AUTOBYTEL INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

¨ 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 22239

Autobytel Inc.

(Exact name of registrant as specified in its charter)

Delaware		33-0711569
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification number)

18872 MacArthur Boulevard Irvine, California		92612
(Address of principal executive offices)		(Zip Code)

(949) 225-4500

(Registrant’s telephone number, including area code)

Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

As of July 31, 2002, there were 31,185,814 shares of the Registrant’s Common Stock outstanding.

INDEX

		Page
PART I. FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements:

	Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001	3

	Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001 (unaudited)	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	35

ITEM 2.	Changes in Securities and Use of Proceeds	37

ITEM 4.	Submission of Matters to a Vote of Security Holders	37

ITEM 6.	Exhibits and Reports on Form 8-K	37

Signatures		38

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Autobytel Inc.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

ASSETS
	June 30,			December 31,
	2002			2001
	(unaudited)
Current assets:
Domestic cash and cash equivalents	$	23,415		$	30,006
International cash and cash equivalents		-			28,784
Restricted cash		29			3,047
Accounts receivable, net of allowance for doubtful accounts and customer credits of $4,552 and $7,109, respectively		9,905			8,519
Prepaid expenses and other current assets		4,035			4,419

Total current assets		37,384			74,775
Property and equipment, net		2,599			2,889
Capitalized software, net		4,668			4,319
Investment in unconsolidated subsidiary		4,747			-
Goodwill		8,644			8,644
Other assets		96			154

Total assets	$	58,138		$	90,781


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,673		$	9,108
Accrued expenses		4,283			9,005
Deferred revenues		4,411			4,708
Customer deposits		86			92
Other current liabilities		338			300

Total current liabilities		13,791			23,213
Long-term liabilities		366			-

Total liabilities		14,157			23,213


Minority interest		-			7,173

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.001 par value; 11,445,187 shares authorized		-			-
Common stock, $0.001 par value; 200,000,000 shares authorized; 31,138,198 and 30,969,377 shares issued and outstanding, respectively		31			31
Additional paid-in capital		203,518			203,280
Accumulated other comprehensive loss		(16	)		(2,438	)
Accumulated deficit		(159,552	)		(140,478	)

Total stockholders’ equity		43,981			60,395

Total liabilities and stockholders’ equity	$	58,138		$	90,781

The accompanying notes are an integral part of these consolidated financial statements.

Autobytel Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Revenues
Program fees	$	15,441		$	11,541		$	30,853		$	24,375
Enterprise sales		2,743			1,600			4,727			3,000
Advertising		1,639			525			3,396			718
Other products and services		1,008			2,062			2,588			4,288

Total revenues		20,831			15,728			41,564			32,381

Operating expenses:
Sales and marketing		13,236			12,833			25,496			26,179
Product and technology development		5,723			4,614			11,476			8,602
General and administrative		2,404			4,016			5,461			7,620
Goodwill impairment		-			21,614			-			21,614
Autobytel.Europe restructuring, impairment and other international charges		-			11,202			15,015			11,202
Domestic restructuring and other (benefits) charges		(58	)		869			(58	)		1,861

Total operating expenses		21,305			55,148			57,390			77,078

Loss from operations		(474	)		(39,420	)		(15,826	)		(44,697	)
Loss on recapitalization of Autobytel.Europe		-			-			(4,168	)		-
Interest income, net		113			923			504			2,073
Foreign currency exchange gain (loss)		(13	)		(259	)		(12	)		458
Equity loss in unconsolidated subsidiaries		(232	)		-			(432	)		(500	)

Loss before minority interest and income taxes		(606	)		(38,756	)		(19,934	)		(42,666	)
Minority interest		-			2,105			866			1,977

Loss before income taxes		(606	)		(36,651	)		(19,068	)		(40,689	)
Provision (benefit) for income taxes		1			(10	)		6			28

Net loss	$	(607	)	$	(36,641	)	$	(19,074	)	$	(40,717	)

Basic and diluted net loss per share	$	(0.02	)	$	(1.80	)	$	(0.61	)	$	(2.00	)

Shares used in computing basic and diluted net loss per share		31,137,392			20,364,619			31,103,469			20,359,553


Comprehensive loss:
Net loss	$	(607	)	$	(36,641	)	$	(19,074	)	$	(40,717	)
Translation adjustment		-			(748	)		-			(3,464	)
Other comprehensive income		-			106			-			-

Comprehensive loss	$	(607	)	$	(37,283	)	$	(19,074	)	$	(44,181	)

The accompanying notes are an integral part of these consolidated financial statements.

Autobytel, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except share and per share data)

(unaudited)

	Six Months Ended June 30,
	2002			2001
Cash flows from operating activities:
Net loss	$	(19,074	)	$	(40,717	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash charges:
Depreciation and amortization		1,849			1,503
Provision for bad debt and customer credits		4,329			1,358
Loss on disposal of property and equipment		(11	)		271
Compensation expense recorded for fair market value of stock options in excess of exercise price		20			124
Autobytel.Europe restructuring and impairment		15,015			-
Loss on recapitalization of Autobytel.Europe		4,168			-
Equity losses in unconsolidated subsidiaries		432			500
Minority interest		(866	)		(1,977	)
Impairment of goodwill		-			21,614
Write-down of capitalized software costs		-			3,455
Write-off of investments in foreign entities		-			2,142
Write-down of property and equipment		-			242
Contract termination costs		-			697
Changes in assets and liabilities:
Accounts receivable		(5,764	)		(1,260	)
Prepaid expenses and other current assets		368			512
Other assets		58			2
Accounts payable		(4,397	)		770
Accrued expenses		(3,765	)		(1,757	)
Restructuring liabilities		(181	)		4,870
Deferred revenues		(297	)		(957	)
Customer deposits		(6	)		2
Other current liabilities		95			(191	)
Long-term restructuring and other liabilities		366			(47	)

Net cash used in operating activities		(7,661	)		(8,844	)

Cash flows from investing activities:
Deconsolidation of Autobytel.Europe		(28,163	)		-
Investment in foreign entities		-			(413	)
Investment in unconsolidated subsidiary		(400	)		-
Notes receivable from foreign entity		-			(88	)
Repayment of notes receivable from foreign entity		-			292
Purchases of property and equipment		(723	)		(369	)
Proceeds from sale of property and equipment		153			-
Capitalized software costs		(1,329	)		(3,765	)

Net cash used in investing activities		(30,462	)		(4,343	)

Cash flows from financing activities:
Net proceeds from sale of common stock		218			57
Net proceeds from sale of subsidiary company stock		-			2,000

Net cash provided by financing activities		218			2,057

Effect of exchange rates on cash		(488	)		(3,464	)

Net decrease in cash and cash equivalents		(38,393	)		(14,594	)
Cash and cash equivalents, beginning of period		61,837			81,945

Cash and cash equivalents, end of period	$	23,444		$	67,351

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	6		$	26

Cash paid during the period for interest	$	-		$	2

The accompanying notes are an integral part of these consolidated financial statements.

AUTOBYTEL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

(Unaudited)

1. Organization and Operations of Autobytel

Autobytel Inc. (Autobytel) is an Internet automotive marketing services company that helps dealers sell cars and manufacturers build brands through efficient marketing and customer relationship management tools and programs. Autobytel owns and operates four Web sites — Autobytel.com, Autoweb.com, CarSmart.com and AutoSite.com. Autobytel is also a leading provider of automotive marketing data and technology through its Automotive Information Center (AIC) division.

Autobytel provides tools and programs to dealers and manufacturers to help them increase market share and reduce customer acquisition costs.

Autobytel is a Delaware corporation incorporated on May 17, 1996. Autobytel was previously formed in Delaware in January 1995 as a limited liability company under the name Auto-By-Tel LLC. Its principal corporate offices are located in Irvine, California. Autobytel completed an initial public offering in March 1999 and its common stock is listed on the Nasdaq National Market under the symbol ABTL.

Since its inception in January 1995, Autobytel has experienced operating losses and has an accumulated deficit of $159,552 as of June 30, 2002. Autobytel believes current cash and cash equivalents are sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

The accompanying interim consolidated financial statements as of June 30, 2002, and for the three months and six months ended June 30, 2002 and 2001, are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of Autobytel’s management, reflect all adjustments, which are of a normal recurring nature, necessary to fairly state Autobytel’s consolidated balance sheets and statements of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Autoweb’s financial position and results of operations from the date of acquisition on August 14, 2001 have been included in the accompanying interim consolidated financial statements. Autobytel’s results for an interim period are not necessarily indicative of the results that may be expected for the year.

Although Autobytel believes that all adjustments necessary for a fair presentation of the interim periods presented are included and that the disclosures are adequate, these consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2001 included in Autobytel’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2002.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires Autobytel 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. Autobytel believes its most significant policies which rely on the use of estimates and assumptions are those related to allowance for doubtful accounts, allowance for customer credits, goodwill, contingencies and restructuring.

Reclassifications

Certain prior year accounts have been reclassified to conform to the current year presentation. The reclassifications had no effect on shareholders’ equity or net loss.

Cash and Cash Equivalents

Cash and cash equivalents as of June 30, 2002 and December 31, 2001 were as follows:

	As of June 30, 2002							As of December 31, 2001
	Total		Restricted			Available		Total		Restricted			Available
Domestic	$	23,444	$	(29	)	$	23,415	$	33,000	$	(2,994	)	$	30,006
International		—		—			—		28,837		(53	)		28,784

Total	$	23,444	$	(29	)	$	23,415	$	61,837	$	(3,047	)	$	58,790

For purposes of the consolidated balance sheets and the consolidated statements of cash flows, Autobytel considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Domestic cash and cash equivalents represent amounts held by Autobytel for use by Autobytel. As of December 31, 2001, $2,966 was held in a restricted interest bearing account to secure an appeal bond related to litigation (see Note 5.) and $28 was held by financial institutions as collateral for business credit cards. The litigation was settled in March 2002 and the bond was released in May 2002. As of June 30, 2002, restricted cash represents $29 related to business credit cards.

International cash and cash equivalents represent amounts held by Autobytel.Europe for use as directed by Autobytel.Europe. These funds were not available to Autobytel. As a result of a reduction in Autobytel’s ownership of Autobytel.Europe (see Note 4.), Autobytel no longer consolidates Autobytel.Europe in its financial statements. Therefore, international cash and cash equivalents are not reported on Autobytel’s balance sheet as of June 30, 2002. As of December 31, 2001, $53 was held by Autobytel.Europe’s landlord as a security deposit.

Computation of Basic and Diluted Net Loss Per Share

Net loss per share has been calculated under Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share.” SFAS No. 128 requires companies to compute earnings per share under two different methods (basic and diluted). Basic net loss per share is calculated by dividing the net loss by the weighted average shares of common stock outstanding during the period. For the three months and six months ended June 30, 2002 and 2001, diluted net loss per share is equal to basic net loss per share since potential common shares from the conversion of stock options and warrants are antidilutive. Autobytel evaluated the requirements of the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 98, and concluded that there are no nominal issuances of common stock or potential common stock which would be required to be shown as outstanding for all periods as outlined in SAB No. 98.

New Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” which requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. It also requires recognition of intangible assets, other than goodwill, in business combinations completed after June 30, 2001 and all acquisitions accounted for using the purchase method of accounting. Autobytel acquired Autoweb.com, Inc. after June 30, 2001 (see Note 3.) and accounted for the acquisition in accordance with SFAS No. 141.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, except for goodwill and intangible assets acquired after June 30, 2001, for which it is immediately applicable. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill must be evaluated for impairment on at least an annual basis. (See Note 5.)

retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Autobytel does not expect the adoption of SFAS No. 143 to have a material effect on its financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which was adopted by Autobytel on January 1, 2002, establishes standards for performing certain tests of impairment on long-lived assets. The adoption of SFAS No. 144 did not have a material effect on Autobytel’s financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Autobytel does not expect the adoption of SFAS No. 146 to have a material effect on its financial position or results of operations.

3. Acquisition of Autoweb.com, Inc.

On August 14, 2001, Autobytel acquired all of the outstanding common stock of Autoweb.com, Inc., an Internet automotive service.

Autoweb stockholders were issued 0.3553 shares of Autobytel common stock for each share of Autoweb common stock outstanding on the date of the acquisition for a total of 10,504,794 shares. The acquisition has been accounted for using the purchase method of accounting.

The aggregate purchase price was $17,131 and consisted of common stock valued at $14,331 and transaction costs of $2,800. The value of the stock issued was determined based on the average market price of Autobytel’s common stock for the three days before and after the date the acquisition agreement was announced. The purchase price has been allocated to the assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date as follows:

Purchase price:
Common stock	$	14,331
Transaction costs paid by Autobytel		2,800

Total purchase price	$	17,131

Allocation of purchase price:
Assets:
Cash	$	8,647
Accounts receivable		6,906
Prepaid expenses and other		4,148
Goodwill		8,644
Liabilities:
Historical liabilities		(6,530	)
Liabilities from exit costs and restructuring		(4,684	)

Total purchase price	$	17,131

The excess of the purchase price over the estimated fair value of the assets acquired and the liabilities assumed was initially recorded as goodwill in the amount of $10,399. In December 2001, the allocation of the purchase price was adjusted as described below and goodwill was reduced to $8,644.

In conjunction with the acquisition, Autobytel estimated the exit costs of anticipated facilities integration, personnel costs and other expenses directly related to the contemplated consolidation of significant operations of Autoweb and Autobytel and accrued $5,789 for such costs and expenses. The employee termination costs consist primarily of compensation and benefits for approximately 80 employees at Autoweb in conjunction with the integration of operations into the Autobytel Irvine facility. In December 2001, the allocation of the purchase price was adjusted as a result of a reduction in Autobytel’s estimates and events and circumstances. Estimated outstanding transaction costs were reduced by $150, historical liabilities were reduced by $500 and liabilities from exit costs and restructuring were reduced by $1,105. The reduction in liabilities from exit costs and restructuring was a result of a negotiated release from Autoweb’s facilities lease and lower than expected employee termination costs. From the date of acquisition through June 30, 2002, $1,740 and $2,731 was paid for rent and compensation, respectively. As of June 30, 2002, the remaining accrual balance was $213. Autobytel expects the remaining accrued costs to be paid in 2002.

Autoweb’s financial position and results of operations from the date of acquisition on August 14, 2001 have been included in the accompanying interim consolidated financial statements.

The following summarized unaudited pro forma consolidated results of operations are presented as if the acquisition of Autoweb had occurred on January 1, 2000. The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisition been completed as presented.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(unaudited)
Revenue	$	20,831		$	24,828		$	41,564		$	51,575
Net loss		(607	)		(39,526	)		(19,074	)		(59,620	)
Basic and diluted net loss per share	$	(0.02	)	$	(1.28	)	$	(0.61	)	$	(1.93	)

4. Autobytel.Europe LLC

Autobytel.Europe LLC (Autobytel.Europe), formerly Auto-By-Tel International LLC, was organized in August 1997 and began operations in the fourth quarter of 1999. Autobytel.Europe was formed to expand the Autobytel business model and operations throughout Europe.

In January 2000, Autobytel.Europe and Autobytel entered into an operating agreement with strategic investors to carryout the expansion plan. In the first quarter of 2000, a total of $36,700 was invested in Autobytel.Europe. The investment was comprised of a $31,700 contribution from strategic investors. Autobytel contributed $5,000 in cash, an exclusive, royalty-free, perpetual license to use or sublicense the “Autobytel” brand name and proprietary software, and assigned its existing License and Services Agreements for the United Kingdom, Scandinavia and Finland to Autobytel.Europe. In March 2001, a strategic investor contributed $2,000 to Autobytel.Europe. Cash contributed to Autobytel.Europe was for use as directed by Autobytel.Europe. These funds were not available to Autobytel. Autobytel does not anticipate contributing additional cash to Autobytel.Europe above the $5,000 it initially contributed.

Autobytel.Europe was considered a start-up company. In accordance with Staff Accounting Bulletin No. 51, the difference between Autobytel’s carrying amount of the investment in Autobytel.Europe and its ownership interest in the underlying net book value of Autobytel.Europe immediately after the investment was reflected as a capital transaction and credited directly to Autobytel’s stockholders’ equity.

Effective January 1, 2001, Autobytel.Europe changed its functional currency from U.S. Dollars to the Euro.

In June 2001, due to a decline in the general economic climate and the environment for Internet related activities in Europe, Autobytel announced the restructuring of Autobytel.Europe. The restructuring primarily consisted of significant staff reductions at Autobytel.Europe and lead to changes in Autobytel.Europe’s capital structure because of the reduction of its business activities.

Autobytel.Europe’s results of operations are consolidated in Autobytel’s results of operations through March 28, 2002, including a non-cash charge of $4,000 for terminated Autobytel.Europe contracts. On March 28, 2002, Autobytel.Europe completed a recapitalization which reduced Autobytel’s ownership of Autobytel.Europe from 76.5% to 49%. As a result of the reduction in Autobytel’s ownership interest, Autobytel recorded a non-cash charge of $4,168 related to the partial disposition of its investment in Autobytel.Europe. Autobytel no longer consolidates Autobytel.Europe in its financial statements but accounts for its remaining investment in Autobytel.Europe under the equity method. At March 28, 2002, Autobytel reviewed its 49% investment in Autobytel.Europe and reduced the carrying amount to its estimated fair value. The impairment of the investment resulted in a non-cash charge of $11,015 to Autobytel. These charges, totaling $19,183, were originally reported as an operating expense on Autobytel’s consolidated statement of operations for the three months ended March 31, 2002. Autobytel has subsequently determined that the $4,168 related to the partial disposition of its investment in Autobytel.Europe is a non-operating expense and has reclassified this amount to properly reflect the charge. The reclassification had no effect on net loss for the three months ended March 31, 2002 or three months or six months ended June 30, 2002. As of June 30, 2002, Autobytel had an investment in Autobytel.Europe with a remaining balance of $4,747 which Autobytel believes represents the fair value of its 49% ownership interest.

5. Goodwill

In accordance with SFAS No. 142, goodwill acquired in the Autoweb acquisition will not be amortized, rather it is evaluated on at least an annual basis for impairment as the acquisition of Autoweb was completed subsequent to June 30, 2001. Based on Autobytel’s evaluation of goodwill in June 2002, no impairment charge was recognized. In future periods, if goodwill is determined to be impaired, Autobytel will recognize a non-cash charge equal to the excess of the carrying value over the determined fair value. There can be no assurance that future evaluations of goodwill will not result in impairment and a charge to earnings. As of June 30, 2002, the unamortized balance of goodwill related to the Autoweb acquisition was $8,644.

During 2001, Autobytel recorded a $22,867 non-cash charge for the full impairment of goodwill and $888 in amortization expense related to A.I.N. Corporation (CarSmart or A.I.N.). Had SFAS No. 142 been in effect in 2001, Autobytel would not have recorded amortization expense of $420 and $841 for goodwill related to the acquisition of CarSmart for the three months and six months ended June 30, 2001, respectively. The following summarizes net loss adjusted to exclude goodwill amortization expense:

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Net loss as reported	$	(607	)	$	(36,641	)	$	(19,074	)	$	(40,717	)
Goodwill amortization		-			420			-			841

Net loss as adjusted	$	(607	)	$	(36,221	)	$	(19,074	)	$	(39,876	)

Basic & diluted loss per share as reported	$	(0.02	)	$	(1.80	)	$	(0.61	)	$	(2.00	)
Basic & diluted loss per share as adjusted	$	(0.02	)	$	(1.78	)	$	(0.61	)	$	(1.96	)

6. Commitments and Contingencies

Litigation

A.I.N. Corporation was sued on September 1, 1999 in a lawsuit entitled Robert Martins v. Michael J. Gorun, A.I.N., Inc., et al., in Los Angeles Superior Court. The complaint contained causes of action for breach of written and oral contracts, promissory estoppel, breach of fiduciary duty and fraud, and sought compensatory and punitive damages and equitable relief. The plaintiff contended he was entitled to a 49.9% ownership interest in A.I.N.’s CarSmart online business based on a purported agreement for the formation of a company called CarSmart On-Line Services. On December 14, 1999, A.I.N. filed a complaint for declaratory relief on the subject of Mr. Martins’ lawsuit in Contra Costa County Superior Court. The Los Angeles action was transferred to Contra Costa County and the two cases were consolidated. Autobytel was added and then dismissed as a cross defendant in such action after summary judgment in its favor. On December 14, 2001, the jury returned a unanimous verdict finding that A.I.N. and Mr. Gorun were not liable for breach of contract, breach of fiduciary duty or fraud and denying Martins any damages. Martins’ equitable claims for promissory estoppel and constructive trust were submitted to the court for decision. On April 5, 2002, the court issued a decision denying any relief on those claims. Autobytel and A.I.N. intend to vigorously contest any appeal by Martins.

Autobytel believes the selling shareholders of A.I.N. are obligated to indemnify Autobytel for all losses, including attorney’s fees, expenses, settlements and judgements, arising out of the lawsuit. The indemnification obligation was initially collateralized by 450,000 shares of Autobytel common stock transferred to the selling shareholders as part of the acquisition of A.I.N., as well as $250 in cash. As of June 30, 2002, the obligation was collateralized by 199,960 remaining shares of common stock and approximately $296 in cash after expenses. The selling shareholders have indicated that they dispute the amount and scope of their indemnity obligation. Autobytel and A.I.N. have instituted arbitration proceedings against the selling shareholders, seeking to enforce the indemnity obligations. The proceeding is in its early stages of prehearings with the arbitrator.

On June 7, 2002, Michael Gorun filed an action entitled Michael Gorun v. Autobytel, et al. in the Santa Clara Superior Court against Autobytel and A.I.N. asserting, among others, claims for declaratory relief under the escrow agreement, merger agreement and employment agreement, damages for breach of employment agreement, damages for interference with prospective advantage, damages for breach of merger agreement and damages for breach of employment agreement. In this action, Mr. Gorun disputes Autobytel and A.I.N.’s claims for indemnity, asserts his alleged rights of indemnity from the Martin’s lawsuit under various theories,

and contends that Autobytel wrongfully asserted restrictions on the sale and registration of his shares of Autobytel stock. Autobytel disputes these allegations and intends to vigorously defend against them.

In August 2001, a purported class action lawsuit was filed in the United States District Court, Southern District of New York against Autobytel and certain of Autobytel’s current directors and officers and underwriters involved in Autobytel’s initial public offering. This action purports to allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autobytel’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autobytel’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The complaint against Autobytel has been consolidated with two other complaints that relate to its initial public offering but do not name it as a defendant, and a consolidated amended complaint has been filed. The action is being coordinated with over 300 other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. Autobytel believes that it has meritorious defenses to the complaint and intends to vigorously defend the action.

Between April and June 2001, eight separate purported class actions virtually identical to the one filed against Autobytel were filed against Autoweb, certain of Autoweb’s former directors and officers and underwriters involved in Autoweb’s initial public offering. The foregoing actions purport to allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autoweb’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autoweb’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The actions seek damages in an unspecified amount. The complaints against Autoweb have been consolidated into a single action, and a consolidated amended complaint has been filed. The action is being coordinated with over 300 other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. Autoweb believes that it has meritorious defenses to the complaints and intends to vigorously defend the actions.

From time to time, Autobytel is involved in other litigation matters relating to claims arising out of the ordinary course of business. Autobytel believes that there are no claims or actions pending or threatened against Autobytel, the ultimate disposition of which would have a material adverse effect on Autobytel’s business, results of operations and financial condition. However, if a court or jury rules against Autobytel and the ruling is ultimately sustained on appeal and damages are awarded against Autobytel, such ruling could have a material and adverse effect on Autobytel’s business, results of operations and financial condition.

7. Accrued Liability for Restructuring and Other Charges

In 2001, Autobytel recorded charges totaling $7,229 for international restructuring and related charges due to a decline in the general economic climate and the environment for Internet related activities in Europe. As a result of a reduction in Autobytel’s ownership of Autobytel.Europe (see Note 4.), Autobytel no longer consolidates Autobytel.Europe in its financial statements. Therefore, the remaining accrued liability related to these charges is not reported on Autobytel’s balance sheet as of June 30, 2002.

In 2001, Autobytel recorded a total of $4,514 for domestic restructuring and other charges. The charges were related to the reorganization of dealer operations, the elimination of duplicate facilities, the write-down of fixed assets, contract termination costs related to online advertising and the aftermarket program on the Autobytel.com Web site, the write-off of previously capitalized software related to the aftermarket program and the integration of Autoweb into Autobytel following the acquisition of Autoweb. In the six months ended June 30, 2002, Autobytel recorded a total of $769 for charges related to the restructuring of Autobytel’s operations to reduce costs and enhance efficiencies. The charges included severance costs affecting approximately 15% of Autobytel’s employees in sales, marketing and information technology, and Autobytel’s lease obligation on the vacant portion of AIC’s office facilities. As of June 30, 2002, the remaining accrued liability related to these charges was $657. Autobytel expects the remaining accrued charges to be paid by 2005.

A summary of the remaining accrued liabilities related to the restructuring and other charges as of June 30, 2002 is as follows:

	Total Charge		Non-Cash Charges		Cash Payments		Autobytel. Europe Decon- solidation		Remaining Accrued Liability
International restructuring and related charges	$	7,229	$	4,277	$	2,133	$	819	$	—
Domestic restructuring and other charges		5,283		739		3,887		—		657

Total	$	12,512	$	5,016	$	6,020	$	819	$	657

8. Business Segment

Autobytel conducts its business within one business segment, which is defined as providing Internet automotive marketing services.

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

You should read the following discussion of our results of operations and financial condition in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” below.

Overview

We are an Internet automotive marketing services company that helps dealers sell cars and manufacturers build brands through efficient marketing and customer relationship management tools and programs. We own and operate four Web sites — Autobytel.com, Autoweb.com, CarSmart.com and AutoSite.com. We are also a leading provider of automotive marketing data and technology through our Automotive Information Center (AIC) division.

We acquired Autoweb.com, Inc. on August 14, 2001. The following summarized unaudited pro forma consolidated results of operations are presented as if the acquisition of Autoweb had occurred on January 1, 2000. The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisition been completed as presented.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(unaudited)
Revenue	$	20,831		$	24,828		$	41,564		$	51,575
Net loss		(607	)		(39,526	)		(19,074	)		(59,620	)
Basic and diluted net loss per share	$	(0.02	)	$	(1.28	)	$	(0.61	)	$	(1.93	)

We have included Autoweb’s financial position and results of operations, including revenues, expenses, cash flows and other relevant operating activity, from the date of acquisition in the discussion and analysis of our consolidated financial position and results of operations below.

We conduct our business within one business segment, which is defined as providing Internet automotive marketing services.

In April 2002, we launched three products, dealer call center, dealer training and Retention Performance Marketing (RPM), designed to assist dealerships and manufacturers market to and retain customers. The dealer call center pre-screens and qualifies car-buyers to identify those with strong purchase intent, dealer training teaches best Internet sales practices in dealerships and RPM provides service reminder marketing programs through e-mail, telephone and traditional print mail.

In May 2002, we continued the restructuring of our operations to reduce costs and enhance efficiency. The restructuring involved staff reductions affecting approximately 15% of our employees in sales, marketing and information technology. This staff reduction resulted in a charge of $0.2 million for severance costs and $0.5 million for our lease obligation on the vacant portion of AIC’s office facilities in the second quarter of 2002. We expect that the staff reduction will generate savings of approximately $4.0 million on an annualized basis, offset by selective headcount additions, resulting in a net savings of approximately $2.5 million to $3.0 million on an annualized basis.

Autobytel.Europe’s results of operations are consolidated in our results of operations through March 28, 2002, including a non-cash charge of $4.0 million for terminated Autobytel.Europe contracts. On March 28, 2002, Autobytel.Europe completed a recapitalization which reduced our ownership of Autobytel.Europe from 76.5% to 49%. As a result of the reduction in our ownership, we recorded a non-cash charge of $4.2 million related to the partial disposition of our investment in Autobytel.Europe. We no longer consolidate Autobytel.Europe in our financial statements but account for our remaining investment in Autobytel.Europe under the equity method. At March 28, 2002, we reviewed our 49% investment in Autobytel.Europe and reduced the carrying amount to its estimated fair value. The impairment of the investment resulted in a non-cash charge of $11.0 million to us. These charges, totaling $19.2 million, were originally reported as an operating expense on our consolidated statement of operations for the three months ended March 31, 2002. We have subsequently determined that the $4.2 million related to the partial disposition of our investment in Autobytel.Europe is a non-operating expense and have reclassified this amount to properly reflect the charge. The reclassification had no effect on net loss for the three months ended March 31, 2002 or three months or six months ended June 30, 2002. As of June 30, 2002, we had an investment in Autobytel.Europe with a remaining balance of $4.7 million which we believe represents the fair value of our 49% ownership interest. We do not anticipate contributing additional cash to Autobytel.Europe above the $5.0 million we initially contributed in January 2000.

We realigned our revenue classifications in the fourth quarter of 2001 in connection with our focus on providing marketing services to dealers and automotive manufacturers. We now classify revenues in four categories — program fees, enterprise sales, advertising and other products and services. Prior year revenues have been presented to conform to the current year presentation.

Program fees consist of fees paid by program dealers located in the United States and Canada who participate in our Autobytel.com, Autoweb.com and CarSmart.com online car buying referral networks. These fees are comprised of initial fees, monthly subscription and transaction fees for qualified consumer leads, or purchase requests, which are directed to participating program dealers. Autobytel.com and CarSmart.com program dealers using our services pay initial subscription fees, as well as ongoing monthly subscription fees based, among other things, on the size of territory, demographics and, indirectly, the transmittal of qualified purchase requests to them. Autoweb.com program dealers using our services primarily pay transaction fees based on the number of qualified purchase requests provided to them each month, and in certain instances, initial fees. Beginning in the second quarter of 2002, program fees also include fees for our new dealers call center and dealer training. We expect to be primarily dependent on our program dealers for revenues in the foreseeable future.

Our program dealer contract terms generally range from 90 days to one year and are terminable on 30 days’ notice by either party. The initial subscription fee from a program dealer is recognized ratably over the term of the dealer’s contract. The majority of our program fees consist of monthly fees which are recognized in the period service is provided. In the second quarter of 2002 and 2001, program fees were $15.4 million and $11.5 million, or 74% and 73% of total revenues, respectively. Average monthly program fees per dealer were $836 and $715 in the second quarter of 2002 and 2001, respectively. Average monthly program fees have increased as a result of our efforts to retain program dealers who provide a reasonable profit to us.

Enterprise sales represent fees from enterprise dealers who participate in our Autobytel.com, Autoweb.com and CarSmart.com online car buying referral networks. Enterprise dealers are major dealer groups and automotive manufacturers. Major dealer groups are entities with more than 25 dealerships that have a single agreement with us. Automotive manufacturers include manufacturers, such as General Motors and Ford. Enterprise sales consist of fees from major dealer groups and automotive manufacturers for purchase requests, data and technology tools. We began recognizing revenues from enterprise sales in 2001 and intend to strengthen the size and quality of our relationships with major dealer groups and automotive manufacturers. Revenues from enterprise sales were $2.7 million and $1.6 million, or 13% and 10% of total revenues, in the second quarter of 2002 and 2001, respectively. Fees in the second quarter of 2001 represent fees from General Motors Corporation for services related to an online locate-to-order vehicle test program.

Advertising revenues represent fees from automotive manufacturers and other advertisers who target car buyers during the research, consideration and decision making process on our Web sites. Using the targeted nature of Internet advertising, manufacturers can advertise their brand image effectively to automotive consumers on any of our four Web sites. Automotive manufacturers can target advertisements to consumers who are researching vehicles, thereby increasing the likelihood of influencing their purchase decisions. Campaign specifications are typically negotiated with the advertising agency or directly with the manufacturer or

automotive-related vendor. Revenues from advertising were $1.6 million and $0.5 million in the second quarter of 2002 and 2001, or 8% and 3% of total revenues, respectively.

Revenues from other products and services include fees for new and continued products, legacy products and international licensing agreements. New and continued products include RPM and products and services which we continue to invest in, such as database marketing and classified listings. Legacy products include consumer oriented products and services which we have redirected resources away from, such as financing, insurance and warranties. International licensing agreements include agreements with international parties that are licensed to use our Autobytel brand name and, in most cases, technology in their respective countries. We do not expect to devote substantial resources to our international operations, but will continue to explore additional licensing business as opportunities arise. In the second quarter of 2002 and 2001, revenues from other products and services were $1.0 million and $2.1 million, or 5% and 14% of total revenues, respectively.

Our revenue is primarily dependent on:

•

our number of program and enterprise dealer relationships,

•

the quality and number of purchase requests delivered to our participating program and enterprise dealers and,

•

the fees paid by each of our program and enterprise dealers on a subscription or per transaction lead basis.

Although we expect our combined program, enterprise and advertising revenue to increase in the future, our revenue is subject to considerable uncertainty. See “Risk Factors” below.

As of June 30, 2002, we had 9,380 dealer relationships. Our dealer relationships as of March 31, 2002 and June 30, 2002 were as follows:

	Dealer relationships as of
	March 31, 2002	June 30, 2002
Autobytel.com	3,698	3,561
Autoweb.com	1,853	1,781
CarSmart.com	687	585

Total program dealers	6,238	5,927
Enterprise dealers	2,716	3,453

Total dealer relationships	8,954	9,380

Program dealer relationships consist of subscriptions to our new car marketing programs and our Used Vehicle CyberStore program. A decline of 311 program dealer relationships from March 31, 2002 to June 30, 2002 was primarily a result of the termination of 967 program dealer relationships by the dealers or by us offset by the addition of 656 program dealer relationships. As of June 30, 2002, 889 program dealers had a relationship with more than one of our branded Web sites. Enterprise dealer relationships consist of subscriptions with major dealer groups and automotive manufacturers. An increase in enterprise dealer relationships from March 31, 2002 to June 30, 2002 was a result of the addition of 737 enterprise dealer relationships. We cannot assure that we will be able to reduce our dealer turnover. Our inability or failure to reduce dealer turnover could have a material adverse effect on our business, results of operations and financial condition.

Our relationship with dealers may terminate for various reasons including:

•

termination by the dealer due to issues with purchase request volume, purchase request quality, fee increases and lack of dedicated personnel to manage the program effectively,

•

termination by us due to the dealers providing poor customer service to consumers and for nonpayment of fees,

•

extinction of the manufacturer brand and

•

selling or termination of the dealer franchise.

A material factor affecting dealer turnover is our ability to provide dealers with high quality purchase requests. High quality purchase requests are those that result in high closing ratios. Closing ratio is the ratio of the number of vehicles purchased at a dealer generated from purchase requests to the total number of purchase requests sent to that dealer. We continue to improve the quality of the purchase requests we send to our program and enterprise dealers by applying filters and validation processes to identify consumers with strong purchase intent. As a result of the implementation of these filters and validation processes, purchase request volume may remain flat or decline in 2002 as purchase requests that do not meet our qualification standards are rejected. We anticipate that improved purchase request quality will help us reduce fee accommodations, reduce dealer turnover and increase revenues in the future.

In the second quarter of 2002, we delivered approximately 1.0 million purchase requests through our online systems to program and enterprise dealers. Of these, approximately 0.9 million were delivered to program dealers and approximately 0.1 million were delivered to enterprise dealers. In the second quarter of 2001, approximately 0.7 million purchase requests were delivered to program dealers, or an increase of 41%, compared to the second quarter of 2002. The increase was due to the acquisition of Autoweb in August of 2001.

Because our primary revenue source is from program fees, our business model is significantly different from many other Internet commerce sites. The automobiles requested through our Web sites are sold by dealers; therefore, we derive no direct revenues from the sale of a vehicle and have no significant cost of goods sold related to vehicles, no procurement, carrying or shipping costs and no inventory risk.

Sales and marketing costs consist primarily of:

•

fees paid to our Internet purchase request providers, including Internet portals and online automotive information providers,

•

promotion and advertising expenses to build our brand awareness and encourage potential customers to visit our Web sites and

•

personnel and other costs associated with sales, marketing, training and support of our dealer networks.

The Internet portals and online automotive information providers charge a combination of annual, monthly and variable fees.

•

Annual fees are amortized over the period they relate to.

•

Monthly fees are expensed in the month they relate to.

•

Variable fees are fees paid for purchase requests and are expensed in the period the purchase requests are received.

Our Internet marketing and advertising costs, including annual, monthly and variable fees, were $8.2 million and $5.4 million in the second quarter of 2002 and 2001, respectively. Also included in sales and marketing expenses are the costs associated with traditional media, such as television, radio and print advertising and with signing up new dealers and their ongoing training and support. Sales and marketing costs are recorded as an expense in the period the service is provided. Sales and marketing expenses have historically fluctuated quarter-to-quarter due to varied levels of marketing and advertising and we believe this will continue in the future.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We believe the following critical accounting policies, among others, require significant judgment in determining estimates and assumptions used in the preparation of our consolidated financial statements. There can be no assurance that actual results will not differ from our estimates and assumptions. For a detailed discussion of the application of these and other accounting policies, see Note 2. of the “Notes to Consolidated Financial Statements” in Part IV., Item 14., “Exhibits, Financial Statement Schedules and Reports on Form 8-K” of our Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 22, 2002.

Accounts Receivable. We maintain allowances for doubtful accounts and customer credits. The allowance for doubtful accounts is our estimate of bad debt expense that could result from the inability or refusal of our customers to pay for our services. The estimated provision for doubtful accounts is charged to operating expenses. The allowance for customer credits is our estimate of fee accommodations to be extended to our customers. The estimated provision for customer credits is recorded as a reduction in revenue. Our estimates are based on our historical bad debt expense and customer credit experience. As of June 30, 2002, accounts receivable totaled $14.5 million offset by $4.6 million in allowances for doubtful accounts and customer credits resulting in net accounts receivable of $9.9 million.

Significant increases in required allowances for doubtful accounts and customer credits have been recorded in recent periods and may occur in the future. If there is a decline in the general economic environment that negatively affects the financial condition of our customers or an increase in the number of customers that are dissatisfied with our services, additional allowances for doubtful accounts and customer credits may be required and the impact on our business, results of operations or financial condition could be material.

Goodwill. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we are required to analyze goodwill for impairment whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable or at least on an annual basis. We use estimates and make assumptions to determine the fair value of goodwill. If estimates or assumptions change in the future, we may be required to record goodwill impairment charges. During 2001, we recorded a $22.9 million non-cash charge for the full impairment of goodwill related to our acquisition of A.I.N. Corporation. Based on our evaluation in June 2002 of goodwill related to our acquisition of Autoweb, no impairment charge was recognized. In future periods, if goodwill is determined to be impaired we will recognize a non-cash charge equal to the excess of the carrying value over the determined fair value. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. As of June 30, 2002, the unamortized balance of goodwill related to the Autoweb acquisition was $8.6 million.

Restructuring. We have recorded reserves and write-offs in connection with the restructuring of our operations. These reserves were based on estimates related to employee separation costs, settlements of contractual obligations, investments and other related costs. Although we do not anticipate significant changes, the actual costs may differ from these estimates. During 2001, we recorded $7.2 million and $4.5 million in international and domestic restructuring charges, respectively. In the second quarter of 2002, we recorded $0.7 million in domestic restructuring charges related to severance costs and our lease obligation on the vacant portion of AIC’s office facilities.

Contingencies. We are subject to proceedings, lawsuits and other claims. We are required to assess the likelihood of any adverse judgments or outcomes of these matters as well as potential ranges of probable losses. The amount of reserves required, if any, for these contingencies is determined after analysis of each individual case. The amount of reserves may change in the future if there are new developments in each matter.

Results of Operations

The following table sets forth our results of operations as a percentage of revenues. Autoweb’s results of operations from the date of acquisition on August, 14, 2001 have been included.

	Three Months Ended June 30,				Six Months Ended June 30,
	2002		2001		2002		2001
Revenues
Program fees	74	%	73	%	74	%	75	%
Enterprise sales	13		10		11		9
Advertising	8		3		8		2
Other products and services	5		14		7		14

Total revenues	100		100		100		100

Operating expenses:
Sales and marketing	64		82		61		81
Product and technology development	27		29		28		27
General and administrative	12		26		13		24
Goodwill impairment	-		137		-		67
Autobytel.Europe restructuring, impairment and other international charges	-		71		36		35
Domestic restructuring and other (benefits) charges	-		6		-		6

Total operating expenses	103		351		138		238

Loss from operations	(3	)	(251	)	(38	)	(138	)
Loss on recapitalization of Autobytel.Europe	-		-		(10	)	-
Interest income, net	1		6		1		6
Foreign currency exchange gain (loss)	-		(2	)	-		1
Equity losses in unconsolidated subsidiaries	(1	)	-		(1	)	(2	)

Loss before minority interest and income taxes	(3	)	(246	)	(48	)	(132	)
Minority interest	-		13		2		6

Loss before income taxes	(3	)	(233	)	(46	)	(126	)
Provision (benefit) for income taxes	-		-		-		-

Net loss	(3	)%	(233	)%	(46	)%	(126	)%

Three Months Ended June 30, 2002 and 2001

Revenues. Our revenues increased by $5.1 million, or 32%, to $20.8 million in the second quarter of 2002 compared to $15.7 million in the second quarter of 2001.

Program Fees. Program fees consist of fees paid by program dealers located in the United States and Canada who participate in our Autobytel.com, Autoweb.com and CarSmart.com online car buying referral networks. These fees are comprised of initial fees and monthly subscription and transaction fees for qualified consumer leads, or purchase requests, which are directed to participating program dealers. Autobytel.com and CarSmart.com program dealers using our services pay initial subscription fees, as well as ongoing monthly subscription fees based, among other things, on the size of territory, demographics and, indirectly, the transmittal of qualified purchase requests to them. Autoweb.com program dealers using our services primarily pay transaction fees based on the number of qualified purchase requests provided to them each month, and in certain instances, initial fees. Program fees in the second quarter of 2002 also include fees for our new dealer call center and dealer training. Program fees increased by $3.9 million, or 34%, to $15.4 million in the second quarter of 2002 compared to $11.5 million in the second quarter of 2001. The increase was primarily due to a $5.3 million increase as a result of our acquisition of Autoweb, partially offset by a $1.4 million, or 12%, decrease in Autobytel and CarSmart program fees due to a decline in our number of dealer relationships. With our

efforts to improve purchase request quality and reduce the number of dealers that cannot provide us with a reasonable profit, we expect our program fee revenues to temporarily remain flat or decline in 2002. We anticipate that improved purchase request quality will help us reduce fee accommodations, reduce program dealer turnover and increase program fee revenues in the future.

Enterprise Sales. Enterprise sales represent fees from enterprise dealers who participate in our Autobytel.com, Autoweb.com and CarSmart.com online car buying referral networks. Enterprise dealers are major dealer groups and automotive manufacturers. Major dealer groups are entities with more than 25 dealerships that have a single agreement with us. Automotive manufacturers include manufacturers, such as General Motors and Ford. Enterprise sales consist of fees from the major dealer groups and automotive manufacturers for purchase requests, data and technology tools. Enterprise sales increased by $1.1 million, or 72%, to $2.7 million in the second quarter of 2002 compared to $1.6 million in the second quarter of 2001. The increase was primarily related to a $1.9 million increase as a result of our acquisition of Autoweb, partially offset by a $ 0.8 million, or 49%, decrease in Autobytel enterprise sales due to the completion in November 2001 of the online locate-to-order vehicle test program described below. Enterprise sales in the second quarter of 2001 represent fees received from General Motors Corporation for services related to an online locate-to-order vehicle test program. The agreement commenced in February 2001 and expired in November 2001. We intend to strengthen the size and quality of our relationships with major dealer groups and automotive manufacturers and expect revenues from enterprise sales to increase in 2002.

Advertising. Revenues from advertising represent fees received from automotive manufacturers and other advertisers who target car buyers during the research, consideration and decision making process on our Web sites. Advertising revenue increased by $1.1 million, or 212%, to $1.6 million in the second quarter of 2002 compared to $0.5 million in the second quarter of 2001. The increase was a result of our acquisition of Autoweb. With the creation of our advertising sales media organization offset by a general decline in media spending by dealerships and manufacturers we expect our advertising revenues to increase in 2002.

Other Products and Services. Revenues from other products and services include fees from our new and continued products, legacy products and international licensing agreements. New and continued products include RPM and products and services which we continue to invest in, such as database marketing and classified listings. Legacy products include consumer oriented products and services which we have redirected resources away from, such as financing, insurance and warranties. International licensing agreements include agreements with international parties that are licensed to use our Autobytel brand name and, in most cases, technology in their respective countries. We do not expect to devote substantial resources to our international operations, but will continue to explore additional licensing business as opportunities arise. Revenues from other products and services decreased by $1.1 million, or 51%, to $1.0 million in the second quarter of 2002 compared to $2.1 million in the second quarter of 2001. The decrease was primarily due to a $1.3 million, or 70%, decline in international licensing, insurance, financing, warranties, database marketing and website maintenance fees partially offset by an increase of $0.2 million, or 544%, in classified listing fees. We expect other product and service revenues to remain flat as we continue to focus our efforts on offering marketing services to dealers and automotive manufacturers such as RPM, database marketing and classified listings and redirect resources away from products such as financing, insurance, warranties, web site maintenance and international licensing.

Sales and Marketing. Sales and marketing expense primarily includes advertising and marketing expenses paid to our purchase request providers and for developing our brand equity, as well as personnel and other costs associated with dealer sales, training and support. Sales and marketing expense increased by $0.4 million, or 3%, to $13.2 million in the second quarter of 2002 compared to $12.8 million in the second quarter of 2001. The increase was primarily due to an increase in online advertising of $2.8 million, or 53%, and personnel and other advertising and sales expenses of $0.7 million, or 5%, which were partially offset by a decrease of $3.1 million, or 89%, in television, print and radio advertising. The increase in online advertising expenses was a result of $5.8 million in online advertising for Autoweb partially offset by a decrease of $3.0 million in online advertising for Autobytel. We expect our sales and marketing expenses as a percentage of revenues to remain flat or slightly decline.

Product and Technology Development. Product and technology development expense primarily includes personnel costs related to developing new products, enhancing the features, content and functionality of our Web sites and our Internet-based communications platform, costs associated with our telecommunications and computer infrastructure and amortization of software development costs. Product and technology development expense increased by $1.1 million, or 24%, to $5.7 million in the second quarter of 2002 compared to $4.6 million in the second quarter of 2001. The increase was primarily due to a $0.6 million, or 22%, increase in personnel and related costs largely resulting from the addition of Autoweb operations to our business and a $0.5 million increase in amortization of capitalized software development costs related to software licensed to our international licensees, our online dealership lead management system called iManager and our new customer service reminder product for dealerships. In addition, software development costs capitalized in the second quarter of 2002 of $0.4 million were related to enhancements to RPM. Software development costs capitalized in the second quarter of 2001 were $1.5 million and were

primarily related to the enhancement of software licensed to our international licensees. We expect our product and technology development expenses as a percentage of revenues to remain flat or slightly decline.

General and Administrative. General and administrative expense primarily consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense was $2.4 million and $4.0 million for the second quarter of 2002 and 2001, respectively. General and administrative expense decreased by $1.6 million, or 40%. The decrease was primarily due to a $0.4 million, or 100%, decrease in goodwill amortization as a result of the adoption of the non-amortization provisions of SFAS No. 142 on January 1, 2002, and a $1.2 million, or 95%, decrease in legal expenses. Legal expenses in the second quarter of 2001 included fees incurred for litigation. We expect our general and administrative expenses as a percentage of revenues to remain flat or slightly decline.

Goodwill Impairment. In accordance with SFAS No. 142, goodwill of $8.6 million recorded on our balance sheet in connection with our acquisition of Autoweb in August 2001 is not amortized. Instead, on at least an annual basis, we evaluate the carrying value of goodwill for impairment. Based on our evaluation of goodwill conducted in June 2002, no impairment charge was recognized. In future periods, if goodwill is determined to be impaired, we will recognize a non-cash charge equal to the excess of the carrying value over the determined fair value. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. In the second quarter of 2001, we determined that goodwill recorded on our balance sheet in connection with our acquisition of CarSmart was in excess of its current estimated fair value and recorded a non-cash charge of $21.6 million to reflect the write-down of goodwill to its estimated current market value of $1.3 million as of June 30, 2001.

Autobytel.Europe restructuring and other international charges. In the second quarter of 2001, we recorded a charge of $11.2 million related to our international operations. The charge consisted of $5.0 million related to the restructuring of Autobytel.Europe’s operations, $3.5 million related to the write-off of obsolete international software, and $2.7 million related to the write-off of investments in European joint ventures largely due to the inability to obtain additional capital to support continued operations of the joint ventures.

Domestic restructuring and other charges. In the second quarter of 2002, we recorded a net benefit of $0.1 million in domestic restructuring and other charges. The net benefit consisted of a $1.0 million benefit related to a reduction in the original estimate of a negotiated settlement with a vendor, discounted legal fees and recovered legal costs from an insurance company, partially offset by charges of $0.9 million related to our lease obligation on the vacant portion of AIC’s office facilities, severance costs for the recent restructuring of our operations to reduce costs and enhance efficiencies and abandoned acquisition costs. In the second quarter of 2001, we recorded a charge of $0.9 million primarily for contract termination costs related to online advertising and the aftermarket program on our Web site as well as the write-off of previously capitalized software related to the aftermarket program.

Interest Income, Net. Interest income decreased by $0.8 million, or 88%, to $0.1 million in the second quarter of 2002 compared to $0.9 million in the second quarter of 2001 due to lower cash balances and declining interest rates.

Foreign Currency Exchange Loss, Net. In the second quarter of 2002, foreign currency exchange losses were a result of foreign exchange rate fluctuations in Canada. In the second quarter of 2001, foreign currency exchange losses were primarily a result of foreign exchange rate fluctuations in Europe. As a result of a decrease in our ownership of Autobytel.Europe in the first quarter of 2002, we no longer consolidate Autobytel.Europe in our financial statements.

Equity Loss in Unconsolidated Subsidiaries Equity loss in unconsolidated subsidiaries represents our share of losses in our Australian venture and Autobytel.Europe. In the second quarter of 2002, the loss recognized for Autobytel Australia was limited to the amount of our investment in Australia, or $0.2 million.

Minority Interest. Minority interest represents the portion of Autobytel.Europe’s net loss allocable to other Autobytel.Europe shareholders. As of March 29, 2002, Autobytel.Europe was no longer a majority-owned subsidiary as we reduced our ownership to 49%. As a result of our reduction in ownership in Autobytel.Europe we no longer record minority interest. In the second quarter of 2001, a portion of the loss generated by Autobytel.Europe was allocated to its other shareholders resulting in a gain of $2.1 million.

Six Months ended June 30, 2002 and 2001

Revenues. Our revenues increased by $9.2 million, or 28%, to $41.6 million in the six months ended June 30, 2002 compared to $32.4 million in the same period of 2001.

Program Fees. Program fees increased by $6.5 million, or 27%, to $30.9 million in the six months ended June 30, 2002 compared to $24.4 million in the same period of 2001. The increase was primarily due to a $10.3 million increase as a result of our acquisition of Autoweb and an increase of $0.3 million due to a change in our estimate of required reserves for customer credits related to Autoweb, partially offset by a $4.1 million, or 17%, decrease in Autobytel and CarSmart program fees due to a decline in our number of dealer relationships. With our efforts to improve purchase request quality and reduce the number of dealers that cannot provide us with a reasonable profit, we expect our program fee revenues to temporarily remain flat or decline in 2002. We anticipate that improved purchase request quality will help us reduce fee accommodations, reduce program dealer turnover and increase program fee revenues in the future.

Enterprise Sales. Enterprise sales increased by $1.7 million, or 58%, to $4.7 million in the six months ended June 30, 2002 compared to $3.0 million in the same period of 2001. Enterprise sales in 2002 include fees from major dealer groups for purchase requests and from manufacturers for automotive marketing data and technology provided by AIC, a division of Autoweb. The increase was primarily related to a $3.9 million increase as a result of our acquisition of Autoweb, partially offset by a $ 2.2 million, or 72%, decrease in Autobytel enterprise sales due to the completion in November 2001 of the online locate-to-order vehicle test program described below. Enterprise sales in 2001 represents fees received from General Motors Corporation for services related to an online locate-to-order vehicle test program. The agreement commenced in February 2001 and expired in November 2001. We intend to strengthen the size and quality of our relationships with major dealer groups and automotive manufacturers and expect revenues from enterprise sales to increase in 2002.

Advertising. Advertising revenue increased by $2.7 million, or 374%, to $3.4 million in the six months ended June 30, 2002 compared to $0.7 million in the same period of 2001. The increase was due to a $2.3 million increase as a result of our acquisition of Autoweb and an increase of $0.4 million, or 52%, in Autobytel and CarSmart advertising revenues. With the creation of our advertising sales media organization offset by a general decline in media spending by dealerships and manufacturers we expect our advertising revenues to increase in 2002.

Other Products and Services. Revenues from other products and services decreased by $1.7 million, or 40%, to $2.6 million in the six months ended June 30, 2002 compared to $4.3 million in the same period of 2001. The decrease was primarily due to a $2.4 million, or 65%, decline in international licensing, insurance, financing, warranty and web site maintenance fees partially offset by an increase of $0.7 million in classified listing and database marketing fees. The $0.7 million increase includes $0.3 million related to a database marketing agreement calling for a minimum initial fee which was earned in the first quarter of 2002. We expect other product and service revenues to remain flat as we continue to focus our efforts on offering marketing services to dealers and automotive manufacturers such as RPM, database marketing and classified listings and redirect resources away from products such as financing, insurance, warranties, web site maintenance and international licensing.

Sales and Marketing. Sales and marketing expense decreased by $0.7 million, or 3%, to $25.5 million in the six months ended June 30, 2002 compared to $26.2 million in the same period of 2001. The decrease was primarily due to a $5.7 million, or 88%, decrease in television, print and radio advertising which was partially offset by an increase in online advertising of $4.6 million, or 40%, and a $0.4 million, or 2%, increase in personnel and other advertising and sales expenses. The increase in online advertising expenses was a result of $9.8 million in online advertising for Autoweb partially offset by a decrease of $5.2 million in online advertising for Autobytel. We expect our sales and marketing expenses as a percentage of revenues to remain flat or slightly decline.

Product and Technology Development. Product and technology development expense increased by $2.9 million, or 33%, to $11.5 million in the six months ended June 30, 2002 compared to $8.6 million in the same period of 2001. The increase was primarily due to a $1.5 million, or 30%, increase in personnel and related costs largely resulting from the addition of Autoweb operations to our business, and $1.0 million in amortization of software development costs related to our international software licenses, iManager and RPM, and $0.4 million, or 11%, increase in other product and technology development expenses. In addition, software development costs capitalized in the six months ended June 30, 2002 of $1.3 million were related to enhancements to RPM. Software development costs capitalized in the six months ended June 30, 2001 were $7.1 million and were primarily related to the enhancement of our existing proprietary software for use by our international licensees. We expect our product and technology development expenses as a percentage of revenues to remain flat or slightly decline.

General and Administrative. General and administrative expense was $5.5 million and $7.6 million for the six months ended June 30, 2002 and 2001, respectively. General and administrative expense decreased by $2.1 million, or 28%. The decrease was primarily due to a $0.8 million, or 100%, decrease in goodwill amortization as result of the adoption of the non-amortization provisions of SFAS No. 142 on January 1, 2002, and a $1.4 million, or 73%, decrease in legal expenses partially offset by a $0.1 million, or 3%, increase in other general corporate expenses. Legal expenses in the six months ended June 30, 2001 included fees incurred for litigation. We expect our general and administrative expenses as a percentage of revenues to remain flat or slightly decline.

Goodwill Impairment. In accordance with SFAS No. 142, goodwill of $8.6 million recorded on our balance sheet in connection with our acquisition of Autoweb in August 2001 is not amortized. Instead, on at least an annual basis, we evaluate the carrying value of goodwill for impairment. Based on our evaluation of goodwill conducted in June 2002, no impairment charge was recognized. In future periods, if goodwill is determined to be impaired, we will recognize a non-cash charge equal to the excess of the carrying value over the determined fair value. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. During the six months ended June 30, 2001, we recorded a non-cash charge of $21.6 million to reflect the write-down of goodwill related to the acquisition of CarSmart to its estimated current market value of $1.3 million as of June 30, 2001.

Autobytel.Europe restructuring, impairment charges and other international charges. During the six months ended June 30, 2002, we recorded non-cash charges of $4.0 million for terminated Autobytel.Europe contracts and $11.0 million for the impairment of our investment in Autobytel.Europe. During the six months ended June 30, 2001, we recorded a charge of $11.2 million related to our international operations which consisted of $5.0 million related to the restructuring of Autobytel.Europe’s operations, $3.5 million related to the write-off of obsolete international software and $2.7 million related to the write-off of investments in European joint ventures.

Domestic restructuring and other charges. For the six months ended June 30, 2002, we recorded a net benefit of $0.1 million in domestic restructuring and other charges mainly due to a $1.0 million benefit related to a reduction in the original estimate of a negotiated settlement with a vendor, discounted legal fees and recovered legal costs from an insurance company, partially offset by charges of $0.9 million related to our lease obligation on the vacant portion of AIC’s office facilities, severance costs for the recent restructuring of our operations to reduce costs and enhance efficiencies and abandoned acquisition costs. For the six months ended June 30, 2001, we recorded a charge of $1.9 million which primarily consisted of restructuring costs of $1.0 million related to the reorganization of our dealer operations, including personnel costs, elimination of duplicate facilities, and the write-down of fixed assets and contract termination costs of $0.9 million related to online advertising and the aftermarket program on our Web site as well as the write-off of previously capitalized software related to the aftermarket program.

Interest Income, Net. For the six months ended June 30, 2002, interest income decreased by $1.6 million, or 76%, to $0.5 million compared to $2.1 million in the same period of 2001 due to lower cash balances and declining interest rates.

Foreign Currency Exchange Gain, Net. Due to foreign exchange rate fluctuations in Canada, a nominal loss was realized in the six months ended June 30, 2002. Primarily due to foreign exchange rate fluctuations in Europe, a $0.5 million gain was realized in the six months ended June 30, 2001. As a result of a decrease in our ownership of Autobytel.Europe, we no longer consolidate Autobytel.Europe in our financial statements.

Equity Loss in Unconsolidated Subsidiaries. Equity loss in unconsolidated subsidiaries represents our share of losses in our Australian venture and Autobytel.Europe. The loss recognized for Autobytel Australia has been limited to the amount of our investment in Australia, or $0.4 million, in the six months ended June 30, 2002 compared to $0.5 million in the same period of 2001.

Minority Interest. Minority interest represents the portion of Autobytel.Europe’s net loss allocable to other Autobytel.Europe shareholders. A portion of the loss generated by Autobytel.Europe, our majority-owned subsidiary through March 28, 2002, was allocated to its other shareholders resulting in a gain of $0.9 million in the six months ended June 30, 2002 compared to a gain of $2.0 million in the same period of 2001. As of March 29, 2002, Autobytel.Europe is no longer a majority-owned subsidiary as we reduced our ownership to 49%.

Stock-options Granted in 2002

From January 1 through June 30, 2002, we granted stock options to purchase 609,000 shares of common stock under our 1998 Stock Option Plan and 1999 Employee and Acquisition Related Stock Option Plan. The stock options were granted at the fair market value on the date of grant. As of June 30, 2002, we had 4,630,433 outstanding stock options.

Option Exchange Offer

On December 14, 2001 we commenced an offer to exchange all options outstanding under our stock option plans, including Autoweb options we assumed in connection with the acquisition of Autoweb, that had an exercise price per share of more than $4.00 for new options.

The offer expired on January 15, 2002. Pursuant to the offer, we accepted for cancellation on January 16, 2002, options to purchase 1,450,534 shares of common stock, representing approximately 29% of the options that were eligible to be tendered for exchange. On July 18, 2002, we granted new options to purchase an aggregate of 747,355 shares of common stock in exchange for those options we accepted for cancellation at a price of $2.35 per share which was the fair market value on the date of grant.

Employees

As of July 31, 2002, we had a total of 226 employees. We also utilize independent contractors as required. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good.

Liquidity and Capital Resources

Net cash used in operating activities was $7.7 million for the six months ended June 30, 2002 and $8.8 million in the same period of 2001. Net cash used for the six months ended June 30, 2002 partially resulted from the net loss for the period offset by non-cash charges for Autobytel.Europe’s restructuring, impairment of our investment and loss on recapitalization, as well as provision for bad debt and customer credits, and depreciation and amortization. The timing of cash receipts and disbursements also contributed to the use of cash due to increased accounts receivable and decreased accounts payable and accrued expenses.

Net cash used in operating activities for the six months ended June 30, 2001 resulted primarily from the net loss for the period offset by the impact of non-cash charges related to goodwill impairment, international restructuring, obsolete international software, the write-off of international investments, depreciation and amortization and provision for bad debt and customer credits. The timing of cash receipts and disbursements provided cash for operations, the majority of which was due to accrued restructuring liabilities, offset by increased accounts receivable and decreased accrued expenses and deferred revenues.

Net cash used in investing activities was $30.5 million and $4.3 million for the six months ended June 30, 2002 and 2001, respectively. Cash used in investing activities in 2002 was primarily related to the deconsolidation of Autobytel.Europe. On March 28, 2002, Autobytel.Europe completed a recapitalization which reduced our ownership of Autobytel.Europe from 76.5% to 49%. As a result of the reduction in our ownership, we no longer consolidate Autobytel.Europe in our financial statements but account for our remaining investment in Autobytel.Europe under the equity method. Due to the deconsolidation of Autobytel.Europe, cash of $28.2 million is no longer included on our balance sheet. We do not anticipate contributing additional cash to Autobytel.Europe above the $5.0 million we initially contributed in January 2000. Cash used in investing activities in 2002 was also related to expenditures for capitalized software related to the development of our new customer service reminder product for dealerships and manufacturers called RPM, an investment in Autobytel Australia and the purchase of computer hardware and software. Cash used in investing activities in 2001 was primarily related to capitalized software development costs.

Net cash provided by financing activities was $0.2 million and $2.1 million for the six months ended June 30, 2002 and 2001, respectively. Proceeds received from the sale of common stock provided cash from financing activities in 2002. Financing activities in 2001 primarily consisted of cash received from a strategic partner for investment in Autobytel.Europe.

As of July 31, 2002, we had approximately $25.4 million in cash and cash equivalents. Our cash usage depends on several factors, including:

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the level of expenditures on marketing and advertising,

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the level of expenditures on product and technology development,

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the ability to increase the volume of purchase requests and transactions related to our Web sites,

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the cost of contractual arrangements with Internet portals, online information providers, and other referral sources,

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the level of investments in joint ventures and licensees, and

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the cash portion of acquisition transactions.

We do not have debt. We believe our current cash and cash equivalents are sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

With respect to years beyond the second quarter of 2003, we may be required to raise additional capital to meet our long term operating requirements. Since inception, our expenses have exceeded our revenues. We expect to be able to fund our operations from internally generated funds sometime in 2003. However, we cannot assure that we will be able to fund our operations from internally generated funds during such period or thereafter.

While we forecast and budget cash requirements, assumptions underlying the estimates may change and could have a material impact on our cash requirements. If capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. We have no commitments for any additional financing, and there can be no assurance that any such commitments can be obtained on favorable terms, if at all.

Any additional equity financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants with respect to dividends, raising capital and other financial and operational matters which could restrict our operations or finances. If we are unable to obtain additional financing as needed, we may be required to reduce the scope of or discontinue our operations or delay or discontinue any expansion, which could have a material adverse effect on our business, results of operations and financial condition.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” which requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. It also requires recognition of intangible assets, other than goodwill, in business combinations completed after June 30, 2001 and all acquisitions accounted for using the purchase method of accounting. We acquired Autoweb.com, Inc. after June 30, 2001 and accounted for the acquisition in accordance with SFAS No. 141.

The acquisition of Autoweb.com, Inc. has been accounted for in accordance with SFAS No. 142 as the acquisition was completed after June 30, 2001. Based on our evaluation of goodwill in June 2002, no impairment was recognized. In future periods, if goodwill is determined to be impaired, we will recognize a non-cash charge equal to the excess of the carrying value over the determined fair value. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. As of June 30, 2002, the unamortized balance of goodwill related to the Autoweb acquisition was $8.6 million. During 2001, we recorded a $22.9 million non-cash charge for the full impairment of goodwill and $0.9 million for amortization expense related to A.I.N. Corporation.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material effect on our financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which we adopted on January 1, 2002, establishes standards for performing certain tests of impairment on long-lived assets. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a material effect on our financial position or results of operations.

Risk Factors

In addition to the factors discussed in the “Overview” and “Liquidity and Capital Resources” sections of Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Part I. Item 3. “Quantitative and

Qualitative Disclosures About Market Risks” in this Quarterly Report on Form 10-Q, the following additional factors may affect our future results.

We have a history of net losses and cannot assure that we will be profitable. If we continue to lose money, our operations will not be financially viable.

Because of the relatively recent emergence of the Internet-based vehicle information and purchasing industry, none of our senior executives has long-term experience in the industry. This limited operating history contributes to our difficulty in predicting future operating results.

We have incurred losses every quarter since inception. Even if we achieve profitability, we might fail to sustain or increase that profitability in the future. We cannot assure that we will be profitable. Autobytel, including Autoweb from the date of acquisition, had an accumulated deficit of $159.6 million as of June 30, 2002 and $140.5 million as of December 31, 2001.

Our potential for future profitability must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets, such as the market for Internet commerce. We believe that to achieve profitability, we must, among other things:

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generate increased vehicle buyer traffic to our Web sites;

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successfully introduce new products and services;

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continue to send new and used vehicle purchase requests to dealers that result in sufficient dealer transactions to justify our fees;

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expand the number of dealers in our networks and enhance the quality of dealers;

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respond to competitive developments;

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maintain a high degree of customer satisfaction;

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provide secure and easy to use Web sites for customers;

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increase visibility of our brand names;

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continue to attract, retain and motivate qualified personnel; and

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continue to upgrade and enhance our technologies to accommodate expanded service offerings and increased consumer traffic.

We cannot be certain that we will be successful in achieving these goals or that if we are successful in achieving these goals, that we will be profitable.

If our dealer attrition increases, our dealer networks and revenues derived from these networks may decrease.

The majority of our revenues are derived from fees paid by our networks of participating program and enterprise dealers. A few agreements account for all of our enterprise dealer relationships. From time to time, a major dealer group or automotive manufacturer may significantly increase or decrease the number of enterprise dealers participating in our dealer networks. If dealer attrition increases and we are unable to add new dealers to mitigate the attrition, our revenues will likely decrease. If the number of dealers in our networks declines our revenues may decrease and our business, results of operations and financial condition will be materially and adversely affected. A material factor affecting dealer attrition is our ability to provide dealers with high quality purchase requests. High quality purchase requests are those that result in high closing ratios. Closing ratio is the ratio of the number of vehicles purchased at a dealer generated from purchase requests to the total number of purchase requests sent to that dealer. Generally, our participating dealers enter into written marketing agreements with us having a stated term ranging from 90 days to one year, but the dealer agreements are cancelable by the dealer upon 30 days notice. We cannot assure that dealers will not terminate their agreements with us. Participating dealers may terminate their relationship with us for any reason, including an unwillingness to accept our subscription terms or as a result of joining alternative marketing programs. Our business is dependent upon our ability to attract and retain qualified new and used vehicle dealers, major dealer groups and automotive manufacturers. We added 1,393 dealer relationships to our dealer networks and 967 dealer relationships were terminated by dealers or us during the second quarter of 2002. In

order for us to grow or maintain our dealer networks, we need to reduce our dealer attrition. We cannot assure that we will be able to reduce the level of dealer attrition, and our failure to do so could materially and adversely affect our business, results of operations and financial condition. As of June 30, 2002, we had 9,380 dealer relationships. As of June 30, 2002, 889 program dealers had a relationship with more than one of our branded Web sites.

We may lose participating dealers because of the reconfiguration of dealer territories. We will lose the revenues associated with any reductions in participating dealers resulting from such reconfiguration.

If the volume of purchase requests increases, we may need to reduce or reconfigure exclusive territories currently assigned to Autobytel or CarSmart dealers to serve consumers more effectively. If a dealer is unwilling to accept a reduction or reconfiguration of its territory, it may terminate its relationship with us. A dealer also could sue to prevent such reduction or reconfiguration, or collect damages from us. We have experienced one such lawsuit. A material decrease in the number of dealers participating in our networks or litigation with dealers could have a material adverse effect on our business, results of operations and financial condition.

We rely heavily on our participating dealers to promote our brand value by providing high quality services to our consumers. If dealers do not provide our consumers high quality services, our brand value will diminish and the number of consumers who use our services may decline causing a decrease in our revenues.

Promotion of our brand value depends on our ability to provide consumers a high quality experience for purchasing vehicles throughout the purchasing process. If our dealers do not provide consumers with high quality service, the value of our brands could be damaged and the number of consumers using our services may decrease. We devote significant efforts to train participating dealers in practices that are intended to increase consumer satisfaction. Our inability to train dealers effectively, or the failure by participating dealers to adopt recommended practices, respond rapidly and professionally to vehicle inquiries, or sell and lease vehicles in accordance with our marketing strategies, could result in low consumer satisfaction, damage our brand names and could materially and adversely affect our business, results of operations and financial condition.

Intense competition could reduce our market share and harm our financial performance. Our market is competitive not only because the Internet has minimal technical barriers to entry, but also because we compete directly with other companies in the offline environment.

Our vehicle purchasing services compete against a variety of Internet and traditional vehicle purchasing services, automotive brokers and classified advertisement providers. Therefore, we are affected by the competitive factors faced by both Internet commerce companies as well as traditional, offline companies within the automotive and automotive-related industries. The market for Internet-based commercial services is new, and competition among commercial Web sites may increase significantly in the future. Our business is characterized by minimal technical barriers to entry, and new competitors can launch a competitive service at relatively low cost. To compete successfully, we must significantly increase awareness of our services and brand names. Failure to compete successfully will cause our revenues to decline and would have a material adverse effect on our business, results of operations and financial condition.

We compete with other entities which maintain similar commercial Web sites including AutoVantage, Microsoft Corporation’s Carpoint, CarsDirect.com, Cars.com, eBayMotors.com and AutoTrader.com. AutoNation, a large consolidator of dealers, has a Web site for marketing vehicles. We also compete indirectly against vehicle brokerage firms and affinity programs offered by several companies, including Costco Wholesale Corporation and Wal-Mart Stores, Inc. In addition, all major automotive manufacturers have their own Web sites and many have launched online buying services, such as General Motors Corporation’s BuyPower and Ford Motor Co. in its partnership with its dealers through FordDirect.com. Our recently announced customer relationship management product, RPM, competes with companies that provide marketing services to automotive manufacturers and dealers, including Reynolds and Reynolds, ADP, Experian and Teletech. We also compete with vehicle dealers that are not part of our networks. Such companies may already maintain or may introduce Web sites which compete with ours.

We believe that the principal competitive factors in the online market are:

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brand recognition;

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speed and quality of fulfillment;

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dealer territorial coverage;

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relationships with automotive manufacturers;

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variety of related products and services;

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ease of use;

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customer satisfaction;

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quality of Web site content;

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quality of service; and

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technical expertise.

We cannot assure that we can compete successfully against current or future competitors, many of which have substantially more capital, existing brand recognition, resources and access to additional financing. In addition, competitive pressures may result in increased marketing costs, decreased Web site traffic or loss of market share or otherwise may materially and adversely affect our business, results of operations and financial condition.

Our quarterly financial results are subject to significant fluctuations which may make it difficult for investors to predict our future performance.

Our quarterly operating results have fluctuated in the past and may fluctuate in the future due to many factors. Our expense levels are based in part on our expectations of future revenues which may vary significantly. If revenues do not increase faster than expenses, our business, results of operations and financial condition will be materially and adversely affected. Other factors that may adversely affect our quarterly operating results include:

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our ability to retain existing dealers, attract new dealers and maintain dealer and customer satisfaction;

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the announcement or introduction of new or enhanced sites, services and products by us or our competitors;

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general economic conditions and economic conditions specific to the Internet, online commerce or the automobile industry;

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a decline in the usage levels of online services and consumer acceptance of the Internet and commercial online services for the purchase of consumer products and services such as those offered by us;

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our ability to upgrade and develop our systems and infrastructure and to attract new personnel in a timely and effective manner;

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the level of traffic on our Web sites and other sites that refer traffic to our Web sites;

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technical difficulties, system downtime, Internet brownouts or electricity blackouts;

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the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure;

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governmental regulation; and

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unforeseen events affecting the industry.

Seasonality is likely to cause fluctuations in our operating results. Investors may not be able to predict our annual operating results based on a quarter to quarter comparison of our operating results.

We expect our business to experience seasonality as it matures. The seasonal patterns of Internet usage and vehicle purchasing do not completely overlap. Historically, Internet usage typically declines during summer and certain holiday periods, while vehicle purchasing in the United States is strongest in the spring and summer months. If seasonality occurs, investors may not be able to

predict our annual operating results based on a quarter to quarter comparison of our operating results. Seasonality in the automotive industry, Internet and commercial online service usage and advertising expenditures is likely to cause fluctuations in our operating results and could have a material adverse effect on our business, operating results and financial condition.

We may be particularly affected by general economic conditions due to the nature of the automotive industry.

The economic strength of the automotive industry significantly impacts the revenues we derive from our dealers, automotive manufacturers and other strategic partners, advertising revenues and consumer traffic to our Web sites. The automotive industry is cyclical, with vehicle sales fluctuating due to changes in national and global economic forces. Purchases of vehicles are typically discretionary for consumers and may be particularly affected by negative trends in the general economy. The success of our operations depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions (and perceptions of such conditions by consumers) affecting disposable consumer income (such as employment, wages and salaries, business conditions and interest rates in regional and local markets). In addition, because the purchase of a vehicle is a significant investment and is relatively discretionary, any reduction in disposable income in general or a general increase in interest rates or a general tightening of lending may affect us more significantly than companies in other industries.

The events of September 11, 2001, threatened terrorist acts, and the ongoing military action have created uncertainties in the automotive industry and domestic and international economies in general. These events appear to be having an adverse impact on general economic conditions, which may reduce demand for vehicles and consequently our services and products which would have an adverse effect on our business, financial condition and results of operations. At this time, however, we are not able to predict the nature, extent and duration of these effects on overall economic conditions or on our business, financial condition and results of operations.

We cannot assure that our business will not be materially adversely affected as a result of an industry or general economic downturn.

If any of our relationships with Internet search engines or online automotive information providers terminates, our purchase request volume could decline. If our purchase request volume or quality declines, our participating dealers may not be satisfied with our services and may terminate their relationships with us or force us to decrease the fees we charge for our service. If this occurs, our revenues would decrease.

We depend on a number of strategic relationships to direct a substantial amount of purchase requests and traffic to our Web sites. The termination of any of these relationships or any significant reduction in traffic to Web sites on which our services are advertised or offered, or the failure to develop additional referral sources, would cause our purchase request volume or quality to decline. If this occurs, dealers may no longer be satisfied with our service and may terminate their relationships with us or force us to decrease the fees we charge for our services. If our dealers terminate their relationships with us or force us to decrease the fees we charge for our services, our revenues will decline which could have a material adverse effect on our business, results of operations and financial condition. We receive a significant number of purchase requests through a limited number of Internet search engines, online automotive information providers, and other auto related Internet sites. We periodically negotiate revisions to existing agreements and these revisions could increase our costs in future periods. A number of our agreements with online service providers may be terminated without cause. We may not be able to maintain our relationship with our online service providers or find alternative, comparable marketing sponsorships and alliances capable of originating significant numbers of purchase requests on terms satisfactory to us. If we cannot maintain or replace our relationships with online service providers, our revenues may decline which would have a material adverse effect on our business, results of operations and financial condition.

If we cannot build and maintain strong brand loyalty our business may suffer.

We believe that the importance of brand recognition will increase as more companies engage in commerce over the Internet. Development and awareness of the Autobytel.com, Autoweb.com and CarSmart.com brands will depend largely on our ability to obtain a leadership position in Internet commerce. If dealers and manufacturers do not perceive us as an effective channel for increasing vehicle sales, or consumers do not perceive us as offering reliable information concerning new and used vehicles, as well as referrals to high quality dealers, in a user-friendly manner that reduces the time spent for vehicle purchases, we will be unsuccessful in promoting and maintaining our brands. Our brands may not be able to gain widespread acceptance among consumers or dealers. Our failure to develop our brands sufficiently would have a material adverse effect on our business, results of operations and financial condition.

If we lose our key personnel or are unable to attract, train and retain additional highly qualified sales, marketing, managerial and technical personnel, our business may suffer.

Our future success depends on our ability to identify, hire, train and retain highly qualified sales, marketing, managerial and technical personnel. In addition, as we introduce new services we may need to hire additional personnel. We may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary managerial, technical, sales and marketing personnel could have a material adverse effect on our business, results of operations and financial condition.

Our business and operations are substantially dependent on the performance of our executive officers and key employees. The loss of the services of one or more of our executive officers or key employees could have a material adverse effect on our business, results of operations and financial condition.

We are a new business in a new industry and need to manage our growth and our entry into new business areas in order to avoid increased expenses without corresponding revenues.

We have been introducing new services to consumers and dealers in order to establish ourselves as a leader in the evolving market for Internet automotive marketing services. The growth of our operations requires us to increase expenditures before we generate revenues. For example, we may need to hire personnel to oversee the introduction of new services before we generate revenues from these services. Our inability to generate satisfactory revenues from such expanded services to offset costs could have a material adverse effect on our business, financial condition and results of operations.

We must also:

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test, introduce and develop new services and products, including enhancing our Web sites;

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expand the breadth of products and services offered;

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expand our market presence through relationships with third parties; and

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acquire new or complementary businesses, products or technologies.

We cannot assure that we can successfully manage these tasks.

If federal or state franchise laws apply to us we may be required to modify or eliminate our marketing programs. If we are unable to market our services in the manner we currently do, our revenues may decrease and our business may suffer.

We believe that neither our relationship with our dealers nor our dealer subscription agreements constitute “franchises” under federal or state franchise laws. A federal court of appeals in Michigan has ruled that our dealer subscription agreement is not a “franchise” under Michigan law. However, if any state’s regulatory requirements relating to franchises or our method of business impose additional requirements on us or include us within an industry-specific regulatory scheme, we may be required to modify our marketing programs in such states in a manner which undermines the program’s attractiveness to consumers or dealers. If our relationship or written agreement with our dealers were found to be a “franchise” under federal or state franchise laws, then we could be subject to other regulations, such as franchise disclosure and registration requirements and limitations on our ability to effect changes in our relationships with our dealers, which may negatively impact our ability to compete and cause our revenues to decrease and our business to suffer. If we become subject to fines or other penalties or if we determine that the franchise and related requirements are overly burdensome, we may elect to terminate operations in such state. In each case, our revenues may decline and our business, results of operations and financial condition could be materially and adversely affected.

We also believe that our dealer marketing service generally does not qualify as an automobile brokerage activity and, therefore, state motor vehicle dealer or broker licensing requirements do not apply to us. Through a subsidiary, we are licensed as a motor vehicle dealer and broker. In response to Texas Department of Transportation concerns, we modified our marketing program in that state to make our program open to all dealers who wish to apply. In addition, we modified the program to include a pricing model under which all participating dealers (regardless of brand) in a given zip code in Texas are charged uniform fees. If other states’ regulatory requirements relating to motor vehicle dealers or brokers are deemed applicable to us, we may become subject to fines, penalties or other requirements and may be required to modify our marketing programs in such states in a manner that undermines the attractiveness of the program to consumers or dealers. If we determine that the licensing or other requirements, in a given state are

overly burdensome, we may elect to terminate operations in such state. In each case, our revenues may decline and our business, results of operations and financial condition could be materially and adversely affected.

If financial broker and insurance licensing requirements apply to us in states where we are not currently licensed, we will be required to obtain additional licenses and our business may suffer.

If we are required to be licensed as a financial broker, it may result in an expensive and time-consuming process that could divert the effort of management away from day-to-day operations. In the event states require us to be licensed and we are unable to do so, or are otherwise unable to comply with regulations required by changes in current operations or the introduction of new services, we could be subject to fines or other penalties or be compelled to discontinue operations in such states, and our business, results of operations and financial condition could be materially and adversely affected.

We provide links on our Web sites so consumers can receive real time quotes for insurance coverage from third parties and submit quote applications online through such parties’ Web sites. We receive fees from such participants in connection with this advertising activity. We do not believe that such activities require us to be licensed under state insurance laws. The use of the Internet in the marketing of insurance products, however, is a relatively new practice. It is not clear whether or to what extent state insurance licensing laws apply to activities similar to ours. Given these uncertainties, we currently hold, through a wholly-owned subsidiary, insurance agent licenses or are otherwise authorized to transact insurance in numerous states.

If we are unable to be licensed to comply with additional regulations, or are otherwise unable to comply with regulations required by changes in current operations or the introduction of new services, we could be subject to fines or other penalties or be compelled to discontinue operations in such states, and our business, results of operations and financial condition could be materially and adversely affected.

There are many risks associated with consummated and potential acquisitions.

We acquired Autoweb in the third quarter of 2001.

Acquisitions involve numerous risks. For example:

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It may be difficult to assimilate the operations and personnel of an acquired business into our own business;

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Management information and accounting systems of an acquired business must be integrated into our current systems;

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We may lose dealers participating in both our network as well as that of the acquired business, if any;

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Our management must devote its attention to assimilating the acquired business which diverts attention from other business concerns;

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We may enter markets in which we have limited prior experience; and

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We may lose key employees of an acquired business.

We intend to continue to evaluate potential acquisitions which we believe will complement or enhance our existing business. If we acquire other companies in the future, it may result in the issuance of equity securities that could dilute existing stockholders’ ownership. We may also incur debt and losses related to the impairment of goodwill and other intangible assets if we acquire another company, and this could negatively impact our results of operations. We currently do not have any definitive agreements to acquire any company or business, and we cannot guarantee that we will be able to identify or complete any acquisition in the future.

Internet commerce has yet to attract significant regulation. Government regulations may result in administrative monetary fines, penalties or taxes that may reduce our future earnings.

There are currently few laws or regulations that apply directly to the Internet. Because our business is dependent on the Internet, the adoption of new local, state, national or international laws or regulations may decrease the growth of Internet usage or the acceptance of Internet commerce which could, in turn, decrease the demand for our services and increase our costs or otherwise have a material adverse effect on our business, results of operations and financial condition.

Tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in Internet commerce. New state tax regulations may subject us to additional state sales, use and income taxes.

Evolving government regulations may require future licensing which could increase administrative costs or adversely affect our revenues.

In a regulatory climate that is uncertain, our operations may be subject to direct and indirect adoption, expansion or reinterpretation of various domestic and foreign laws and regulations. Compliance with these future laws and regulations may require us to obtain appropriate licenses at an undeterminable and possibly significant initial monetary and annual expense. These additional monetary expenditures may increase future overhead, thereby potentially reducing our future results of operations.

We have identified what we believe are the areas of domestic government regulation, which if changed, would be costly to us. These laws and regulations include franchise laws, motor vehicle brokerage licensing laws, motor vehicle dealership licensing laws, insurance licensing laws and financial services laws, which are or may be applicable to aspects of our business as applicable. There could be laws and regulations applicable to our business which we have not identified or which, if changed, may be costly to us.

The introduction of new services and expansion of our operations to foreign countries may require us to comply with additional, yet undetermined, laws and regulations. Compliance may require obtaining appropriate business licenses, filing of bonds, appointment of foreign agents and periodic business reporting activity. The failure to adequately comply with these future laws and regulations may delay or possibly prevent some of our products or services from being offered in a particular foreign country, thereby having an adverse affect on our results of operations.

Our success is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenues will decrease.

The Internet and electronic commerce markets are characterized by rapid technological change, changes in user and customer requirements, frequent new service and product introductions embodying new technologies and the emergence of new industry standards and practices that could render our existing Web sites and technology obsolete. These market characteristics are exacerbated by the emerging nature of the market and the fact that many companies are expected to introduce new Internet products and services in the near future. If we are unable to adapt to changing technologies, our business, results of operations and financial condition could be materially and adversely affected. Our performance will depend, in part, on our ability to continue to enhance our existing services, develop new technology that addresses the increasingly sophisticated and varied needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our Web sites and iManager systems and other proprietary technology entails significant technical and business risks. We may not be successful in using new technologies effectively or adapting our Web sites and iManager systems, or other proprietary technology to customer requirements or to emerging industry standards.

We are vulnerable to electricity blackouts and communications system interruptions. The majority of our primary servers are located in a single location. If electricity or communications to that location or to our headquarters were interrupted, our operations could be adversely affected.

We presently host our production Web Sites and certain systems, including Autobytel.com, Autoweb.com, CarSmart.com and iManager, at a secure hosting facility in Irvine, California. Although backup servers are available, our primary servers are vulnerable to interruption by damage from fire, earthquake, flood, power loss, telecommunications failure, break-ins and other events beyond our control. In the event that we experience significant system disruptions, our business, results of operations and financial condition would be materially and adversely affected. We have, from time to time, experienced periodic systems interruptions and anticipate that such interruptions will occur in the future.

As a result of a variety of factors, available electricity supply in California may not be sufficient to meet demand at all times in some areas, and these constraints may continue for several years. The supply constraints have been managed, and will likely continue to be managed, by a combination of obtaining additional supplies, requested conservation, interruption of certain customers whose rates include that possibility, and as a last resort, interruption of some or all customers in certain areas through “rolling blackouts.” Relieving the supply constraints is likely to cause increases in the retail rates to be paid. Our main production systems are hosted in a secure facility with generators and other alternate power supplies in case of a power outage. However, our corporate offices, where we maintain our accounting, finance and contract management systems, are vulnerable to wide-scale power outages. To date, we have not

been significantly affected by rolling black-outs or other interruptions in service related to the constraints on electricity supply. In the event we are affected by increased electricity rates or interruptions due to electricity supply constraints, our business, results of operations and financial condition could be materially and adversely affected.

We maintain business interruption insurance which pays up to $25 million for the actual loss of business income sustained due to the suspension of operations as a result of direct physical loss of or damage to property at our offices. However, in the event of a prolonged interruption, this business interruption insurance may not be sufficient to fully compensate us for the resulting losses.

Internet commerce is new and evolving with few profitable business models. We cannot assure that our business model will be profitable.

The market for Internet-based purchasing services has only recently begun to develop and is rapidly evolving. While many Internet commerce companies have grown in terms of revenues, few are profitable. We cannot assure that we will be profitable. As is typical for a new and rapidly evolving industry, demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty and there are few proven services and products. Moreover, since the market for our services is new and evolving, it is difficult to predict the future growth rate, if any, and size of this market. The extent to which other participants in the automotive industry will accept the role of third party all make, all model services like us is not yet known.

If consumers do not adopt Internet commerce as a mainstream medium of commerce or if automotive industry participants resist the role of third party online services, our revenues may not grow and our earnings may suffer.

The success of our services will continue to depend upon the adoption of the Internet by consumers and dealers as a mainstream medium for commerce and/or the willingness of automotive manufacturers to cooperate with third party services. While we believe that our services offer significant advantages to consumers and dealers, there can be no assurance that widespread acceptance of Internet commerce in general, or of our services in particular, will occur or that automotive companies will continue to accept a role for third party services such as us. Our success assumes that consumers and dealers who have historically relied upon traditional means of commerce to purchase or lease vehicles, and to procure vehicle financing and insurance, will accept new methods of conducting business and exchanging information and that automotive manufacturers will accept, rather than resist, a role for all make, all model third party sites such as ours that allow for comparisons. In addition, dealers must be persuaded to adopt new selling models and be trained to use and invest in developing technologies. If the market for Internet-based vehicle marketing services fails to develop, develops slower than expected, faces opposition or becomes saturated with competitors, or if our services do not achieve market acceptance, our business, results of operations and financial condition will be materially and adversely affected.

Internet-related issues may reduce or slow the growth in the use of our services in the future.

Critical issues concerning the commercial use of the Internet, such as, ease of access, security, privacy, reliability, cost, and quality of service, remain unresolved and may impact the growth of Internet use. 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. The recent growth in Internet traffic has caused frequent periods of decreased performance, outages and delays. Our ability to increase the speed with which we provide services to consumers and to increase the scope and quality of such services is limited by and dependent upon the speed and reliability of the Internet, which is beyond our control. If periods of decreased performance, outages or delays on the Internet occur frequently or the other critical issues concerning the Internet are not resolved, overall Internet usage or usage of our Web sites could increase more slowly or decline, which would cause our business, results of operations and financial condition to be materially and adversely affected.

The public market for our common stock may continue to be volatile, especially since market prices for Internet-related and technology stocks have often been unrelated to operating performance.

Prior to the initial public offering of our common stock in March 1999, there was no public market for our common stock. We cannot assure that an active trading market will be sustained or that the market price of the common stock will not decline. Recently, the stock market in general and the shares of Internet companies in particular have experienced significant price fluctuations. The market price of the common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to factors such as:

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actual or anticipated variations in our quarterly operating results;

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historical and anticipated operating metrics such as the number of participating dealers, the visitors to our Web sites and the frequency with which they transact;

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announcements of new product or service offerings;

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technological innovations;

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competitive developments, including actions by automotive manufacturers;

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changes in financial estimates by securities analysts;

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conditions and trends in the Internet and electronic commerce industries;

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adoption of new accounting standards affecting the technology or automotive industry; and

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general market conditions and other factors.

Further, the stock markets, and in particular the Nasdaq National Market, have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and have often been unrelated or disproportionate to the operating performance of such companies. These broad market factors have and may continue to adversely affect the market price of our common stock. In addition, general economic, political and market conditions, such as recessions, interest rates, international currency fluctuations, terrorist acts, military actions or wars, may adversely affect the market price of the common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies with publicly traded securities. Such litigation could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, results of operations and financial condition.

Changing legislation affecting the automotive industry could require increased regulatory and lobbying costs and may harm our business.

Our services may result in changing the way vehicles are sold which may be viewed as threatening by new and used vehicle dealers who do not subscribe to our programs. Such businesses are often represented by influential lobbying organizations, and such organizations or other persons may propose legislation which could impact the evolving marketing and distribution model which our services promote. Should current laws be changed or new laws passed, our business, results of operations and financial condition could be materially and adversely affected. As we introduce new services, we may need to comply with additional licensing regulations and regulatory requirements.

To date, we have not spent significant resources on lobbying or related government affairs issues but we may need to do so in the future. A significant increase in the amount we spend on lobbying or related activities would have a material adverse effect on our results of operations and financial condition.

Our computer infrastructure may be vulnerable to security breaches. Any such problems could jeopardize confidential information transmitted over the Internet, cause interruptions in our operations or cause us to have liability to third persons.

Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems and security breaches. Any such problems or security breach could cause us to have liability to one or more third parties and disrupt all or part of our operations. A party who is able to circumvent our security measures could misappropriate proprietary information, jeopardize the confidential nature of information transmitted over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions and the privacy of users could also inhibit the growth of the Internet in general, particularly as a means of conducting commercial transactions. To the extent that our activities or those of third party contractors involve the storage and transmission of proprietary information such as personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities.]Our current insurance program may protect us against some, but not all, of such losses. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

We depend on continued technological improvements in our systems and in the Internet overall. If we are unable to handle an unexpectedly large increase in volume of consumers using our Web sites, we cannot assure our consumers or dealers that purchase requests will be efficiently processed and our business may suffer.

If the Internet continues to experience significant growth in the number of users and the level of use, then the Internet infrastructure may not be able to continue to support the demands placed on it by such potential growth. The Internet may not prove to be a viable commercial medium because of inadequate development of the necessary infrastructure, timely development of complementary products such as high speed modems, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or increased government regulation.

An unexpectedly large increase in the volume or pace of traffic on our Web sites or the number of orders placed by customers may require us to expand and further upgrade our technology, transaction-processing systems and network infrastructure. We may not be able to accurately project the rate or timing of increases, if any, in the use of our Web sites or expand and upgrade our systems and infrastructure to accommodate such increases. In addition, we cannot assure that our dealers will efficiently process purchase requests.

Any of such failures regarding the Internet in general or our Web sites, technology systems and infrastructure in particular, or with respect to our dealers, would have a material and adverse affect on our business, results of operations and financial condition.

Misappropriation of our intellectual property and proprietary rights could impair our competitive position.

Our ability to compete depends upon our proprietary systems and technology. While we rely on trademark, trade secret, patent and copyright law, confidentiality agreements and technical measures to protect our proprietary rights, we believe that the technical and creative skills of our personnel, continued development of our proprietary systems and technology, brand name recognition and reliable Web site maintenance are more essential in establishing and maintaining a leadership position and strengthening our brands. As part of our confidentiality procedures, we generally enter into agreements with our employees and consultants and limit access to our trade secrets and technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary rights is difficult. We cannot assure that the steps taken by us will prevent misappropriation of technology or that the agreements entered into for that purpose will be enforceable. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services are made available online. In addition, litigation may be necessary in the future to enforce or protect our intellectual property rights or to defend against claims or infringement or invalidity. Misappropriation of our intellectual property or potential litigation could have a material adverse effect on our business, results of operations and financial condition.

We face risk of claims from third parties relating to intellectual property and may incur liability for retrieving and transmitting information over the Internet that could harm our business.

As part of our business, we make Internet services and content available to our customers. This creates the potential for claims to be made against us, either directly or through contractual indemnification provisions with third parties. 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 may be accessible through our Web sites, links or car review services. Such claims might, for example, be made for defamation, negligence, patent, copyright or trademark infringement, personal injury, breach of contract, unfair competition, false advertising, invasion of privacy or other legal theories based on the nature, content or copying of these materials. Such claims might assert, among other things, 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 such third parties through such Web sites. It is also possible that, if any third-party content information provided on our Web sites contains errors, consumers could make claims against us for losses incurred in reliance on such information. Any claims could result in costly litigation, divert management’s attention and resources, cause delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements.

We also enter into agreements with other companies under which any revenue that results from the purchase of services through direct links to or from our Web sites is shared. Such arrangements may expose us to additional legal risks and uncertainties, including local, state, federal and foreign government regulation and potential liabilities to consumers of these services, even if we do not provide the services ourselves. We cannot assure that any indemnification provided to us in our agreements with these parties, if available, will be adequate.

Even to the extent such claims do not result in liability to us, we could incur significant costs in investigating and defending against such claims. The imposition upon us of potential liability for information carried on or disseminated through our system could require us to implement measures to reduce our exposure to such liability, which might require the expenditure of substantial resources or limit the attractiveness of our services to consumers, dealers and others.

Litigation regarding intellectual property rights is common in the Internet and software industries. We expect that Internet technologies and software products and services may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. There can be no assurance that our services do not infringe on the intellectual property rights of third parties.

In the past, plaintiffs have brought these types of claims and sometimes successfully litigated them against online services. Our general liability insurance 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 our insurance coverage could have a material adverse effect on our business, results of operations and financial condition. However, we are not aware of any infringements, events or circumstances that would result in these types of claims that would cause a material adverse effect on our business, results of operations or financial condition.

We could be adversely affected by litigation. If we were subject to a significant adverse litigation outcome, our financial condition could be materially adversely affected.

We are a defendant in certain proceedings which are described in “Part II. Item 1. Legal Proceedings” herein.

From time to time, we are involved in other litigation matters arising from the normal course of our business activities. We believe that we have meritorious defenses in the proceedings filed against us, and intend to vigorously defend the actions; however, this and other litigation, even if not meritorious could result in substantial costs and diversion of resources and management attention and an adverse outcome in litigation could materially affect our business, results of operations and financial condition.

If we are unable to maintain our Nasdaq National Market listing, the liquidity of our common stock would be seriously limited.

We cannot assure that we will be able to comply with the minimum requirements for continued listing on the Nasdaq National Market. In the event our shares are delisted from the Nasdaq National Market, we anticipate that we would attempt to have our common stock traded on the NASD over-the counter Bulletin Board. If our common stock is delisted, it would seriously limit the

liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could have a material adverse effect on our business.

We are uncertain of our ability to obtain additional financing for our future capital needs. If we are unable to obtain additional financing we may not be able to continue to operate our business.

We currently anticipate that our cash, cash equivalents and short-term investments will be sufficient to meet our anticipated needs for working capital and other cash requirements at least for the next 12 months. We may need to raise additional funds sooner, however, in order to fund more rapid expansion, to develop new or enhance existing services or products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. There can be no assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of potential acquisition opportunities, develop or enhance services or products or respond to competitive pressures would be significantly limited. In addition, our ability to continue to operate our business may also be materially adversely affected in the event additional financing is not available when required. Such limitation could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a third party from acquiring us or limit the price third parties are willing to pay for our stock.

Provisions of our amended and restated certificate of incorporation and bylaws relating to our corporate governance could make it difficult for a third party to acquire us, and could discourage a third party from attempting to acquire control of us. These provisions allow us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the stockholders. These provisions provide that the board of directors is divided into three classes, which may have the effect of delaying or preventing changes in control or change in our management because less than a majority of the board of directors are up for election at each annual meeting. In addition, these provisions impose various procedural and other requirements which could make it more difficult for stockholders to effect corporate actions such as a merger, asset sale or other change of control of us. Such charter provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.

We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together with affiliates and associates, owns or did own 15% or more of the corporation’s voting stock.

Our actual results could differ from forward-looking statements in this report.

This report contains forward-looking statements based on current expectations which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risk factors set forth above and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

two cases were consolidated. Autobytel was added and then dismissed as a cross defendant in such action after summary judgment in its favor. On December 14, 2001, the jury returned a unanimous verdict finding that A.I.N. and Mr. Gorun were not liable for breach of contracts, breach of fiduciary duty or fraud and denying Martins any damages. Martins’ equitable claims for promissory estoppel and constructive trust were submitted to the court for decision. On April 5, 2002, the court issued a decision denying any relief on those claims. We intend to vigorously contest any appeal by Martins.

We believe the selling shareholders of A.I.N. are obligated to indemnify us for all losses, including attorney’s fees, expenses, settlements and judgments, arising out of the lawsuit. The indemnification obligation was initially collateralized by 450,000 shares of Autobytel common stock transferred to the selling shareholders as part of the acquisition of A.I.N., as well as $250,000 in cash. As of June 30, 2002, the obligation was collateralized by 199,960 remaining shares of common stock and approximately $296,000 in cash after expenses. The selling shareholders have indicated that they dispute the amount and scope of their indemnity obligation. Autobytel and A.I.N. have instituted arbitration proceedings against the selling shareholders, seeking to enforce the indemnity obligations. The proceeding is in its early stages of prehearings with the arbitrator.

In August 2001, a purported class action lawsuit was filed in the United States District Court, Southern District of New York against Autobytel and certain of Autobytel’s current directors and officers and underwriters involved in Autobytel’s initial public offering. This action purports to allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autobytel’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autobytel’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The complaint against Autobytel has been consolidated with two other complaints that relate to its initial public offering but do not name it as a defendant, and a consolidated amended complaint has been filed. The action is being coordinated with over 300 other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. We believe that we have meritorious defenses to the complaint and intend to vigorously defend the action.

Between April and June 2001, eight separate purported class actions virtually identical to the one filed against Autobytel were filed against Autoweb, certain of Autoweb’s current and former directors and officers and underwriters involved in Autoweb’s initial public offering. The foregoing actions purport to allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autoweb’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autoweb’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The actions seek damages in an unspecified amount. The complaints against Autoweb have been consolidated into a single action, and a consolidated amended complaint has been filed. The action is being coordinated with over 300 other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. We believe that we have meritorious defenses to the complaints and intend to vigorously defend the actions.

From time to time, we are involved in other litigation matters relating to claims arising out of the ordinary course of business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on our business, results of operations and financial condition. However, if a court or jury rules against us and the ruling is ultimately sustained on appeal and damages are awarded against us, such ruling could have a material and adverse effect on our business, results of operations and financial condition.

Item 2. Changes in Securities and Use of Proceeds

We have no specific plans at this time for the use of the balance of the proceeds received from the public offering and expect to use such proceeds for working capital and general corporate purposes.

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

Autobytel held its Annual Meeting of Stockholders on June 25, 2002. The following is a brief description of the matter voted upon at the meeting and the number of votes cast for or withheld with respect to such matter. Each director proposed by Autobytel was elected.

(a) The stockholders reelected the four nominees for Autobytel’s board of directors:

Director	For	Withheld Authority
Jeffrey A. Schwartz	21,535,176	184,933
Richard A. Post	21,605,367	114,742
Peter Titz	16,430,338	5,289,771
Mark Ross	21,341,981	378,128

The term of office as director for Michael J. Fuchs, Jeffrey H. Coats, Roberts S. Grimes, Mark N. Kaplan and Kenneth J. Orton continued after the meeting.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:


10.1*		Amendment Number 3 to Interactive Marketing Agreement between America Online, Inc. and Autoweb.com, Inc. dated as of March 1, 2002.
99.1		Chief Executive Officer Certification of Periodic Report, dated August 13, 2002.
99.2		Chief Financial Officer Certification of Periodic Report, dated August 13, 2002.
*		Confidential treatment has been requested with regard to certain portions of this document. Such portions were filed separately with the Securities and Exchange Commission.

(b) Reports on Form 8-K:

On April 26, 2002, we filed a Form 8-K dated April 25, 2002 announcing our financial results for the quarter ended March 31, 2002.

On May 22, 2002, we filed a Form 8-K dated May 21, 2002 announcing the replacement of Arthur Andersen LLP by PricewaterhouseCoopers LLP as independent accountants for fiscal year 2002.

SIGNATURES

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

AUTOBYTEL INC.

By: /s/ HOSHI PRINTER

Hoshi Printer

Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

By: /s/ AMIT KOTHARI

Amit Kothari

Vice President and Controller

(Principal Accounting Officer)

Date: August 13, 2002

EXHIBIT INDEX

Exhibit Number
10.1*		Amendment Number 3 to Interactive Marketing Agreement between America Online, Inc. and Autoweb.com, Inc. dated as of March 1, 2002.

99.1		Chief Executive Officer Certification of Periodic Report, dated August 13, 2002.

99.2		Chief Financial Officer Certification of Periodic Report, dated August 13, 2002.

*		Confidential treatment has been requested with regard to certain portions of this document. Such portions were filed separately with the Securities and Exchange Commission.

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