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

Form 10-Q

For the quarterly period ended September 30, 2002

or

For the transition period from__________ to __________.

Commission file number 22239

          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.

          As of October 31, 2002, there were 31,192,038 shares of the Registrant’s Common Stock outstanding.

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INDEX

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PART I. FINANCIAL INFORMATION

Item 1.   Consolidated Financial Statements

Autobytel Inc.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share data)

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

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Autobytel Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except share and per share data)

(unaudited)

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

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Autobytel Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except share and per share data)

(unaudited)

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

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AUTOBYTEL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar 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 provider of automotive marketing data and technology through its Automotive Information Center (AIC) division.

          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 $161,654 as of September 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 September 30, 2002, and for the three months and nine months ended September 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. The financial position and results of operations of Autoweb.com, Inc. (Autoweb) 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.

          Also, in December 2001, Autobytel realigned its revenue classifications in connection with its focus on providing marketing services to dealers and automotive manufacturers. Autobytel now classifies revenues in four categories — program

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fees, enterprise sales, advertising and other products and services. Prior period revenues have been presented to conform to the current year presentation. The realignment had no effect on total revenues.

Cash and Cash Equivalents

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

          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 6.) 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 September 30, 2002, restricted cash represents $28 related to business credit cards.

          International cash and cash equivalents represent amounts held by Autobytel.Europe LLC (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 in March 2002 (see Note 4.), Autobytel no longer consolidates Autobytel.Europe in its financial statements. Therefore, international cash and cash equivalents are  no longer reported on Autobytel’s balance sheet. 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 nine months ended September 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 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.)

          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. 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.

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          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, 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 10,504,793 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:

          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 and August 2002, the allocation of the purchase price was adjusted as described below and goodwill was reduced to $8,367.

          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 consisted 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 September 30, 2002, $1,740 and $2,731 was paid for rent and compensation, respectively. In August 2002, the allocation of the purchase price was adjusted due to a $277 increase in the original estimate of accounts receivable. As of September 30, 2002, the remaining accrual balance was $212. Autobytel expects the remaining accrued costs to be paid by December 31, 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, 2001. The unaudited pro forma results are not necessarily indicative of future earnings

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          or earnings that would have been reported had the acquisition been completed as presented.

4.  Autobytel.Europe LLC

          Autobytel.Europe 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 SAB 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. As of September 30, 2002, Autobytel had an investment in Autobytel.Europe with a remaining balance of $4,684 which Autobytel believes has not incurred a further decline in value.

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. In August 2002, the allocation of the Autoweb purchase price was adjusted due to an increase in the original estimate of accounts receivable resulting in a reduction in goodwill and increase in accounts receivable of $277. As of September 30, 2002, the unamortized balance of goodwill related to the Autoweb acquisition was $8,367.

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          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 $24 and $865 for goodwill related to the acquisition of CarSmart for the three months and nine months ended September 30, 2001, respectively. The following summarizes net loss adjusted to exclude goodwill amortization expense:

6.   Commitments and Contingencies

Marketing and Advertising Agreements

          Autobytel has agreements with search engines and Internet service and automotive information providers. In July 2002, Autobytel renegotiated an agreement with a major Internet service. Minimum future payments under the agreement were reduced from $5,083 to $1,568 as of September 30, 2002. Payment is due in February 2003.  As part of the renegotiation, the contracted number of impressions was reduced.

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, A.I.N. and Martins entered into a settlement agreement in July 2002.

          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 September 30, 2002, the obligation was collateralized by 199,960 remaining shares of common stock and approximately $297 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 and damages for breach of merger agreement. In this action, Mr. Gorun disputes Autobytel and A.I.N.’s claims for indemnity arising from the Martins lawsuit, asserts his alleged rights of indemnity from the Martins 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.

          On October 10, 2002, Morrison & Foerster LLP, a law firm that represented Autobytel, A.I.N. and Mr. Gorun at various points in the Martins litigation, filed an action entitled Morrison & Foerster LLP v. Autobytel.com Inc. et al. in the Santa Clara Superior Court against Autobytel, A.I.N and Mr. Gorun asserting claims for damages for breach of contract for failure to pay legal fees and expenses plus interest accrued thereon in the aggregate of approximately $660,000 as of August 31,

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2002. Autobytel and A.I.N. dispute these allegations and intend to vigorously defend against them. In addition, Autobytel and A.I.N. believe that they have meritorious claims against Morrison & Foerster LLP.

          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 and former directors and officers (Autobytel Individual Defendants) 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. On October 9, 2002, the Autobytel Individual Defendants were dismissed from the case without prejudice.  Autobytel believes that it has meritorious claims against the underwriters 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 (Autoweb Individual Defendants) 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. On October 9, 2002, the Autoweb Individual Defendants were dismissed from the case without prejudice. Autoweb believes that it has meritorious claims against the underwriters and intends to vigorously defend the actions.

