
equity or debt financing to meet future working capital needs. We cannot assure
you that such additional financing will be available or, if available, that such
financing can be obtained on satisfactory terms.

YEAR 2000 COMPLIANCE

In order to minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we identified, evaluated, implemented and
tested changes to our computer systems, applications and software necessary to
achieve Year 2000 compliance. Our computer systems and equipment successfully
transitioned to the Year 2000 with no significant issues. We continue to monitor
for latent problems that could surface at key dates or events in the future. We
do not anticipate any significant problems related to these events. Total
expenses related to Year 2000 compliance were not material.

ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The following consolidated financial statements, and the related notes
thereto, of the Cobalt Group and the Report of Independent Accountants are filed
as a part of this Form 10-K.

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... 34
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 35
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... 36
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 38
Notes to the Consolidated Financial Statements.............. 39
</TABLE>

33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of The Cobalt Group, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of The Cobalt Group, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedules listed in the
index appearing under Item 14(a)(2) present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/S/ PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

January 25, 2000

34
<PAGE>
THE COBALT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................... $14,224 $ 5,756
Short-term investments.................................. -- 983
Accounts receivable, net of allowance for doubtful
accounts of $497 and $85, respectively.............. 4,581 1,250
Other current assets.................................... 2,225 130
------- -------
21,030 8,119
Capital assets, net......................................... 4,636 1,453
Intangible assets, net...................................... 27,330 479
Other assets................................................ 1,036 11
------- -------
Total assets........................................ $54,032 $10,062
======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities
Accounts payable........................................ $ 2,020 $ 191
Accrued liabilities..................................... 1,520 776
Deferred revenue........................................ 2,456 1,290
Software financing contract, current portion............ 362 --
Capital lease obligations, current portion.............. 844 328
------- -------
7,202 2,585
------- -------
Non-current liabilities
Software financing contract, non-current portion........ 28 --
Capital lease obligations, non-current portion.......... 1,217 557
------- -------
1,245 557
------- -------
Commitments and contingencies (Note 10)

Mandatorily redeemable convertible preferred stock
Series A; $0.01 par value per share; 0 and 2,106,282
shares issued and outstanding, respectively;
redemption
and liquidation value of $0 and $1,158,
respectively........................................ -- 1,116
Series B; $0.01 par value per share; 0 and 7,047,620
shares issued and outstanding, respectively;
redemption and liquidation value of $0 and $29,600
plus
unpaid dividends, respectively...................... -- 30,046
Series C; $0.01 par value per share, no shares issued
and outstanding........................................ -- --
------- -------
-- 31,162
------- -------
Shareholders' equity (deficit)
Preferred stock; $0.01 par value per share; 100,000,000
shares
authorized; 0 and 9,153,902 shares issued and
outstanding as
mandatorily redeemable convertible preferred stock,
respectively........................................ -- --
Common stock; $0.01 par value per share; 200,000,000
shares
authorized; 16,855,431 and 1,343,898 issued
and outstanding, respectively....................... 169 13
Additional paid-in capital.............................. 89,957 2,435
Deferred compensation................................... (3,036) (1,686)
Notes receivable from shareholders...................... (144) (144)
Accumulated deficit..................................... (41,361) (24,860)
------- -------
Total Shareholders' equity (deficit)........................ 45,585 (24,242)
------- -------
Total liabilities, mandatorily redeemable
convertible preferred
stock and shareholders' equity (deficit)............ $54,032 $10,062
======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

35
<PAGE>
THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Revenues................................................... $ 23,286 $ 6,245 $ 1,711
Cost of revenues........................................... 4,819 1,199 285
---------- --------- ---------
Gross profit............................................. 18,467 5,046 1,426
Operating expenses
Sales and marketing...................................... 11,591 4,048 1,740
Product development...................................... 3,168 961 361
General and administrative............................... 13,199 4,328 1,592
Amortization of intangible assets........................ 3,696 299 22
Stock-based compensation................................. 2,806 806 406
---------- --------- ---------
Total operating expenses............................... 34,460 10,442 4,121
---------- --------- ---------
Loss from operations....................................... (15,993) (5,396) (2,695)
Gain on sale of HomeScout.................................. -- 1,626 --
Common and preferred stock repurchase premium.............. -- (1,384) --
Interest expense........................................... (993) (93) (17)
Other income, net.......................................... 485 142 47
---------- --------- ---------
Net loss................................................... $ (16,501) $ (5,105) $ (2,665)
========== ========= =========
Net loss available to common shareholders.................. $ (18,028) $ (13,930) $ (2,673)
========== ========= =========
Basic and diluted net loss per share....................... $ (2.26) $ (4.74) $ (0.77)
========== ========= =========
Weighted-average shares outstanding........................ 7,971,443 2,938,460 3,485,563
========== ========= =========
Pro forma net loss available to common shareholders
(unaudited).............................................. $ (16,501)
==========
Pro forma basic and diluted net loss per share
(unaudited).............................................. $ (1.22)
==========
Pro forma weighted-average shares outstanding
(unaudited).............................................. 13,519,898
==========
</TABLE>

See accompanying notes to consolidated financial statements.

36
<PAGE>
THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTES
----------------------- PAID-IN DEFERRED RECEIVABLE FROM ACCUMULATED
SHARES PAR VALUE CAPITAL COMPENSATION SHAREHOLDERS DEFICIT TOTAL
----------- --------- ---------- ------------ --------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997..... 3,888,224 $ 39 $ 697 $ -- $ (144) $ (1,243) $ (651)
Net loss........................ (2,665) (2,665)
Issuance of stock options and
warrants to non-employees..... 42 42
Issuance of stock options to
employees..................... 606 (606) --
Amortization of deferred
compensation.................. 406 406
Forfeitures of employee stock
options....................... (53) 53 --
Proceeds from issuance of
stock......................... 6,750 7 7
Contribution of shareholder
services...................... 146 146
Issuance of parity shares....... 119,867 1 16 17
Proceeds from exercise of stock
options....................... 4,771 1 1
Accretion of mandatorily
redeemable convertible
preferred stock............... (8) (8)
Repurchase of common stock...... (613,015) (6) (186) (192)
----------- ---- ------- ------- -------- -------- --------
Balances at December 31, 1997... 3,406,597 34 1,268 (147) (144) (3,908) (2,897)
Net loss........................ (5,105) (5,105)
Issuance of stock options to
employees..................... 2,244 (2,244) --
Amortization of deferred
compensation.................. 532 532
Forfeitures of employee stock
options....................... (173) 173 --
Proceeds from exercise of stock
options....................... 110,507 1 26 27
Accretion of mandatorily
redeemable convertible
preferred stock............... (14) (14)
Repurchase of mandatorily
redeemable convertible
preferred stock............... (8,262) (8,262)
Repurchase of common stock...... (2,173,206) (22) (367) (7,585) (7,974)
Dividends on mandatorily
redeemable convertible
preferred stock............... (549) (549)
----------- ---- ------- ------- -------- -------- --------
Balances at December 31, 1998... 1,343,898 13 2,435 (1,686) (144) (24,860) (24,242)
Net loss........................ (16,501) (16,501)
Issuance of stock options to
employees..................... 5,510 (5,510) --
Issuance of PartsVoice
warrants...................... 381 381
Proceeds from initial public
offering, net................. 4,500,000 45 44,731 44,776
Sale of common stock............ 454,545 5 4,995 5,000
Conversion of preferred
shares........................ 9,666,402 97 34,635 34,732
Amortization of deferred
compensation.................. 2,806 2,806
Forfeitures of employee stock
options....................... (1,354) 1,354 --
Issuance of warrant shares...... 35,108 --
Proceeds from exercise of stock
options....................... 855,478 9 151 160
Accretion of mandatorily
redeemable convertible
preferred stock............... (17) (17)
Dividends on mandatorily
redeemable convertible
preferred stock............... (1,510) (1,510)
----------- ---- ------- ------- -------- -------- --------
Balances at December 31, 1999... 16,855,431 $169 $89,957 $(3,036) $ (144) $(41,361) $ 45,585
=========== ==== ======= ======= ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

37
<PAGE>
THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(16,501) $(5,105) $(2,665)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization............................. 4,988 614 120
Provision for doubtful accounts........................... 412 45 40
Stock-based compensation.................................. 2,806 806 465
Common stock repurchase premium........................... -- 1,384 --
Net (gain) loss on sale of assets......................... 7 (1,617) --
Changes in:
Accounts receivable..................................... (3,743) (836) (451)
Other assets............................................ (3,120) (109) (16)
Accounts payable and accrued liabilities................ 2,573 612 (4)
Deferred revenue........................................ 1,166 393 699
-------- ------- -------
Net cash used in operating activities................... (11,412) (3,813) (1,812)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets............................. (1,885) (472) (349)
Acquisition of PartsVoice................................. (3,281) -- --
Proceeds from sale of HomeScout........................... -- 1,626 --
Short term investments.................................... 983 (983) --
Proceeds from disposal of capital assets.................. -- 5 1
-------- ------- -------
Net cash provided by (used in) investing activities..... (4,183) 176 (348)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering and direct sale of
common stock, net of issuance costs..................... 49,776 -- --
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net of costs............... 100 29,193 2,431
Repurchase of common stock and mandatorily redeemable
convertible preferred stock............................. -- (19,227) (192)
Repayment of notes payable................................ (26,600) (1,200) --
Proceeds from issuance of notes payable................... 3,600 1,000 200
Payments of dividends on preferred stock.................. (2,059) -- --
Payment of capital lease obligation and software
contract................................................ (914) (141) (30)
Proceeds from exercise of stock options................... 160 27 1
Payment of DealerNet acquisition liability................ -- (500) --
Other..................................................... -- -- (13)
-------- ------- -------
Net cash provided by financing activities............... 24,063 9,152 2,397
-------- ------- -------
Net increase in cash and cash equivalents................... 8,468 5,515 237
Cash and cash equivalents, beginning of period.............. 5,756 241 4
-------- ------- -------
Cash and cash equivalents, end of period.................... $ 14,224 $ 5,756 $ 241
======== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

38
<PAGE>
THE COBALT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

NATURE OF THE BUSINESS

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

During 1999 the Company maintained YachtWorld, a marine Web site, which
contains photo listings of yachts for sale on the Web, as well as other
marine-related information. On January 25, 2000 the Company sold this division.

PRINCIPLES OF CONSOLIDATION

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.

CASH AND CASH EQUIVALENTS

The Company considers all short-term highly liquid instruments purchased
within three months of their maturity date to be cash equivalents. The Company
maintains its cash accounts with four financial institutions that are insured by
the Federal Deposit Insurance Corporation up to $100,000.

SHORT-TERM INVESTMENTS

Short-term investments consisted of highly rated commercial paper with
original maturities of between three and six months. These investments are
classified as available-for-sale and are carried at fair value. The fair value
of these securities approximates cost, and there were no material unrealized
gains or losses at December 31, 1998. There were no short-term investments at
December 31, 1999.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, accrued
liabilities, deferred revenue, capital lease obligations and software financing
contract. Except for capital lease obligations and software financing contract
the carrying amounts of financial instruments approximate fair value due to
their short maturities. The fair value of capital lease obligations and software
financing contract at December 31, 1999 and 1998 is not materially different
from the carrying amount, based on interest rates available to the Company for
similar types of arrangements.

39
<PAGE>
CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. Substantially all of the Company's
clients are in the automotive industry. The Company does not require collateral
from its clients. Individual client balances are generally small and clients are
required to pay for Web site service in advance. Due to the nature of the
business, only one client accounted for more than 10% of accounts receivable as
of December 31, 1999 or 10% of net revenues for the year ended December 31,
1999. DaimlerChrysler, including Mercedes-Benz, accounted for 19% of trade
accounts receivable before allowances (receivables) as of December 31, 1999 and
16% of net revenues for the year ended December 31, 1999. No individual client
accounted for more than 10% of accounts receivable as of December 31, 1998 and
1997, or 10% of net revenues for the years ended December 31, 1998 and 1997. The
Company maintains an allowance for doubtful accounts receivable based upon its
historical experience and the expected collectibility of accounts receivable.
Credit losses to date have been within the Company's estimates. The Company has
a cash investment policy which restricts investments to ensure preservation of
principal and maintenance of liquidity.

REVENUE RECOGNITION

The Company derives its revenues from fees charged to its automobile
dealership, dealer group and manufacturer clients for Web site maintenance and
data extraction services, as well as Internet advertising and promotional
services. Web site maintenance, parts locating, and data extraction service
revenue is recognized ratably over the service period. Revenue on initial design
and construction fees and custom projects is recognized at the time of Web site
activation. The Company's obligations for Internet advertising services
typically include guarantees of minimum number of "impressions", or times that
an advertisement is viewed. To the extent minimum guaranteed impressions are not
met, the Company defers recognition of the corresponding revenues until the
remaining guaranteed impression levels are achieved.

The majority of the Company's services are sold to clients under short-term
service agreements with an initial term of six to twelve months and
month-to-month thereafter. Revenues are recognized net of promotional discounts.
Some or all initial services may be offered on a "free trial" basis, generally
for periods of one to three months. Revenue is not recognized until the end of
the free trial period and until the client has agreed to continue services.
Prepayments received for sites not yet activated and services not yet provided
are reported as deferred revenue.

COST OF REVENUES

The Company's cost of revenues consists of the costs associated with
production, maintenance and delivery of the Company's services. These costs
include production and design personnel costs, communication expenses related to
data transfer, fees payable to third parties for distribution of vehicle
inventory data to other Web sites, banner advertising purchased from third party
Web sites and resold to clients, site content licensing fees, and costs of Web
servers used to host client data. These costs also include software and hardware
costs to host and serve data.

PRODUCT DEVELOPMENT

Product development costs represent research and development expenses which
are charged to operations as incurred.

CAPITAL ASSETS

Capital assets consist of computer equipment, furniture and other equipment,
purchased software and leasehold improvements, which are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets or the term of the lease,
whichever is shorter. The useful lives of capital assets range from three to
five years. Maintenance and

40
<PAGE>
repairs, which neither materially add to the value of the asset nor prolong its
life, are charged to expense as incurred.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including but not limited to, capital assets and intangible
assets, when events and circumstances warrant such a review. The carrying value
of a long-lived asset is considered impaired when the anticipated undiscounted
cash flow from such asset is separately identifiable and is less than its
carrying value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed
of are determined in a similar manner, except that fair values are reduced for
the cost to dispose. No losses from impairment have been recognized in the
consolidated financial statements.

ADVERTISING COSTS

Advertising costs include costs of print and Internet banner advertising.
The Company expenses advertising costs when the advertising takes place.
Advertising costs for the years ended December 31, 1999, 1998 and 1997 were
$985,000, $276,000 and $156,000, respectively.

STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" and related interpretations,
and complies with the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force, Issue 96-18.

INCOME TAXES

The Company provides for income taxes using the liability method. This
method requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. If it is more likely than
not that some portion of a deferred tax asset will not be realized, a valuation
allowance is recorded.

NET LOSS PER SHARE AND UNAUDITED PRO FORMA 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
and Series A and B mandatorily redeemable convertible preferred stock. Basic and
diluted net loss per share are equal for the periods presented because the
impact of common stock equivalents is anti-dilutive. Potentially dilutive
securities totaling 1,273,082, 11,259,342 and 6,220,188 shares for the years
ended December 31, 1999, 1998 and 1997, respectively, were excluded from diluted
net loss per share due to their anti-dilutive effect. Common stock options and
warrants are converted using the treasury stock method. Mandatorily redeemable
convertible preferred stock is converted using the if-converted method.

In accordance with EITF Topic D-53, the Company's 1998 net loss available to
common shareholders is increased by $8,262,000 which represents the excess of
the fair value over the carrying value of Series A preferred shares which were
repurchased by the Company during October 1998.

Unaudited pro forma net loss per share is computed using the
weighted-average number of common shares outstanding, including the pro forma
effects of the automatic conversion of the Company's mandatorily redeemable
convertible preferred stock into shares of the Company's common stock effective

41
<PAGE>
upon the closing of the Company's initial public offering as if such conversion
occurred on the date the shares were originally issued.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
NUMERATOR:
Net loss................................................. $ (16,501) $ (5,105) $ (2,665)
Dividends on mandatorily redeemable
convertible preferred stock.............................. (1,510) (549) --
Excess Consideration for Redemption of
Series A mandatorily redeemable
convertible preferred stock.............................. -- (8,262) --
Accretion of mandatorily redeemable
convertible preferred stock.............................. (17) (14) (8)
---------- --------- ---------
Net loss available to common shareholders................ (18,028) $ (13,930) $ (2,673)
========= =========
Effect of pro forma conversion of preferred shares
(unaudited):
Dividends on mandatorily redeemable
convertible preferred stock.............................. 1,510
Accretion of mandatorily redeemable
convertible preferred stock.............................. 17
----------
Pro forma net loss available to common shareholders...... $ (16,501)
==========

DENOMINATOR:
Weighted-average shares outstanding...................... 7,971,443 2,938,460 3,485,563
========= =========
Weighted-average effect of pro forma
conversion of preferred shares (unaudited)............... 5,548,455
==========
Pro forma weighted average shares
outstanding (unaudited).................................. 13,519,898
==========
</TABLE>

SEGMENT INFORMATION

The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS 131)
in the fiscal year ended December 31, 1999. FAS 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. FAS 131 also establishes
standards for related disclosures about products and services, adn geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
maker, as defined under FAS 131, is the Chief Executive Officer. To date, the
Company has viewed its operations as one segment.

INTERNALLY USED WEB SITE DEVELOPMENT COSTS

Costs incurred in the development of core software for the Company's Web
site infrastructure are capitalized in accordance with Statement of
Position 98-1 (Accounting for the Costs of Software Developed or Obtained for
Internal Use) and are amortized over the expected useful life of the developed

42
<PAGE>
software ranging from 1-3 years. Costs incurred in the development of content,
and maintenance costs for the Company's internally used Web sites are expensed
as incurred.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to
delay the effective date of FAS 133 by one year. Adoption of FAS 133 is required
for fiscal year 2001. This statement establishes a new model for accounting for
derivatives and hedging activities. Under FAS 133, all derivatives must be
recognized as assets and liabilities and measured at fair value. The Company
adopted FAS 133 on January 1, 1999. The Company has determined that it does not
have any derivatives or hedging activities.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." This
pronouncement summarizes certain of the SEC staff's views on applying generally
accepted accounting principles to revenue recognition. We are required to adopt
SAB 101 for our fiscal year ending December 31, 2001. We do not expect such
adoption to have an impact on our results of operations, financial position or
cash flows.

2. ACQUISITION OF PARTSVOICE

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

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

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Fixed assets................................................ $ 115
Goodwill.................................................... 13,247
Trademarks/trade name....................................... 1,200
Customer lists.............................................. 13,800
Existing technology......................................... 1,100
Workforce................................................... 1,200
-------
$30,662
=======
</TABLE>

The following summarizes the unaudited pro forma results of operations, on a
combined basis, as if the Company's acquisition of PartsVoice occurred as of the
beginning of each of the periods presented,

43
<PAGE>
after including the impact of certain adjustments, such as amortization of
intangible assets and interest on acquisition indebtedness:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
(IN)THOUSANDS, (UNAUDITED)
EXCEPT PER SHARE
AMOUNTS
Net revenues................................................ $26,721 $15,773
Net loss.................................................... (17,212) (7,592)
Basic and diluted net loss per share........................ $ (2.35) $ (5.67)
</TABLE>

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

3. CAPITAL ASSETS

A summary of capital assets follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment.......................................... $3,840 $1,190
Furniture and other equipment............................... 874 378
Software.................................................... 1,421 161
Leasehold improvements...................................... 208 134
------ ------
6,343 1,863
Less: Accumulated depreciation and amortization............. (1,707) (410)
------ ------
$4,636 $1,453
====== ======
</TABLE>

Equipment held under capital leases is included in capital assets. The cost
of the leased equipment is $2.9 million and $1.1 million at December 31, 1999
and 1998, respectively. The accumulated amortization for these items is $857,000
and $173,000 at December 31, 1999 and 1998, respectively.

4. INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
USEFUL LIVES DECEMBER 31, 1999 DECEMBER 31, 1998
------------ ----------------- -----------------
(YEARS) (IN THOUSANDS)
<S> <C> <C> <C>
Goodwill.......................................... 6 $13,247 $ --
Trademarks/trade name............................. 6 1,200 --
Customer lists.................................... 3--6 14,600 800
Existing technology............................... 5 1,100 --
Workforce......................................... 5 1,200 --
------- -----
31,347 800
Less: Accumulated amortization.................... (4,017) (321)
------- -----
$27,330 $ 479
======= =====
</TABLE>

These assets are amortized using the straight-line method over their
respective estimated useful lives.

44
<PAGE>
5. ACCRUED LIABILITIES

A summary of accrued liabilities follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related benefits...................... $1,183 $324
Accrued professional fees................................. -- 166
Accrued taxes payable..................................... 141 51
Other..................................................... 196 235
------ ----
$1,520 $776
====== ====
</TABLE>

6. INCOME TAXES

From inception through February 28, 1997 the Company was organized as an S
corporation for income tax reporting purposes and, as such, the tax effects were
passed directly to the shareholders. Effective February 28, 1997, the Company
became a C corporation. No current provision for income taxes has been recorded
for the year ended December 31, 1999 or 1998, due to losses incurred during the
periods. A valuation allowance has been recorded for deferred tax assets because
the available objective evidence creates sufficient uncertainty regarding the
ability to realize the deferred tax asset.

For the periods in which the Company was a C corporation, a reconciliation
of taxes on income at the federal statutory rate to actual tax expense is as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at statutory rate................... $(5,610) $(1,736) $(906)
Nondeductible items............................. -- 564 6
Loss attributed to S corporation................ -- -- 66
Change in valuation allowance................... 5,529 1,249 902
Other........................................... 81 (77) (68)
------- ------- -----
$ -- $ -- $ --
======= ======= =====
</TABLE>

Temporary differences that give rise to the Company's deferred tax assets
and liabilities comprise the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carry-forwards................. $5,988 $1,672 $724
Depreciation and amortization..................... 773 77 (5)
Compensation expense related to stock options..... 629 336 158
Allowance for doubtful accounts................... 169 29 14
Accrued liabilities............................... 121 37 11
Valuation allowance............................... (7,680) (2,151) (902)
------ ------ ----
$ -- $ -- $ --
====== ====== ====
</TABLE>

45
<PAGE>
At December 31, 1999, the Company had net operating loss carry-forwards of
approximately $17.6 million, which will expire beginning in the year 2012, if
not previously utilized. Should certain changes in the Company's ownership
occur, there could be a limitation on the utilization of its net operating
losses. The Company has determined that such a change occurred in October 1998
and the utilization of loss carryforwards generated through that period will be
limited.

7. EQUITY TRANSACTIONS

INITIAL PUBLIC OFFERING

On August 10, 1999, the Company completed an initial public offering in
which proceeds, net of underwriting discounts, commissions and expenses of
approximately $44.8 million were raised. An additional $5.0 million was raised
in a direct sale of 454,545 shares of Common Stock to General Electric Capital
Assurance Company. A portion of the proceeds was used to retire notes payable of
$26.6 million and pay all accumulated dividends of $2.1 million on mandatorily
redeemable convertible preferred stock.

Upon completion of the initial public offering, all outstanding shares of
the Company's mandatorily redeemable convertible preferred stock were converted
to shares of common stock. One share of common stock was exchanged for each
share of preferred stock, resulting in an increase in shareholder equity of
$34.7 million.

STOCK REPURCHASE

On October 7, 1998, the Company used a portion of the proceeds from the
issuance of the Series B preferred stock to repurchase and retire 2,173,206
shares of common stock and 2,404,652 shares of Series A preferred stock at $4.20
per share. The number of shares redeemed was sufficient to provide the Series B
investor with a 62% ownership position, on a fully diluted basis, as of the
investment date. The repurchase price of both the Series A preferred stock and
common stock was in excess of the $3.99 and $3.78, respectively, per share fair
values of the stock at the date of repurchase. In accordance with EITF Topic
D-53, the Company recognized expense of $505,000, which represents the excess of
the repurchase price over the fair value of the repurchased preferred shares. In
accordance with FASB Technical Bulletin 85-6, the Company recognized expense of
$879,000, which represents the excess of the repurchase price over the fair
value of all common shares repurchased, with the exception of 76,382 repurchased
shares which resulted from employee stock option exercises immediately preceding
the repurchase. For these shares, $274,000 in expense was recognized for the
excess of the repurchase price over the employees' cost basis in the shares.
This amount is included in stock-based compensation in the consolidated
statement of operations.

WARRANTS

On April 30, 1999, the Company issued warrants in connection with the
acquisition of PartsVoice, LLC. See Note 2.

During February 1997, the Company issued warrants to purchase 37,500 shares
of common stock with an exercise price of $0.55 per share. These warrants were
issued to a third party in consideration for professional services performed.
These warrants were exercised on August 12, 1999 in a cashless conversion
transaction and 35,108 shares of common stock were issued to the holder. These
warrants were recorded at their Black-Scholes fair value of $14,000, which was
recognized as general and administrative expense. The fair value was calculated
using the following assumptions: fair value of common stock of $0.50 per share,
expected life of 5 years, risk free interest rate of 6.20%, volatility of 90%
and dividend yield of 0%.

46
<PAGE>
OTHER TRANSACTIONS

On April 30, 1999, Howard Tullman, a director of Cobalt, purchased 12,500
shares of Series C convertible preferred Stock for $100,000.

On February 28, 1997, two of the Company's officers, who are also
shareholders, entered into an agreement to settle the Company's liability for
deferred compensation. The terms of the agreement required a cash payment of
half the amount due and the remainder was forgiven by the officers. Such amount
is included in shareholders' equity as a contribution of services.

As of February 28, 1997, certain of the Company's shareholders had purchased
shares of common stock at prices in excess of the share price paid by the
Series A Preferred shareholders. To retain their basis in parity with the
Series A Preferred share price, these shareholders received a total of 119,867
additional shares of common stock, which the Company accounted for as a stock
dividend of $43,000 to non-employee shareholders and as compensation expense of
$17,000 to employee shareholders.

On February 28, 1997, the Company repurchased 613,015 shares of common stock
from a former officer and a former employee at $0.30 per share.

8. STOCK PURCHASE AND OPTION PLANS

STOCK PURCHASE PLAN

The Company's Board of Directors adopted the Employee Stock Purchase Plan
(the Purchase Plan) on August 12, 1999 under which 300,000 shares have been
reserved for issuance. Under the Purchase Plan, eligible employees may purchase
common stock in an amount not to exceed 15% of the employees' cash compensation.
The purchase price per share will be 85% of the common stock fair value at the
lower of certain plan defined dates. As of December 31, 1999 there have been no
shares issued under the Purchase Plan and 300,000 shares are available for
future issuance.

STOCK OPTION PLAN

The Company has a stock option plan (the Plan) for employees, directors,
consultants or independent contractors under which is reserved 3,641,000 shares
of common stock. Pursuant to the Plan, the Board of Directors has granted
nonqualified stock options and incentive stock options. The vesting period,
exercise price and expiration period of options are established at the
discretion of the Board of Directors. While some options were vested when
granted, options generally vest over a four-year period and expire ten years
from the date of grant.

The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date for
each stock option. With respect to the stock options granted since inception
through July 1999, the Company has recorded deferred stock-based compensation of
$8.4 million for the difference between the exercise price and the fair value of
the common stock underlying the options at the date of grant. This amount is
being amortized, in accordance with FASB Interpretation No. 28, over the vesting
period of the individual options. Compensation expense relating to these grants
of $2,749,000, $532,000 and $378,000 was amortized in 1999, 1998 and 1997,
respectively.

STOCK OPTION PLAN--GRANTS TO NON-EMPLOYEES

During the years ended December 31, 1999, 1998 and 1997 45,500, 0 and 38,500
options, respectively, were granted to third parties, excluding Directors, under
the Plan. Compensation expense relating to these grants of $57,000, $0 and
$28,000 was recognized in 1999, 1998 and 1997, respectively. The fair value of

47
<PAGE>
each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Exercise prices (per share).......................... $ 1.85--$7.20 $ .60--$1.25 $ .30--$1.25
------------------ ----------------- -----------------
Fair value of common stock........................... $ 6.00--$9.24 $ .60--$1.25 $ .44--$1.53

Expected lives....................................... 3--6 months 5 years 5 years
Weighted average risk free interest rate............. 5.59% 6.32% 6.15%
Volatility........................................... 90% 90% 90%
Dividend yield....................................... 0% 0% 0%
</TABLE>

On March 24, 1997, the Board of Directors approved an option repricing. All
options issued and outstanding at that date with exercise prices in excess of
$0.30 were repriced at $0.30.

STOCK OPTION PLAN ACTIVITY AND SUMMARY

The following table summarizes the activity under the Plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE FMV AVERAGE AVERAGE FMV
EXERCISE OF OPTIONS EXERCISE OF OPTIONS
SHARES PRICE GRANTED SHARES PRICE GRANTED
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 2,043,940 $0.39 1,647,754 $0.20
Granted................ 1,496,628 4.28 655,100 0.80
Exercised.............. (855,478) 0.19 (110,507) 0.27
Forfeited.............. (357,215) 2.04 (148,407) 0.37
--------- ---------
Outstanding at end of
period................. 2,327,875 $2.71 2,043,940 $0.39
========= =========
Exercisable at the end of
period................. 789,261 $1.04 1,115,651 $0.16
========= =========
Options granted during
the period at market... 301,600 $8.97 $8.97 -- $ -- $ --
========= =========
Options granted during
the period at less than
market................. 1,195,028 $3.09 $8.18 655,100 $0.80 $3.02
========= =========

<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997
-----------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE FMV
EXERCISE OF OPTIONS
SHARES PRICE GRANTED
--------- --------- -----------
<S> <C> <C> <C>
Outstanding at beginning
of period.............. 409,884 $0.34
Granted................ 1,351,170 0.20
Exercised.............. (4,771) 0.28
Forfeited.............. (108,529) 0.48
---------
Outstanding at end of
period................. 1,647,754 $0.20
=========
Exercisable at the end of
period................. 1,015,597 $0.14
=========
Options granted during
the period at market... -- $ -- $ --
=========
Options granted during
the period at less than
market................. 1,351,170 $0.20 $0.56
=========
</TABLE>

At December 31, 1999, 415,501 shares remained reserved and available for
grant under the Plan.

48
<PAGE>
The following table summarizes the information about stock options
outstanding as of December 31, 1999:

<TABLE>
<CAPTION>
OUTSTANDING
-----------------------------------------------
WEIGHTED- EXERCISABLE
AVERAGE --------------------------
REMAINING WEIGHTED-
NUMBER OF CONTRACTUAL LIFE WEIGHTED-AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------ --------- ---------------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.10--0.30............ 481,610 7.09 $0.23 385,947 $0.21
0.60--0.75............. 518,906 8.47 0.75 198,431 0.74
1.85................... 784,333 9.26 1.85 153,970 1.85
6.00--8.00............. 388,726 9.58 6.98 50,913 6.11
10.38--11.00........... 154,300 9.66 10.68 -- --
--------- ------- ----- ------- -----
2,327,875 8.72 $2.71 789,261 $1.04
========= ======= ===== ======= =====
</TABLE>

FAIR VALUE DISCLOSURES

Had the Company determined compensation expense based on the fair value of
the option at the grant date for its stock options issued to employees, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net loss
As reported................................. $(16,501) $(5,105) $(2,665)
Pro forma................................... (16,758) (5,649) (2,805)
Basic and Diluted net loss per share
As reported................................. $ (2.26) $ (4.74) $ (0.77)
Pro forma................................... (2.30) (4.93) (0.81)
</TABLE>

For all grants that were granted prior to the Company's initial public
offering in August 1999, the fair value of these options was determined using
the minimum value method, which assumes no volatility except for non-employees.
The fair value for the options granted subsequent to the Company's initial
public offering was estimated at the date of grant using a Black-Scholes option
pricing model. The following weighted average assumptions were used for employee
stock option grants in 1999, 1998 and 1997: risk free interest rate at grant
date of 5.48%, 5.11% and 6.26%, respectively, no dividends, volatility of 118%
subsequent to the Company's initial public offering in 1999, no volatility from
January to July in 1999, in 1998 or 1997, and expected lives of five years in
all three years. In addition, because the determination of the fair value of all
options granted after such time as the Company became a public entity included
an expected volatility factor in addition to the factors described in the
preceding paragraph, the above results may not be representative of future
periods.

The March 24, 1997 option-repricing event is considered a modification of an
existing option. For determination of the pro forma amounts, this modification
is treated as if a new option had been issued and any additional incremental
value recorded in the year of repricing is immediately recognized for vested
options and amortized over the remaining vesting period for nonvested options.

Pro forma net loss amounts reported above reflect only options granted in
1995 through December 31, 1999. The full impact of calculating compensation
expense for stock options based on fair value at the grant date is not reflected
in the pro forma net loss amounts because compensation expense is reflected over
the options' vesting period of four years.

49
<PAGE>
9. RETIREMENT SAVINGS PLAN

On August 1, 1997, the Company established a retirement savings plan that
qualifies under Internal Revenue Code Section 401(k). The plan covers all
qualified employees. Contributions to this plan by the Company are made at the
discretion of the Board of Directors. The Company has not contributed to the
plan.

10. LEASE COMMITMENTS

The Company leases office space for its corporate headquarters in Seattle,
Washington, under a lease that expires in December 31, 2005. The lease includes
an option to extend the lease two additional five-year terms. The Company also
leases office space in Portland, Oregon and Austin, Texas. During 1999 we based
our principal office space from one of our shareholders.

The Company leases various equipment under master capital lease agreements
with one of its shareholders. The leases expire at various dates between 2000
and 2003.

Future minimum lease payments at December 31, 1999 for these leases are as
follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, OPERATING CAPITAL
- ------------------------- --------- --------
(IN THOUSANDS)
<S> <C> <C>
2000................................................... $ 1,849 $1,047
2001................................................... 1,932 1,039
2002................................................... 1,986 373
2003................................................... 1,878 8
2004................................................... 1,955 --
Thereafter............................................. 2,019 --
------- ------
Total minimum lease payments........................... $11,619 2,467
======= ======
Less: Portion representing interest.................... (406)
------
Present value of capital lease obligations............. 2,061
Less: Current portion.................................. (844)
------
Capital lease obligations, non-current portion......... $1,217
======
</TABLE>

The Company records operating lease expense using the straight-line method.
Operating lease expense was approximately $883,000, $349,000, and $140,000 for
the years ended December 31, 1999, 1998, and 1997, respectively.

11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid for interest during 1999, 1998 and 1997 was $993,000, $90,000 and
$17,000, respectively.

The Company purchased capital assets under capital leases of $2.5 million,
$959,000 and $21,000, during the years ended December 31, 1999, 1998 and 1997,
respectively.

12. SALE OF HOMESCOUT

On March 4, 1998 the Company sold substantially all of the assets related to
its HomeScout operations to Homeshark, Inc. for $1,626,000. Revenues for
HomeScout were $19,000 and $61,000 for the years ended December 31, 1998 and
1997, respectively.

13. ACQUISITION OF DEALERNET

On December 1, 1997, the Company purchased assets comprised primarily of a
customer list and the related customer service agreements (DealerNet) from The
Reynolds and Reynolds Company. The

50
<PAGE>
purchase price was $800,000, of which $500,000 was paid in cash over the twelve
months following acquisition and $300,000 was paid by issuance of Series B
mandatorily redeemable convertible preferred stock in November 1998.

14. SUBSEQUENT EVENTS

SALE OF YACHTWORLD

On January 25, 2000 the Company sold the assets related to its YachtWorld
division to Boats.com, Inc. for cash proceeds of $3.5 million and a note
receivable in the amount of $10.5 million. The note bears interest at 8.0% and
is due in three installments during 2000. The Company also acquired warrants to
purchase 473,455 shares of Boats.com common stock at $18.91 per share. In
addition, the Company received a position on Boats.com's board of directors
until the note is paid in full. Revenues for YachtWorld were $602,000, $185,000
and $80,000 for the years ended December 31, 1999, 1998 and 1997, respectively.

ACQUISITION OF INTEGRALINK, INC.

On January 14, 2000, the Company acquired the assets of IntegraLink, Inc.
(IntegraLink), whose principal business is advanced data extraction and
reporting services. At closing, the Company paid aggregate purchase
consideration of (i) $1.5 million in cash; (ii) promissory notes in the
principal amount of $250,000 due January 14, 2001; and (iii) 85,000 shares of
the Company's common stock valued at $22.00 per share.

The Company will account for the IntegraLink acquisition using the purchase
method of accounting. The aggregate purchase price of approximately
$3.7 million will be allocated to the net assets acquired, based upon their
respective fair market values. The excess of the purchase price, including
estimated acquisition costs, over the fair market value of the net assets
acquired will be allocated to goodwill.

IntegraLink commenced operations in 1998 and generated revenues of $595,000
(unaudited) for the year ended December 31, 1999.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

51
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to directors will be included under "Election of
Directors" in our definitive proxy statement for our 2000 annual meeting of
shareholders (the "2000 Proxy Statement") to be filed not later than 120 days
after the end of the fiscal year covered by this report and is incorporated by
reference herein. Information with respect to our executive officers is included
under Item 4(a) of Part I of this report.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive compensation will be included under
"Executive Compensation" in our 2000 Proxy Statement and is incorporated by
reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to security ownership of certain beneficial owners
and management will be included under "Security Ownership of Certain Beneficial
Owners and Management" in our 2000 Proxy Statement and is incorporated by
reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and related transactions
with management will be included under "Certain Transactions" in our 2000 Proxy
Statement and is incorporated by reference herein.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. FINANCIAL STATEMENTS

See Item 8 of this Form 10-K.

2. FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule of Cobalt for each of the years
ended December 31, 1999, 1998 and 1997 should be read in conjunction with the
Consolidated Financial Statements, and related notes thereto, of Cobalt.

<TABLE>
<CAPTION>
PAGE NUMBER
------------
<S> <C>
Schedule II--Valuation and Qualifying Accounts and
Reserves.................................................. S-1
Schedules other than those listed above have been omitted
since they are either not required, not applicable, or the
information has otherwise been included.
</TABLE>

52
<PAGE>
3. EXHIBITS

(a) The exhibits listed below are filed as part of this report:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of The Cobalt
Group, Inc.

3.2* Bylaws of The Cobalt Group, Inc.

10.1* The Cobalt Group, Inc. 1995 Stock Option Plan, as amended.

10.2* Promissory Note, dated August 20, 1996, between The Cobalt
Group, Inc. and John W.P. Holt (and schedule of similar Note
between The Cobalt Group, Inc. and Geoffrey T. Baker).

10.3* Confidentiality and Noncompetition Agreement, dated February
28, 1997, between The Cobalt Group, Inc. and John W.P. Holt
(schedule of similar Agreement with Geoffrey T. Barker).

10.4* Registration Agreement, dated February 28, 1997, between The
Cobalt Group, Inc., The Productivity Fund III, L.P.,
Environmental Private Equity Fund II, L.P. and Mark T.
Koulogeorge.

10.4.1* First Amendment to Registration Agreement, dated October 7,
1998, between The Cobalt Group, Inc., the Productivity Fund
III, L.P., Environmental Private Equity Fund II, L.P. and
Mark T. Koulogeorge.

10.4.2* Second Amendment to Registration Agreement, dated July 7,
1998, between The Cobalt Group Inc., the Productivity Fund
III, L.P., Environmental Private Equity Fund II, L.P. and
Mark T. Koulogeorge.

10.5* Series B Stock Purchase Agreement, dated October 7, 1998,
between The Cobalt Group, Inc. and E.M. Warburg, Pincus,
L.P.

10.6* Purchase Agreement, dated April 19, 1999, between The Cobalt
Group, Inc., Locators, Inc., Parts Finder Locating Systems,
Inc., Compu-Time. Inc., Brian Allen and Shirley Atherton.

10.7* Warrant Shares and Series C Preferred Shares Registration
Agreement, dated April 30, 1999, between The Cobalt Group,
Inc., Compu-Time, Inc., Parts Finder Locating Systems, Inc.
and Locators, Inc.

10.8* Purchase Warrant, dated April 30, 1999, from The Cobalt
Group, Inc. to Parts Finder Locating Systems, Inc. (and
schedule of similar Warrants).

10.9* The Cobalt Group, Inc. 1999 Employee Stock Purchase Plan.

10.10* Share Purchase Agreement dated July 7, 1999 between The
Cobalt Group, Inc. and GE Financial Assurance Holdings, Inc.

10.11** Lease Agreement (office form dated October 24, 1999).

10.12** Lease Agreement (parking dated October 24, 1999).

10.13*** Agreement and Plan of Merger dated January 14, 2000 between
IL Acquisition Inc., The Cobalt Group, Inc., IntegraLink,
Inc., Kevin Distelhorst, Philip Turner and Steven French.

10.14**** Asset Purchase Agreement dated January 25, 2000 between The
Cobalt Group, Inc., and Boats.com, Inc.

21.1 Subsidiaries of the Registrant.
</TABLE>

53
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<S> <C>
23.1 Consent of Independent Accountants.

24.1 Power of Attorney (reference is made to the signature page).

27.1 Financial Data Schedule.
- -----------------------------------------------------------------------------------

* Incorporated by reference to the Registration Statement of
Form S-1 (No. 333-79483) filed by the Registrant on May 27,
1999, as amended.

** Incorporated by reference to the Quarterly Report on Form
10-Q filed by the Registrant on November 15, 1999.

*** Incorporated by reference to the Current Report on Form 8-K
filed by the Registrant on
February 1, 2000.

**** Incorporated by reference to the Current Report on Form 8-K
filed by the Registrant on February 14, 2000.
</TABLE>

54
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned; thereunto duly authorized, in Seattle, Washington
on March 30, 2000.

<TABLE>
<S> <C> <C>
THE COBALT GROUP, INC.

By: /s/ DAVID M. DOUGLASS
-----------------------------------------
David M. Douglass
</TABLE>

55
<PAGE>
POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John W.P. Holt and David M. Douglass each of
them, his attorney-in-fact, with the power of substitution, for any and all
capacities, to sign any amendments to this Report, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on March 30, 2000 on
behalf of the Registrant and in the capacities indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN W.P. HOLT President, Chief Executive Officer and Director
- ------------------------------------ (Principal Executive Officer)
John W.P. Holt

/s/ DAVID M. DOUGLASS Chief Financial Officer, Executive Vice President and
- ------------------------------------ Secretary (Principal Financial and Accounting
David M. Douglass Officer)

/s/ HOWARD A. TULLMAN Chairman of the Board of Directors
- ------------------------------------
Howard A. Tullman

/s/ GEOFFREY T. BARKER Director
- ------------------------------------
Geoffrey T. Barker

/s/ MARK T. KOULOGEORGE Director
- ------------------------------------
Mark T. Koulogeorge

/s/ JOSEPH P. LANDY Director
- ------------------------------------
Joseph P. Landy

/s/ ERNEST H. POMERANTZ Director
- ------------------------------------
Ernest H. Pomerantz

/s/ J.D. POWER, III Director
- ------------------------------------
J.D. Power, III
</TABLE>

56
<PAGE>
FINANCIAL STATEMENT SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING COST AND END OF
OF PERIOD EXPENSES DEDUCTIONS * PERIOD
---------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts.................. $ -- $54,000 $(14,000) $40,000
Year ended December 31, 1998
Allowance for doubtful accounts.................. 40,000 193,000 (148,000) 85,000
Year ended December 31, 1999
Allowance for doubtful accounts.................. 85,000 518,000 (106,000) 497,000
</TABLE>

* Deductions are direct write-offs of uncollectable amounts.

S-1

<PAGE>

Exhibit 3.1

AMENDED AND RESTATED ARTICLES OF INCORPORATION

THE COBALT GROUP, INC.

ARTICLE I

Name
----

The name of this Corporation is The Cobalt Group, Inc.

ARTICLE II

Capital Stock
-------------

2.1 AUTHORIZED CAPITAL. The total number of shares which this Corporation
is authorized to issue is 300,000,000, consisting of 200,000,000 shares of
Common Stock, $0.01 par value per share ("Common Stock"), and 100,000,000
shares of Preferred Stock, $0.01 par value per share ("Preferred Stock").
Subject to any rights granted to Preferred Stock in accordance with
applicable Washington law, the Common Stock shall have all the rights
ordinarily associated with common shares, including but not limited to
general voting rights, general rights to dividends and liquidation rights.

2.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be
issued from time to time in one or more series in any manner permitted by law
and the provisions of these Articles of Incorporation, as determined from
time to time by the Board of Directors and stated in the resolution or
resolutions providing for the issuance thereof, prior to the issuance of any
shares thereof. The Board of Directors shall have the authority to fix and
determine and to amend, subject to the provisions hereof, the designations,
preferences, limitations and relative rights of the shares of any series that
is wholly unissued or is to be established. Unless otherwise specifically
provided in the resolution establishing any series, the Board of Directors
shall further have the authority, after the issuance of shares of a series
whose number it has designated, to amend the resolution establishing such
series to decrease the number of shares of that series, but not below the
number of shares of such series then outstanding. In the event that there are
no issued or outstanding shares of a series of Preferred Stock which this
Corporation has been authorized to issue, unless otherwise specifically
provided in the resolution establishing such series, the Board of Directors,
without any further action on the part of the holders of the outstanding
shares of any class or series of stock of this Corporation, may amend these
Restated Articles of Incorporation to delete all reference to such series.

<PAGE>

ARTICLE III

No Preemptive Rights

Except as may be otherwise agreed by this Corporation or be provided by
the Board of Directors, no holder of any shares of this Corporation shall
have any preemptive right to purchase, subscribe for or otherwise acquire any
securities of this Corporation of any class or kind now or hereafter
authorized.

ARTICLE IV

No Cumulative Voting

There shall be no cumulative voting of shares in this Corporation.

ARTICLE V

Directors

5.1 NUMBER. The Corporation shall have at least one director, the
actual number to be prescribed in the Bylaws. The number of directors may be
increased or decreased from time to time by amendment of the Bylaws, but no
decrease shall have the effect of shortening the term of any incumbent
director.

5.2 STAGGERED TERMS. Prior to the 2000 annual election of Directors,
unless a director earlier dies, resigns or is removed, his term in office
shall expire at the next annual meeting of shareholders. At the 2000 annual
election of directors, the Board of Directors shall be divided into three
classes with said classes to be as equal in number as may be possible. At the
first election of directors to such classified Board of Directors, each Class
1 Director shall be elected to serve until the next ensuing annual meeting
of shareholders, each Class 2 Director shall be elected to serve until the
second ensuing annual meeting of shareholders and each Class 3 Director shall
be elected to serve until the third ensuing annual meeting of shareholders.
At each annual meeting of shareholders following the meeting at which the
Board of Directors is initially classified, the number of directors equal to
the number of directors in the class whose term expires at the time of such
meeting shall be elected to serve until the third ensuing annual meeting of
shareholders. Notwithstanding any of the foregoing provisions of this Article
V, directors shall serve until their successors are elected and qualified or
until their earlier death, resignation or removal from office, or until there
is a decrease in the number of directors; provided, however, that no decrease
in the number of directors shall have the effect of shortening the term of
any incumbent director.

<PAGE>

5.3 REMOVAL. The directors of this Corporation may be removed only for
cause, in the manner provided by the Bylaws, by the affirmative vote of the
holders of not less than a majority of the shares entitled to elect the
director or directors whose removal is being sought.

ARTICLE VI

Limitation on Director Liability

To the fullest extent permitted by the Washington Business Corporation
Act, as it exists on the date hereof or may hereafter be amended, a director
of this Corporation shall not be liable to the Corporation or its
shareholders for monetary damages for his or her conduct as a director. Any
amendment to or repeal of this Article shall not adversely affect any right
or protection of a director of this Corporation with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.

ARTICLE VII

Indemnification of Directors

To the fullest extent permitted by the Washington Business Corporation
Act and the Bylaws of this Corporation, this Corporation is authorized to
indemnify any of its directors. The Board of Directors shall be entitled to
determine the terms of indemnification, including advance of expenses, and
to give effect thereto through the adoption of Bylaws, approval of
agreements, or by any other manner approved by the Board of Directors. Any
amendment to or repeal of this Article shall not adversely affect any right
of an individual with respect to any right to indemnification arising prior
to such amendment or repeal.

ARTICLE VIII

Registered Agent and Registered Office

The registered agent of this Corporation in the State of Washington is
JGB Service Corporation. The street address of the registered agent of this
Corporation in the State of Washington is 3600 One Union Square, 600
University Street, Seattle, Washington 98101.

<PAGE>

ARTICLE IX

Shareholder Voting on Significant Corporate Action

Any corporate action for which the Washington Business Corporation Act,
as then in effect, would otherwise require approval by a two-thirds vote of
the shareholders of the Corporation shall be deemed approved by the
shareholders if it is approved by the affirmative vote of the holders of a
majority of shares entitled to vote. Notwithstanding this Article, effect
shall be given to any other provision of these Articles that specifically
requires a greater vote for approval of any particular corporate action.

ARTICLE X

Shareholder Action Without Meeting

Any action that may be taken at a meeting of the shareholders may be
taken without a meeting or a vote if (i) the action is taken by written
consent delivered to the Corporation of all shareholders entitled to vote on
the action or (ii) the action is taken by written consent delivered to the
Corporation by the shareholders of the Corporation holding of record, or
otherwise entitled to vote, in the aggregate not less than the minimum number
of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote on the action were present and
voted. A notice of the taking of action by shareholders by less than unanimous
written consent shall be mailed at least one business day, or such longer
period as is required by law, prior to the date the action becomes
effective to those shareholders entitled to vote on the action who have not
consented in writing, and, if required by law that notice of a meeting of
shareholders to consider the action be given to nonvoting shareholders, to
all nonvoting shareholders of the Corporation. Any such notice shall be in
such form as may be required by applicable law. Any consent delivered to the
Corporation pursuant to this Article shall be inserted in the minute book as
if it were the minutes of a meeting of the shareholders.

IN WITNESS WHEREOF, these Restated Articles of Incorporation are executed
on behalf of the Corporation this 17th day of March, 2000.

THE COBALT GROUP, INC.

By /s/ John W.P. Holt
-------------------------------------
John W.P. Holt
Chief Executive Officer and President

<PAGE>

Exhibit 21.1

Subsidiaries of the Registrant

1. PartsVoice, LLC, an Oregon limited liability company

2. IntegraLink Corporation, a Washington corporation

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-86667) of The Cobalt Group, Inc. of our report
dated January 25, 2000 relating to the financial statements, which appears in
this Annual Report on Form 10-K.

PricewaterhouseCoopers LLP

Seattle, Washington

March 30, 2000

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,224
<SECURITIES> 0
<RECEIVABLES> 5,078
<ALLOWANCES> 497
<INVENTORY> 0
<CURRENT-ASSETS> 21,030
<PP&E> 5,052
<DEPRECIATION> 416
<TOTAL-ASSETS> 54,032
<CURRENT-LIABILITIES> 7,202
<BONDS> 0
0
0
<COMMON> 169
<OTHER-SE> 45,416
<TOTAL-LIABILITY-AND-EQUITY> 54,032
<SALES> 0
<TOTAL-REVENUES> 23,286
<CGS> 0
<TOTAL-COSTS> 4,819
<OTHER-EXPENSES> 34,460
<LOSS-PROVISION> 382
<INTEREST-EXPENSE> 993
<INCOME-PRETAX> (16,501)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,501)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,501)
<EPS-BASIC> (2.26)
<EPS-DILUTED> (2.26)

</TABLE>