          Autobytel has not recorded any loss contingencies associated with the above legal matters.

          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 September 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 nine months ended September 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 September 30, 2002, the remaining accrued liability related to these charges was $565. Autobytel expects the remaining accrued charges to be paid by 2005.

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

8.   Business Segment

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

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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 provider of automotive marketing data and technology through our Automotive Information Center (“AIC”) division.

          We acquired Autoweb.com, Inc.(“Autoweb”) 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, 2001. 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.

          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 the third quarter of 2002, we generated $3.1 million in cash primarily due to more aggressive collection efforts which included additional resources and the implementation of a dealer suspension policy for dealers that have past due amounts on account. In addition, cost reductions, which included the renegotiation of a major portal agreement, contributed to the generation of cash in the third quarter of 2002. Although there is no assurance, we anticipate that our cash position will be stable for the remainder of the year.

          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. As of September 30, 2002, we had an investment in Autobytel.Europe with a remaining balance of $4.7 million which we believe has not incurred a further decline in value. 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 period revenues have been presented to conform to the current year presentation.

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          Program fees consist of fees paid by program dealers 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 dealer 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 third quarter of 2002 and 2001, program fees were $14.0 million and $13.2 million, or 73% of total revenues. Average monthly program fees per dealer were $813 and $730 in the third 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 include fees from major dealer groups and automotive manufacturers for purchase requests delivered to enterprise dealers and fees from manufacturers and other users for automotive marketing data and technology provided by AIC. Enterprise dealers consist of (i) dealers that are part of major dealer groups with more than 25 dealerships with which we have a single agreement and (ii) dealers that are eligible to receive purchase requests from us as part of a single agreement with an automotive manufacturer or its automotive buying service affiliate. Automotive manufacturers include manufacturers such as General Motors and Ford. 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 $2.3 million and $1.8 million, or 12% and 10% of total revenues, in the third quarter of 2002 and 2001, respectively. Fees in the third quarter of 2001 include $0.8 million 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 $2.0 million and $1.3 million in the third quarter of 2002 and 2001, or 10% and 7% of total revenues, respectively.

          Revenues from other products and services include fees for new products, continued products, legacy products and international licensing agreements. New products include Retention Performance Marketing (RPM), our customer service reminder marketing program for dealerships and manufacturers. Continued products include products and services which we continue to offer 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 will explore additional international business as opportunities arise. In the third quarter of 2002 and 2001, revenues from other products and services were $1.0 million and $1.9 million, or 5% and 10% of total revenues, respectively.

          Our revenue is primarily dependent on the quality and quantity of purchase requests delivered to our program and enterprise dealers. 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.

          Our Quality Verification System (QVS)^SM uses filters and validation processes to identify consumers with strong purchase intent. As a result of the implementation of QVS, purchase request quality increased. 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 anticipate that improved purchase request quality will help us increase closing ratios and further reduce customer credits, reduce dealer turnover and increase revenues in the future.

          In the third quarter of 2002, we delivered approximately 0.8 million purchase requests through our online systems to program and enterprise dealers. Of these, approximately 0.7 million were delivered to program dealers and approximately 0.1 million were

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delivered to enterprise dealers. In the third quarter of 2001, approximately 1.0 million purchase requests were delivered to program and enterprise dealers, or a decrease of 28%, compared to the third quarter of 2002. The decrease was primarily a result of our recent quality initiatives as we rejected purchase requests that did not meet our qualification standards and a decline in our number of program dealer relationships due to our efforts to retain dealers that provide a reasonable profit to us. We expect the quantity of purchase requests we deliver to our program and enterprise dealers to temporarily remain flat or decline in 2002.

          As of September 30, 2002, we had 20,588 dealer relationships. Our dealer relationships as of June 30, 2002 and September 30, 2002 were as follows:

          Program dealer relationships consist of subscriptions to our new car marketing programs and our Used Vehicle CyberStore program. A decline of 350 program dealer relationships from June 30, 2002 to September 20, 2002 was primarily a result of the termination of 811 program dealer relationships by the dealers or by us offset by the addition of 461 program dealer relationships. In the third quarter of 2002, we began reporting suspended dealer relationships. Suspended dealer relationships are relationships with dealers to whom the delivery of purchase requests has been suspended until past due amounts on account are resolved. The number of suspended dealer relationships increased by 75 during the third quarter of 2002. We do not recognize revenue from dealers for periods that they are under suspension. As of September 30, 2002, 668 program dealers had a relationship with more than one of our branded Web sites.

          Our relationship with dealers may terminate for various reasons including: